As filed with the Securities and Exchange Commission on April 29, 1999
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. 27 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 27 [X]
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)
[ ] On pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(1)
[X] On June 30, 1999 pursuant to Rule 485(a)(1)
[ ] 75 days after filing pursuant to Rule 485(a)(2)
[ ] On pursuant to Rule 485(a)(2)
Title of Securities Being Registered: Class A, B, C and Y Shares of Beneficial
Interest.
<PAGE>
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
JUNE 30, 1999
-------------------------------
This prospectus offers shares in PaineWebber's four municipal bond funds. Each
fund offers four classes of shares--Class A, Class B, Class C and Class Y. Each
class has different sales charges and ongoing expenses. You can choose the class
that is best for you based on how much you plan to invest and how long you plan
to hold your fund shares. Class Y shares are available only to certain types of
investors.
The funds are not appropriate investments for tax-advantaged accounts.
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved any fund's shares or determined whether this prospectus
is complete or accurate. To state otherwise is a crime.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PaineWebber California Tax-Free Income Fund PaineWebber National Tax-Free Income Fund
PaineWebber Municipal High Income Fund PaineWebber New York Tax-Free Income Fund
</TABLE>
- ----------------------------------------------------------
-----------------------------------------------------------------------------
CONTENTS
THE FUNDS
-----------------------------------------------------------------------------
What every investor 3 California Tax-Free Income Fund
should know about
the funds 6 National Tax-Free Income Fund
9 Municipal High Income Fund
12 New York Tax-Free Income Fund
16 More About Risks and Investment Strategies
YOUR INVESTMENT
-----------------------------------------------------------------------------
Information for 18 Managing Your Fund Account
managing your fund - Flexible Pricing
account - Buying Shares
- Selling Shares
- Exchanging Shares
- Pricing and Valuation
ADDITIONAL INFORMATION
-----------------------------------------------------------------------------
Additional important 23 Management
information about the
funds 24 Dividends and Taxes
25 Financial Highlights
-----------------------------------------------------------------------------
Where to learn more
about PaineWebber Back Cover
mutual funds
---------------------------------------------
The funds are not complete or
balanced investment programs.
---------------------------------------------
2
<PAGE>
PaineWebber California Tax-Free Income Fund
- ------------------------------------------------------------
PAINEWEBBER CALIFORNIA TAX-FREE INCOME FUND
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
FUND 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.
PRINCIPAL INVESTMENT STRATEGIES
The fund normally invests substantially all its assets in California municipal
bonds. These are bonds and similar securities that are exempt from federal
income tax and from California personal income tax. The fund may invest up to
20% of its total assets in California municipal bonds that are subject to the
federal alternative minimum tax.
The fund invests primarily in California municipal bonds that are investment
grade, but it also invests, to a lesser extent, in lower rated bonds. The fund
uses interest rate futures contracts and other derivatives to help manage its
portfolio duration. "Duration" is a measure of the fund's exposure to interest
rate risk.
The fund's investment adviser, Mitchell Hutchins Asset Management Inc., uses a
"top down" investment process to select bonds for the fund Mitchell Hutchins
determines the appropriate duration for the fund's portfolio based on its
assessment of whether market interest rates are likely to rise or fall and on
whether rates are more attractive for longer or shorter term bonds. Mitchell
Hutchins allocates the fund's investments among market sectors, such as general
obligation or revenue bonds and higher or lower credit quality, by analyzing the
relative attractiveness of rates and market opportunities in each sector. Within
the limits set by these allocation decisions, Mitchell Hutchins selects specific
bonds based on an analysis of their credit quality and terms.
PRINCIPAL RISKS
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund.
Because the fund concentrates its investments in California, it will be more
severely affected by unfavorable political or economic conditions in California
than a more geographically diverse fund. The fund is subject to interest rate
risk, which means that the value of its investments generally will fall when
interest rates rise. The fund also is subject to credit risk in that the issuers
of its portfolio securities may not make principal or interest payments when
due. The market for municipal bonds can be adversely affected by legislative
proposals to eliminate or limit the tax-exempt status of municipal bond interest
or the fund's dividends.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies" under the
following headings:
o Single State Concentration Risk
o Interest Rate Risk
o Credit Risk
o Political Risk
o Related Securities Concentration Risk
o Prepayment ("Call") Risk
o Derivatives Risk
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THOSE REPORTS).
3
<PAGE>
PaineWebber California Tax-Free Income Fund
- ------------------------------------------------------------
PERFORMANCE
RISK/RETURN BAR CHART AND TABLE
The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.
The bar chart shows how the fund's performance has varied from year to year. The
bar chart shows Class A shares because they have the longest performance history
of any class of fund shares. The chart does not reflect the effect of sales
charges; if it did, the total returns shown would be lower.
The table that follows the bar chart shows the average annual returns over
several time periods for each class of the fund's shares. That table does
reflect fund sales charges. The table compares fund returns to returns on a
broad-based market index that is unmanaged and that, therefore, does not include
any sales charges or expenses.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
CALIFORNIA TAX-FREE INCOME FUND -- TOTAL RETURN ON CLASS A SHARES
[INSERT BAR CHART]
NOTE: Calendar year-to-date total return as of March 31, 1999 -- %
Best quarter during years shown: quarter, 19 -- %
Worst quarter during years shown: quarter, 19 -- %
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
<TABLE>
<CAPTION>
LEHMAN BROTHERS
CLASS CLASS A CLASS B* CLASS C CLASS Y MUNICIPAL BOND
(INCEPTION DATE) (9/16/85) (7/1/91) (7/2/92) (2/5/98) INDEX
<S> <C> <C> <C> <C> <C>
One Year %
Five Years N/A %
Ten Years N/A N/A N/A %
Life of Class **
- -----------
<FN>
* Reflects conversion of Class B shares to Class A after six years.
** Average annual total returns for the Lehman Brothers Municipal Bond Index for the life of each class were as follows: Class
A -- ___%; Class B -- ___%; Class C -- ___%; Class Y -- ___%.
</FN>
</TABLE>
4
<PAGE>
PaineWebber California Tax-Free Income Fund
- -----------------------------------------------------------
EXPENSES AND FEE TABLES
FEES AND EXPENSES These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.
SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investments)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Maximum Sales
Charge (Load) Imposed on Purchases (as a
% of offering price) 4% None None None
Maximum
Contingent Deferred
Sales Charge (Load) (CDSC)
(as a % of offering price) None 5% 0.75% None
Exchange Fee None None None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Management Fees 0.50% 0.50% 0.50% 0.50%
Distribution and/or Service
(12b-1) Fees 0.25 1.00 0.75 0.00
Other Expenses
Total Annual Fund Operating Expenses
Expense Reimbursement*
Net Expenses*
- -------------
<FN>
* The fund and Mitchell Hutchins have entered into an expense reimbursement agreement. Mitchell Hutchins has agreed to
reimburse the fund to the extent that the fund's expenses through the end of the current fiscal year otherwise would exceed
the "Net Expenses" rates for each class as shown above. The fund has agreed to repay Mitchell Hutchins for those reimbursed
expenses if it can do so over the following three years without causing the fund's expenses in any of those years to exceed
those "Net Expenses" rates.
</FN>
</TABLE>
EXAMPLE
This example is intended to help you compare the cost of investing in
PaineWebber California Tax-Free Income Fund with the cost of investing in other
mutual funds.
This example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods unless
otherwise stated. The example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Class A
Class B (assuming sales of all shares at end of period)
Class B (assuming no sales of shares)
Class C (assuming sales of all shares at end of period)
Class C (assuming no sales of shares)
Class Y
</TABLE>
5
<PAGE>
PaineWebber National Tax-Free Income Fund
- -----------------------------------------------------------------------------
PAINEWEBBER NATIONAL TAX-FREE INCOME FUND
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
FUND OBJECTIVE
High current income exempt from federal income tax, consistent with the
preservation of capital and liquidity within the fund's quality standards.
PRINCIPAL INVESTMENT STRATEGIES
The fund normally invests substantially all its assets in municipal bonds. These
are bonds and similar securities that are exempt from federal income tax. The
fund may invest up to 20% of its total assets in municipal bonds that are
subject to the federal alternative minimum tax.
The fund invests primarily in municipal bonds that are investment grade, but it
also invests, to a lesser extent, in lower rated bonds. The fund uses interest
rate futures contracts and other derivatives to help manage its portfolio
duration. "Duration" is a measure of the fund's exposure to interest rate risk.
The fund's investment adviser, Mitchell Hutchins Asset Management Inc., uses a
"top down" investment process to select bonds for the fund Mitchell Hutchins
determines the appropriate duration for the fund's portfolio based on its
assessment of whether market interest rates are likely to rise or fall and on
whether rates are more attractive for longer or shorter term bonds. Mitchell
Hutchins allocates the fund's investments among market sectors, such as general
obligation or revenue bonds and higher or lower credit quality, by analyzing the
relative attractiveness of rates and market opportunities in each sector. Within
the limits set by these allocation decisions, Mitchell Hutchins selects specific
bonds based on an analysis of their credit quality and terms.
PRINCIPAL RISKS
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund.
The fund is subject to interest rate risk, which means that the value of its
investments generally will fall when interest rates rise. The fund also is
subject to credit risk in that the issuers of its portfolio securities may not
make principal or interest payments when due. The market for municipal bonds can
be adversely affected by legislative proposals to eliminate or limit the
tax-exempt status of municipal bond interest or the fund's dividends.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies" under the
following headings:
o Interest Rate Risk
o Credit Risk
o Political Risk
o Related Securities Concentration Risk
o Prepayment ("Call") Risk
o Derivatives Risk
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THOSE REPORTS).
6
<PAGE>
PaineWebber National Tax-Free Income Fund
- -----------------------------------------------------------------------------
PERFORMANCE
RISK/RETURN BAR CHART AND TABLE
The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.
The bar chart shows how the fund's performance has varied from year to year. The
bar chart shows Class A shares because they have the longest performance history
of any class of fund shares. The chart does not reflect the effect of sales
charges; if it did, the total returns shown would be lower.
The table that follows the bar chart shows the average annual returns over
several time periods for each class of the fund's shares. That table does
reflect fund sales charges. The table compares fund returns to returns on a
broad-based market index that is unmanaged and that, therefore, does not include
any sales charges or expenses.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
NATIONAL TAX-FREE INCOME FUND -- TOTAL RETURN ON CLASS A SHARES
[INSERT BAR CHART]
NOTE: Calendar year-to-date total return as of March 31, 1999 -- %
Best quarter during years shown: quarter, 19 -- %
Worst quarter during years shown: quarter, 19 -- %
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
<TABLE>
<CAPTION>
LEHMAN BROTHERS
CLASS CLASS A CLASS B* CLASS C CLASS Y MUNICIPAL BOND
(INCEPTION DATE) (12/3/84) (7/1/91) (7/2/92) (11/3/95) INDEX
<S> <C> <C> <C> <C> <C>
One Year %
Five Years N/A %
Ten Years N/A N/A N/A %
Life of Class **
- -----------
<FN>
* Reflects conversion of Class B shares to Class A after six years.
** Average annual total returns for the Lehman Brothers Municipal Bond Index for the life of each class were as follows: Class
A -- ___%; Class B -- ___%; Class C -- ___%; Class Y -- ___%.
</FN>
</TABLE>
7
<PAGE>
PaineWebber National Tax-Free Income Fund
- -----------------------------------------------------------------------------
EXPENSES AND FEE TABLES
FEES AND EXPENSES These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.
SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investments)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Maximum Sales
Charge (Load) Imposed on Purchases (as a % of
offering price) 4% None None None
Maximum
Contingent Deferred
Sales Charge (Load) (CDSC)
(as a % of offering price) None 5% 0.75% None
Exchange Fee None None None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Management Fees 0.50% 0.50% 0.50% 0.50%
Distribution and/or Service
(12b-1) Fees 0.25 1.00 0.75 0.00
Other Expenses
Total Annual Fund
Operating Expenses
</TABLE>
EXAMPLE
This example is intended to help you compare the cost of investing in
PaineWebber National Tax-Free Income Fund with the cost of investing in other
mutual funds.
The example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods unless
otherwise stated. The example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Class A
Class B (assuming sales of all shares at end of period)
Class B (assuming no sales of shares)
Class C (assuming sales of all shares at end of period)
Class C (assuming no sales of shares)
Class Y
</TABLE>
8
<PAGE>
PaineWebber Municipal High Income Fund
- ------------------------------------------------------------
PAINEWEBBER MUNICIPAL HIGH INCOME FUND
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
FUND OBJECTIVE
High current income exempt from federal income tax.
PRINCIPAL INVESTMENT STRATEGIES
The fund normally invests substantially all of its assets in municipal bonds.
These are bonds and similar securities that are exempt from federal income tax.
The fund may invest without limit in municipal bonds that are subject to the
federal alternative minimum tax (AMT). The fund invests in these bonds when its
investment adviser, Mitchell Hutchins Asset Management Inc., believes they offer
attractive yields relative to municipal bonds with similar investment
characteristics but that are not subject to AMT.
The fund invests primarily in municipal bonds that are of medium or lower credit
quality. These include high yield bonds, which are not investment grade and are
sometimes called "junk bonds." The fund uses interest rate futures contracts and
other derivatives to help manage its portfolio duration. "Duration" is a measure
of the fund's exposure to interest rate risk.
Mitchell Hutchins uses a "top down" investment process to select bonds for the
fund Mitchell Hutchins determines the appropriate duration for the fund's
portfolio based on its assessment of whether market interest rates are likely to
rise or fall and on whether rates are more attractive for longer or shorter term
bonds. Mitchell Hutchins allocates the fund's investments among market sectors,
such as general obligation or revenue bonds and higher or lower credit quality,
by analyzing the relative attractiveness of rates and market opportunities in
each sector. Within the limits set by these allocation decisions, Mitchell
Hutchins selects specific bonds based on an analysis of their credit quality and
terms.
PRINCIPAL RISKS
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund.
The fund invests a large portion of its assets in high yield or "junk" municipal
bonds and so is subject to high credit risk - the risk that the issuers of these
bonds will not make principal or interest payments when due. The fund also is
subject to interest rate risk, which means that the value of its investments
generally will fall when interest rates rise. The market for municipal bonds can
be adversely affected by legislative proposals to eliminate or limit the
tax-exempt status of municipal bond interest or the fund's dividends. Because
the fund is non-diversified, it can invest more of its assets in a single issuer
than a diversified fund can. As a result, changes in the market value of a
single issuer can have a greater effect on the fund's performance and share
price than if the fund held a smaller position.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies" under the
following headings:
o Credit Risk
o Interest Rate Risk
o Political Risk
o Non-Diversified Status Risk
o Related Securities Concentration Risk
o Prepayment ("Call") Risk
o Derivatives Risk
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THOSE REPORTS).
9
<PAGE>
PaineWebber Municipal High Income Fund
- ------------------------------------------------------------
PERFORMANCE
RISK/RETURN BAR CHART AND TABLE
The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.
The bar chart shows how the fund's performance has varied from year to year. The
bar chart shows Class A shares because they have the longest performance history
of any class of fund shares. The chart does not reflect the effect of sales
charges; if it did, the total returns shown would be lower.
The table that follows the bar chart does reflect fund sales charges. The table
compares fund returns to returns on a broad-based market index that is unmanaged
and that, therefore, does not include any sales charges or expenses.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
MUNICIPAL HIGH INCOME FUND -- TOTAL RETURN ON CLASS A SHARES
[INSERT BAR CHART]
NOTE: Calendar year-to-date total return as of March 31, 1999 -- %
Best quarter during years shown: quarter, 19 -- %
Worst quarter during years shown: quarter, 19 -- %
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
<TABLE>
<CAPTION>
LEHMAN BROTHERS
CLASS CLASS A CLASS B* CLASS C CLASS Y MUNICIPAL BOND
(INCEPTION DATE) (6/23/87) (7/1/91) (7/2/92) (2/5/98) INDEX
<S> <C> <C> <C> <C> <C>
One Year %
Five Years N/A %
Ten Years N/A N/A N/A %
Life of Class **
- -----------
<FN>
* Reflects conversion of Class B shares to Class A after six years.
** Average annual total returns for the Lehman Brothers Municipal Bond Index for the life of each class were as follows: Class
A -- ___%; Class B -- ___%; Class C -- ___%; Class Y -- ___%.
</FN>
</TABLE>
10
<PAGE>
PaineWebber Municipal High Income Fund
- -------------------------------------------------------------
EXPENSES AND FEE TABLES
FEES AND EXPENSES These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.
SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investments)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Maximum Sales
Charge (Load) Imposed on Purchases (as
a % of offering price) 4% None None None
Maximum
Contingent Deferred
Sales Charge (Load) (CDSC)
(as a % of offering price) None 5% 0.75% None
Exchange Fee None None None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Management Fees 0.60% 0.60% 0.60% 0.60%
Distribution and/or Service
(12b-1) Fees 0.25 1.00 0.75 0.00
Other Expenses
Total Annual Fund
Operating Expenses
</TABLE>
EXAMPLE
The following example is intended to help you compare the cost of investing in
PaineWebber Municipal High Income Fund with the cost of investing in other
mutual funds.
The example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods unless
otherwise stated. The example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Class A
Class B (assuming sales of all shares at end of period)
Class B (assuming no sales of shares)
Class C (assuming sales of all shares at end of period)
Class C (assuming no sales of shares)
Class Y
</TABLE>
11
<PAGE>
PaineWebber New York Tax-Free Income Fund
- --------------------------------------------------------
PAINEWEBBER NEW YORK TAX-FREE INCOME FUND
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
FUND OBJECTIVE
High current income exempt from federal income tax and from New York State and
New York City personal income taxes.
PRINCIPAL INVESTMENT STRATEGIES
The fund normally invests substantially all its assets in New York municipal
bonds. These are bonds and similar securities that are exempt from federal
income tax and from New York State and New York City personal income tax. The
fund may invest up to 20% of its total assets in New York municipal bonds that
are subject to the federal alternative minimum tax.
The fund invests primarily in New York municipal bonds that are investment
grade, but it also invests, to a lesser extent, in lower rated bonds. The fund
uses interest rate futures contracts and other derivatives to help manage its
portfolio duration. "Duration" is a measure of the fund's exposure to interest
rate risk.
The fund's investment adviser, Mitchell Hutchins Asset Management Inc., uses a
"top down" investment process to select bonds for the fund Mitchell Hutchins
determines the appropriate duration for the fund's portfolio based on its
assessment of whether market interest rates are likely to rise or fall and on
whether rates are more attractive for longer or shorter term bonds. Mitchell
Hutchins allocates the fund's investments among market sectors, such as general
obligation or revenue bonds and higher or lower credit quality, by analyzing the
relative attractiveness of rates and market opportunities in each sector. Within
the limits set by these allocation decisions, Mitchell Hutchins selects specific
bonds based on an analysis of their credit quality and terms.
PRINCIPAL RISKS
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund. The principal risks presented by the fund are:
Because the fund concentrates its investments in New York, it will be more
severely affected by unfavorable political or economic conditions in New York
than a more geographically diverse fund. The fund is subject to interest rate
risk, which means that the value of its investments generally will fall when
interest rates rise. The fund also is subject to credit risk in that the issuers
of its portfolio securities may not make principal or interest payments when
due. The market for municipal bonds can be adversely affected by legislative
proposals to eliminate or limit the tax-exempt status of municipal bond interest
or the fund's dividends. Because the fund is non-diversified, it can invest more
of its assets in a single issuer than a diversified fund can. As a result,
changes in the market value of a single issuer can have a greater effect on the
fund's performance and share price than if the fund held a smaller position.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies" under the
following headings:
o Single State Concentration Risk
o Interest Rate Risk
o Credit Risk
o Political Risk
o Non-Diversified Status Risk
o Related Securities Concentration Risk
o Prepayment ("Call") Risk
o Derivatives Risk
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THOSE REPORTS).
12
<PAGE>
PaineWebber New York Tax-Free Income Fund
- --------------------------------------------------------
PERFORMANCE
RISK/RETURN BAR CHART AND TABLE
The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.
The bar chart shows how the fund's performance has varied from year to year. The
bar chart shows Class A shares because they have the longest performance history
of any class of fund shares. The bar chart does not reflect the effect of sales
charges; if it did, the total returns shown would be lower.
