<PAGE>
As filed with the Securities and Exchange Commission on June 27, 2000
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. 29 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 29 [X]
PAINEWEBBER MUTUAL FUND TRUST
(Exact name of registrant as specified in charter)
51 West 52nd Street
New York, New York 10019-6114
(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.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Second Floor
Washington, D.C. 20036-1800
Telephone: (202) 778-9000
Approximate Date of Proposed Public Offering: Effective Date of this
Post-Effective Amendment.
It is proposed that this filing will become effective:
[ ] Immediately upon filing pursuant to Rule 485(b)
-------
[ X ] On June 30, 2000 pursuant to Rule 485(b)
-------
[ ] 60 days after filing pursuant to Rule 485(a)(1)
-------
[ ] On _________ pursuant to Rule 485(a)(1)
-------
[ ] 75 days after filing pursuant to Rule 485(a)(2)
-------
[ ] On _________ pursuant to Rule 485(a)(2)
-------
Title of Securities Being Registered: Class A, B, C and Y Shares of Beneficial
Interest.
<PAGE>
PaineWebber
National Tax-Free Income Fund
PaineWebber
Municipal High Income Fund
PaineWebber
California Tax-Free Income Fund
PaineWebber
New York Tax-Free Income Fund
----------------
PROSPECTUS
JUNE 30, 2000
------------------------------
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>
--------------------------------------------------------------------------------
------------------------
National Tax-Free Income Fund Municipal High Income Fund
California Tax-Free Income Fund New York Tax-Free Income Fund
Contents
THE FUNDS
<TABLE>
<S> <C> <C>
---------------------------------------------------------------------------------------------
What every investor
should know about National Tax-Free Income Fund
the funds 3 Investment Objective, Strategies and Risks
4 Performance
5 Expenses and Fee Tables
Municipal High Income Fund
6 Investment Objective, Strategies and Risks
7 Performance
8 Expenses and Fee Tables
California Tax-Free Income Fund
9 Investment Objective, Strategies and Risks
10 Performance
11 Expenses and Fee Tables
New York Tax-Free Income Fund
12 Investment Objective, Strategies and Risks
13 Performance
14 Expenses and Fee Tables
15 More About Risks and Investment Strategies
YOUR INVESTMENT
---------------------------------------------------------------------------------------------
Information for 17 Managing Your Fund Account
managing your fund --Flexible Pricing
account --Buying Shares
--Selling Shares
--Exchanging Shares
--Pricing and Valuation
ADDITIONAL INFORMATION
---------------------------------------------------------------------------------------------
Additional important 22 Management
information about 23 Dividends and Taxes
the funds 23 Financial Highlights
---------------------------------------------------------------------------------------------
Where to learn more Back Cover
about PaineWebber
mutual funds
</TABLE>
The funds are not complete
or
balanced investment
programs.
--------------------------------------------------------------------------------
Prospectus Page 2
<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 may (but is not
required to) use 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 most attractive for longer, medium 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; you may lose money by investing in
the fund. The principal risks presented by the fund are:
- INTEREST RATE RISK--The value of the fund's investments generally will fall
when interest rates rise.
- CREDIT RISK--Municipal bond issuers may fail to make payments when due, or
they may become less willing or less able to do so.
- POLITICAL RISK--The fund's investments are significantly affected by political
changes, including legislation proposals which may make municipal bonds less
attractive in comparison to taxable bonds.
- RELATED SECURITIES CONCENTRATION RISK--Because the fund may invest more than
25% of its total assets in municipal bonds that are issued to finance similar
projects, economic, business, or political developments or changes that affect
one municipal bond also may affect other municipal bonds in the same sector.
- DERIVATIVES RISK--The fund's investments in derivatives may rise or fall more
rapidly than other investments.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies."
INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THOSE REPORTS).
--------------------------------------------------------------------------------
Prospectus Page 3
<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.
TOTAL RETURN ON CLASS A SHARES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CALENDAR YEAR TOTAL RETURN
<S> <C>
1990 6.55%
1991 11.12%
1992 8.01%
1993 12.32%
1994 -7.14%
1995 16.01%
1996 2.29%
1997 9.37%
1998 5.67%
1999 -4.06%
</TABLE>
Total return January 1 to March 31, 2000--2.89%
Best quarter during years shown: 1st quarter, 1995--6.34%
Worst quarter during years shown: 1st quarter, 1994--(6.10)%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1999
<TABLE>
<CAPTION>
LEHMAN
BROTHERS
CLASS CLASS A CLASS B* CLASS C CLASS Y MUNICIPAL
(INCEPTION DATE) (12/3/84) (7/1/91) (7/2/92) (11/3/95) BOND INDEX
---------------- --------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
One Year.......................................... (7.90)% (9.37)% (5.25)% (3.88)% (2.06)%
Five Years........................................ 4.78% 4.48% 5.08% N/A 6.91%
Ten Years......................................... 5.35% N/A N/A N/A 6.89%
Life of Class..................................... 7.30% 5.01% 4.18% 3.98% **
</TABLE>
---------
*Assumes conversion of Class B shares to Class A shares 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--8.70%; Class B--6.72%;
Class C--6.06%; Class Y--4.90%.
--------------------------------------------------------------------------------
Prospectus Page 4
<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 investment)
<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.............................................. 0.12 0.16 0.14 0.15
---- ---- ---- ----
Total Annual Fund Operating Expenses........................ 0.87% 1.66% 1.39% 0.65%
==== ==== ==== ====
</TABLE>
EXAMPLE
This example is intended to help you compare the cost of investing in the 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..................................................... $485 $666 $ 863 $1,430
Class B (assuming sales of all shares at end of period)..... 669 823 1,102 1,561
Class B (assuming no sales of shares)....................... 169 523 902 1,561
Class C (assuming sales of all shares at end of period)..... 217 440 761 1,669
Class C (assuming no sales of shares)....................... 142 440 761 1,669
Class Y..................................................... 66 208 362 810
</TABLE>
--------------------------------------------------------------------------------
Prospectus Page 5
<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 that have similar investment
characteristics but 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 may (but is not required to) use
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 most attractive for longer, medium 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; you may lose money by investing in
the fund. The principal risks presented by the fund are:
- CREDIT RISK--Municipal bond issuers may fail to make payments when due, or
they may become less willing or less able to do so.