The table that follows the bar chart shows the average annual returns over
several time periods for the fund's Class A, B and C shares. The fund's Class Y
shares are not included because they do not have performance for a full calendar
year. That table does reflect fund sales charges. The table compares fund
returns to returns on a broad-based market index that is unmanaged and that,
therefore, does not include any sales charges or expenses.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
NEW YORK TAX-FREE INCOME FUND -- TOTAL RETURN ON CLASS A SHARES
[INSERT BAR CHART]
NOTE: Calendar year to-date-total return as of March 31, 1999 -- %
Best quarter during years shown: quarter, 19 -- %
Worst quarter during years shown: quarter, 19 -- %
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
<TABLE>
<CAPTION>
LEHMAN BROTHERS
CLASS CLASS A CLASS B* CLASS C MUNICIPAL BOND
(INCEPTION DATE) (9/23/88) (7/1/91) (7/2/92) INDEX
<S> <C> <C> <C> <C>
One Year %
Five Years %
Ten Years N/A N/A %
Life of Class **
- -----------
<FN>
* Reflects conversion of Class B shares to Class A after six years.
** Average annual total returns for the Lehman Brothers Municipal Bond Index for the life of each class were as follows: Class
A -- ___%; Class B -- ___%; Class C -- ___%; Class Y -- ___%.
</FN>
</TABLE>
13
<PAGE>
PaineWebber New York Tax-Free Income Fund
- --------------------------------------------------------
EXPENSES AND FEE TABLES
FEES AND EXPENSES These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.
SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investments)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Maximum Sales
Charge (Load) Imposed on Purchases (as
a % of offering price) 4% None None None
Maximum
Contingent Deferred
Sales Charge (Load) (CDSC)
(as a % of offering price) None 5% 0.75% None
Exchange Fee None None None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Management Fees 0.60% 0.60% 0.60% 0.60%
Distribution and/or Service(12b-1) Fees 0.25 1.00 0.75 0.00
Other Expenses
Total Annual Fund Operating Expenses
Expense Reimbursement*
Net Expenses*
- --------------
<FN>
* The fund and Mitchell Hutchins have entered into an expense reimbursement agreement. Mitchell Hutchins has agreed to
reimburse the fund to the extent that the fund's expenses through the end of the current fiscal year otherwise would exceed
the "Net Expenses" rates for each class as shown above. The fund has agreed to repay Mitchell Hutchins for those reimbursed
expenses if it can do so over the following three years without causing the fund's expenses in any of those years to exceed
those "Net Expenses" rates.
</FN>
</TABLE>
EXAMPLE
The following example is intended to help you compare the cost of investing in
PaineWebber New York Tax-Free Income Fund with the cost of investing in other
mutual funds.
The example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods unless
otherwise stated. The example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Class A
Class B (assuming sales of all shares at end of period)
Class B (assuming no sales of shares)
Class C (assuming sales of all shares at end of period)
Class C (assuming no sales of shares)
Class Y
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PaineWebber California Tax-Free Income Fund PaineWebber National Tax-Free Income Fund
PaineWebber Municipal High Income Fund PaineWebber New York Tax-Free Income Fund
</TABLE>
MORE ABOUT RISKS AND INVESTMENT STRATEGIES
PRINCIPAL RISKS
The main risks of investing in one or more of the funds are described below. Not
all of these risks apply to each fund. You can find a list of the main risks
that apply to a particular fund by looking under the "Investment Objective,
Strategies and Risks" heading for that fund.
Other risks of investing in a fund, along with further detail about some of the
risks described below, are discussed in the funds' Statement of Additional
Information ("SAI"). Information on how you can obtain the SAI is on the back
cover of this prospectus.
CREDIT RISK. Credit risk is the risk that the issuer of a bond will not make
principal or interest payments when they are due. Even if an issuer does not
default on a payment, a municipal bond's value may decline if the market
believes that the issuer has become less able, or less willing, to make payments
on time. Even high quality municipal bonds are subject to some credit risk.
However, credit risk is higher for lower quality municipal bonds. High yield
municipal bonds involve high credit risk and are considered speculative. These
low quality bonds may fluctuate in market value more than higher quality bonds
and may be more difficult to sell during market downturns at the time and price
a fund desires.
DERIVATIVES RISK. The value of "derivatives" - so-called because their value
"derives" from the value of an underlying asset, reference rate or index - may
rise or fall more rapidly than other investments. For some derivatives, it is
possible for a fund to lose more than the amount it invested in the derivative.
Options and futures contracts are examples of derivatives. If a fund uses
derivatives to adjust or "hedge" the overall risk of its portfolio, it is
possible that the hedge will not succeed. This may happen for various reasons,
including unexpected changes in the value of the derivatives that are not
matched by opposite changes in the value of the rest of the fund's portfolio. In
addition, a fund's use of derivatives may cause it to have taxable income
INTEREST RATE RISK. The value of municipal bonds generally can be expected to
fall when interest rates rise and to rise when interest rates fall. Interest
rate risk is the risk that interest rates will rise, so that the value of a
fund's investments in municipal bonds will fall. In general, the value of
municipal bonds with longer durations fluctuates more in response to interest
rate changes than municipal bonds with shorter durations.
NON-DIVERSIFIED STATUS RISK. A non-diversified fund is not subject to certain
limitations on its ability to invest more than 5% of its total assets in
securities of a single issuer. When a fund holds a large position in the
securities of one issuer, changes in the financial condition or in the market's
assessment of that issuer may cause larger changes in the fund's total return
and in the price of its shares than if the fund held only a smaller position.
POLITICAL RISK. The municipal bond market can be significantly affected by
political changes, including legislation or proposals at either the state or the
federal level to eliminate or limit the tax-exempt status of municipal bond
interest or the tax-exempt status of a municipal bond fund's dividends.
Similarly, reductions in tax rates may make municipal bonds less attractive in
comparison to taxable bonds. Legislatures also may fail to appropriate funds
needed to pay municipal bond obligations. These events could cause the value of
a fund's investments in municipal bonds to fall and might adversely affect the
tax-exempt status of the fund's investments or of the dividends that the fund
pays. During periods of uncertainty, the prices of municipal securities can
become volatile.
15
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PaineWebber California Tax-Free Income Fund PaineWebber National Tax-Free Income Fund
PaineWebber Municipal High Income Fund PaineWebber New York Tax-Free Income Fund
</TABLE>
PREPAYMENT (OR "CALL") RISK. Municipal bonds may have "call" provisions that
allow the issuer to prepay bonds before their scheduled maturity dates. As a
result, during periods of falling interest rates, a fund may need to reinvest
payments from bonds that had high stated interest rates in bonds that pay lower
rates, thus reducing the fund's income.
RELATED SECURITIES CONCENTRATION RISK. Each fund may invest more than 25% of its
total assets in municipal bonds that are issued to finance similar projects,
such as those relating to education, health care, transportation or utilities.
Economic, business or political developments or changes that affect one
municipal bond also may affect other municipal bonds in the same sector. As a
result, the funds are subject to greater risk than funds that do not follow this
practice.
SINGLE STATE CONCENTRATION RISK. The performance of a fund that invests
primarily in the municipal bonds of a single state will be more severely
affected by unfavorable political or economic conditions within that state than
a more geographically diversified fund. As a result, an investment in the fund
could be more volatile and involve greater risk than an investment in a more
geographically diversified fund.
15A
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PaineWebber California Tax-Free Income Fund PaineWebber National Tax-Free Income Fund
PaineWebber Municipal High Income Fund PaineWebber New York Tax-Free Income Fund
</TABLE>
- ----------------------------------------------------------
o CALIFORNIA TAX-FREE INCOME FUND. The State of California and many of its
agencies and local governments have been experiencing, and continue to
experience, financial difficulties. The credit standings of California and
certain local governments have been, and could be further, reduced.
o NEW YORK TAX-FREE INCOME FUND. 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. The
credit standings of New York State and certain local governments have been,
and could be further, reduced.
ADDITIONAL RISKS
YEAR 2000 RISK. The funds could be adversely affected by problems relating to
the inability of computer systems used by Mitchell Hutchins and the funds' other
service providers to recognize the year 2000. While year 2000-related computer
problems could have a negative effect on the funds, Mitchell Hutchins is working
to avoid these problems with respect to its own computer systems and to obtain
assurances from other service providers that they are taking similar steps.
Similarly, the municipal issuers whose bonds are bought by the funds and the
trading systems used by the funds could be adversely affected by this issue. The
ability of a municipal issuer or trading system to respond successfully to the
issue requires both technological sophistication and diligence, and there can be
no assurance that any steps taken will be sufficient to avoid an adverse impact
on the funds.
ADDITIONAL INVESTMENT STRATEGIES
DEFENSIVE POSITIONS; CASH RESERVES. In order to protect itself from adverse
market conditions, a fund may take a temporary defensive position that is
different from its normal investment strategy. This means that the fund may
temporarily invest a larger-than-normal part, or even all, of its assets in cash
or money market instruments that pay taxable interest. Since these investments
provide relatively low income that is taxable, a defensive position may not be
consistent with achieving a fund's investment objective. However, each fund also
may invest in money market instruments that pay tax-exempt interest on an
unlimited basis as part of its ordinary investment strategy.
PORTFOLIO TURNOVER. Each fund may engage in frequent trading when Mitchell
Hutchins believes portfolio changes are appropriate. Frequent trading may
increase a fund's capital gains that are realized for tax purposes in any given
year. A fund's capital gain dividends are taxable. Shareholders pay taxes on
dividends that represent short-term capital gains at the same rate as ordinary
income. Dividends representing long-term capital gains are taxed at a lower
rate.
Frequent trading also may result in higher fund expenses due to transaction
costs. The funds do not restrict the frequency of trading to limit expenses or
the tax effect that a fund's capital gain dividends may have on shareholders.
16
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PaineWebber California Tax-Free Income Fund PaineWebber National Tax-Free Income Fund
PaineWebber Municipal High Income Fund PaineWebber New York Tax-Free Income Fund
</TABLE>
- ----------------------------------------------------------
YOUR INVESTMENT
MANAGING YOUR FUND ACCOUNT
FLEXIBLE PRICING
The funds offer four classes of shares - Class A, Class B, Class C and Class Y.
Each class has different sales charges and ongoing expenses. You can choose the
class that is best for you, based on how much you plan to invest in the funds
and how long you plan to hold your fund investment. Class Y shares are available
only to certain types of investors.
Each fund has adopted a plan under rule 12b-1 for its Class A, Class B and Class
C shares that allows it to pay service and (for Class B and Class C shares)
distribution fees for the sale of its shares and services provided to
shareholders. Because the 12b-1 distribution fees for Class B and Class C shares
are paid out of a fund's assets on an ongoing basis, over time they will
increase the cost of your investment and may cost you more than if you paid a
front-end sale charge.
CLASS A SHARES
Class A shares have a front-end sales charge that is included in the offering
price of the Class A shares. This sales charge is not invested in the fund.
Class A shares pay an annual 12b-1 service fee of 0.25% of average net assets,
but they pay no 12b-1 distribution fees. The ongoing expenses for Class A shares
are lower than for Class B and Class C shares.
The Class A sales charges for each fund are described in the following tables.
<TABLE>
<CAPTION>
SALES CHARGE AS A PERCENTAGE OF: DISCOUNT TO SELECTED DEALERS AS
AMOUNT OF INVESTMENT OFFERING PRICE NET AMOUNT INVESTED PERCENTAGE OF OFFERING PRICE
- -------------------- -------------- ------------------- ----------------------------
<S> <C> <C> <C>
Less than $100,000............... 4.00% 4.17% 3.75%
$100,000 to $249,999............. 3.00 3.09 2.75
$250,000 to $499,999............ 2.25 2.30 2.00
$500,000 to $999,999 ............ 1.75 1.78 1.50
$1,000,000 and over (1) ......... None None 1.00(2)
<FN>
(1) A contingent deferred sales charge of 1% of the shares' offering price or the net asset value at the time of sale by the
shareholder, whichever is less, is charged on sales of shares made within one year of the purchase date. Class A shares
representing reinvestment of dividends are not subject to this 1% charge. Withdrawals in the first year after purchase of up to
12% of the value of the fund account under the funds' Systematic Withdrawal Plan are not subject to this charge.
(2) Mitchell Hutchins pays 1% to PaineWebber.
</FN>
</TABLE>
SALES CHARGE REDUCTIONS AND WAIVERS. You may qualify for a lower sales charge if
you already own Class A shares of a PaineWebber mutual fund. You can combine the
value of Class A shares that you own in other PaineWebber funds and the purchase
amount of the Class A shares of the PaineWebber fund that you are buying.
You may also qualify for a lower sales charge if you combine your purchases with
those of:
o your spouse, parents or children under age 21;
o your Individual Retirement Accounts (IRAs);
17
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PaineWebber California Tax-Free Income Fund PaineWebber National Tax-Free Income Fund
PaineWebber Municipal High Income Fund PaineWebber New York Tax-Free Income Fund
</TABLE>
- ----------------------------------------------------------
o certain employee benefit plans, including 401(k) plans;
o a company that you control;
o a trust that you created;
o Uniform Gifts to Minors Act/Uniform Transfers to Minors Act accounts
created by you or by a group of investors for your children; or
o accounts with the same adviser.
You may qualify for a complete waiver of the sales charge if you:
o Are an employee of PaineWebber or its affiliates or the spouse, parent or
child under age 21 of a PaineWebber employee;
o Buy these shares through a PaineWebber Financial Advisor who was formerly
employed as an investment executive with a competing brokerage firm that
was registered as a broker-dealer with the SEC, and
- you were the Financial Advisor's client at the competing
brokerage firm;
- within 90 days of buying shares in a fund, you sell shares of
one or more mutual funds that were principally underwritten by
the competing brokerage firm or its affiliates, and you either
paid a sales charge to buy those shares, pay a contingent
deferred sales charge when selling them or held those shares
until the contingent deferred sales charge was waived; and
- you purchase an amount that does not exceed the total amount
of money you received from the sale of the other mutual fund;
o Acquire these shares through the reinvestment of dividends of a PaineWebber
unit investment trust;
o Are a 401(k) or 403(b) qualified employee benefit plan with 50 or more
eligible employees in the plan or at least $1 million in assets; or
o Are a participant in the PaineWebber Members Onlysm Program. For
investments made pursuant to this waiver, Mitchell Hutchins may make
payments out of its own resources to PaineWebber and to participating
membership organizations in a total amount not to exceed 1% of the amount
invested.
NOTE: See the funds' SAI for some other sales charge waivers. If you think you
qualify for any sales charge reductions or waivers, you will need to provide
documentation to PaineWebber or the fund. For more information, you should
contact your PaineWebber Financial Advisor or correspondent firm or call
1-800-647-1568. If you want information on the funds' Systematic Withdrawal
Plan, see the SAI or contact your PaineWebber Financial Advisor or correspondent
firm.
18
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PaineWebber California Tax-Free Income Fund PaineWebber National Tax-Free Income Fund
PaineWebber Municipal High Income Fund PaineWebber New York Tax-Free Income Fund
</TABLE>
- ----------------------------------------------------------
CLASS B SHARES
Class B shares have a contingent deferred sales charge. When you purchase Class
B shares, we invest 100% of your purchase in fund shares. However, you may have
to pay the deferred sales charge when you sell your fund shares, depending on
how long you own the shares.
Class B shares pay an annual 12b-1 distribution fee of 0.75% of average net
assets, as well as an annual 12b-1 service fee of 0.25% of average net assets.
If you hold your Class B shares for six years, they will automatically convert
to Class A shares, which have lower ongoing expenses.
If you sell Class B shares before the end of six years, you will pay a deferred
sales charge. We calculate the deferred sales charge by multiplying the lesser
of the net asset value of the Class B shares at the time of purchase or the net
asset value at the time of sale by the percentage shown below:
IF YOU SELL PERCENTAGE BY WHICH THE
SHARES WITHIN: SHARES' NET ASSET
VALUE IS MULTIPLIED:
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
We will not impose the deferred sales charge on Class B shares representing
reinvestment of dividends or on withdrawals in any year of up to 12% of the
value of your Class B shares under the Systematic Withdrawal Plan.
18A
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PaineWebber California Tax-Free Income Fund PaineWebber National Tax-Free Income Fund
PaineWebber Municipal High Income Fund PaineWebber New York Tax-Free Income Fund
</TABLE>
- ----------------------------------------------------------
To minimize your deferred sales charge, we will assume that you are selling:
o First, Class B shares representing reinvested dividends, and
o Second, Class B shares that you have owned the longest.
SALES CHARGE WAIVERS. You may qualify for a waiver of the deferred sales charge
on a sale of shares if:
o You participate in the Systematic Withdrawal Plan;
o You are older than 59-1/2 and are selling shares to take a distribution
from certain types of retirement plans;
o You receive a tax-free return of an excess IRA contribution;
o You receive a tax-qualified retirement plan distribution following
retirement; or
o The shares are sold within one year of your death and you owned the shares
either (1) as the sole shareholder or (2) with your spouse as a joint
tenant with the right of survivorship.
NOTE: If you think you qualify for any of these sales charge waivers, you will
need to provide documentation to PaineWebber or the fund. For more information,
you should contact your PaineWebber Financial Advisor or correspondent firm or
call 1-800-647-1568. If you want information on the Systematic Withdrawal Plan,
see the SAI or contact your PaineWebber Financial Advisor or correspondent firm.
CLASS C SHARES
Class C shares have a level load sales charge in the form of ongoing 12b-1
distribution fees. When you purchase Class C shares, we will invest 100% of your
purchase in fund shares.
Class C shares pay an annual 12b-1 distribution fee of 0.50% of average net
assets, as well as an annual 12b-1 service fee of 0.25% of average net assets.
Class C shares do not convert to another class of shares. This means that you
will pay the 12b-1 fees for as long as you own your shares.
Class C shares also have a contingent deferred sales charge. You may have to pay
the deferred sales charge if you sell your shares within one year of the date
you purchased them. We calculate the deferred sales charge on sales of Class C
shares by multiplying 0.75% by the lesser of the net asset value of the Class C
shares at the time of purchase or the net asset value at the time of sale. We
will not impose the deferred sales charge on Class C shares representing
reinvestment of dividends or on withdrawals in the first year after purchase, of
up to 12% of the value of your Class C shares under the Systematic Withdrawal
Plan.
NOTE: If you want information on the funds' Systematic Withdrawal Plan, see the
SAI or contact your PaineWebber Financial Advisor or correspondent firm.
19
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PaineWebber California Tax-Free Income Fund PaineWebber National Tax-Free Income Fund
PaineWebber Municipal High Income Fund PaineWebber New York Tax-Free Income Fund
</TABLE>
- ----------------------------------------------------------
CLASS Y SHARES
Class Y shares have no sales charges. Only specific types of investors can
purchase Class Y shares. You may be eligible to purchase Class Y shares if you:
o Buy shares through PaineWebber's PACE Multi-Advisor Program;
o Buy $10 million or more of PaineWebber fund shares at any one time;
o Are a qualified retirement plan with 5,000 or more eligible employees or
$50 million in assets; or
o Are an investment company advised by PaineWebber or an affiliate of
PaineWebber.
Class Y shares do not pay ongoing 12b-1 service or distribution fees or sales
charges. The ongoing expenses for Class Y shares are the lowest of all the
classes.
BUYING SHARES
If you are a PaineWebber client, or a client of a PaineWebber correspondent
firm, you can purchase fund shares through your Financial Advisor. Otherwise,
you can invest in the funds through the funds' transfer agent, PFPC Inc. You can
obtain an application by calling 1-800-647-1568. You must completed and sign the
application and mail it, along with a check, to: PFPC Inc., Attn.: PaineWebber
Mutual Funds, P.O. Box 8950, Wilmington, DE 19899.
If you wish to invest in other PaineWebber Funds, you can do so by:
o Contacting your Financial Advisor (if you have an account at PaineWebber or
at a PaineWebber correspondent firm);
19A
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PaineWebber California Tax-Free Income Fund PaineWebber National Tax-Free Income Fund
PaineWebber Municipal High Income Fund PaineWebber New York Tax-Free Income Fund
</TABLE>
- ----------------------------------------------------------
o Mailing an application with a check; or
o Opening an account by exchanging shares from another PaineWebber fund.
You do not have to complete an application when you make additional investments
in the same fund.
The funds and Mitchell Hutchins reserve the right to reject a purchase order or
suspend the offering of shares.
MINIMUM INVESTMENTS:
To open an account ................................... $1,000
To add to an account ................................. $ 100
Each fund may waive or reduce these amounts for:
o Employees of PaineWebber or its affiliates; or
o Participants in certain pension plans, retirement accounts, unaffiliated
investment programs or the funds' automatic investment plans.
SELLING SHARES
You can sell your fund shares at any time. If you own more than one class of
shares, you should specify which class you want to sell. If you do not, the fund
will assume that you want to sell shares in the following order: Class A, then
Class C, then Class B and last, Class Y.
If you want to sell shares that you purchased recently, the fund may delay
payment until it verifies that it has received good payment. If you purchased
shares by check, this can take up to 15 days.
If you have an account with PaineWebber or a PaineWebber correspondent firm, you
can sell shares by contacting your Financial Advisor.
If you do not have an account at PaineWebber or a correspondent firm, and you
bought your shares through the transfer agent, you can sell your shares by
writing to the fund's transfer agent. Your letter must include:
o Your name and address;
o The fund's name;
o The fund account number;
o The dollar amount or number of shares you want to sell; and
o A guarantee of each registered owner's signature. A signature guarantee may
be obtained from a financial institution, broker, dealer or clearing agency
that is a participant in one of the medallion programs recognized by the
Securities Transfer Agents Association. These are: Securities Transfer
Agents Medallion Program (STAMP), Stock Exchanges Medallion Program (SEMP)
and the New York Stock Exchange Medallion Signature Program (MSP). The
funds will not accept signature guarantees that are not a part of these
programs.
Mail the letter to:
PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.
20
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PaineWebber California Tax-Free Income Fund PaineWebber National Tax-Free Income Fund
PaineWebber Municipal High Income Fund PaineWebber New York Tax-Free Income Fund
</TABLE>
- ----------------------------------------------------------
If you sell Class A shares and then repurchase Class A shares of the same fund
within 365 days of the sale, you can reinstate your account without paying a
sales charge.
It costs each fund money to maintain shareholder accounts. Therefore, the funds
reserve the right to repurchase all shares in any account that has a net asset
value of less than $500. If a fund elects to do this with your account, it will
notify you that you can increase the amount invested to $500 or more within 60
days. A fund will not repurchase shares in accounts that fall below $500 solely
because of a decrease in the fund's net asset value.
EXCHANGING SHARES
You may exchange Class A, Class B or Class C shares of each fund for shares of
the same class of most other PaineWebber funds. You may not exchange Class Y
shares.
You will not pay either a front-end sales charge or a deferred sales charge when
you exchange shares. However, you may have to pay a deferred sales charge if you
later sell the shares you acquired in the exchange. Each fund will use the date
that you purchased the shares in the first fund to determine whether you must
pay a deferred sales charge when you sell the shares in the acquired fund.
Other PaineWebber funds may have different minimum investment amounts. You may
not be able to exchange your shares if your exchange is not as large as the
minimum investment amount in that other fund.
20A
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PaineWebber California Tax-Free Income Fund PaineWebber National Tax-Free Income Fund
PaineWebber Municipal High Income Fund PaineWebber New York Tax-Free Income Fund
</TABLE>
- ----------------------------------------------------------
You may exchange shares of one fund for shares of another fund only after the
first purchase has settled and the first fund has received your payment.
PAINEWEBBER CLIENTS If you bought your shares through PaineWebber or a
correspondent firm, you may exchange your shares by placing an order with your
PaineWebber Financial Advisor.
OTHER INVESTORS If you are not a PaineWebber client, you may exchange your
shares by writing to the fund's transfer agent. You must include:
o Your name and address;
o The name of the fund whose shares you are selling and the name of the fund
whose shares you want to buy;
o Your account number;
o How much you are exchanging (by dollar amount or by number of shares to be
sold); and
o A guarantee of your signature. (See "Buying Shares" for information on
obtaining a signature guarantee.)
Mail the letter to:
PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.
A fund may modify or terminate the exchange privilege at any time.
PRICING AND VALUATION
The price at which you may buy, sell or exchange fund shares is based on net
asset value per share. Each fund calculates net asset value on days that the New
York Stock Exchange is open. Each fund calculates net asset value separately for
each class as of the close of regular trading on the NYSE (generally, 4:00 p.m.,
Eastern time). The NYSE normally is not open, and the funds do not price their
shares, on national holidays and on Good Friday. If trading on the NYSE is
halted for the day before 4:00 p.m., Eastern time, the fund's net asset value
per share will be calculated as of the time trading was halted.
Your price for buying, selling or exchanging shares will be based on the net
asset value that is next calculated after the fund accepts your order. If you
place your order through PaineWebber, your PaineWebber Financial Advisor is
responsible for making sure that your order is promptly sent to the fund.
You should keep in mind that a front-end sales charge may be applied to your
purchase if you buy Class A shares. A deferred sales charge may be applied when
you sell Class B or Class C shares. Each fund calculates its net asset value
based on the current market value for its portfolio securities. The funds
normally obtain market values for their securities from independent pricing
services that use reported last sales prices, current market quotations or
valuations from computerized "matrix" systems that derive values based on
comparable securities. If a market value is not available from an independent
pricing source for a particular security, that security is valued at a fair
value determined by or under the direction of the fund's board. The funds
normally use the amortized cost method to value bonds that will mature in 60
days or less.
Judgment plays a greater role in valuing thinly traded securities, including
many lower-rated municipal bonds, because there is less reliable, objective data
available.
21
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PaineWebber California Tax-Free Income Fund PaineWebber National Tax-Free Income Fund
PaineWebber Municipal High Income Fund PaineWebber New York Tax-Free Income Fund
</TABLE>
- ----------------------------------------------------------
MANAGEMENT
INVESTMENT ADVISER
Mitchell Hutchins Asset Management Inc. is the investment adviser and
administrator of the funds. Mitchell Hutchins is located at 1285 Avenue of the
Americas, New York, New York, 10019, and is a wholly owned asset management
subsidiary of PaineWebber Incorporated, which is wholly owned by Paine Webber
Group Inc., a publicly owned financial services holding company. On May 31,
1999, Mitchell Hutchins was adviser or sub-adviser of 33 investment companies
with 75 separate portfolios and aggregate assets of approximately $__._ billion.
PORTFOLIO MANAGERS
Dennis L. McCauley is responsible for overseeing all active fixed income
investments, including domestic and global taxable and tax-exempt mutual funds.
McCauley has been employed by Mitchell Hutchins since December 1994. Prior to
joining Mitchell Hutchins, Mr. McCauley worked for IBM Corporation, where he was
director of fixed income investments. He was 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
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 California
Tax-Free Income Fund, National Tax-Free Income Fund and New York Tax-Free Income
Fund. Mr. Gerry is also a portfolio manager for Municipal High Income Fund. Mr.
Gerry has portfolio management responsibilities 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
and has held his fund responsibilities since that time. Prior to January 1996,
Mr. Gerry was associated with J. P. Morgan Private Banking, where he was
responsible for managing municipal assets, including several municipal bond
funds.
For California Tax-Free Income Fund, Cynthia Bow is co-portfolio manager and
also has day-to-day responsibility for the fund. Ms. Bow is a vice president of
Mitchell Hutchins and has been with Mitchell Hutchins since 1982. Ms. Bow has
held her fund responsibilities since April 1993.
For National Tax-Free Income Fund and New York 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. Mr. Murphy has
been with Mitchell Hutchins since April 1994 and has held his fund
responsibilities since July 1994 for National Tax-Free Income Fund and January
1996 for New York Tax-Free Fund.
For 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. Veronda has been with Mitchell Hutchins since September 1995 and
has held his fund responsibilities since that date. 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, invest rate forecasts and other considerations pertaining to
municipal investments.
22
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PaineWebber California Tax-Free Income Fund PaineWebber National Tax-Free Income Fund
PaineWebber Municipal High Income Fund PaineWebber New York Tax-Free Income Fund
</TABLE>
- ----------------------------------------------------------
ADVISORY FEES
The funds paid advisory fees to Mitchell Hutchins for the most recent fiscal
year at the following rates based on average daily net assets:
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%
OTHER INFORMATION
The funds have received an exemptive order from the SEC that permits their
boards to appoint and replace sub-advisers and to amend sub-advisory contracts
without obtaining shareholder approval. A fund's shareholders must approve this
policy before its board may implement it. As of the date of this prospectus, no
fund's shareholders have done so.
22A
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PaineWebber California Tax-Free Income Fund PaineWebber National Tax-Free Income Fund
PaineWebber Municipal High Income Fund PaineWebber New York Tax-Free Income Fund
</TABLE>
- ----------------------------------------------------------
DIVIDENDS AND TAXES
DIVIDENDS
Each fund normally declares dividends daily and pays them monthly. Each fund
distributes substantially all of its gains, if any, annually.
Classes with higher expenses are expected to have lower dividends. For example,
Class B shares are expected to have the lowest dividends of any class of a
fund's shares, while Class Y shares are expected to have the highest.
You will receive dividends in additional shares of the same class unless you
elect to receive them in cash. Contact your Financial Advisor at PaineWebber or
one of its corresponding firms if you prefer to receive dividends in cash.
TAXES
Each fund seeks to pay dividends that are exempt from federal income tax.
California Tax-Free Income Fund also seeks to pay dividends that are exempt from
California personal income tax, and New York Tax-Free Income Fund to pay
dividends that are exempt from New York State and New York City personal income
taxes.
A portion of each fund's dividends may be subject to federal and state income
taxes. Each fund also may pay dividends that are subject to the federal
alternative minimum tax.
Each fund's distributions of capital gains are taxable to you for federal tax
purposes. The distribution of capital gains may be taxed at a lower rate than
ordinary income, depending on whether the fund held the assets that generated
the gains for more than 12 months.
Your fund will tell you how you should treat its dividends for federal and state
tax purposes.
Any taxable dividends you receive from a fund will be taxable to you regardless
of whether you receive them in additional fund shares or in cash.
When you sell fund shares, you generally will be subject to federal income tax
on any gain you realize. If you exchange any fund's shares for shares of another
PaineWebber mutual fund, the transaction will be treated as a sale of the first
fund's shares, and any gain will be subject to federal income tax.
23
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PaineWebber California Tax-Free Income Fund PaineWebber National Tax-Free Income Fund
PaineWebber Municipal High Income Fund PaineWebber New York Tax-Free Income Fund
</TABLE>
- ----------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
the funds' financial performance for the past 5 years. Shorter periods are shown
for funds or classes of fund shares that have existed for less than 5 years.
Certain information reflects financial results for a single fund share. In the
tables, "total investment return" represents the rate that an investor would
have earned (or lost) on an investment in a fund (assuming reinvestment of all
dividends).
This information in the financial highlights has been audited by Ernst & Young
LLP, independent auditors whose reports, along with the funds' financial
statements, are included in the funds' annual report to shareholders. The annual
report may be obtained without charge by calling 1-800-647-1568.
24
<PAGE>
PaineWebber California Tax-Free Income Fund
- --------------------------------------------------------------
CALIFORNIA TAX-FREE INCOME FUND
[FINANCIAL HIGHLIGHTS TO BE PROVIDED]
25
<PAGE>
PaineWebber National Tax-Free Income Fund
- --------------------------------------------------------------
NATIONAL TAX-FREE INCOME FUND
[FINANCIAL HIGHLIGHTS TO BE PROVIDED]
26
<PAGE>
PaineWebber Municipal High Income Fund
- -----------------------------------------
MUNICIPAL HIGH INCOME FUND
[FINANCIAL HIGHLIGHTS TO BE PROVIDED]
27
<PAGE>
PaineWebber New York Tax-Free Income Fund
- -----------------------------------------
NEW YORK TAX-FREE INCOME FUND
[FINANCIAL HIGHLIGHTS TO BE PROVIDED]
28
<PAGE>
[BACK COVER]
<TABLE>
<CAPTION>
<S> <C> <C>
TICKER SYMBOL: California Tax-Free Income Class: A: Municipal High Income Class: A:
B: B:
C: C:
Y: None Y: None
National Tax-Free Income Class: A: New York Tax-Free Income Class: A:
B: B:
C: C:
Y: None Y: None
</TABLE>
If you want more information about the funds, the following documents are
available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS
Additional information about the funds' investments is available in the funds'
annual and semi-annual reports to shareholders. In the funds' annual reports you
will find a discussion of the market conditions and investment strategies that
significantly affected the funds' performance during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI):
The SAI provides more detailed information about the funds and is incorporated
by reference into this prospectus.
You may discuss your questions about the funds by contacting your PaineWebber
Financial Advisor. You may obtain free copies of annual and semi-annual reports
and the SAI by contacting the funds directly at 1-800-647-1568.
You may review and copy information about the funds, including shareholder
reports and the SAI, at the Public Reference Room of the Securities and Exchange
Commission. You can get text-only copies of reports and other information about
the funds:
o For a fee, by writing to or calling the SEC's Public Reference Room,
Washington, D.C. 20549-6009 Telephone: 1-800-SEC-0330
o Free, from the SEC's Internet website at: http://www.sec.gov
Investment Company Act File Nos.
PaineWebber Mutual Fund Trust - 811-4312
(PaineWebber California Tax-Free Income Fund and PaineWebber National
Tax-Free Income Fund)
PaineWebber Municipal Series - 811-5014
(PaineWebber Municipal High Income Fund and PaineWebber New York Tax-Free
Income Fund)
29
<PAGE>
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 a "Trust"). PaineWebber
California Tax-Free Income Fund and PaineWebber National Tax-Free Income Fund
are diversified series of PaineWebber Mutual Fund Trust. PaineWebber Municipal
High Income Fund and PaineWebber New York Tax-Free Income Fund are
non-diversified series of PaineWebber Municipal Series.
The investment adviser, administrator and distributor for each fund is
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
asset management subsidiary of PaineWebber Incorporated ("PaineWebber"). As
distributor for the funds, Mitchell Hutchins has appointed PaineWebber to serve
as the exclusive dealer for the sale of fund shares.
Portions of each fund's Annual Report to Shareholders are incorporated
by reference into this Statement of Additional Information. The Annual Reports
accompany this Statement of Additional Information. You may obtain an additional
copy of a fund's Annual Report by calling toll-free 1-800-647-1568.
This Statement of Additional Information ("SAI") is not a prospectus
and should be read only in conjunction with the funds' current Prospectus, dated
June 30, 1999. A copy of the Prospectus may be obtained by calling any
PaineWebber Financial Advisor or correspondent firm or by calling toll-free
1-800-647-1568. This SAI is dated June 30, 1999.
TABLE OF CONTENTS
PAGE
The Funds and Their Investment Policies............................ 2
The Funds' Investments, Related Risks and Limitations..............
Strategies Using Derivative Instrument.............................
Organization of the Trusts; Trustees and Officers and
Principal Holders of Securities....................................
Investment Advisory and Distribution Arrangements..................
Portfolio Transactions.............................................
Reduced Sales Charges, Additional Exchange and
Redemption Information and Other Services..........................
Conversion of Class B Shares.......................................
Valuation of Shares................................................
Performance Information............................................
Taxes..............................................................
Other Information..................................................
Financial Statements...............................................
Appendix........................................................... A-1
<PAGE>
THE FUNDS AND THEIR INVESTMENT POLICIES
No fund's investment objective may be changed without shareholder
approval. Except where noted, the other investment policies of each fund may be
changed by its board without shareholder approval. As with other mutual funds,
there is no assurance that a fund will achieve its investment objective.
CALIFORNIA TAX-FREE INCOME FUND'S investment objective is 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"). The fund normally 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").
California Tax-Free Income Fund normally invests at least 65% of its
total assets in investment grade municipal securities - that is, municipal
securities that have an investment grade long-term rating or one of the two
highest short-term ratings from a nationally recognized statistical rating
agency ("rating agency") or , if unrated, are determined by Mitchell Hutchins to
be of comparable quality. The fund may invest up to 35% of its total assets in
municipal securities that are not investment grade. The fund may invest more
than 25% of its net assets in Industrial Development Bonds and Private Activity
Bonds (defined below). The fund may not invest more than 10% of its total assets
in inverse floaters. The fund intends to invest no more than 5% of its total
assets in uninsured "non-appropriation" municipal lease obligations (defined
below). There is no percentage limitation on the fund's ability to invest in
other municipal lease obligations.
California Tax-Free Income Fund may invest up to 10% of its net assets
in illiquid securities. The fund may purchase securities on a when-issued or
delayed delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may also borrow for temporary or emergency purposes, but
not in excess of 10% of its total assets.
NATIONAL TAX-FREE INCOME FUND'S investment objective is to achieve 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.
National Tax-Free Income Fund normally invests at least 65% of its
total assets in investment grade municipal securities - that is, municipal
securities that have an investment grade long-term rating or one of the two
highest short-term ratings from a rating agency or , if unrated, are determined
by Mitchell Hutchins to be of comparable quality. The fund may invest up to 35%
of its total assets in municipal securities that are not investment grade. The
fund may invest more than 25% of its net assets in Industrial Development Bonds
and Private Activity Bonds (defined below). The fund may not invest more than
10% of its total assets in inverse floaters. The fund intends to invest no more
than 5% of its total assets in uninsured "non-appropriation" municipal lease
obligations (defined below). There is no percentage limitation on the fund's
ability to invest in other municipal lease obligations.
National Tax-Free Income Fund may invest up to 10% of its net assets in
illiquid securities. The fund may purchase securities on a when-issued or
delayed delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may also borrow for temporary or emergency purposes, but
not in excess of 10% of its total assets.
MUNICIPAL HIGH INCOME FUND'S investment objective is to provide high
current income exempt from federal income tax. The fund normally invests at
least 80% of its assets in municipal securities and may invest without limit in
2
<PAGE>
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.
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 lower grade municipal securities. The fund may invest more than 25%
of its net assets in Industrial Development Bonds and Private Activity Bonds
(defined below). The fund may not invest more than 10% of its total assets in
inverse floaters. The fund intends to invest no more than 5% of its total assets
in uninsured "non-appropriation" municipal lease obligations (defined below).
There is no percentage limitation on the fund's ability to invest in other
municipal lease obligations.
Municipal High Income Fund may invest up to 10% of its net assets in
illiquid securities. The fund may purchase securities on a when-issued or
delayed delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may also borrow for temporary or emergency purposes, but
not in excess of 10% of its total assets.
NEW YORK TAX-FREE INCOME FUND'S investment objective 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, it 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,
the fund invests at least 80% of its net assets in New York Obligations that pay
AMT exempt interest.
New York Tax-Free Income Fund normally invests at least 65% of its
total assets in investment grade municipal securities - that is, municipal
securities that have an investment grade long-term rating or one of the two
highest short-term ratings from a nationally recognized statistical rating
agency ("rating agency") or , if unrated, are determined by Mitchell Hutchins to
be of comparable quality. The fund may invest up to 35% of its total assets in
municipal securities that are not investment grade. The fund may invest more
than 25% of its net assets in Industrial Development Bonds and Private Activity
Bonds (defined below). The fund may not invest more than 10% of its total assets
in inverse floaters. The fund intends to invest no more than 5% of its total
assets in uninsured "non-appropriation" municipal lease obligations (defined
below). There is no percentage limitation on the fund's ability to invest in
other municipal lease obligations.
New York Tax-Free Income Fund may invest up to 10% of its net assets in
illiquid securities. The fund may purchase securities on a when-issued or
delayed delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may also borrow for temporary or emergency purposes, but
not in excess of 10% of its total assets.
THE FUNDS' INVESTMENTS, RELATED RISKS AND LIMITATIONS
The following supplements the information contained in the Prospectus
and above concerning the funds' investments, related risks and limitations.
Except as otherwise indicated in the Prospectus or the Statement of Additional
Information, the funds have established no policy limitations on their ability
to use the investments or techniques discussed in these documents.
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
3
<PAGE>
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. Various types of municipal bonds are described in the following
sections.
MUNICIPAL LEASE OBLIGATIONS. The term "municipal bonds" also includes
municipal lease obligations, such as leases, installment purchase contracts and
conditional sales contracts, and certificates of participation therein.
Municipal lease obligations are issued by state and local governments and
authorities to purchase land or various types of equipment or facilities and may
be subject to annual budget appropriations. The funds generally invest in
municipal lease obligations through certificates of participation.
Although municipal lease obligations do not constitute general
obligations of the municipality for which the municipality's taxing power is
pledged, they ordinarily are backed by the municipality's covenant to budget
for, appropriate and make the payments due under the lease obligation. The
leases underlying certain municipal lease obligations, however, provide that
lease payments are subject to partial or full abatement if, because of material
damage or destruction of the leased property, there is substantial interference
with the lessee's use or occupancy of such property. This "abatement risk" may
be reduced by the existence of insurance covering the leased property, the
maintenance by the lessee of reserve funds or the provision of credit
enhancements such as letters of credit.
Certain municipal lease obligations contain "non-appropriation" clauses
which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Some municipal lease obligations of this type
are insured as to timely payment of principal and interest, even in the event of
a failure by the municipality to appropriate sufficient funds to make payments
under the lease. However, in the case of an uninsured municipal lease
obligation, a fund's ability to recover under the lease in the event of a
non-appropriation or default will be limited solely to the repossession of
leased property without recourse to the general credit of the lessee, and
disposition of the property in the event of foreclosure might prove difficult.