- INTEREST RATE RISK--The value of the fund's investments generally will fall
when interest rates rise.
- POLITICAL RISK--The fund's investments are significantly affected by political
changes, including legislation proposals which may make municipal bonds less
attractive in comparison to taxable bonds.
- SINGLE ISSUER CONCENTRATION RISK--Because the fund is non-diversified, it can
invest more of its assets in a single issuer than a diversified fund. As a
result, changes in the value of a single issuer's securities can have a
greater impact on the fund's performance.
- RELATED SECURITIES CONCENTRATION RISK--Because the fund may invest more than
25% of its total assets in municipal bonds that are issued to finance similar
projects, economic, business, or political developments or changes that affect
one municipal bond also may affect other municipal bonds in the same sector.
- DERIVATIVES RISK--The fund's investments in derivatives may rise or fall more
rapidly than other investments.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies."
INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THOSE REPORTS).
--------------------------------------------------------------------------------
Prospectus Page 6
<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 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.
TOTAL RETURN ON CLASS A SHARES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CALENDAR YEAR TOTAL RETURN
<S> <C>
1990 5.52%
1991 13.32%
1992 9.79%
1993 12.14%
1994 -7.77%
1995 15.55%
1996 5.94%
1997 10.73%
1998 5.07%
1999 -3.49%
</TABLE>
Total return January 1 to March 31, 2000--1.36%
Best quarter during years shown: 1st quarter, 1995--6.06%
Worst quarter during years shown: 1st quarter, 1994--(6.53)%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1999
<TABLE>
<CAPTION>
LEHMAN
BROTHERS
CLASS CLASS A CLASS B* CLASS C CLASS Y MUNICIPAL
(INCEPTION DATE) (6/23/87) (7/1/91) (7/2/92) (2/5/98) BOND INDEX
---------------- --------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
One Year........................................... (7.32)% (8.70)% (4.57)% (3.20)% (2.06)%
Five Years......................................... 5.70% 5.45% 6.04% N/A 6.91%
Ten Years.......................................... 6.01% N/A N/A N/A 6.89%
Life of Class...................................... 6.80% 5.71% 4.73% 0.47% **
</TABLE>
---------
*Assumes conversion of Class B shares to Class A shares 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--7.33%; Class B--6.72%;
Class C--6.06%; Class Y--1.67%.
--------------------------------------------------------------------------------
Prospectus Page 7
<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 investment)
<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.............................................. 0.20 0.21 0.20 0.26
---- ---- ---- ----
Total Annual Fund Operating Expenses........................ 1.05% 1.81% 1.55% 0.86%
==== ==== ==== ====
</TABLE>
EXAMPLE
The following example is intended to help you compare the cost of investing in
the 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..................................................... $503 $721 $ 956 $1,631
Class B (assuming sales of all shares at end of period)..... 684 869 1,180 1,744
Class B (assuming no sales of shares)....................... 184 569 980 1,744
Class C (assuming sales of all shares at end of period)..... 233 490 845 1,845
Class C (assuming no sales of shares)....................... 158 490 845 1,845
Class Y..................................................... 88 274 477 1,061
</TABLE>
--------------------------------------------------------------------------------
Prospectus Page 8
<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
may (but is not required to) use 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 most attractive for longer, medium 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; you may lose money by investing in
the fund. The principal risks presented by the fund are:
- INTEREST RATE RISK--The value of the fund's investments generally will fall
when interest rates rise.
- CREDIT RISK--Municipal bond issuers may fail to make payments when due, or
they may become less willing or less able to do so.
- SINGLE STATE CONCENTRATION RISK--Because the fund invests substantially all
its assets in California municipal bonds, its performance will be more
severely affected by unfavorable political or economic conditions in
California than a more geographically diverse fund.
- POLITICAL RISK--The fund's investments are significantly affected by political
changes, including legislation proposals which may make municipal bonds less
attractive in comparison to taxable bonds.
- RELATED SECURITIES CONCENTRATION RISK--Because the fund may invest more than
25% of its total assets in municipal bonds that are issued to finance similar
projects, economic, business, or political developments or changes that affect
one municipal bond also may affect other municipal bonds in the same sector.
- DERIVATIVES RISK--The fund's investments in derivatives may rise or fall more
rapidly than other investments.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies."
INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THOSE REPORTS).
--------------------------------------------------------------------------------
Prospectus Page 9
<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.
TOTAL RETURN ON CLASS A SHARES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CALENDAR YEAR TOTAL RETURN
<S> <C>
1990 6.68%
1991 10.84%
1992 7.49%
1993 11.96%
1994 -8.07%
1995 16.80%
1996 2.74%
1997 8.80%
1998 6.00%
1999 -4.32%
</TABLE>
Total return January 1 to March 31, 2000--3.85%
Best quarter during years shown: 1st quarter, 1995--7.02%
Worst quarter during years shown: 1st quarter, 1994--(6.64)%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1999
<TABLE>
<CAPTION>
LEHMAN
BROTHERS
CLASS CLASS A CLASS B* CLASS C CLASS Y MUNICIPAL
(INCEPTION DATE) (9/16/85) (7/1/91) (7/2/92) (2/5/98) BOND INDEX
---------------- --------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
One Year........................................... (8.17)% (9.57)% (5.49)% (4.09)% (2.06)%
Five Years......................................... 4.92% 4.64% 5.22% N/A 6.91%
Ten Years.......................................... 5.21% N/A N/A N/A 6.89%
Life of Class...................................... 6.84% 4.82% 4.08% 0.54% **
</TABLE>
---------
*Assumes conversion of Class B shares to Class A shares 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--8.29%; Class B--6.72%;
Class C--6.06%; Class Y--1.67%.