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 "Taxes" below.
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 a 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
4
<PAGE>
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, 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 instruments
back to the bank. Such right generally is backed by the bank's irrevocable
letter of credit or guarantee and permits the fund to draw on the letter of
credit on demand, after specified notice, for all or any part of the principal
amount of the fund's participation interest plus accrued interest. Generally,
each fund intends to exercise the demand under the letters of credit or other
guarantees only (1) upon a default under the terms of the underlying bond, (2)
to maintain the fund's portfolio in accordance with its investment objective and
policies or (3) as needed to provide liquidity to the fund in order to meet
redemption requests. The ability of a bank to fulfill its obligations under a
letter of credit or guarantee might be affected by possible financial
difficulties of its borrowers, adverse interest rate or economic conditions,
regulatory limitations or other factors. Mitchell Hutchins will monitor the
pricing, quality and liquidity of the participation interests held by a fund,
and the credit standing of banks issuing letters of credit or guarantees
supporting such participation interests on the basis of published financial
information reports of rating services and bank analytical services.
TENDER OPTION BONDS. Tender option bonds are long-term municipal
securities sold by a bank subject to a "tender option" that gives the purchaser
the right to tender them to the bank at par plus accrued interest at designated
times (the "tender option"). The tender option may be exercisable 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 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
5
<PAGE>
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 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.
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.
YIELD FACTORS AND CREDIT RATINGS; NON-INVESTMENT GRADE BONDS. 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 rating agencies
are private services that provide ratings of the credit quality of bonds and
certain other securities, including municipal securities. A description of the
ratings assigned to municipal bonds by Moody's and S&P is included in the
Appendix to this SAI. Credit ratings attempt to evaluate the safety of principal
and interest payments, but they do not evaluate the volatility of a bond's value
or its liquidity and do not guarantee the performance of the issuer. Rating
agencies may fail to make timely changes in credit ratings in response to
subsequent events, so that an issuer's current financial condition may be better
or worse than the rating indicates. There is a risk that rating agencies may
downgrade a bond's rating. Subsequent to a bond's purchase by a fund, it may
cease to be rated or its rating may be reduced below the minimum rating required
for purchase by the fund. The funds may use these ratings in determining whether
to purchase, sell or hold a security. It should be emphasized, however, that
ratings are general and are not absolute standards of quality. Consequently,
municipal bonds with the same maturity, interest rate and rating may have
different market prices.
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, California personal income tax, 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 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
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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.
Investment grade securities are rated in one of the four highest rating
categories by a rating agency, such as Moody's or S&P, or, if unrated, are
determined to be of comparable quality by Mitchell Hutchins. Medium grade
municipal securities are investment grade and are rated A, Baa or MIG-2 by
Moody's or A, BBB or SP-2 by S&P, have received an equivalent rating from
another rating agency or are determined by Mitchell Hutchins to be of comparable
quality. Moody's considers bonds rated Baa (its lowest investment grade rating)
to have speculative characteristics. This means that changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case for higher rated bonds.
High yield municipal bonds (commonly known as municipal "junk bonds")
are non-investment grade bonds. This means they are rated Ba or lower by
Moody's, BB or lower by S&P, comparably rated by another rating agency or
determined by Mitchell Hutchins to be of comparable quality. The high yield
municipal bonds in which the funds may invest may
o be rated Ba, B or MIG-3 by Moody's or BB, B or SP-3 by S&P,
o have an equivalent rating from another rating agency, or
o if unrated, are determined by Mitchell Hutchins to be of comparable
quality.
A fund's investments in non-investment grade municipal bonds entail
greater risk than its investments in higher rated bonds. Non-investment grade
municipal bonds are considered predominantly speculative with respect to the
issuer's ability to pay interest and repay principal and may involve significant
risk exposure to adverse conditions. Non-investment grade municipal bonds
generally offer a higher current yield than that available for investment grade
issues and may be less sensitive to interest rate changes; however, they involve
higher risks, in that they are more sensitive to adverse changes market
conditions. During periods of economic downturn or rising interest rates, their
issuers may experience financial stress which could adversely affect their
ability to make payments of interest and principal and increase the possibility
of default.
The market for non-investment grade municipal bonds generally is
thinner and less active than that for higher quality securities, which may limit
a fund's ability to sell such securities at fair value in response to changes in
the economy or financial markets. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may also decrease the values and
liquidity of non-investment grade municipal bonds, especially in a thinly traded
market.
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
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commitment, its cost would be treated as unrealized depreciation and would be
amortized over the period the commitment is held by the fund.
ILLIQUID SECURITIES. The term "illiquid securities" for purposes of the
Prospectus and SAI means securities that cannot be disposed of within seven days
in the ordinary course of business at approximately the amount at which a fund
has valued the securities and includes, among other things, purchased
over-the-counter options, 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 each fund's board. The assets used as cover for over-the-counter
options written by the funds will be considered illiquid unless the
over-the-counter options are sold to qualified dealers who agree that the funds
may repurchase any over-the-counter options they write at a maximum price to be
calculated by a formula set forth in the option agreements. The cover for an
over-the-counter option written subject to this procedure would be considered
illiquid only to the extent that the maximum repurchase price under the formula
exceeds the intrinsic value of the option. To the extent a fund invests in
illiquid securities, it may not be able to readily liquidate such investments
and may have to sell other investments if necessary to raise cash to meet its
obligations. The lack of a liquid secondary market for illiquid securities may
make it more difficult for a fund to assign a value to those securities for
purposes of valuing its portfolio and calculating its net asset value.
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 bids 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 the applicable 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.
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 or
other obligations from a bank or securities dealer (or its affiliate) and
simultaneously commits to resell them to the counterparty at an agreed-upon date
or upon demand and at a price reflecting a market rate of interest unrelated to
the coupon rate or maturity of the purchased obligations. A fund maintains
custody of the underlying obligations prior to their repurchase, either through
its regular custodian or through a special "tri-party" custodian or
sub-custodian that maintains separate accounts for both the fund and its
counterparty. Thus, the obligation of the counterparty to pay the repurchase
price on the date agreed to or upon demand is, in effect, secured by such
obligations. Repurchase agreements carry certain risks not associated with
direct investments in securities, including a possible decline in the market
value of the underlying obligations. If their value becomes less than the
repurchase price, plus any agreed-upon additional amount, the counterparty must
provide additional collateral so that at all times the collateral is at least
equal to the repurchase price plus any agreed-upon additional amount. The
difference between the total amount to be received upon repurchase of the
obligations and the price that was paid by a fund upon acquisition is accrued as
interest and included in its net investment income. Repurchase agreements
involving obligations other than U.S. government securities (such as commercial
paper and corporate bonds) may be subject to special risks and may not have the
benefit of certain protections in the event of the counterparty's insolvency. If
the seller or guarantor becomes insolvent, the fund may suffer delays, costs and
possible losses in connection with the disposition of collateral. Each fund
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intends to enter into repurchase agreements only with counterparties in
transactions believed by Mitchell Hutchins to present minimum credit risks in
accordance with guidelines established by the fund's board.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each fund may purchase
securities on a "when-issued" basis or may purchase or sell securities for
delayed delivery, I.E., for issuance or delivery to or by the fund later than
the normal settlement date for such securities at a stated price and yield.
[When-issued securities include TBA ("to be assigned") securities. TBA
securities are usually mortgage-backed securities that are purchased on a
forward commitment basis with an approximate principal amount and no defined
maturity date. The actual principal amount and maturity date are determined upon
settlement when the specific mortgage pools are assigned.] A fund generally
would not pay for such securities or start earning interest on them until they
are received. However, when a fund undertakes a when-issued or delayed delivery
obligation, it immediately assumes the risks of ownership, including the risks
of price fluctuation. Failure of the issuer to deliver a security purchased by a
fund on a when-issued or delayed delivery basis may result in the fund's
incurring or missing an opportunity to make an alternative investment. Depending
on market conditions, a fund's when-issued and delayed delivery purchase
commitments could cause its net asset value per share to be more volatile,
because such securities may increase the amount by which the fund's total
assets, including the value of when-issued and delayed delivery securities held
by that fund, exceeds its net assets.
A security purchased on a when-issued or delayed delivery basis is
recorded as an asset on the commitment date and is subject to changes in market
value, generally based upon changes in the level of interest rates. Thus,
fluctuation in the value of the security from the time of the commitment date
will affect a fund's net asset value. When a fund commits to purchase securities
on a when-issued or delayed delivery basis, its custodian segregates assets to
cover the amount of the commitment. See "The Funds' Investments, Related risks
and Limitations--Segregated Accounts." A fund may sell the right to acquire the
security prior to delivery if Mitchell Hutchins deems it advantageous to do so,
which may result in a gain or loss to the fund.
DURATION. Duration is a measure of the expected life of a debt security
on a present value basis. Duration incorporates the debt security's yield,
coupon interest payments, final maturity and call features into one measure and
is one of the fundamental tools used by Mitchell Hutchins in portfolio selection
and yield curve positioning for a fund's bond investments. Duration was
developed as a more precise alternative to the concept "term to maturity."
Traditionally, a debt security's "term to maturity" has been used as a proxy for
the sensitivity of the security's price to changes in interest rates (which is
the "interest rate risk" or "volatility" of the security). However, "term to
maturity" measures only the time until a debt security provides for a final
payment, taking no account of the pattern of the security's payments prior to
maturity.
Duration takes the length of the time intervals between the present
time and the time that the interest and principal payments are scheduled or, in
the case of a callable debt security, expected to be made, and weights them by
the present values of the cash to be received at each future point in time. For
any debt security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. For example, depending on its
coupon and the level of market yields, a Treasury note with a remaining maturity
of five years might have a duration of 4.5 years. For mortgage-backed and other
securities that are subject to prepayments, put or call features or adjustable
coupons, the difference between the remaining stated maturity and the duration
is likely to be much greater.
Duration allows Mitchell Hutchins to make certain predictions as to the
effect that changes in the level of interest rates will have on the value of a
fund's portfolio of debt securities. For example, when the level of interest
rates increases by 1%, a debt security having a positive duration of three years
generally will decrease by approximately 3%. Thus, if Mitchell Hutchins
calculates the duration of a fund's portfolio of debt securities as three years,
it normally would expect the portfolio to change in value by approximately 3%
for every 1% change in the level of interest rates. However, various factors,
such as changes in anticipated prepayment rates, qualitative considerations and
market supply and demand, can cause particular securities to respond somewhat
differently to changes in interest rates than indicated in the above example.
Moreover, in the case of mortgage-backed and other complex securities, duration
calculations are estimates and are not precise. This is particularly true during
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periods of market volatility. Accordingly, the net asset value of a fund's
portfolio of debt securities may vary in relation to interest rates by a greater
or lesser percentage than indicated by the above example.
Futures, options and options on futures have durations that, in
general, are closely related to the duration of the securities that underlie
them. Holding long futures or call option positions will lengthen portfolio
duration by approximately the same amount as would holding an equivalent amount
of the underlying securities. Short futures or put options have durations
roughly equal to the negative duration of the securities that underlie these
positions, and have the effect of reducing portfolio duration by approximately
the same amount as would selling an equivalent amount of the underlying
securities.
There are some situations in which the standard duration calculation
does not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by the standard duration calculation is the case of mortgage-backed
securities. The stated final maturity of such securities is generally 30 years,
but current prepayment rates are critical in determining the securities'
interest rate exposure. In these and other similar 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.
LENDING OF PORTFOLIO SECURITIES. Each fund is authorized to lend its
portfolio securities to broker-dealers or institutional investors that Mitchell
Hutchins deems qualified. Lending securities enables a fund to earn additional
income, but could result in a loss or delay in recovering these securities. The
borrower of a fund's portfolio securities must maintain acceptable collateral
with that fund's custodian in an amount, marked to market daily, at least equal
to the market value of the securities loaned, plus accrued interest and
dividends. Acceptable collateral is limited to cash, U.S. government securities
and irrevocable letters of credit that meet certain guidelines established by
Mitchell Hutchins. Each fund may reinvest any cash collateral in money market
investments or other short-term liquid investments. In determining whether to
lend securities to a particular broker-dealer or institutional investor,
Mitchell Hutchins will consider, and during the period of the loan will monitor,
all relevant facts and circumstances, including the creditworthiness of the
borrower. Each fund will retain authority to terminate any of its loans at any
time. Each fund may pay fees in connection with a loan and may pay the borrower
or placing broker a negotiated portion of the interest earned on the
reinvestment of cash held as collateral. A fund will receive amounts equivalent
to any dividends, interest or other distributions on the securities loaned. Each
fund will regain record ownership of loaned securities to exercise beneficial
rights, such as voting and subscription rights, when regaining such rights is
considered to be in the fund's interest.
Pursuant to procedures adopted by the boards governing each fund's
securities lending program, PaineWebber has been retained to serve as lending
agent for each fund. The boards also have authorized the payment of fees
(including fees calculated as a percentage of invested cash collateral) to
PaineWebber for these services. Each board periodically reviews all portfolio
securities loan transactions for which PaineWebber acted as lending agent.
PaineWebber also has been approved as a borrower under each fund's securities
lending program.
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, it will
maintain with an approved custodian in a segregated account cash or liquid
securities, marked to market daily, in an amount at least equal to the fund's
obligation or commitment under such transactions. As described below under
"Strategies Using Derivative Instruments," segregated accounts may also be
required in connection with certain transactions involving options or futures.
TEMPORARY AND DEFENSIVE INVESTMENTS; MONEY MARKET INVESTMENTS. 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
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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.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES
[updated disclosure to be inserted]
SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL SECURITIES
[updated disclosure to be inserted]
INVESTMENT LIMITATIONS OF THE FUNDS
FUNDAMENTAL LIMITATIONS. The following fundamental investment
limitations cannot be changed for a fund without the affirmative vote of the
lesser of (a) more than 50% of the outstanding shares of the fund or (b) 67% or
more of the shares of the fund present at a shareholders' meeting if more than
50% of the outstanding shares are represented at the meeting in person or by
proxy. If a percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting from a change in values of
portfolio securities or amount of total assets will not be considered a
violation of any of the following limitations.
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, as amended ("Investment Company Act") and
then not in excess of 33 1/3% of the fund's total assets (including the amount
of the senior securities issued but reduced by any liabilities not constituting
senior securities) at the time of the issuance or borrowing, except that the
fund may borrow up to an additional 5% of its total assets (not including the
amount borrowed) for temporary or emergency purposes.
(3) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers' acceptances or
similar instruments will not be considered the making of a loan.
(4) engage in the business of underwriting securities of other issuers,
except to the extent that the fund might be considered an underwriter under the
federal securities laws in connection with its disposition of portfolio
securities.
(5) purchase or sell real estate, except that investments in securities
of issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by interests
in real estate are not subject to this limitation, and except that the fund may
exercise rights under agreements relating to such securities, including the
right to enforce security interests and to hold real estate acquired by reason
of such enforcement until that real estate can be liquidated in an orderly
manner.
(6) purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but the fund may purchase, sell or enter
into financial options and futures, forward and spot currency contracts, swap
transactions and other financial contracts or derivative instruments.
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(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:
(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 form 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
non-fundamental and may be changed by the vote of the appropriate board without
shareholder approval.
Each fund will not:
(1) invest more than 10% of its net assets in illiquid securities.
(2) purchase portfolio securities while borrowings in excess of 5% of
its total assets are outstanding.
(3) purchase securities on margin, except for short-term credit
necessary for clearance of portfolio transactions and except that the fund may
make margin deposits in connection with its use of financial options and
futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments.
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(4) engage in short sales of securities or maintain a short position,
except that the fund may (a) sell short "against the box" and (b) maintain short
positions in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts or
derivative instruments.
(5) purchase securities of other investment companies, except to the
extent permitted by the Investment Company Act of 1940 and except that this
limitation does not apply to securities received or acquired as dividends,
through offers of exchange, or as a result of reorganization, consolidation, or
merger (and except that a fund will not purchase securities of registered
open-end investment companies or registered unit investment trusts in reliance
on Sections 12(d)(1)(F) or 12(d)(1)(G) of the Investment Company Act of 1940).
STRATEGIES USING DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. 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 each fund's portfolio and also
to attempt to enhance income, realize gains or manage the duration of its
portfolio. A fund may enter into transactions involving one or more types of
Derivative Instruments under which the full value of its portfolio is at risk.
Under normal circumstances, however, each fund's use of these instruments will
place at risk a much smaller portion of its assets. In particular, each fund may
use the Derivative Instruments described below.
The funds might not use any derivative instruments or strategies, and
there can be no assurance that using any strategy will succeed. If the Mitchell
Hutchins is incorrect in its judgment on market values, interest rates or other
economic factors in using a derivative instrument or strategy, a fund may have
lower net income and a net loss on the investment.
OPTIONS ON 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 or currency underlying the option at a specified price
at any time during the term of the option or at specified times or at the
expiration of the option, depending on the type of option involved. The writer
of the call option, who receives the premium, has the obligation, upon exercise
of the option during the option term, to deliver the underlying security or
currency against payment of the exercise price. A put option is a similar
contract that gives its purchaser, in return for a premium, the right to sell
the underlying security or currency at a specified price during the option term
or at specified times or at the expiration of the option, depending on the type
of option involved. The writer of the put option, who receives the premium, has
the obligation, upon exercise of the option during the option term, to buy the
underlying security or currency at the exercise price.
OPTIONS ON DEBT SECURITIES INDICES--A index assigns relative values to
the securities included in the index and fluctuates with changes in the market
values of those securities. A securities index option operates in the same way
as a more traditional securities option, except that exercise of a securities
index option is effected with cash payment and does not involve delivery of
securities. Thus, upon exercise of a securities index option, the purchaser will
realize, and the writer will pay, an amount based on the difference between the
exercise price and the closing price of the securities index.
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 securities index value
at the close of trading of the contract and the price at which the futures
contract is originally struck. No physical delivery of the securities comprising
the index is made. Generally, contracts are closed out prior to the expiration
date of the contract.
MUNICIPAL DEBT AND INTEREST RATE FUTURES CONTRACTS--A municipal debt or
interest rate futures contracts are bilateral agreements pursuant to which one
party agrees to make, and the other party agrees to accept, delivery of a
specified type of debt security or currency at a specified future time and at a
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specified price. Although such futures contracts by their terms call for actual
delivery or acceptance of debt securities or currency, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery.
OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar
to options on securities or currency, except that an option on a futures
contract gives the purchaser the right, in return for the premium, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase or sell a
security or currency, at a specified price at any time during the option term or
at specified times or at the expiration of the option, depending on the type of
option involved. Upon exercise of the option, the delivery of the futures
position to the holder of the option will be accompanied by delivery of the
accumulated balance that represents the amount by which the market price of the
futures contract exceeds, in the case of a call, or is less than, in the case of
a put, the exercise price of the option on the future. The writer of an option,
upon exercise, will assume a short position in the case of a call and a long
position in the case of a put.
GENERAL DESCRIPTION OF STRATEGIES USING DERIVATIVE INSTRUMENTS. Hedging
strategies can be broadly categorized as "short hedges" and "long hedges." A
short hedge is a purchase or sale of a Derivative Instrument intended partially
or fully to offset potential declines in the value of one or more investments
held in a fund's portfolio. Thus, in a short hedge a fund takes a position in a
Derivative Instrument whose price is expected to move in the opposite direction
of the price of the investment being hedged. For example, a fund might purchase
a put option on a security to hedge against a potential decline in the value of
that security. If the price of the security declined below the exercise price of
the put, a fund could exercise the put and thus limit its loss below the
exercise price to the premium paid plus transaction costs. In the alternative,
because the value of the put option can be expected to increase as the value of
the underlying security declines, a fund might be able to close out the put
option and realize a gain to offset the decline in the value of the security.
Conversely, a long hedge is a purchase or sale of a Derivative
Instrument intended partially or fully to offset potential increases in the
acquisition cost of one or more investments that a fund intends to acquire.
Thus, in a long hedge, a fund takes a position in a Derivative Instrument whose
price is expected to move in the same direction as the price of the prospective
investment being hedged. For example, a fund might purchase a call option on a
security it intends to purchase in order to hedge against an increase in the
cost of the security. If the price of the security increased above the exercise
price of the call, a fund could exercise the call and thus limit its acquisition
cost to the exercise price plus the premium paid and transaction costs.
Alternatively, a fund might be able to offset the price increase by closing out
an appreciated call option and realizing a gain.