--------------------------------------------------------------------------------
Prospectus Page 10
<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 investment)
<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.............................................. 0.20 0.22 0.21 0.18
---- ---- ---- ----
Total Annual Fund Operating Expenses........................ 0.95% 1.72% 1.46% 0.68%
Management Fee Waiver*...................................... 0.20 0.20 0.20 0.20
---- ---- ---- ----
Net Expenses*............................................... 0.75% 1.52% 1.26% 0.48%
==== ==== ==== ====
</TABLE>
---------
*The fund and Mitchell Hutchins have entered into a written fee waiver
agreement. Mitchell Hutchins is contractually obligated to waive 0.20% of its
management fee through June 30, 2001, so that the effective management fee
during that period is 0.30% of average daily net assets.
EXAMPLE
This example is intended to help you compare the cost of investing in the 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, except for the
one year period when the fund's expenses are lower due to Mitchell Hutchins' fee
waiver. 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..................................................... $474 $671 $ 886 $1,502
Class B (assuming sales of all shares at end of period)..... 655 822 1,115 1,621
Class B (assuming no sales of shares)....................... 155 522 915 1,621
Class C (assuming sales of all shares at end of period)..... 203 442 778 1,729
Class C (assuming no sales of shares)....................... 128 442 778 1,729
Class Y..................................................... 49 197 359 828
</TABLE>
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Prospectus Page 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 taxes. 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
may (but is not required to) use 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 most attractive for longer, medium 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; you may lose money by investing in
the fund. The principal risks presented by the fund are:
- INTEREST RATE RISK--The value of the fund's investments generally will fall
when interest rates rise.
- CREDIT RISK--Bond issuers may fail to make payments when due, or they may
become less willing or less able to do so.
- SINGLE STATE CONCENTRATION RISK--Because the fund invests substantially all
its assets in New York municipal bonds, its performance will be more severely
affected by unfavorable political or economic conditions in New York than a
more geographically diverse fund.
- POLITICAL RISK--The fund's investments are significantly affected by political
changes, including legislation proposals which may make municipal bonds less
attractive in comparison to taxable bonds.
- SINGLE ISSUER CONCENTRATION RISK--Because the fund is non-diversified, it can
invest more of its assets in a single issuer than a diversified fund. As a
result, changes in the value of a single issuer's securities can have a
greater impact on the fund's performance.
- RELATED SECURITIES CONCENTRATION RISK--Because the fund may invest more than
25% of its total assets in municipal bonds that are issued to finance similar
projects, economic, business, or political developments or changes that affect
one municipal bond also may affect other municipal bonds in the same sector.
- DERIVATIVES RISK--The fund's investments in derivatives may rise or fall more
rapidly than other investments.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies."
INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THOSE REPORTS).
--------------------------------------------------------------------------------
Prospectus Page 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 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.
TOTAL RETURN ON CLASS A SHARES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CALENDAR YEAR TOTAL RETURN
<S> <C>
1990 5.53%
1991 12.85%
1992 9.85%
1993 12.72%
1994 -8.48%
1995 17.57%
1996 3.46%
1997 9.31%
1998 6.29%
1999 -4.57%
</TABLE>
Total return January 1 to March 31, 2000--3.39%
Best quarter during years shown: 1st quarter, 1995--7.39%
Worst quarter during years shown: 1st quarter, 1994--(6.58)%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1999
<TABLE>
<CAPTION>
LEHMAN
BROTHERS
CLASS CLASS A CLASS B* CLASS C CLASS Y MUNICIPAL
(INCEPTION DATE) (9/23/88) (7/1/91) (7/2/92) (5/21/98) BOND INDEX
---------------- --------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
One Year.......................................... (8.39)% (9.90)% (5.81)% (4.34)% (2.06)%
Five Years........................................ 5.31% 5.03% 5.62% N/A 6.91%
Ten Years......................................... 5.74% N/A N/A N/A 6.89%
Life of Class..................................... 6.12% 5.44% 4.50% 0.13% **
</TABLE>
---------
*Assumes conversion of Class B shares to Class A shares 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--7.25%; Class B--6.72%;
Class C--6.06%; Class Y--1.23%.
--------------------------------------------------------------------------------
Prospectus Page 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 investment)
<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.............................................. 0.49 0.49 0.48 0.45
---- ---- ---- ----
Total Annual Fund Operating Expenses........................ 1.34% 2.09% 1.83% 1.05%
Expense Reimbursement*...................................... 0.32 0.32 0.31 0.28
---- ---- ---- ----
Net Expenses*............................................... 1.02% 1.77% 1.52% 0.77%
==== ==== ==== ====
</TABLE>
---------
*The fund and Mitchell Hutchins have entered into a written expense
reimbursement agreement. Mitchell Hutchins is contractually obligated to
reimburse the fund to the extent that the fund's expenses through June 30, 2001
otherwise would exceed the "Net Expenses" rate 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.
EXAMPLE
The following example is intended to help you compare the cost of investing in
the 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, except for the
one year period when the fund's expenses are lower due to its reimbursement
agreement with Mitchell Hutchins. 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..................................................... $500 $777 $1,075 $1,921
Class B (assuming sales of all shares at end of period)..... 680 924 1,294 2,027
Class B (assuming no sales of shares)....................... 180 624 1,094 2,027
Class C (assuming sales of all shares at end of period)..... 230 545 961 2,123
Class C (assuming no sales of shares)....................... 155 545 961 2,123
Class Y..................................................... 79 306 552 1,257
</TABLE>
--------------------------------------------------------------------------------
Prospectus Page 14
<PAGE>
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------------------------
National Tax-Free Income Fund Municipal High Income Fund
California Tax-Free Income Fund New York Tax-Free Income Fund
MORE ABOUT RISKS AND INVESTMENT
STRATEGIES
--------------------------------------------------------------------------------
PRINCIPAL RISKS
The main risks of investing in 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 greater for lower quality municipal bonds. Municipal
bonds that are not investment grade involve high credit risk and are considered
speculative. High yield, lower quality bonds may fluctuate in value more than
higher quality bonds and, during periods of market volatility, may be more
difficult to sell at the time and price a fund desires.