A fund may purchase and write (sell) straddles on securities or indices
of securities. A long straddle is a combination of a call and a put option
purchased on the same security or on the same futures contract, where the
exercise price of the put is equal to the exercise price of the call. A fund
might enter into a long straddle when Mitchell Hutchins believes it likely that
the prices of the securities will be more volatile during the term of the option
than the option pricing implies. A short straddle is a combination of a call and
a put written on the same security where the exercise price of the put is equal
to the exercise price of the call. A fund might enter into a short straddle when
Mitchell Hutchins believes it unlikely that the prices of the securities will be
as volatile during the term of the option as the option pricing implies.
Derivative Instruments on securities generally are used to hedge
against price movements in one or more particular securities positions that a
fund owns or intends to acquire. Derivative Instruments on stock indices, in
contrast, generally are used to hedge against price movements in broad market
sectors in which a fund has invested or expects to invest. Derivative
Instruments on debt securities may be used to hedge either individual securities
or broad fixed income market sectors.
Income strategies using Derivative Instruments may include the writing
of covered options to obtain the related option premiums. Gain strategies may
include using Derivative Instruments to increase or decrease a fund's exposure
to different asset classes without buying or selling the underlying instruments.
A fund also may use derivatives to simulate full investment by the fund while
maintaining a cash balance for fund management purposes (such as to provide
liquidity to meet anticipated shareholder sales of fund shares and for fund
operating expenses).
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The use of Derivative Instruments is subject to applicable regulations
of the SEC, the several options and futures exchanges upon which they are traded
and the Commodity Futures Trading Commission ("CFTC"). In addition, a fund's
ability to use Derivative Instruments may be limited by tax considerations. See
"Taxes."
In addition to the products, strategies and risks described below and
in the Prospectus, Mitchell Hutchins 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 for a fund to the extent that they are consistent with the fund's
investment objective and permitted by its investment limitations and applicable
regulatory authorities. The funds' Prospectus or 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 the
ability of Mitchell Hutchins to predict movements of the overall securities,
interest rate or currency exchange markets, which requires different skills than
predicting changes in the prices of individual securities. While Mitchell
Hutchins is experienced in the use of Derivative Instruments, there can be no
assurance that any particular strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation,
between price movements of a Derivative Instrument and price movements of the
investments that are being hedged. For example, if the value of a Derivative
Instrument used in a short hedge increased by less than the decline in value of
the hedged investment, the hedge would not be fully successful. Such a lack of
correlation might occur due to factors affecting the markets in which Derivative
Instruments are traded, rather than the value of the investments being hedged.
The effectiveness of hedges using Derivative Instruments on indices will depend
on the degree of correlation between price movements in the index and price
movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly
or partially offsetting the negative effect of unfavorable price movements in
the investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a fund entered into a short
hedge because Mitchell Hutchins projected a decline in the price of a security
in that fund's portfolio, and the price of that security increased instead, the
gain from that increase might be wholly or partially offset by a decline in the
price of the Derivative Instrument. Moreover, if the price of the Derivative
Instrument declined by more than the increase in the price of the security, the
fund could suffer a loss. In either such case, the fund would have been in a
better position had it not hedged at all.
(4) As described below, a fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Derivative Instruments involving obligations to third parties
(i.e., Derivative Instruments other than purchased options). If the fund was
unable to close out its positions in such Derivative Instruments, it might be
required to continue to maintain such assets or accounts or make such payments
until the positions expired or matured. These requirements might impair a fund's
ability to sell a portfolio security or make an investment at a time when it
would otherwise be favorable to do so, or require that the fund sell a portfolio
security at a disadvantageous time. A fund's ability to close out a position in
a Derivative Instrument prior to expiration or maturity depends on the existence
of a liquid secondary market or, in the absence of such a market, the ability
and willingness of a counterparty to enter into a transaction closing out the
position. Therefore, there is no assurance that any hedging position can be
closed out at a time and price that is favorable to a fund.
COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS. Transactions using
Derivative Instruments, other than purchased options, expose the funds to an
obligation to another party. A fund will not enter into any such transactions
unless it owns either (1) an offsetting ("covered") position in securities,
currencies or other options or futures contracts or (2) cash or liquid
securities, with a value sufficient at all times to cover its potential
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obligations to the extent not covered as provided in (1) above. Each fund will
comply with SEC guidelines regarding cover for such transactions and will, if
the guidelines so require, set aside cash or liquid securities in a segregated
account with its custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding Derivative Instrument is open, unless
they are replaced with similar assets. As a result, committing a large portion
of a fund's assets to cover positions or to segregated accounts could impede
portfolio management or the fund's ability to meet redemption requests or other
current obligations.
OPTIONS. The funds may purchase put and call options, and write (sell)
covered put or call options on securities in which they invest and related
indices. The purchase of call options may serve as a long hedge, and the
purchase of put options may serve as a short hedge. A fund may also use options
to attempt to realize gains by increasing or reducing its exposure to an asset
class without purchasing or selling the underlying securities. Writing covered
put or call options can enable a fund to enhance income by reason of the
premiums paid by the purchasers of such options. Writing covered call options
serves as a limited short hedge, because declines in the value of the hedged
investment would be offset to the extent of the premium received for writing the
option. However, if the security appreciates to a price higher than the exercise
price of the call option, it can be expected that the option will be exercised
and the affected fund will be obligated to sell the security at less than its
market value. Writing covered put options serves as a limited long hedge,
because increases in the value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if the security
depreciates to a price lower than the exercise price of the put option, it can
be expected that the put option will be exercised and the fund will be obligated
to purchase the security at more than its market value. The securities or other
assets used as cover for over-the-counter options written by a fund would be
considered illiquid to the extent described under "The Funds' Investments,
Related Risks and Limitations--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, over-the-counter options on bonds are
European-style options. This means that the option can only be exercised
immediately prior to its expiration. This is in contract to American-style
options that may be exercised at any time. There are also other types of options
that may be exercised on certain specified dates before expiration. Options that
expire unexercised have no value.
A fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, a fund may terminate
its obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit a fund to realize profits or limit
losses on an option position prior to its exercise or expiration.
The funds may purchase and write both exchange-traded and
over-the-counter options. However, exchange-traded or liquid over-the-counter
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 over-the-counter 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,
over-the-counter options are contracts between a fund and its counterparty
(usually a securities dealer or a bank) with no clearing organization guarantee.
Thus, when a fund purchases or writes an over-the-counter option, it relies on
the counterparty to make or take delivery of the underlying investment upon
exercise of the option. Failure by the counterparty to do so would result in the
loss of any premium paid by the fund as well as the loss of any expected benefit
of the transaction.
The funds' ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. The funds
intend to purchase or write only those exchange-traded options for which there
appears to be a liquid secondary market. However, there can be no assurance that
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such a market will exist at any particular time. Closing transactions can be
made for over-the-counter options only by negotiating directly with the
counterparty, or by a transaction in the secondary market if any such market
exists. Although the funds will enter into over-the-counter options only with
counterparties that are expected to be capable of entering into closing
transactions with the funds, there is no assurance that a fund will in fact be
able to close out an over-the-counter option position at a favorable price prior
to expiration. In the event of insolvency of the counterparty, a fund might be
unable to close out an over-the-counter option position at any time prior to its
expiration.
If a fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered put or call
option written by the fund could cause material losses because the fund would be
unable to sell the investment used as cover for the written option until the
option expires or is exercised.
A fund may purchase and write put and call options on indices in much
the same manner as the more traditional options discussed above, except the
index options may serve as a hedge against overall fluctuations in a securities
market (or market sector) rather than anticipated increases or decreases in the
value of a particular security.
LIMITATIONS ON THE USE OF OPTIONS. The use of options is governed by
the following guidelines, which can be changed by each fund's board without
shareholder vote:
(1) A fund may purchase a put or call option, including any
straddle or spread, only if the value of its premium, when aggregated with the
premiums on all other options held by the fund, does not exceed 5% of its total
assets.
(2) The aggregate value of securities underlying put options
written by a fund, determined as of the date the put options are written, will
not exceed 50% of its net assets.
(3) The aggregate premiums paid on all options (including options
on securities and securities indices and options on futures contracts) purchased
by a fund that are held at any time will not exceed 20% of its net assets.
FUTURES. The funds may purchase and sell municipal bond index futures
contracts, municipal debt future contracts and interest rate futures contracts.
A fund may purchase put and call options, and write covered put and call
options, on futures in which it is allowed to invest. The purchase of futures or
call options thereon can serve as a long hedge, and the sale of futures or the
purchase of put options thereon can serve as a short hedge. Writing covered call
options on futures contracts can serve as a limited short hedge, and writing
covered put options on futures contracts can serve as a limited long hedge,
using a strategy similar to that used for writing covered options on securities
or indices. In addition, a fund may purchase or sell futures contracts or
purchase options thereon to increase or reduce its exposure to an asset class
without purchasing or selling the underlying securities.
Futures strategies also can be used to manage the average duration of a
fund's portfolio. If Mitchell Hutchins 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 the fund's portfolio, the fund may
buy a futures contract or a call option thereon, or sell a put option thereon.
A fund may also write put options on futures contracts while at the
same time purchasing call options on the same futures contracts in order
synthetically to create a long futures contract position. Such options would
have the same strike prices and expiration dates. A fund will engage in this
strategy only when it is more advantageous to a fund than is purchasing the
futures contract.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, "initial margin" consisting of cash, obligations of
the United States or obligations fully guaranteed as to principal and interest
by the United States, in an amount generally equal to 10% or less of the
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<PAGE>
contract value. Margin must also be deposited when writing a call option on a
futures contract, in accordance with applicable exchange rules. Unlike margin in
securities transactions, initial margin on futures contracts does not represent
a borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to a fund at the termination of the transaction if all
contractual obligations have been satisfied. Under certain circumstances, such
as periods of high volatility, a fund may be required by an exchange to increase
the level of its initial margin payment, and initial margin requirements might
be increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of each fund's obligations to or from a futures
broker. When a fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a fund purchases or
sells a futures contract or writes a call option thereon, it is subject to daily
variation margin calls that could be substantial in the event of adverse price
movements. If a fund has insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a time when such sales are
disadvantageous.
Holders and writers of futures positions and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The funds intend to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a future or related option can vary from
the previous day's settlement price; once that limit is reached, no trades may
be made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If a fund were unable to liquidate a futures or related options
position due to the absence of a liquid secondary market or the imposition of
price limits, it could incur substantial losses. A fund would continue to be
subject to market risk with respect to the position. In addition, except in the
case of purchased options, a fund would continue to be required to make daily
variation margin payments and might be required to maintain the position being
hedged by the future or option or to maintain cash or securities in a segregated
account.
Certain characteristics of the futures market might increase the risk
that movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, "program trading" and
other investment strategies might result in temporary price distortions.
LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS. The use of
futures and related options is governed by the following guidelines, which can
be changed by a fund's board without shareholder vote:
(1) To the extent a fund enters into futures contracts and options
on futures positions that are not for bona fide hedging purposes (as defined by
the CFTC), the aggregate initial margin and premiums on those positions
(excluding the amount by which options are "in-the-money") may not exceed 5% of
its net assets.
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(2) The aggregate premiums paid on all options (including options
on securities and securities indices and options on futures contracts) purchased
by each fund that are held at any time will not exceed 20% of its net assets.
(3) The aggregate margin deposits on all futures contracts and
options thereon held at any time by each fund will not exceed 5% of its total
assets.
ORGANIZATION OF TRUSTS; TRUSTEES AND OFFICERS AND PRINCIPAL HOLDERS OF
SECURITIES
Mutual Fund Trust was formed on November 21, 1986 as a business trust
under the laws of the Commonwealth of Massachusetts. Municipal Series was formed
on January 28, 1987 as a business trust under the laws of the Commonwealth of
Massachusetts. Each Trust has two operating series and is governed by a board of
trustees, which is authorized to establish additional series and to issue an
unlimited number of shares of beneficial interest of each existing or future
series, par value $0.001 per share. The applicable board oversees each fund's
operations.
The trustees and executive officers of each Trust, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
<S> <C> <C>
Margo N. Alexander**; 52 Trustee and President Mrs. Alexander is chairman (since March 1999),
chief executive officer and a director of Mitchell
Hutchins (since January 1995), and an executive
vice president and a director of PaineWebber
(since March 1984). Mrs. Alexander is
president and a director or trustee of 32
investment companies for which Mitchell
Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.
Richard Q. Armstrong; 64 Trustee Mr. Armstrong is chairman and principal of
R.Q.A. Enterprises R.Q.A. Enterprises (management consulting
One Old Church Road firm)(since April 1991 and principal occupation
Unit #6 since March 1995). Mr. Armstrong was
Greenwich, CT 06830 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 31
investment companies for which Mitchell
Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.
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<PAGE>
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
E. Garrett Bewkes, Jr.**; 72 Trustee and Chairman of Mr. Bewkes is a director of Paine Webber Group
the Board of Trustees Inc. ("PW Group") (holding company of
PaineWebber and Mitchell Hutchins). Prior to
December 1995, he was a consultant to PW
Group. Prior to 1988, he was chairman of the
board, president and chief executive officer of
American Bakeries Company. Mr. Bewkes is a
director of Interstate Bakeries Corporation.
Mr. Bewkes is a director or trustee of 35
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Richard R. Burt; 52 Trustee Mr. Burt is chairman of IEP Advisors, Inc.
1275 Pennsylvania Ave, N.W. (international investments and consulting firm)
Washington, DC 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 31 investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Mary C. Farrell**; 49 Trustee Ms. Farrell is a managing director, senior
investment strategist and member of the
Investment Policy Committee of PaineWebber.
Ms. Farrell joined PaineWebber in 1982. She is
a member of the 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 31 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
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<PAGE>
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
Meyer Feldberg; 57 Trustee Mr. Feldberg is Dean and Professor of
Columbia University Management of the Graduate School of Business,
101 Uris Hall Columbia University. Prior to 1989, he was
New York, NY 10027 president of the 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 34 investment companies
for which Mitchell Hutchins, PaineWebber or one
of their affiliates serves as investment
adviser.
George W. Gowen; 69 Trustee Mr. Gowen is a partner in the law firm of
666 Third Avenue Dunnington, Bartholow & Miller. Prior to May
New York, NY 10017 1994, he was a partner in the law firm of
Fryer, Ross & Gowen. Mr. Gowen is a director
or trustee of 34 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Frederic V. Malek; 62 Trustee Mr. Malek is chairman of Thayer Capital
1455 Pennsylvania Ave, N.W. Partners (merchant bank). From January 1992 to
Suite 350 November 1992, he was campaign manager of
Washington, DC 20004 Bush-Quayle `92. 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), Manor Care, Inc. (health care) and
Northwest Airlines Inc. Mr. Malek is a
director or trustee of 31 investment companies
for which Mitchell Hutchins, PaineWebber or one
of their affiliates serves as investment
adviser.
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<PAGE>
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
Carl W. Schafer; 63 Trustee Mr. Schafer is president of the Atlantic
66 Witherspoon Street, #1100 Foundation (charitable foundation supporting
Princeton, NJ 08542 mainly oceanographic exploration and
research). He is a director of Base Ten
Systems, Inc. (software), Roadway Express, Inc.
(trucking), The Guardian Group of Mutual Funds,
the Harding, Loevner Funds, Evans Systems, Inc.
(motor fuels, convenience store and diversified
company), Electronic Clearing House, Inc.
(financial transactions processing), Frontier
Oil Corporation and Nutraceutix, Inc.
(biotechnology company). Prior to January
1993, he was chairman of the Investment
Advisory Committee of the Howard Hughes Medical
Institute. Mr. Schafer is a director or
trustee of 31 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Cynthia N. Bow; 40 Vice President Ms. Bow is a vice president and a portfolio
(Mutual Fund Trust only) manager of Mitchell Hutchins. Ms. Bow has been
with 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; 42 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; 30 Vice President and Mr. Lee is a vice president and a manager of
Assistant Treasurer the mutual fund finance department of Mitchell
Hutchins. Prior to September 1997, he was an
audit manager in the financial services
practice of Ernst & Young LLP. Mr. Lee is a
vice president and assistant treasurer of 32
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as an investment adviser.
Dennis McCauley; 52 Vice President Mr. McCauley is a managing director and chief
investment officer--fixed income of Mitchell
Hutchins. Prior to December 1994, he was
director of fixed income investments of IBM
Corporation. Mr. McCauley is a vice president
of 22 investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
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NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
Ann E. Moran; 41 Vice President and Ms. Moran is a vice president and a manager of
Assistant Treasurer the mutual fund finance department of Mitchell
Hutchins. Ms. Moran is a vice president and
assistant treasurer of 32 investment companies
for which Mitchell Hutchins, PaineWebber or one
of their affiliates serves as investment
adviser.
Richard S. Murphy; 44 Vice President Mr. Murphy is a senior vice president and a
(Mutual Fund Trust only) portfolio manager of Mitchell Hutchins. Prior
to 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; 47 Vice President and Ms. O'Donnell is a senior vice president and
Secretary deputy general counsel of Mitchell Hutchins.
Ms. O'Donnell is a vice president and secretary
of 31 investment companies and a vice president
and assistant secretary of one investment
company for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.
Emil Polito; 38 Vice President Mr. Polito is a senior vice president and
director of operations and control for Mitchell
Hutchins. Mr. Polito is a vice president of 32
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Victoria E. Schonfeld; 48 Vice President Ms. Schonfeld is a managing director and
general counsel of Mitchell Hutchins (since May
1994) and a senior vice president of
PaineWebber (since July 1995). Prior to May
1994, she was a partner in the law firm of
Arnold & Porter. Ms. Schonfeld is a vice
president of 31 investment companies and a vice
president and secretary of one investment
company for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves
as investment adviser.
Paul H. Schubert; 36 Vice President and Mr. Schubert is a senior vice president 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
32 investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
23
<PAGE>
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
Barney A. Taglialatela; 38 Vice President and Mr. Taglialatela is a vice president and a
Assistant Treasurer manager of the mutual fund finance department
of Mitchell Hutchins. Prior to February 1995,
he was a manager of the mutual fund finance
division of Kidder Peabody Asset Management,
Inc. Mr. Taglialatela is a vice president and
assistant treasurer of 32 investment companies
for which Mitchell Hutchins, PaineWebber or one
of their affiliates serves as investment
adviser.
William W. Veronda; 53 Vice President Mr. Veronda is a senior vice president of
(PW Municipal Series Mitchell Hutchins. Prior to September 1995, he
only) was a senior 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; 37 Vice President and Mr. Weller is a first vice president and
Assistant Secretary associate general counsel of Mitchell
Hutchins. Prior to May 1995, he was an
attorney in private practice. Mr. Weller is a
vice president and assistant secretary of 31
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
- -------------
<FN>
* 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.
</FN>
</TABLE>
Each Trust pays trustees who are not "interested persons" of the Trust
("disinterested trustees") $1,000 annually for each series and an additional up
to $150 per series for each board meeting and each separate meeting of a board
committee. 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.
24
<PAGE>
The table below includes certain information relating to the
compensation of the current board members who held office with the Trusts or
with other PaineWebber funds during the funds' fiscal years ended [February 28,
1998].
<TABLE>
<CAPTION>
COMPENSATION TABLE+
AGGREGATE AGGREGATE
COMPENSATION FROM COMPENSATION TOTAL COMPENSATION FROM
MUTUAL FUND TRUST* FROM MUNICIPAL THE TRUSTS AND THE FUND
NAME OF PERSON, POSITION SERIES* COMPLEX**
<S> <C> <C> <C>
Richard Q. Armstrong, $101,372
Trustee
Richard R. Burt, 101,372
Trustee
Meyer Feldberg, 116,222
Trustee
George W. Gowen, 108,272
Trustee
Frederic V. Malek, 101,372
Trustee
Carl W. Schafer, 101,372
Trustee
- --------------------
<FN>
+ Only independent board members are compensated by the Trusts and identified above; board members who are
"interested persons," as defined by the Investment Company Act, do not receive compensation.
* Represents fees paid to each Trustee from the Trust indicated for the fiscal year ended February 28, 1999.
** Represents total compensation paid during the calendar year ended December 31, 1998, to each board member by 31
investment companies (33 in the case of Messrs. Feldberg and Gowen) for which Mitchell Hutchins, PaineWebber or
one of their affiliates served as investment adviser. No fund within the PaineWebber fund complex has a bonus,
pension, profit sharing or retirement plan.
</FN>
</TABLE>
PRINCIPAL HOLDERS OF SECURITIES
As of [June 1, 1999], the funds' records showed no shareholders as
owning 5% or more of any class of a fund's shares.