Some municipal bonds are "insured bonds," which means that a private insurer
guarantees payment even if the issuer of the bond defaults. Insured bonds are
subject to credit risks relating to both the issuer and the insurer, since if
the market believes that either of them has become less able to make payments,
the value of the municipal bond may decline. Bond insurance does not protect
against interest rate or other non-credit risks.
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. A fund's use of
derivatives may not succeed for various reasons, including unexpected changes in
the values of the derivatives or the assets underlying them. Also, if a fund
uses derivatives as a hedge, the hedge will not succeed if changes in the values
of the derivatives are not matched by opposite changes in the values of the
assets being hedged.
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. Bonds that are subject
to "call" provisions may be prepaid at specified times prior to their scheduled
maturity dates, especially if prevailing interest rates are lower than they were
when the bond was issued. A fund may need to reinvest the proceeds of called
bonds in investments that pay lower rates, thus reducing the fund's income.
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.
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
--------------------------------------------------------------------------------
Prospectus Page 15
<PAGE>
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------------------------
National Tax-Free Income Fund Municipal High Income Fund
California Tax-Free Income Fund New York Tax-Free Income Fund
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 ISSUER CONCENTRATION RISK. Municipal High Income Fund and New York
Tax-Free Income Fund are non-diversified. A non-diversified fund may invest more
than 5% of its total assets in securities of a single issuer to a greater extent
than a diversified fund. 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 a smaller position.
SINGLE STATE CONCENTRATION RISK. California Tax-Free Income Fund and New York
Tax-Free Income Fund invest primarily in the municipal bonds of a single state,
and their performance 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 these funds could be more volatile and
involve greater risk than an investment in a more geographically diversified
fund. Information on factors affecting investments in California and New York
municipal bonds is contained in the SAI.
ADDITIONAL INVESTMENT STRATEGIES
DEFENSIVE POSITIONS; CASH RESERVES. 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 in order to
achieve its investment objective. Frequent trading may result in portfolio
turnover over 100% or more (high portfolio turnover).
Frequent trading may increase the portion of a fund's capital gains that are
realized for tax purposes in any given year. This may increase the fund's
taxable dividends in that year. Frequent trading also may increase the portion
of a fund's realized capital gains that are considered "short-term" for tax
purposes. Shareholders will pay higher taxes on dividends that represent
short-term capital gains than they would pay on dividends that represent
long-term capital gains. Frequent trading also may result in higher fund
expenses due to transaction costs.
The funds do not restrict the frequency of trading in order to limit expenses or
the tax effect that the fund's dividends may have on shareholders.
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Prospectus Page 16
<PAGE>
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------------------------
National Tax-Free Income Fund Municipal High Income Fund
California Tax-Free Income Fund New York Tax-Free Income Fund
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 and how long
you plan to hold your fund investment. Class Y shares are only available 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 fees for providing services to
shareholders and (for Class B and Class C shares) distribution fees for the sale
of its shares. 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 sales 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 table.
CLASS A SALES CHARGES
<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)
</TABLE>
---------
(1) A contingent deferred sales charge of 1% of the shares' offering price or
the net asset value at the time of sale by the shareholder, whichever is
less, is charged on sales of shares made within one year of the purchase
date. 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.
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:
- your spouse, parents or children under age 21;
- your Individual Retirement Accounts (IRAs);
- certain employee benefit plans, including 401(k) plans;
- a company that you control;
- a trust that you created;
- Uniform Gifts to Minors Act/Uniform Transfers to Minors Act accounts created
by you or by a group of investors for your children; or
- accounts with the same adviser.
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Prospectus Page 17
<PAGE>
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------------------------
National Tax-Free Income Fund Municipal High Income Fund
California Tax-Free Income Fund New York Tax-Free Income Fund
You may qualify for a complete waiver of the sales charge if you:
- Are an employee of PaineWebber or its affiliates or the spouse, parent or
child under age 21 of a PaineWebber employee;
- 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;
- Acquire these shares through the reinvestment of dividends of a PaineWebber
unit investment trust;
- 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;
- Are a participant in the PaineWebber Members Only-SM- 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; or
- Acquire these shares through a PaineWebber InsightOne-SM- Program brokerage
account.
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:
<TABLE>
<CAPTION>
PERCENTAGE BY WHICH
IF YOU SELL THE SHARES' NET ASSET
SHARES WITHIN: VALUE IS MULTIPLIED:
-------------- ---------------------
<S> <C>
1st year since purchase...... 5%
2nd year since purchase...... 4
3rd year since purchase...... 3
4th year since purchase...... 2
5th year since purchase...... 2
6th year since purchase...... 1
7th year since purchase...... None
</TABLE>
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.
To minimize your deferred sales charge, we will assume that you are selling:
- First, Class B shares representing reinvested dividends, and
- 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:
- You participate in the Systematic Withdrawal Plan;
- You are older than 59 1/2 and are selling shares to take a distribution from
certain types of retirement plans;
- You receive a tax-free return of an excess IRA contribution;
- You receive a tax-qualified retirement plan distribution following retirement;
or
- 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.
--------------------------------------------------------------------------------
Prospectus Page 18
<PAGE>
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------------------------
National Tax-Free Income Fund Municipal High Income Fund
California Tax-Free Income Fund New York Tax-Free Income Fund
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.
You may be eligible to sell your shares without paying a contingent deferred
sales charge if you are a 401(k) or 403(b) qualified employee benefit plan with
fewer than 100 employees or less than $1 million in assets.
NOTE ON SALES CHARGE WAIVERS REGARDING CLASS A, CLASS B AND CLASS C SHARES
If you think you qualify for any of the sales charge waivers described above,
you will need to provide documentation to PaineWebber or the funds. 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.
CLASS Y SHARES
Class Y shares have no sales charge. Only specific types of investors can
purchase Class Y shares. You may be eligible to purchase Class Y shares if you:
- Buy shares through PaineWebber's PACE-SM- Multi-Advisor Program;
- Buy $10 million or more of PaineWebber fund shares at any one time;
- Are a qualified retirement plan with 5,000 or more eligible employees or
$50 million in assets; or
- Are an investment company advised by PaineWebber or an affiliate of
PaineWebber.
Class Y shares do not pay ongoing 12b-1 distribution or service 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 complete 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:
- Contacting your Financial Advisor (if you have an account at PaineWebber or at
a PaineWebber correspondent firm);
- Mailing an application with a check; or
- 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.
<TABLE>
<CAPTION>
MINIMUM INVESTMENTS:
<S> <C>
To open an account......... $1,000
To add to an account....... $ 100
</TABLE>
Each fund may waive or reduce these amounts for:
- Employees of PaineWebber or its affiliates; or
- Participants in certain pension plans, retirement accounts, unaffiliated
investment programs or the funds' automatic investment plans.
FREQUENT TRADING. The interests of a fund's long-term shareholders and its
ability to manage its investments may be adversely affected when its shares are
repeatedly bought and sold in response to short-term market fluctuations - also
known as "market timing." When large dollar amounts are involved, the fund may
have difficulty implementing long-term investment strategies, because it cannot
predict how much cash it will have to invest. Market timing also may force the
fund to sell portfolio securities at disadvantageous times to raise the cash
needed to buy a market timer's fund shares. These factors may hurt the fund's
performance and its shareholders. When Mitchell Hutchins believes
--------------------------------------------------------------------------------
Prospectus Page 19
<PAGE>
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------------------------
National Tax-Free Income Fund Municipal High Income Fund
California Tax-Free Income Fund New York Tax-Free Income Fund
frequent trading would have a disruptive effect on a fund's ability to manage
its investments, Mitchell Hutchins and the fund may reject purchase orders and
exchanges into the fund by any person, group or account that Mitchell Hutchins
believes to be a market timer. A fund may notify the market timer that a
purchase order or an exchange has been rejected after the day the order is
placed.
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:
- Your name and address;
- The fund's name;
- The fund account number;
- The dollar amount or number of shares you want to sell; and
- 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.
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.
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 AND CORRESPONDENT FIRM CLIENTS. If you bought your shares through
PaineWebber or a correspondent firm, you may exchange your shares by placing an
order with your 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:
- Your name and address;
- The name of the fund whose shares you are selling and the name of the fund
whose shares you want to buy;
- Your account number;
- How much you are exchanging (by dollar amount or by number of shares to be
sold); and
- A guarantee of your signature. (See "Selling Shares" for information on
obtaining a signature guarantee.)
--------------------------------------------------------------------------------
Prospectus Page 20
<PAGE>
--------------------------------------------------------------------------------
------------------------
National Tax-Free Income Fund Municipal High Income Fund
California Tax-Free Income Fund New York Tax-Free Income Fund
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 most 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.
--------------------------------------------------------------------------------
Prospectus Page 21
<PAGE>
--------------------------------------------------------------------------------
------------------------
National Tax-Free Income Fund Municipal High Income Fund
California Tax-Free Income Fund New York Tax-Free Income Fund
MANAGEMENT
--------------------------------------------------------------------------------
INVESTMENT ADVISER
Mitchell Hutchins Asset Management Inc. is the investment adviser and
administrator of the funds. Mitchell Hutchins is located at 51 West 52nd Street,
New York, New York 10019-6114, 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, 2000, Mitchell
Hutchins was adviser or sub-adviser of 31 investment companies with 76 separate
portfolios and aggregate assets of approximately $52.7 billion.
PORTFOLIO MANAGERS
Dennis L. McCauley, a managing director at Mitchell Hutchins, is responsible for
overseeing all active fixed income investments, including domestic and global
taxable and tax-exempt mutual funds. Mr. McCauley has been employed by Mitchell
Hutchins since December 1994.
Elbridge (Ebby) T. Gerry III, a managing director at Mitchell Hutchins, is the
sole portfolio manager and has day-to-day responsibility for National Tax-Free
Income Fund and New York Tax-Free Income Fund. Mr. Gerry is also a co-portfolio
manager for Municipal High Income Fund and California Tax-Free 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 Municipal High Income Fund, William W. Veronda, a senior vice president of
Mitchell Hutchins, is a co-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.
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.
Other members of Mitchell Hutchins' municipal investments group provide input on
market outlook, invest rate forecasts and other considerations pertaining to
municipal investments.
ADVISORY FEES
The funds paid fees to Mitchell Hutchins for advisory and administration
services during the most recent fiscal year at the following annual contract
rates expressed as a percentage of a fund's average daily net assets:
<TABLE>
<S> <C>
National Tax-Free Income Fund.......... 0.50%
Municipal High Income Fund............. 0.60%
California Tax-Free Income Fund........ 0.30%*
New York Tax-Free Income Fund.......... 0.60%
</TABLE>
---------
*This is the effective rate resulting from Mitchell Hutchins' waiver of 0.20% of
its 0.50% advisory fee.
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 shareholder approval. A fund's shareholders must approve this policy
before its board may implement it. As of the date of this prospectus, the
shareholders of the funds have not been asked to do so.
--------------------------------------------------------------------------------
Prospectus Page 22
<PAGE>
--------------------------------------------------------------------------------
------------------------
National Tax-Free Income Fund Municipal High Income Fund
California Tax-Free Income Fund New York Tax-Free Income Fund
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 correspondent 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 income
tax purposes. Distributions 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
income 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 and state
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 taxed accordingly.