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the
investment adviser and administrator pursuant to a separate contract (each an
"Advisory Contract") with each Trust. The Advisory Contract for Mutual Fund
Trust is dated April 21, 1988 and supplemented by a Fee Agreement dated June 30,
1992 with respect to National Tax-Free Income Fund. The Advisory Contract for
Municipal Series is dated July 1, 1989. Under the applicable Advisory Contract,
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.
25
<PAGE>
During each of the periods indicated, Mitchell Hutchins earned (or
accrued) advisory fees in the amounts set forth below:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED FEBRUARY 28/29,
1999 1998 1997
<S> <C> <C> <C>
California Tax-Free Income Fund.......... $ 776,955 $ 902,327
National Tax-Free Income Fund............ 1,634,990 2,022,871
Municipal High Income Fund............... 551,107 555,499
New York Tax-Free Income Fund............ 264,754 312,553
(of which (of which
$117,350 was $123,590 was
waived) waived)
</TABLE>
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 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.
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:
26
<PAGE>
<TABLE>
<CAPTION>
FOR THE FIVE
MONTHS ENDED FISCAL YEAR ENDED
JULY 31, 1997 FEBRUARY 28, 1997
<S> <C> <C> <C>
California Tax-Free Income Fund.......... $5,924 $16,293
National Tax-Free Income Fund............... $15,757 $43,965
Municipal High Income Fund.................. $5,104 $13,436
New York Tax-Free Income Fund............... $2,077 $7,682
(of which $7,682
was waived)
</TABLE>
Subsequent to July 31, 1997, PFPC (not the funds) pays PaineWebber for
certain transfer agency related services that PFPC has delegated to PaineWebber.
During the fiscal years ended February 28, 1998 and February 28, 1999,
the funds paid (or accrued) no fees to PaineWebber for its services as
securities lending agent.
NET ASSETS. The following table shows the approximate net assets as of
May 31, 1998, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser or sub-adviser. An
investment company may fall into more than one of the categories below.
NET ASSETS
INVESTMENT CATEGORY ($MIL)
Domestic (excluding Money Market)................
Global...........................................
Equity/Balanced..................................
Fixed Income (excluding Money Market)............
Taxable Fixed Income.....................
Tax-Free Fixed Income....................
Money Market Funds...............................
PERSONAL TRADING POLICIES. Mitchell Hutchins personnel may invest in
securities for their own accounts pursuant to a code of ethics that describes
the fiduciary duty owed to shareholders of PaineWebber mutual funds and other
Mitchell Hutchins advisory accounts by all Mitchell Hutchins' directors,
officers and employees, establishes procedures for personal investing and
restricts certain transactions. For example, employee accounts generally must be
maintained at PaineWebber, personal trades in most securities require
pre-clearance and short-term trading and participation in initial public
offerings generally are prohibited. In addition, the code of ethics puts
restrictions on the timing of personal investing in relation to trades by
PaineWebber funds and other Mitchell Hutchins advisory clients.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
each class of shares of each fund under separate distribution contracts with
each Trust (collectively, "Distribution Contracts"). Each Distribution Contract
requires Mitchell Hutchins to use its best efforts, consistent with its other
businesses, to sell shares of the applicable fund. Shares of each fund are
offered continuously. Under separate exclusive dealer agreements between
Mitchell Hutchins and PaineWebber relating to each class of shares of the funds
(collectively, "Exclusive Dealer Agreements"), PaineWebber and its correspondent
firms sell each fund's shares.
27
<PAGE>
Under separate plans of distribution pertaining to the Class A, Class B
and Class C shares of each fund adopted by each Trust in the manner prescribed
under Rule 12b-1 under the Investment Company Act of 1940 (each, respectively, a
"Class A Plan," "Class B Plan" and "Class C Plan," and collectively, "Plans"),
each fund pays Mitchell Hutchins a service fee, accrued daily and payable
monthly, at the annual rate of 0.25% of the average daily net assets of each
class of shares. Under the Class B Plan, each fund pays Mitchell Hutchins a
distribution fee, accrued daily and payable monthly, at the annual rate of 0.75%
of the average daily net assets of the Class B shares. Under the Class C Plan,
each fund pays Mitchell Hutchins a distribution fee, accrued daily and payable
monthly, at the annual rate of 0.50% of the average daily net assets of the
Class C shares. There is no distribution plan with respect to the funds' Class Y
shares.
Mitchell Hutchins uses the service fees under the Plans for Class A, B
and C shares primarily to pay PaineWebber for shareholder servicing, currently
at the annual rate of 0.25% of the aggregate investment amounts maintained in
each fund by PaineWebber clients. PaineWebber then compensates its Financial
Advisors 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:
o Offset the commissions it pays to PaineWebber for selling
each fund's Class B and Class C shares, respectively.
o 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 Financial Advisors when Class B and Class C
shares are bought by investors, as well as on an ongoing basis. Mitchell
Hutchins receives no special compensation from any of the funds or investors at
the time Class B or C shares are bought.
Mitchell Hutchins receives the proceeds of the initial sales charge
paid when Class A shares are bought and of the contingent deferred sales charge
paid upon sales of shares. These proceeds may be used to cover distribution
expenses.
The Plans and the related Distribution Contracts for Class A, Class B
and Class C shares specify that each fund must pay service and distribution fees
to Mitchell Hutchins for its activities, not as reimbursement for specific
expenses incurred. Therefore, even if Mitchell Hutchins' expenses exceed the
service or distribution fees it receives, the funds will not be obligated to pay
more than those fees. On the other hand, if Mitchell Hutchins' expenses are less
than such fees, it will retain its full fees and realize a profit. Expenses in
excess of service and distribution fees received or accrued through the
termination date of any Plan will be Mitchell Hutchins' sole responsibility and
not that of the funds. Annually, the board of each fund reviews the Plans and
Mitchell Hutchins' corresponding expenses for each class separately from the
Plans and expenses of the other classes.
Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the applicable board at least quarterly, and the board members will
review, reports regarding all amounts expended under the Plan and the purposes
for which such expenditures were made, (2) the Plan will continue in effect only
so long as it is approved at least annually, and any material amendment thereto
is approved, by the applicable board, including those board members who are not
"interested persons" of the Trust and who have no direct or indirect financial
interest in the operation of the Plan or any agreement related to the Plan,
acting in person at a meeting called for that purpose, (3) payments by a fund
under the Plan shall not be materially increased without the affirmative vote of
the holders of a majority of the outstanding shares of the relevant class and
(4) while the Plan remains in effect, the selection and nomination of board
members who are not "interested persons" of the Trust shall be committed to the
discretion of the board members who are not "interested persons" of that Trust.
28
<PAGE>
In reporting amounts expended under the Plans to the board members,
Mitchell Hutchins allocates expenses attributable to the sale of each class of
each fund's shares to such class based on the ratio of sales of shares of such
class to the sales of all three classes of shares. The fees paid by one class of
a fund's shares will not be used to subsidize the sale of any other class of
fund shares.
The funds paid (or accrued) the following service and/or distribution
fees to Mitchell Hutchins under the Class A, Class B and Class C Plans during
the fiscal year ended February 28, 1999:
<TABLE>
<CAPTION>
CALIFORNIA NEW YORK TAX-
TAX-FREE INCOME NATIONAL TAX-FREE MUNICIPAL HIGH FREE INCOME
FUND FUND INCOME FUND FUND
<S> <C> <C> <C> <C>
Class A.................
Class B.................
Class C.................
</TABLE>
Mitchell Hutchins estimates that it and its parent corporation,
PaineWebber, incurred the following shareholder service-related and
distribution-related expenses with respect to each fund during the fiscal year
ended February 28, 1999:
<TABLE>
<CAPTION>
NEW YORK
CALIFORNIA NATIONAL MUNICIPAL TAX-FREE
TAX-FREE INCOME TAX-FREE INCOME HIGH INCOME INCOME
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
CLASS A
Marketing and advertising...............
Amortization of commissions.............
Printing of prospectuses and statements
of additional information...............
Branch network costs allocated and
interest expense........................
Service fees paid to PaineWebber
Financial Advisors......................
CLASS B
Marketing and advertising...............
Amortization of commissions.............
Printing of prospectuses and statements
of additional information...............
Branch network costs allocated and
interest expense........................
Service fees paid to PaineWebber
Financial Advisors......................
CLASS C
Marketing and advertising...............
Amortization of commissions.............
Printing of prospectuses and statements
of additional information...............
Branch network costs allocated and
interest expense........................
29
<PAGE>
NEW YORK
CALIFORNIA NATIONAL MUNICIPAL TAX-FREE
TAX-FREE INCOME TAX-FREE INCOME HIGH INCOME INCOME
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
Service fees paid to PaineWebber
Financial Advisors......................
</TABLE>
"Marketing and advertising" includes various internal costs allocated
by Mitchell Hutchins to its efforts at distributing the funds' shares. These
internal costs encompass office rent, salaries and other overhead expenses of
various departments and areas of operations of Mitchell Hutchins. "Branch
network costs allocated and interest expense" consist of an allocated portion of
the expenses of various PaineWebber departments involved in the distribution of
the funds' shares, including the PaineWebber retail branch system.
In approving each fund's overall Flexible PricingSM system of
distribution, the applicable board considered several factors, including that
implementation of Flexible Pricing would (1) enable investors to choose the
purchasing option best suited to their individual situation, thereby encouraging
current shareholders to make additional investments in the fund and attracting
new investors and assets to the fund to the benefit of the fund and its
shareholders, (2) facilitate distribution of the fund's shares and (3) maintain
the competitive position of the fund in relation to other funds that have
implemented or are seeking to implement similar distribution arrangements.
In approving the Class A Plan, each board considered all the features
of the distribution system, including (1) the conditions under which initial
sales charges would be imposed and the amount of such charges, (2) Mitchell
Hutchins' belief that the initial sales charge combined with a service fee would
be attractive to PaineWebber Financial Advisors and correspondent firms,
resulting in greater growth of the fund than might otherwise be the case, (3)
the advantages to the shareholders of economies of scale resulting from growth
in the fund's assets and potential continued growth, (4) the services provided
to the fund and its shareholders by Mitchell Hutchins, (5) the services provided
by PaineWebber pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins
and (6) Mitchell Hutchins' shareholder service-related expenses and costs.
In approving the Class B Plan, the board of each fund considered all
the features of the distribution system, including (1) the conditions under
which contingent deferred sales charges would be imposed and the amount of such
charges, (2) the advantage to investors in having no initial sales charges
deducted from fund purchase payments and instead having the entire amount of
their purchase payments immediately invested in fund shares, (3) Mitchell
Hutchins' belief that the ability of PaineWebber Financial Advisors 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
Financial Advisors and correspondent firms, resulting in greater growth of the
fund than might otherwise be the case, (4) the advantages to the shareholders of
economies of scale resulting from growth in the fund's assets and potential
continued growth, (5) the services provided to the fund and its shareholders by
Mitchell Hutchins, (6) the services provided by PaineWebber pursuant to its
Exclusive Dealer Agreement with Mitchell Hutchins and (7) Mitchell Hutchins'
shareholder service- and distribution-related expenses and costs. The board
members also recognized that Mitchell Hutchins' willingness to compensate
PaineWebber and its Financial Advisors, 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 Financial Advisors 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
30
<PAGE>
payments immediately in Class C shares and generally do not face contingent
deferred sales charges, would prove attractive to the Financial Advisors and
correspondent firms, resulting in greater growth to the fund than might
otherwise be the case, (4) the advantages to the shareholders of economies of
scale resulting from growth in the fund's assets and potential continued growth,
(5) the services provided to the fund and its shareholders by Mitchell Hutchins,
(6) the services provided by PaineWebber pursuant to its Exclusive Dealer
Agreement with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder service-
and distribution-related expenses and costs. The board members also recognized
that Mitchell Hutchins' willingness to compensate PaineWebber and its Financial
Advisors, without the concomitant receipt by Mitchell Hutchins of initial sales
charges or contingent deferred sales charges upon redemption after one year
following purchase was conditioned upon its expectation of being compensated
under the Class C Plan.
With respect to each Plan, the boards considered all compensation that
Mitchell Hutchins would receive under the Plan and the Distribution Contract,
including service fees and, as applicable, initial sales charges, distribution
fees and contingent deferred sales charges. The boards also considered the
benefits that would accrue to Mitchell Hutchins under each Plan in that Mitchell
Hutchins would receive service, distribution and advisory fees that are
calculated based upon a percentage of the average net assets of a fund, which
fees would increase if the Plan were successful and the fund attained and
maintained significant asset levels.
Under the Distribution Contract between each Trust and Mitchell
Hutchins for the Class A shares for the fiscal years (or periods) set forth
below, Mitchell Hutchins earned the following approximate amounts of sales
charges and retained the following approximate amounts, net of concessions to
PaineWebber as exclusive dealer.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28/29,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CALIFORNIA TAX-FREE INCOME FUND
Earned.......................................... $ 79,848 $ 56,842
Retained........................................ 6,304 4,798
NATIONAL TAX-FREE INCOME FUND
Earned.......................................... 79,748 148,485
Retained........................................ 6,357 1,253
MUNICIPAL HIGH INCOME FUND
Earned.......................................... 121,988 23,894
Retained........................................ 7,764 1,867
NEW YORK TAX-FREE INCOME FUND
Earned.......................................... 47,579 11,290
Retained........................................ 3,962 838
</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, 1999:
<TABLE>
<CAPTION>
NEW YORK
CALIFORNIA TAX-FREE NATIONAL TAX-FREE MUNICIPAL HIGH TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
<S> <C> <C> <C> <C>
Class A...............
Class B...............
Class C...............
</TABLE>
31
<PAGE>
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 brokerage commission
or dealer spread), 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
over-the-counter market on a "net" basis without a stated commission through
dealers acting for their own accounts and not through brokers. Prices paid to
dealers in principal transactions generally include a "spread," which is the
difference between the prices at which the dealer is willing to purchase and
sell a specific security at the time. For the last three fiscal years, the funds
have not paid any brokerage commissions.
For purchases or sales with broker-dealer firms that act as principal,
Mitchell Hutchins seeks best execution. Although Mitchell Hutchins may receive
certain research or execution services in connection with these 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 that could be purchased for hard dollars. Mitchell Hutchins may
engage in agency transactions in over-the-counter 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 brokers or dealers
through which or with 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 brokers or dealers in
connection with other funds or accounts that either of them advises may be used
in advising the funds. Information and research received from brokers or dealers
will be in addition to, and not in lieu of, the services required to be
performed by Mitchell Hutchins under the Advisory Contracts.
Investment decisions for a fund and for other investment accounts
managed by Mitchell Hutchins are made independently of each other in light of
differing considerations for the various accounts. However, the same investment
decision may occasionally be made for a fund and one or more of such accounts.
In such cases, simultaneous transactions are inevitable. Purchases or sales are
then averaged as to price and allocated between that fund and such other
account(s) as to amount according to a formula deemed equitable to the fund and
such account(s). While in some cases this practice could have a detrimental
effect upon the price or value of the security as far as the funds are
concerned, or upon their ability to complete their entire order, in other cases
it is believed that coordination and the ability to participate in volume
transactions will be beneficial to the funds.
The funds will not purchase securities that are offered in
underwritings in which PaineWebber is a member of the underwriting or selling
group, except pursuant to procedures adopted by each board pursuant to Rule
10f-3 under the Investment Company Act of 1940. Among other things, these
procedures require that the spread or commission paid in connection with such a
purchase be reasonable and fair, the purchase be at not more than the public
offering price prior to the end of the first business day after the date of the
public offering and that PaineWebber or any affiliate thereof not participate in
or benefit from the sale to the fund.
PORTFOLIO TURNOVER. The funds' annual portfolio turnover rates may vary
greatly from year to year, but they will not be a limiting factor when
management deems portfolio changes appropriate. The portfolio turnover rate is
calculated by dividing the lesser of a fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of securities in the portfolio during the year.
32
<PAGE>
The funds' respective portfolio turnover rates for the fiscal years
shown were:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED FEBRUARY 28
1999 1998
---- ----
<S> <C> <C>
California Tax-Free Income Fund............... 107%
National Tax-Free Income Fund................. 79%
Municipal High Income Fund.................... 22%
New York Tax-Free Income Fund................. 34%
</TABLE>
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES
[WAIVERS OF SALES CHARGES/CONTINGENT DEFERRED SALES CHARGES -- CLASS A
SHARES. The following additional sales charge waivers are available for Class A
shares if you:
o Purchase shares through a variable annuity offered only to qualified
plans. For investments made pursuant to this waiver, Mitchell
Hutchins may make payments out of its own resources to PaineWebber
and to the variable annuity's sponsor, adviser or distributor in a
total amount not to exceed l% of the amount invested;
o Acquire shares through an investment program that is not sponsored
by PaineWebber or its affiliates and that charges participants a fee
for program services, provided that the program sponsor has entered
into a written agreement with PaineWebber permitting the sale of
shares at net asset value to that program. For investments made
pursuant to this waiver, Mitchell Hutchins may make a payment to
PaineWebber out of its own resources in an amount not to exceed 1%
of the amount invested. For subsequent investments or exchanges made
to implement a rebalancing feature of such an investment program,
the minimum subsequent investment requirement is also waived;
o Acquire shares in connection with a reorganization pursuant to which
a fund acquires substantially all of the assets and liabilities of
another fund in exchange solely for shares of the acquiring fund; or
o Acquire shares in connection with the disposition of proceeds from
the sale of shares of Managed High Yield Plus Fund Inc. that were
acquired during that fund's initial public offering of shares and
that meet certain other conditions described in its prospectus
In addition, reduced sales charges on Class A shares are available
through the combined purchase plan or through rights of accumulation described
below. Class A share purchases of $1 million or more are not subject to an
initial sales charge; however, if a shareholder sells these shares within one
year after purchase, a contingent deferred sales charge of 1% of the offering
price or the net asset value of the shares at the time of sale by the
shareholder, whichever is less, is imposed.]
COMBINED PURCHASE PRIVILEGE -- CLASS A SHARES. Investors and eligible
groups of related fund investors may combine purchases of Class A shares of the
funds with concurrent purchases of Class A shares of any other PaineWebber
mutual fund and thus take advantage of the reduced sales charges indicated in
the tables of sales charges for Class A shares in the Prospectus. The sales
charge payable on the purchase of Class A shares of the funds and Class A shares
of such other funds will be at the rates applicable to the total amount of the
combined concurrent purchases.
An "eligible group of related fund investors" can consist of any
combination of the following:
(a) an individual, that individual's spouse, parents and
children;
33
<PAGE>
(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.
[REINSTATEMENT PRIVILEGE -- CLASS A SHARES. Shareholders who have
redeemed Class A shares of a fund may reinstate their account without a sales
charge by notifying the transfer agent of such desire and forwarding a check for
the amount to be purchased within 365 days after the date of redemption. The
reinstatement will be made at the net asset value per share next computed after
the notice of reinstatement and check are received. The amount of a purchase
under this reinstatement privilege cannot exceed the amount of the redemption
proceeds. Gain on a redemption is taxable regardless of whether the
reinstatement privilege is exercised, although a loss arising out of a
redemption might not be deductible under certain circumstances. See "Taxes"
below.]
WAIVERS OF CONTINGENT DEFERRED SALES CHARGES -- CLASS B SHARES. 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. Among other circumstances, the contingent
deferred sales charge on Class B shares is waived where a total or partial
redemption is made within one year following the death of the shareholder. The
contingent deferred sales charge waiver is available where the decedent is
either the sole shareholder or owns the shares with his or her spouse as a joint
tenant with right of survivorship. This waiver applies only to redemption of
shares held at the time of death.
[PURCHASES OF CLASS Y SHARES THROUGH THE PACE MULTI ADVISOR PROGRAM. An
investor who participates in the PACE Multi Advisor Program is eligible to
purchase Class Y shares. The PACE Multi Advisor Program is an advisory program
sponsored by PaineWebber that provides comprehensive investment services,
including investor profiling, a personalized asset allocation strategy using an
appropriate combination of funds, and a quarterly investment performance review.
Participation in the PACE Multi Advisor Program is subject to payment of an
advisory fee at the effective maximum annual rate of 1.5% of assets. Employees
34
<PAGE>
of PaineWebber and its affiliates are entitled to a waiver of this fee. Please
contact your PaineWebber Financial Advisor or PaineWebber's correspondent firms
for more information concerning mutual funds that are available through the PACE
Multi Advisor Program.]