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 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.
--------------------------------------------------------------------------------
Prospectus Page 23
<PAGE>
--------------------------------------------------------------------------------
------------------------
PaineWebber National Tax-Free Income Fund
FINANCIAL HIGHLIGHTS
(Continued)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NATIONAL TAX-FREE INCOME FUND
------------------------------------------------------------
CLASS A
------------------------------------------------------------
FOR THE FOR THE YEARS ENDED FOR THE
YEAR ENDED FEBRUARY 28, YEAR ENDED
FEBRUARY 29, ------------------------------ FEBRUARY 29,
2000 1999 1998 1997 1996
------------ -------- -------- --------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period............ $ 11.73 $ 11.97 $ 11.55 $ 11.64 $ 11.26
-------- -------- -------- -------- --------
Net investment
income............ 0.55 0.56 0.56 0.55 0.58
Net realized and
unrealized gains
(losses) from
investments and
futures........... (1.00) 0.05 0.50 (0.09) 0.39
-------- -------- -------- -------- --------
Net increase
(decrease) from
investment
operations........ (0.45) 0.61 1.06 0.46 0.97
-------- -------- -------- -------- --------
Dividends from net
investment
income............ (0.55) (0.56) (0.56) (0.55) (0.59)
Distributions from
net realized gains
from investment
transactions...... (0.07) (0.29) (0.08) -- --
-------- -------- -------- -------- --------
Total dividends and
distributions to
shareholders...... (0.62) (0.85) (0.64) (0.55) (0.59)
-------- -------- -------- -------- --------
Net asset value, end
of period......... $ 10.66 $ 11.73 $ 11.97 $ 11.55 $ 11.64
======== ======== ======== ======== ========
Total investment
return(1)......... (3.91)% 5.31% 9.48% 4.14% 8.75%
======== ======== ======== ======== ========
Ratios/Supplemental
data:
Net assets, end of
period (000's).... $194,134 $227,151 $229,040 $263,425 $315,899
Expenses to average
net assets........ 0.87% 0.94% 0.95% 0.91% 0.93%(2)
Net investment
income to average
net assets........ 4.96% 4.72% 4.77% 4.85% 5.06%(2)
Portfolio turnover
rate.............. 29% 43% 79% 81% 74%
</TABLE>
------------
+ Commencement of issuance of shares
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include any applicable sales charges or program fees; results would be
lower if they were included. Total investment return for periods of less
than one year has not been annualized.
(2) These ratios include non-recurring acquisition expenses of 0.03%.
--------------------------------------------------------------------------------
Prospectus Page 24
<PAGE>
--------------------------------------------------------------------------------
------------------------
PaineWebber National Tax-Free Income Fund
FINANCIAL HIGHLIGHTS
(Continued)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NATIONAL TAX-FREE INCOME FUND
-----------------------------------------------------------------------
CLASS B CLASS C
-------------------------------------------------------- ------------
FOR THE FOR THE YEARS ENDED FOR THE FOR THE
YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED
FEBRUARY 29, --------------------------- FEBRUARY 29, FEBRUARY 29,
2000 1999 1998 1997 1996 2000
------------ ------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period............ $ 11.73 $ 11.97 $ 11.55 $ 11.64 $ 11.26 $ 11.73
------- ------- ------- ------- -------- -------
Net investment
income............ 0.46 0.47 0.47 0.46 0.49 0.49
Net realized and
unrealized gains
(losses) from
investments and
futures........... (1.00) 0.05 0.50 (0.09) 0.39 (1.00)
------- ------- ------- ------- -------- -------
Net increase
(decrease) from
investment
operations........ (0.54) 0.52 0.97 0.37 0.88 (0.51)
------- ------- ------- ------- -------- -------
Dividends from net
investment
income............ (0.46) (0.47) (0.47) (0.46) (0.50) (0.49)
Distributions from
net realized gains
from investment
transactions...... (0.07) (0.29) (0.08) -- -- (0.07)
------- ------- ------- ------- -------- -------
Total dividends and
distributions to
shareholders...... (0.53) (0.76) (0.55) (0.46) (0.50) (0.56)
------- ------- ------- ------- -------- -------
Net asset value, end
of period......... $ 10.66 $ 11.73 $ 11.97 $ 11.55 $ 11.64 $ 10.66
======= ======= ======= ======= ======== =======
Total investment
return(1)......... (4.68)% 4.48% 8.62% 3.35% 7.94% (4.42)%
======= ======= ======= ======= ======== =======
Ratios/Supplemental
data:
Net assets, end of
period (000's).... $16,310 $24,085 $32,815 $40,949 $ 51,546 $39,045
Expenses to average
net assets........ 1.66% 1.72% 1.73% 1.67% 1.68%(2) 1.39%
Net investment
income to average
net assets........ 4.14% 3.93% 3.98% 4.09% 4.31%(2) 4.43%
Portfolio turnover
rate.............. 29% 43% 79% 81% 74% 29%