[PURCHASES AND SALES OF CLASS Y SHARES FOR PARTICIPANTS IN PW 401(K)
PLUS PLAN. The trustee of the PW 401(k) Plus Plan, a defined contribution plan
sponsored by PW Group, buys and sells Class Y shares of the funds to implement
the investment choices of individual plan participants with respect to their PW
401(k) Plus Plan contributions. Individual plan participants should consult the
Summary Plan Description and other plan material of the PW 401(k) Plus Plan
(collectively, "Plan Documents") for a description of the procedures and
limitations applicable to making and changing investment choices. Copies of the
Plan Documents are available from the Benefits Connection, 100 Halfday Road,
Lincolnshire, IL 60069 or by calling 1-888-PWEBBER (1-888-793-2237). As
described in the Plan Documents, the price at which Class Y shares are bought
and sold by the trustee of PW 401(k) Plus Plan might be more or less than the
price per share at the time the participants made their investment choices.]
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of the funds may be exchanged for shares of the
corresponding class of most other PaineWebber mutual funds. Class Y shares are
not eligible for exchange. Shareholders will receive at least 60 days' notice of
any termination or material modification of the exchange offer, except no notice
need be given if, under extraordinary circumstances, either redemptions are
suspended under the circumstances described below or a fund temporarily delays
or ceases the sales of its shares because it is unable to invest amounts
effectively in accordance with the fund's investment objective, policies and
restrictions.
If conditions exist that make cash payments undesirable, each fund
reserves the right to honor any request for redemption by making payment in
whole or in part in securities chosen by the fund and valued in the same way as
they would be valued for purposes of computing the fund's net asset value. Any
such redemption in kind will be made with readily marketable securities, to the
extent available. If payment is made in securities, a shareholder may incur
brokerage expenses in converting these securities into cash. Each fund has
elected, however, to be governed by Rule 18f-1 under the Investment Company Act
of 1940, under which it is obligated to redeem shares solely in cash up to the
lesser of $250,000 or 1% of its net asset value during any 90-day period for one
shareholder. This election is irrevocable unless the SEC permits its withdrawal.
The funds may suspend redemption privileges or postpone the date of
payment during any period (1) when the New York Stock Exchange is closed or
trading on the New York Stock Exchange is restricted as determined by the SEC,
(2) when an emergency exists, as defined by the SEC, that makes it not
reasonably practicable for a fund to dispose of securities owned by it or fairly
to determine the value of its assets or (3) as the SEC may otherwise permit. The
redemption price may be more or less than the shareholder's cost, depending on
the market value of a fund's portfolio at the time.
SERVICE ORGANIZATIONS. A fund may authorize service organizations, and
their agents, to accept on its behalf purchase and redemption orders that are in
"good form." A fund will be deemed to have received these purchase and
redemption orders when a service organization or its agent accepts them. Like
all customer orders, these orders will be priced based on the fund's net asset
value next computed after receipt of the order by the service organizations or
their agents. Service organizations may include retirement plan service
providers who aggregate purchase and redemption instructions received from
numerous retirement plans or plan participants.
AUTOMATIC INVESTMENT PLAN. PaineWebber offers an automatic investment
plan with a minimum initial investment of $1,000 through which a fund will
deduct $50 or more on a monthly, quarterly, semi-annual or annual basis from the
investor's bank account to invest directly in the fund. Participation in the
automatic investment plan enables an investor to use the technique of "dollar
cost averaging." When an investor invests the same dollar amount each month
under the plan, the investor will purchase more shares when a fund's net asset
value per share is low and fewer shares when the net asset value per share is
high. Using this technique, an investor's average purchase price per share over
any given period will be lower than if the investor purchased a fixed number of
shares on a monthly basis during the period. Of course, investing through the
automatic investment plan does not assure a profit or protect against loss in
35
<PAGE>
declining markets. Additionally, because the automatic investment plan involves
continuous investing regardless of price levels, an investor should consider his
or her financial ability to continue purchases through periods of both low and
high price levels.
SYSTEMATIC WITHDRAWAL PLAN. The systematic withdrawal plan allows
investors to set up monthly, quarterly (March, June, September and December),
semi-annual (June and December) or annual (December) withdrawals from their
PaineWebber Mutual Fund accounts. Minimum balances and withdrawals vary
according to the class of shares:
o Class A and Class C shares. Minimum value of fund shares is
$5,000; minimum withdrawals of $100.
o Class B shares. Minimum value of fund shares is $20,000; minimum
monthly, quarterly, and semi-annual and annual withdrawals of
$200, $400, $600 and $800, respectively.
Withdrawals under the systematic withdrawal plan will not be subject to
a contingent deferred sales charge if the investor withdraws no more than 12% of
the value of the fund account when the investor signed up for the Plan (for
Class B shares, annually; for Class A and Class C shares, during the first year
under the Plan). Shareholders who elect to receive dividends or other
distributions in cash may not participate in this plan.
An investor's participation in the systematic withdrawal plan will
terminate automatically if the "Initial Account Balance" (a term that means the
value of the fund account at the time the investor elects to participate in the
systematic withdrawal plan), less aggregate redemptions made other than pursuant
to the systematic withdrawal plan, is less than the minimum values specified
above. Purchases of additional shares of a fund concurrent with withdrawals are
ordinarily disadvantageous to shareholders because of tax liabilities and, for
Class A shares, initial sales charges. On or about the 20th of a month for
monthly, quarterly, semi-annual and annual plans, PaineWebber will arrange for
redemption by the funds of sufficient fund shares to provide the withdrawal
payments specified by participants in the funds' systematic withdrawal plan. The
payments generally are mailed approximately five Business Days (defined under
"Valuation of Shares") after the redemption date. Withdrawal payments should not
be considered dividends, but redemption proceeds. If periodic withdrawals
continually exceed reinvested dividends and other distributions, a shareholder's
investment may be correspondingly reduced. A shareholder may change the amount
of the systematic withdrawal or terminate participation in the systematic
withdrawal plan at any time without charge or penalty by written instructions
with signatures guaranteed to PaineWebber or PFPC Inc. 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 PFPC. Shareholders may request the
forms needed to establish a systematic withdrawal plan from their PaineWebber
Financial Advisors, correspondent firms or PFPC at 1-800-647-1568.
[INDIVIDUAL RETIREMENT ACCOUNTS. Self-directed IRAs are available
through PaineWebber in which purchases of PaineWebber mutual funds and other
investments may be made. Investors considering establishing an IRA should review
applicable tax laws and should consult their tax advisers.]
[TRANSFER OF ACCOUNTS. If investors holding shares of a fund in a
PaineWebber brokerage account transfer their brokerage accounts to another firm,
the fund shares will be moved to an account with PFPC. However, if the other
firm has entered into a selected dealer agreement with Mitchell Hutchins
relating to the fund, the shareholder may be able to hold fund shares in an
account with the other firm.]
PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN(SERVICEMARK);
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT(REGISTERED) (RMA)(REGISTERED)
Shares of PaineWebber mutual funds (each a "PW Fund" and, collectively,
the "PW Funds") are available for purchase through the RMA Resource Accumulation
Plan ("Plan") by customers of PaineWebber and its correspondent firms who
maintain Resource Management Accounts ("RMA accountholders"). The Plan allows an
RMA accountholder to continually invest in one or more of the PW Funds at
regular intervals, with payment for shares purchased automatically deducted from
36
<PAGE>
the client's RMA account. The client may elect to invest at monthly or quarterly
intervals and may elect either to invest a fixed dollar amount (minimum $100 per
period) or to purchase a fixed number of shares. A client can elect to have Plan
purchases executed on the first or fifteenth day of the month. Settlement occurs
three Business Days (defined under "Valuation of Shares") after the trade date,
and the purchase price of the shares is withdrawn from the investor's RMA
account on the settlement date from the following sources and in the following
order: uninvested cash balances, balances in RMA money market funds, or margin
borrowing power, if applicable to the account.
To participate in the Plan, an investor must be an RMA accountholder,
must have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client Agreement
and Instruction Form available from PaineWebber. The investor must have received
a current prospectus for each PW Fund selected prior to enrolling in the Plan.
Information about mutual fund positions and outstanding instructions under the
Plan are noted on the RMA accountholder's account statement. Instructions under
the Plan may be changed at any time, but may take up to two weeks to become
effective.
The terms of the Plan, or an RMA accountholder's participation in the
Plan, may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds may
be offered through the Plan.
PERIODIC INVESTING AND DOLLAR COST AVERAGING. Periodic investing in the
PW Funds or other mutual funds, whether through the Plan or otherwise, helps
investors establish and maintain a disciplined approach to accumulating assets
over time, de-emphasizing the importance of timing the market's highs and lows.
Periodic investing also permits an investor to take advantage of "dollar cost
averaging." By investing a fixed amount in mutual fund shares at established
intervals, an investor purchases more shares when the price is lower and fewer
shares when the price is higher, thereby increasing his or her earning
potential. Of course, dollar cost averaging does not guarantee a profit or
protect against a loss in a declining market, and an investor should consider
his or her financial ability to continue investing through periods of both low
and high share prices. However, over time, dollar cost averaging generally
results in a lower average original investment cost than if an investor invested
a larger dollar amount in a mutual fund at one time.
PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT. In order to enroll in the
Plan, an investor must have opened an RMA account with PaineWebber or one of its
correspondent firms. The RMA account is PaineWebber's comprehensive asset
management account and offers investors a number of features, including the
following:
o monthly Premier account statements that itemize all account
activity, including investment transactions, checking activity
and Gold MasterCard(Registered) transactions during the period,
and provide unrealized and realized gain and loss estimates for
most securities held in the account;
o comprehensive year-end summary statements that provide
information on account activity for use in tax planning and tax
return preparation;
o automatic "sweep" of uninvested cash into the RMA
accountholder's choice of one of the six RMA money market
funds-RMA Money Market Portfolio, RMA U.S. Government Portfolio,
RMA Tax-Free Fund, RMA California Municipal Money Fund, RMA New
Jersey Municipal Money Fund and RMA New York Municipal Money
Fund. AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY. ALTHOUGH A MONEY MARKET FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS
POSSIBLE TO LOSE MONEY BY INVESTING IN A MONEY MARKET FUND.
o 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;
37
<PAGE>
o 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;
o 24-hour access to account information through toll-free numbers,
and more detailed personal assistance during business hours from
the RMA Service Center;
o 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 PFPC and not through PaineWebber; and
o automatic direct deposit of checks into your RMA account and
automatic withdrawals from the account.
The annual account fee for an RMA account is $85, which includes the
Gold MasterCard, with an additional fee of $40 if the investor selects an
optional line of credit with the Gold MasterCard.
CONVERSION OF CLASS B SHARES
Class B shares of a fund will automatically convert to Class A shares
of that fund, based on the relative net asset values per share of the two
classes, as of the close of business on the first Business Day (as defined under
"Valuation of Shares") of the month in which the sixth anniversary of the
initial issuance of such Class B shares occurs. For the purpose of calculating
the holding period required for conversion of Class B shares, the date of
initial issuance shall mean (i) the date on which such Class B shares were
issued or (ii) for Class B shares obtained through an exchange, or a series of
exchanges, the date on which the original Class B shares were issued. For
purposes of conversion to Class A shares, Class B shares purchased through the
reinvestment of dividends and other distributions paid in respect of Class B
shares will be held in a separate sub-account. Each time any Class B shares in
the shareholder's regular account (other than those in the sub-account) convert
to Class A shares, a pro rata portion of the Class B shares in the sub-account
will also convert to Class A shares. The portion will be determined by the ratio
that the shareholder's Class B shares converting to Class A shares bears to the
shareholder's total Class B shares not acquired through dividends and other
distributions.
The conversion feature is subject to the continuing availability of an
opinion of counsel to the effect that the dividends and other distributions paid
on Class A and Class B shares will not result in "preferential dividends" under
the Internal Revenue Code and 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 will
not continue to be met.
VALUATION OF SHARES
Each fund determines its net asset value per share separately for each
class of shares, normally as of the close of regular trading (usually 4:00 p.m.,
Eastern time) on the New York Stock Exchange on each Business Day, which is
defined as each Monday through Friday when the New York Stock Exchange is open.
Prices will be calculated earlier when the New York Stock Exchange closes early
because trading has been halted for the day. Currently the New York Stock
Exchange 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 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
over-the-counter market and listed on the Nasdaq Stock Market ("Nasdaq")
38
<PAGE>
normally are valued at the last available sale price on Nasdaq prior to
valuation; other over-the-counter securities are valued at the last bid price
available prior to valuation. Where market quotations are readily available,
portfolio securities are valued based upon market quotations, provided those
quotations adequately reflect, in the judgment of Mitchell Hutchins, the fair
value of the security. Where those market quotations are not readily available,
securities are valued based upon appraisals received from a pricing service
using a computerized matrix system or based upon appraisals derived from
information concerning the security or similar securities received from
recognized dealers in those securities. All other securities and other assets
are valued at fair value as determined in good faith by or under the direction
of the applicable board. It should be recognized that judgment often plays a
greater role in valuing thinly traded securities, including many lower rated
bonds, than is the case with respect to securities for which a broader range of
dealer quotations and last-sale information is available. The amortized cost
method of valuation generally is used to value debt obligations with 60 days or
less remaining until maturity, unless the applicable board determines that this
does not represent fair value.
PERFORMANCE INFORMATION
The funds' performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represent past performance and are not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
TOTAL RETURN CALCULATIONS. Average annual total return quotes
("Standardized Return") used in each fund's Performance Advertisements are
calculated according to the following formula:
P(1 + T)n = ERV
where: P = a hypothetical initial payment of $1,000 to purchase
shares of a specified class
T = average annual total return of shares of that class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment at the beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. In calculating the ending redeemable value, for Class A shares, the
maximum 4.0% sales charge is deducted from the initial $1,000 payment and, for
Class B and Class C shares, the applicable contingent deferred sales charge
imposed on a redemption of Class B or Class C shares held for the period is
deducted. All dividends and other distributions are assumed to have been
reinvested at net asset value.
The funds also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). The funds calculate Non-Standardized Return
for specified periods of time by assuming an investment of $1,000 in fund shares
and assuming the reinvestment of all dividends and other distributions. The rate
of return is determined by subtracting the initial value of the investment from
the ending value and by dividing the remainder by the initial value. Neither
initial nor contingent deferred sales charges are taken into account in
calculating Non-Standardized Return; the inclusion of those charges would reduce
the return.
Both Standardized Return and Non-Standardized Return for Class B shares
for periods of over six years reflect conversion of the Class B shares to Class
A shares at the end of the sixth year.
The following tables show performance information for each class of the
funds' shares outstanding for the periods indicated. All returns for periods of
more than one year are expressed as an average annual return.
39
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE INCOME FUND
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Year ended February 28, 1999:
Standardized Return*.................
Non-Standardized Return..............
Five Years ended February 28, 1999:
Standardized Return*.................
Non-Standardized Return..............
Ten Years ended February 28, 1999:
Standardized Return..................
Non-Standardized Return..............
Inception** to February 28, 1999:
Standardized Return*.................
Non-Standardized Return..............
</TABLE>
<TABLE>
<CAPTION>
NATIONAL TAX-FREE INCOME FUND
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Year ended February 28, 1999:
Standardized Return*.................
Non-Standardized Return..............
Five Years ended February 28, 1999:
Standardized Return*.................
Non-Standardized Return..............
Ten Years ended February 28, 1999:
Standardized Return*.................
Non-Standardized Return*.............
Inception** to February 28,1999:
Standardized Return*.................
Non-Standardized Return..............
</TABLE>
<TABLE>
<CAPTION>
MUNICIPAL HIGH INCOME FUND
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Year ended February 28, 1999:
Standardized Return*.................
Non-Standardized Return..............
Five Years ended February 28, 1999:
Standardized Return*.................
Non-Standardized Return..............
Ten Years ended February 28, 1999:
Standardized Return..................
Non-Standardized Return..............
Inception** to February 28, 1999:
Standardized Return*.................
Non-Standardized Return..............
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
NEW YORK TAX-FREE INCOME FUND
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Year ended February 28, 1999:
Standardized Return*.................
Non-Standardized Return..............
Five Years ended February 28, 1999:
Standardized Return*.................
Non-Standardized Return..............
Ten Years ended February 28, 1999:
Standardized Return..................
Non-Standardized Return..............
Inception** to February 28, 1999:
Standardized Return*.................
Non-Standardized Return..............
- --------------
<FN>
* All Standardized Return figures for Class A shares reflect deduction of the current maximum sales charge of
4.0%. All Standardized Return figures for Class B and Class C shares reflect deduction of the applicable
contingent deferred sales charges imposed on a redemption of shares held for the period. Class Y shares do not
impose an initial or contingent deferred sales charge; therefore, the performance information is the same for
both standardized return and non-standardized return for the periods indicated.
** The inception date for each class of shares is as follows:
</FN>
</TABLE>
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
California Tax-Free Income Fund 09/16/85 07/01/91 07/02/92 02/05/98
National Tax-Free Income Fund 12/03/84 07/01/91 07/02/92 11/03/95
Municipal High Income Fund 06/23/87 07/01/91 07/02/92 02/05/98
New York Tax-Free Income Fund 09/23/88 07/01/91 07/02/92 5/21/98
</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 and Class C shares) at the end of the Period. Yield quotations
are calculated according to the following formula:
YIELD = [OBJECT OMITTED]
where: a = interest earned during the Period attributable to a
class of shares
b = expenses accrued for the Period attributable to a
class of shares (net of reimbursements)
c = the average daily number of shares of a class
outstanding during the Period that were entitled to
receive dividends
d = the maximum offering price per share (in the case
of Class A shares) or the net asset value per share
(in the case of Class B and Class C shares) on the
last day of the Period.
41
<PAGE>
Except as noted below, in determining interest income earned during the
Period (variable "a" in the above formula), each fund calculates interest earned
on each debt obligation held by it during the Period by (1) computing the
obligation's yield to maturity, based on the market value of the obligation
(including actual accrued interest) on the last business day of the Period or,
if the obligation was purchased during the Period, the purchase price plus
accrued interest and (2) dividing the yield to maturity by 360, and multiplying
the resulting quotient by the market value of the obligation (including actual
accrued interest) to determine the interest income on the obligation for each
day of the period that the obligation is in the portfolio. Once interest earned
is calculated in this fashion for each debt obligation held by the fund,
interest earned during the Period is then determined by totaling the interest
earned on all debt obligations. For purposes of these calculations, the maturity
of an obligation with one or more call provisions is assumed to be the next date
on which the obligation reasonably can be expected to be called or, if none, the
maturity date. With respect to Class A shares, in calculating the maximum
offering price per share at the end of the Period (variable "d" in the above
formula) the fund's current maximum 4.0 initial sales charge on Class A shares
is included.
The following table shows the yield for each class of shares of each
fund for the 30-day period ended February 28, 1999:
<TABLE>
<CAPTION>
CALIFORNIA NATIONAL NEW YORK
TAX-FREE INCOME TAX-FREE INCOME MUNICIPAL HIGH TAX-FREE
FUND FUND INCOME FUND INCOME FUND
<S> <C> <C> <C> <C>
Class A.............
Class B.............
Class C.............
Class Y.............
</TABLE>
Tax-exempt yield is calculated according to the same formula except
that the 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:
TAX EQUIVALENT YIELD = [OBJECT OMITTED]
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, 1999:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
California Tax-Free Income Fund..........
National Tax-Free Income Fund............
Municipal High Income Fund...............
New York Tax-Free Income Fund............
</TABLE>
42
<PAGE>
OTHER INFORMATION. In Performance Advertisements, the funds may compare
their Standardized Return and/or their Non-Standardized Return with data
published by Lipper Inc. ("Lipper") for U.S. government funds, corporate bond
(BBB) funds and high yield funds, CDA Investment Technologies, Inc. ("CDA"),
Wiesenberger Investment Companies Service ("Wiesenberger"), Investment Company
Data, Inc. ("ICD") or Morningstar Mutual Funds ("Morningstar"), or with the
performance of recognized stock, bond and other indices, including the Municipal
Bond Buyers Indices, Lehman Bond Index, the Standard & Poor's 500 Composite
Stock Price Index ("S&P 500"), 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 these 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 the funds and comparative mutual fund data and ratings
reported in independent periodicals, including THE WALL STREET JOURNAL, MONEY
Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW
YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST and THE KIPLINGER LETTERS.
Comparisons in Performance Advertisements may be in graphic form.
The funds may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on a fund investment are reinvested in
additional fund shares, any future income or capital appreciation of a fund
would increase the value, not only of the original fund investment, but also of
the additional fund shares received through reinvestment. As a result, the value
of a fund investment would increase more quickly than if dividends or other
distributions had been paid in cash.