<CAPTION>
NATIONAL TAX-FREE INCOME FUND
---------------------------------------------------------------------------------------------------
CLASS C CLASS Y
----------------------------------------- -------------------------------------------------------
FOR THE YEARS FOR THE PERIOD
FOR THE YEARS ENDED FOR THE FOR THE ENDED NOVEMBER 3,
FEBRUARY 28, YEAR ENDED YEAR ENDED FEBRUARY 28, 1995+ THROUGH
--------------------------- FEBRUARY 29, FEBRUARY 29, ------------------------ FEBRUARY 29,
1999 1998 1997 1996 2000 1999 1998 1997 1996
------- ------- ------- ------------ ------------ ------ ------ ------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period............ $ 11.97 $ 11.55 $ 11.64 $ 11.26 $ 11.73 $11.98 $11.55 $11.65 $ 11.62
------- ------- ------- -------- ------- ------ ------ ------ --------
Net investment
income............ 0.50 0.50 0.49 0.52 0.58 0.59 0.59 0.58 0.19
Net realized and
unrealized gains
(losses) from
investments and
futures........... 0.05 0.50 (0.09) 0.39 (1.00) 0.04 0.51 (0.10) 0.01
------- ------- ------- -------- ------- ------ ------ ------ --------
Net increase
(decrease) from
investment
operations........ 0.55 1.00 0.40 0.91 (0.42) 0.63 1.10 0.48 0.20
------- ------- ------- -------- ------- ------ ------ ------ --------
Dividends from net
investment
income............ (0.50) (0.50) (0.49) (0.53) (0.58) (0.59) (0.59) (0.58) (0.17)
Distributions from
net realized gains
from investment
transactions...... (0.29) (0.08) -- -- (0.07) (0.29) (0.08) -- --
------- ------- ------- -------- ------- ------ ------ ------ --------
Total dividends and
distributions to
shareholders...... (0.79) (0.58) (0.49) (0.53) (0.65) (0.88) (0.67) (0.58) (0.17)
------- ------- ------- -------- ------- ------ ------ ------ --------
Net asset value, end
of period......... $ 11.73 $ 11.97 $ 11.55 $ 11.64 $ 10.66 $11.73 $11.98 $11.55 $ 11.65
======= ======= ======= ======== ======= ====== ====== ====== ========
Total investment
return(1)......... 4.76% 8.92% 3.61% 8.19% (3.72)% 5.49% 9.87% 4.32% 1.70%
======= ======= ======= ======== ======= ====== ====== ====== ========
Ratios/Supplemental
data:
Net assets, end of
period (000's).... $47,722 $49,647 $59,652 $ 75,076 $ 733 $ 821 $ 241 $ 246 $ 341
Expenses to average
net assets........ 1.47% 1.47% 1.42% 1.45%(2) 0.65% 0.71% 0.68% 0.65% 0.64%(2)*
Net investment
income to average
net assets........ 4.20% 4.26% 4.34% 4.57%(2) 5.23% 4.95% 5.04% 5.13% 5.19%(2)*
Portfolio turnover
rate.............. 43% 79% 81% 74% 29% 43% 79% 81% 74%
</TABLE>
------------
--------------------------------------------------------------------------------
Prospectus Page 25
<PAGE>
--------------------------------------------------------------------------------
------------------------
PaineWebber Municipal High Income Fund
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MUNICIPAL HIGH INCOME FUND
----------------------------------------------------------
CLASS A
----------------------------------------------------------
FOR THE FOR THE YEARS ENDED FOR THE
YEAR ENDED FEBRUARY 28, YEAR ENDED
FEBRUARY 29, ---------------------------- FEBRUARY 29,
2000 1999 1998 1997 1996
------------ ------- ------- --------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period............ $ 10.88 $ 10.96 $ 10.39 $ 10.29 $ 9.92
------- ------- ------- -------- -------
Net investment
income............ 0.55 0.55 0.55 0.56 0.62
Net realized and
unrealized gains
(losses) from
investments and
futures........... (0.96) (0.07) 0.57 0.10 0.37
------- ------- ------- -------- -------
Net increase
(decrease) from
investment
operations........ (0.41) 0.48 1.12 0.66 0.99
------- ------- ------- -------- -------
Dividends from net
investment
income............ (0.55) (0.55) (0.55) (0.56) (0.62)
Distributions from
net realized gains
from investment
transactions...... (0.06) (0.01) -- -- --
------- ------- ------- -------- -------
Total dividends and
distributions to
shareholders...... (0.61) (0.56) (0.55) (0.56) (0.62)
------- ------- ------- -------- -------
Net asset value, end
of period......... $ 9.86 $ 10.88 $ 10.96 $ 10.39 $ 10.29
======= ======= ======= ======== =======
Total investment
return(1)......... (3.91)% 4.80% 11.06% 6.61% 10.18%
======= ======= ======= ======== =======
Ratios/Supplemental
data:
Net assets, end of
period (000's).... $62,568 $66,771 $59,288 $ 52,593 $57,280
Expenses to average
net assets........ 1.05% 1.12% 1.22% 1.15% 1.10%
Net investment
income to average
net assets........ 5.27% 5.02% 5.15% 5.49% 5.94%
Portfolio turnover
rate.............. 19% 26% 22% 64% 48%
</TABLE>
------------
+ Commencement of issuance of shares
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include any applicable sales charges or program fees; results would be
lower if they were included. Total investment return for periods of less
than one year has not been annualized.