The funds may also compare their performance with the performance of
bank certificates of deposit (CDs) as measured by the CDA Certificate of Deposit
Index, the Bank Rate Monitor National Index and the averages of yields of CDs of
major banks published by Banxquote(R) Money Markets. In comparing the funds'
performance to CD performance, investors should keep in mind that bank CDs are
insured in whole or in part by an agency of the U.S. government and offer fixed
principal and fixed or variable rates of interest, and that bank CD yields may
vary depending on the financial institution offering the CD and prevailing
interest rates. Shares of the funds are not insured or guaranteed by the U.S.
government and returns and net asset values will fluctuate. The debt securities
held by the funds generally have longer maturities than most CDs and may reflect
interest rate fluctuations for longer term debt securities. An investment in any
fund involves greater risks than an investment in either a money market fund or
a CD.
TAXES
BACKUP WITHHOLDING. Each fund is required to withhold 31% of all
taxable dividends, capital gain distributions and redemption proceeds payable to
individuals and certain other non-corporate shareholders who do not provide the
fund or PaineWebber with a correct taxpayer identification number. Withholding
at that rate also is required from dividends and capital gain distributions
payable to those shareholders who otherwise are subject to backup withholding.
SALE OR EXCHANGE OF FUND SHARES. A shareholder's sale (redemption) of
shares may result in a taxable gain or loss, depending on whether the
shareholder receives more or less than his or her adjusted basis for the shares
(which normally includes any initial sales charge paid on Class A shares). An
exchange of any fund's shares for shares of another PaineWebber mutual fund
generally will have similar tax consequences. In addition, if a fund's shares
are bought within 30 days before or after selling other shares of the fund
(regardless of class) at a loss, all or a portion of that loss will not be
deductible and will increase the basis of the newly purchased shares.
43
<PAGE>
CLASS A SHAREHOLDERS. A special tax rule applies when a shareholder
sells or exchanges Class A shares within 90 days of purchase and subsequently
acquires Class A shares of the same or another 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.
CONVERSION OF CLASS B SHARES. A shareholder will recognize no gain or
loss as a result of a conversion from Class B shares to Class A shares.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. 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).
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
form 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
44
<PAGE>
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 in 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 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 that the produce 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
45
<PAGE>
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
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 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 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.
46
<PAGE>
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 1998 federal individual income tax rates. For
example, a couple with taxable income of $90,000 in 1998, or a single individual
with taxable income of $55,000 in 1998, 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>
<CAPTION>
TABLE I. 1998 FEDERAL TAXABLE VS. TAX-FREE YIELDS*
TAXABLE INCOME (000'S) A TAX-FREE YIELD OF
- -------------------------------------- ----------------------------------------------------------
FEDERAL TAX
SINGLE JOINT 4.00% 5.00% 6.00% 7.00% 8.00%
RETURN RETURN BRACKET IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
- ------------------ ---------------- ------------ ----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 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
.........
* See note following Table III.
</TABLE>
47
<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 1998 federal individual and 1998 California personal income tax rates. For
example, a California couple with taxable income of $90,000 in 1998, or a single
California individual with taxable income of $55,000 in 1998, 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>
<CAPTION>
TABLE II. 1998 FEDERAL AND CALIFORNIA TAXABLE VS. TAX-FREE YIELDS*
EFFECTIVE
CALIFORNIA
TAXABLE INCOME (000'S) AND A TAX-FREE YIELD OF
- -------------------------------------- ----------------------------------------------------------
FEDERAL TAX
SINGLE JOINT 4.00% 5.00% 6.00% 7.00% 8.00%
RETURN RETURN BRACKET IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
- ------------------ ---------------- ------------ ----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$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
.........
* See note following Table III.
</TABLE>
48
<PAGE>
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
1998 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 New York City with taxable income of $90,000 in
1998 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 1998, 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 a taxable income of $55,000 in 1998, 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.
<TABLE>
<CAPTION>
TABLE III. 1998 FEDERAL AND NEW YORK TAXABLE VS. TAX-FREE YIELDS*
COMBINED
TAXABLE INCOME (000'S) FEDERAL A TAX-FREE YIELD OF
- -------------------------------------- ---------------------------------------------------------
NYS/NYCTAX
SINGLE JOINT 4.00% 5.00% 6.00% 7.00% 8.00%
RETURN RETURN BRACKET IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
- ------------------ ---------------- -------------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 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
TAXABLE INCOME (000'S) COMBINED A TAX-FREE YIELD OF
- -------------------------------------- ---------------------------------------------------------
FEDERAL NYS
SINGLE JOINT TAX 4.00% 5.00% 6.00% 7.00% 8.00%
RETURN RETURN BRACKET IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
- ------------------ ---------------- -------------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 24.7 $0 - 41.2 20.82% 5.05% 6.31% 7.58% 8.94% 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
.........
<FN>
* 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
49
<PAGE>
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).
</FN>
</TABLE>
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
MASSACHUSETTS BUSINESS TRUSTS. Each Trust is an entity of the type
commonly known as a "Massachusetts business trust." Under Massachusetts law,
shareholders of a fund could, under certain circumstances, be held personally
liable for the obligations of the fund or its Trust. However, each Trust's
Declaration of Trust disclaims shareholder liability for acts or obligations of
the Trust or the fund and requires that notice of such disclaimer be given in
each note, bond, contract, instrument, certificate or undertaking made or issued
by the board members or by any officers or officer by or on behalf of the Trust
or the fund, the board members or any of them in connection with the Trust. Each
Declaration of Trust provides for indemnification from the relevant fund's
property for all losses and expenses of any shareholder held personally liable
for the obligations of the fund. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the fund itself would be unable to meet its obligations, a possibility
that Mitchell Hutchins believes is remote and not material. Upon payment of any
liability incurred by a shareholder solely by reason of being or having been a
shareholder, the shareholder paying such liability would be entitled to
reimbursement from the general assets of the relevant fund. The board members
intend to conduct each fund's operations in such a way as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the fund.
CLASSES OF SHARES. A share of each class of a fund represents an
identical interest in that fund's investment portfolio and has the same rights,
privileges and preferences. However, each class may differ with respect to sales
charges, if any, distribution and/or service fees, if any, other expenses
allocable exclusively to each class, voting rights on matters exclusively
affecting that class, and its exchange privilege, if any. The different sales
charges and other expenses applicable to the different classes of shares of the
funds will affect the performance of those classes. Each share of a fund is
entitled to participate equally in dividends, other distributions and the
proceeds of any liquidation of that fund. However, due to the differing expenses
of the classes, dividends and liquidation proceeds on Class A, B, C and Y shares
will differ.
VOTING RIGHTS. Shareholders of each fund are entitled to one vote for
each full share held and fractional votes for fractional shares held. Voting
rights are not cumulative and, as a result, the holders of more than 50% of all
the shares of a Trust may elect all of the board members of that Trust. The
shares of a fund will be voted together, except that only the shareholders of a
particular class of a fund may vote on matters affecting only that class, such
as the terms of a Rule 12b-1 Plan as it relates to the class. The shares of each
series of a Trust will be voted separately, except when an aggregate vote of all
the series of a Trust is required by law.
The funds do not hold annual meetings. Shareholders of record of no
less than two-thirds of the outstanding shares of a Trust may remove a board
member through a declaration in writing or by vote cast in person or by proxy at
a meeting called for that purpose. A meeting will be called to vote on the
removal of a board member at the written request of holders of 10% of the
outstanding shares of a Trust.
CLASS-SPECIFIC EXPENSES. Each fund may determine to allocate certain of
its expenses (in addition to service and distribution fees) to the specific
classes of its shares to which those expenses are attributable. For example,
Class B and Class C shares bear higher transfer agency fees per shareholder
account than those borne by Class A or Class Y shares. The higher fee is imposed
due to the higher costs incurred by the transfer agent in tracking shares
subject to a contingent deferred sales charge because, upon redemption, the
duration of the shareholder's investment must be determined in order to
determine the applicable charge. Although the transfer agency fee will differ on
50
<PAGE>
a per account basis as stated above, the specific extent to which the transfer
agency fees will differ between the classes as a percentage of net assets is not
certain, because the fee as a percentage of net assets will be affected by the
number of shareholder accounts in each class and the relative amounts of net
assets in each class.
PRIOR NAMES. Prior to November 10, 1995, the Class C shares of the
funds were called "Class D" shares.
CUSTODIAN AND RECORDKEEPING AGENT; TRANSFER AND DIVIDEND AGENT. State
Street Bank and Trust Company, located at One Heritage Drive, North Quincy,
Massachusetts 02171, serves as custodian and recordkeeping agent for each fund.
PFPC Inc., a subsidiary of PNC Bank, N.A., serves as each fund's transfer and
dividend disbursing agent. It is located at 400 Bellevue Parkway, Wilmington, DE
19809.]
COMBINED PROSPECTUS. Although each fund is offering only its own
shares, it is possible that a fund might become liable for a misstatement in the
Prospectus about another fund. The board of each fund has considered this factor
in approving the use of a single, combined Prospectus.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the funds.
Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and Mitchell
Hutchins in connection with other matters.
AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York
10019, serves as independent auditors for the Funds.
FINANCIAL STATEMENTS
Each fund's Annual Report to Shareholders for its last fiscal year ended
February 28, 1999 is a separate document supplied with this SAI, and the
financial statements, accompanying notes and report of independent auditors or
independent accountants appearing therein are incorporated herein by this
reference.
51
<PAGE>
APPENDIX
RATINGS INFORMATION
DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS
AAA. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues; AA.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risk appear somewhat larger than in Aaa securities; A. Bonds which
are rated A possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future; BAA. Bonds
which are rated Baa are considered as medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payment and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well; BA. Bonds which are rated Ba are judged to
have speculative elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class; B. Bonds which are
rated B generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small; CAA. Bonds which are rated Caa are of
poor standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest; CA. Bonds which are rated Ca
represent obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings; C. Bonds which are rated C
are the lowest rated class of bonds, and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from AA through CAA. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category, the modifier
2 indicates a mid-range ranking, and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
DESCRIPTION OF S&P MUNICIPAL DEBT RATINGS
AAA. An obligation rated AAA has the highest rating assigned by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong; AA. An obligation rated AA differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong; A. An obligation rated A is
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than obligations in higher rated categories. However, the
obligor's capacity to meet its financial commitment on the obligation is still
strong; BBB. An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation; BB, B, CCC, CC, C, D. 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
A-1
<PAGE>
the obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation; CCC. An obligation rated CCC is currently vulnerable to
nonpayment and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation; CC. An obligation rated CC is currently highly vulnerable to
nonpayment; C. The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued; D. An obligation rated D is in payment default.
The D rating category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
CI. The rating CI is reserved for income bonds on which no interest is
being paid.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
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. 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 S&P 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 the assessment.
- --Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
- --Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
SP-1. Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation. SP-2.
Satisfactory capacity to pay principal and interest with some vulnerability to
A-2
<PAGE>
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:
PRIME-1. Issuers (or supporting institutions) assigned this
highest rating have a superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be evidenced by the following
characteristics: Leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earnings
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.
PRIME-2. Issuers (or supporting institutions) assigned this
rating have a strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the characteristics
cited above, but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
PRIME-3. Issuers (or supporting institutions) assigned this
rating have an acceptable capacity for repayment of senior short-term
obligations. The effect of industry characteristics and market composition 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.
NOT PRIME. Issuers assigned this rating do not fall within
any of the Prime rating categories.
Commercial paper rated by S&P have the following characteristics:
A-1. A short-term obligation rated A-1 is rated in the highest
category by S&P. The obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are designated
with a plus sign (+). This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong. A-2. A short-term
obligation rated A-2 is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory. A-3. A short-term obligation rated
A-3 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. B. A
short-term obligation rated B is regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitments on the obligation. C. A short-term obligation rated C 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. D. A short-term obligation rated D is in payment default. The D
rating category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The D rating also will
be used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
A-3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED PaineWebber
OR REFERRED TO IN THE PROSPECTUS AND THIS California Tax-Free Income Fund
STATEMENT OF ADDITIONAL INFORMATION. THE FUNDS
AND THEIR DISTRIBUTOR HAVE NOT AUTHORIZED ANYONE PaineWebber
TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. National Tax-Free Income Fund
THE PROSPECTUS AND THIS STATEMENT OF ADDITIONAL
INFORMATION IS NOT AN OFFER TO SELL SHARES OF THE PaineWebber
FUNDS IN ANY JURISDICTION WHERE THE FUNDS OR THEIR Municipal High Income Fund
DISTRIBUTOR MAY NOT LAWFULLY SELL THOSE SHARES.
PaineWebber
New York Tax-Free Income Fund
------------
------------------------------------------
Statement of Additional Information
June 30, 1999
------------------------------------------
PAINEWEBBER
</TABLE>
(COPYRIGHT)1999 PaineWebber Incorporated
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits
--------
(1) Amended and Restated Declaration of Trust 1/
(2) Restated By-Laws 1/
(3) Instruments defining the rights of holders of Registrant's
shares of beneficial interest 2/
(4) (a) Investment Advisory and Administration Contract 1/
(b) Investment Advisory and Administration Fee Agreement
1/
(5) (a) Distribution Contract (Class A Shares) 1/
(b) Distribution Contract (Class B Shares) 1/
(c) Distribution Contract (Class C Shares) 3/
(d) Distribution Contract (Class Y Shares) 3/
(e) Exclusive Dealer Agreement (Class A Shares) 1/
(f) Exclusive Dealer Agreement (Class B Shares) 1/
(g) Exclusive Dealer Agreement (Class C Shares) 3/
(h) Exclusive Dealer Agreement (Class Y Shares) 3/
(6) Bonus, profit sharing or pension plans - none
(7) Custodian Agreement 1/
(8) Transfer Agency Agreement 1/
(9) Opinion and consent of counsel (to be filed)
(10) Other opinions, appraisals, rulings, and consents:
(a) Auditor's consent (to be filed)
(b) Consent of Special Counsel with respect to California
law (to be filed)
(11) Financial statements omitted from prospectus - none
(12) Letter of investment intent 1/
(13) (a) Plan of Distribution pursuant to Rule 12b-1 with
respect to Class A Shares (to be filed)
(b) Plan of Distribution pursuant to Rule 12b-1 with
respect to Class B Shares (to be filed)
(c) Plan of Distribution pursuant to Rule 12b-1 with
respect to Class C Shares (to be filed)
(14) and
(27) Financial Data Schedule (to be filed)
(15) Plan pursuant to Rule 18f-3 4/
________________________
1/ Incorporated by reference from Post-Effective Amendment No. 26 to the
registration statement of PaineWebber Mutual Fund Trust, SEC File No.
2-98149, filed July 1, 1998.
2/ 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
<PAGE>
3/ 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.
4/ 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 material fact required to be stated in it
or necessary to make the statements in it, in light of the circumstances under
C-2
<PAGE>
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.
MANAGED HIGH YIELD FUND INC.
MANAGED HIGH YIELD PLUS FUND INC.
MITCHELL HUTCHINS INSTITUTIONAL SERIES
MITCHELL HUTCHINS PORTFOLIOS
MITCHELL HUTCHINS SERIES TRUST
PAINEWEBBER AMERICA FUND
C-3
<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.
<TABLE>
<CAPTION>
Positions and Office With Underwriter or
Name Position With Registrant Exclusive Dealer
- ---- ------------------------ ----------------
<S> <C> <C>
Margo N. Alexander President and Trustee President, Chief Executive Officer and a
Director of Mitchell Hutchins and Executive
Vice President and a Director of
PaineWebber
Mary C. Farrell Trustee Managing Director, Senior Investment
Strategist and member of 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 Assistant Vice President and a Manager of the Mutual
Treasurer Fund Finance Department of Mitchell Hutchins
Dennis McCauley Vice President Managing Director and Chief Investment
Officer - Fixed Income of Mitchell Hutchins
C-4
<PAGE>
Positions and Office With Underwriter or
Name Position With Registrant Exclusive Dealer
- ---- ------------------------ ----------------
Ann E. Moran Vice President and Assistant Vice President and a Manager of the Mutual
Treasurer Fund Finance Department of Mitchell Hutchins
Richard S. Murphy Vice President Senior Vice President and a Portfolio
Manager of Mitchell Hutchins
Dianne E. O'Donnell Vice President and Secretary Senior Vice President and 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 and a Senior Vice
President of PaineWebber
Paul H. Schubert Vice President and Treasurer Senior Vice President and Director of the
Mutual Fund Finance Department of Mitchell
Hutchins
Barney A. Taglialatela Vice President and Assistant Vice President and a Manager of the Mutual
Treasurer Fund Finance Department of Mitchell Hutchins
Keith A. Weller Vice President and Assistant First Vice President and Associate General
Secretary Counsel of Mitchell Hutchins
</TABLE>
(c) None
Item 28. Location of Accounts and Records
--------------------------------
The books and other documents required by paragraphs (b)(4), (c) and
(d) of Rule 31a-1 under the Investment Company Act of 1940 are maintained in the
physical possession of Mitchell Hutchins 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>
PAINEWEBBER MUTUAL FUND TRUST
EXHIBIT INDEX
Exhibit
Number
- ------
(1) Amended and Restated Declaration of Trust 1/
(2) Restated By-Laws 1/
(3) Instruments defining the rights of holders of Registrant's
shares of beneficial interest 2/
(4) (a) Investment Advisory and Administration Contract 1/
(b) Investment Advisory and Administration Fee Agreement
1/
(5) (a) Distribution Contract (Class A Shares) 1/
(b) Distribution Contract (Class B Shares) 1/
(c) Distribution Contract (Class C Shares) 3/
(d) Distribution Contract (Class Y Shares) 3/
(e) Exclusive Dealer Agreement (Class A Shares) 1/
(f) Exclusive Dealer Agreement (Class B Shares) 1/
(g) Exclusive Dealer Agreement (Class C Shares) 3/
(h) Exclusive Dealer Agreement (Class Y Shares) 3/
(6) Bonus, profit sharing or pension plans - none
(7) Custodian Agreement 1/
(8) Transfer Agency Agreement 1/
(9) Opinion and consent of counsel (to be filed)
(10) Other opinions, appraisals, rulings, and consents:
(a) Auditor's consent (to be filed)
(b) Consent of Special Counsel with respect to California
law (to be filed)
(11) Financial statements omitted from prospectus - none
(12) Letter of investment intent 1/
(13) (a) Plan of Distribution pursuant to Rule 12b-1 with
respect to Class A Shares (to be filed)
(b) Plan of Distribution pursuant to Rule 12b-1 with
respect to Class B Shares (to be filed)
(c) Plan of Distribution pursuant to Rule 12b-1 with
respect to Class C Shares (to be filed)
(14) and
(27) Financial Data Schedule (to be filed)
(15) Plan pursuant to Rule 18f-3 4/
________________________
1/ Incorporated by reference from Post-Effective Amendment No. 26 to the
registration statement of PaineWebber Mutual Fund Trust, SEC File No.
2-98149, filed July 1, 1998.
<PAGE>
2/ 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.
3/ 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.
4/ 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>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York, on the 28th day of April, 1999.
PAINEWEBBER MUTUAL FUND TRUST
By: /s/ DIANNE E. O'DONNELL
------------------------
Dianne E. O'Donnell
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment has been signed below by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
/s/ Margo N. Alexander President and Trustee April 28, 1999
- -------------------------- (Chief Executive Officer)
Margo N. Alexander *
/s/ E. Garrett Bewkes, Jr. Trustee and Chairman April 28, 1999
- -------------------------- of the Board of Trustees
E. Garrett Bewkes, Jr. *
/s/ Richard Q. Armstrong Trustee April 28, 1999
- --------------------------
Richard Q. Armstrong *
/s/ Richard R. Burt Trustee April 28, 1999
- --------------------------
Richard R. Burt *
/s/ Mary C. Farrell Trustee April 28, 1999
- --------------------------
Mary C. Farrell *
/s/ Meyer Feldberg Trustee April 28, 1999
- --------------------------
Meyer Feldberg *
/s/ George W. Gowen Trustee April 28, 1999
- --------------------------
George W. Gowen *
/s/ Frederic V. Malek Trustee April 28, 1999
- --------------------------
Frederic V. Malek *
/s/ Carl W. Schafer Trustee April 28, 1999
- --------------------------
Carl W. Schafer *
/s/ Paul H. Schubert Vice President and April 28, 1999
- -------------------------- Treasurer (Chief Financial
Paul H. Schubert and Accounting Officer)
<PAGE>
SIGNATURES (CONTINUED)
* Signature affixed by Elinor W. Gammon pursuant to powers of attorney
dated May 21, 1996 and incorporated by reference from Post-Effective
Amendment No. 30 to the registration statement of PaineWebber Managed
Municipal Trust, SEC File 2-89016, filed June 27, 1996.
<PAGE>