--------------------------------------------------------------------------------
Prospectus Page 26
<PAGE>
--------------------------------------------------------------------------------
------------------------
PaineWebber Municipal High Income Fund
FINANCIAL HIGHLIGHTS
(Continued)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MUNICIPAL HIGH INCOME FUND
-----------------------------------------------------------------------
CLASS B CLASS C
-------------------------------------------------------- ------------
FOR THE FOR THE YEARS ENDED FOR THE FOR THE
YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED
FEBRUARY 29, --------------------------- FEBRUARY 29, FEBRUARY 29,
2000 1999 1998 1997 1996 2000
------------ ------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period............ $ 10.87 $ 10.96 $ 10.39 $ 10.29 $ 9.92 $ 10.88
------- ------- ------- ------- -------- -------
Net investment
income............ 0.47 0.47 0.47 0.48 0.54 0.50
Net realized and
unrealized gains
(losses) from
investments and
futures........... (0.96) (0.08) 0.57 0.10 0.37 (0.97)
------- ------- ------- ------- -------- -------
Net increase
(decrease) from
investment
operations........ (0.49) 0.39 1.04 0.58 0.91 (0.47)
------- ------- ------- ------- -------- -------
Dividends from net
investment
income............ (0.47) (0.47) (0.47) (0.48) (0.54) (0.50)
Distributions from
net realized gains
from investment
transactions...... (0.06) (0.01) -- -- -- (0.06)
------- ------- ------- ------- -------- -------
Total dividends and
distributions to
shareholders...... (0.53) (0.48) (0.47) (0.48) (0.54) (0.56)
------- ------- ------- ------- -------- -------
Net asset value, end
of period......... $ 9.85 $ 10.87 $ 10.96 $ 10.39 $ 10.29 $ 9.85
======= ======= ======= ======= ======== =======
Total investment
return(1)......... (4.65)% 3.87% 10.23% 5.82% 9.36% (4.49)%
======= ======= ======= ======= ======== =======
Ratios/Supplemental
data:
Net assets, end of
period (000's).... $13,999 $18,675 $18,097 $19,427 $ 23,868 $19,819
Expenses to average
net assets........ 1.81% 1.88% 1.98% 1.90% 1.85% 1.55%
Net investment
income to average
net assets........ 4.48% 4.24% 4.39% 4.73% 5.19% 4.76%
Portfolio turnover
rate.............. 19% 26% 22% 64% 48% 19%
<CAPTION>
MUNICIPAL HIGH INCOME FUND
--------------------------------------------------------------------------------------
CLASS C CLASS Y
------------------------------------------ -----------------------------------------
FOR THE
PERIOD
FOR THE YEARS ENDED FOR THE FOR THE FOR THE FEBRUARY 5,
FEBRUARY 28, YEAR ENDED YEAR ENDED YEAR ENDED 1998+ THROUGH
---------------------------- FEBRUARY 29, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1999 1998 1997 1996 2000 1999 1998
------- ------- -------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period............ $ 10.96 $ 10.39 $ 10.29 $ 9.92 $ 10.88 $ 10.97 $ 10.98
------- ------- ------- -------- ------- ---------- ----------
Net investment
income............ 0.49 0.50 0.51 0.56 0.57 0.58 0.04
Net realized and
unrealized gains
(losses) from
investments and
futures........... (0.07) 0.57 0.10 0.37 (0.96) (0.08) (0.01)
------- ------- ------- -------- ------- ---------- ----------
Net increase
(decrease) from
investment
operations........ 0.42 1.07 0.61 0.93 (0.39) 0.50 0.03
------- ------- ------- -------- ------- ---------- ----------
Dividends from net
investment
income............ (0.49) (0.50) (0.51) (0.56) (0.57) (0.58) (0.04)
Distributions from
net realized gains
from investment
transactions...... (0.01) -- -- -- (0.06) (0.01) --
------- ------- ------- -------- ------- ---------- ----------
Total dividends and
distributions to
shareholders...... (0.50) (0.50) (0.51) (0.56) (0.63) (0.59) (0.04)
------- ------- ------- -------- ------- ---------- ----------
Net asset value, end
of period......... $ 10.88 $ 10.96 $ 10.39 $ 10.29 $ 9.86 $ 10.88 $ 10.97
======= ======= ======= ======== ======= ========== ==========
Total investment
return(1)......... 4.25% 10.51% 6.08% 9.64% (3.73)% 4.96% (0.09)%
======= ======= ======= ======== ======= ========== ==========
Ratios/Supplemental
data:
Net assets, end of
period (000's).... $24,355 $21,982 $16,967 $ 20,700 $ 242 $ 414 $ 56
Expenses to average
net assets........ 1.62% 1.72% 1.66% 1.60% 0.86% 0.87% 1.00%*
Net investment
income to average
net assets........ 4.52% 4.64% 4.98% 5.45% 5.45% 5.28% 5.44%*
Portfolio turnover
rate.............. 26% 22% 64% 48% 19% 26% 22%
</TABLE>
------------
--------------------------------------------------------------------------------
Prospectus Page 27
<PAGE>
--------------------------------------------------------------------------------
------------------------
PaineWebber California Tax-Free Income Fund
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE INCOME FUND
------------------------------------------------
CLASS A
------------------------------------------------
FOR THE FOR THE YEARS
YEAR ENDED ENDED FEBRUARY 28,
FEBRUARY 29, ----------------------------------
2000 1999 1998 1997
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 11.18 $ 11.39 $ 10.91 $ 11.02
------- -------- -------- --------
Net investment income.... 0.51 0.52 0.51 0.52
Net realized and
unrealized gains
(losses) from
investments and
futures................ (0.95) 0.11 0.48 (0.11)
------- -------- -------- --------
Net increase (decrease)
from investment
operations............. (0.44) 0.63 0.99 0.41
------- -------- -------- --------
Dividends from net
investment income...... (0.51) (0.52) (0.51) (0.52)
Distributions from net
realized gains from
investment
transactions........... (0.06) (0.32) -- --
------- -------- -------- --------
Total dividends and
distributions to
shareholders........... (0.57) (0.84) (0.51) (0.52)
------- -------- -------- --------
Net asset value, end of
period................. $ 10.17 $ 11.18 $ 11.39 $ 10.91
======= ======== ======== ========
Total investment
return(1).............. (3.96)% 5.90% 9.26% 3.92%
======= ======== ======== ========
Ratios/Supplemental data:
Net assets, end of period
(000's)................ $99,668 $119,266 $120,804 $127,040
Expenses to average net
assets, net of waivers
from adviser........... 0.75% 0.83% 0.98% 0.97%
Expenses to average net
assets, before waivers
from adviser........... 0.95% 0.96% 0.98% 0.97%
Net investment income to
average net assets, net
of waivers from
adviser................ 4.85% 4.59% 4.56% 4.85%
Net investment income to
average net assets,
before waivers from
adviser................ 4.65% 4.46% 4.56% 4.85%
Portfolio turnover
rate................... 24% 45% 107% 73%
<CAPTION>
CALIFORNIA TAX-FREE INCOME FUND
------------
CLASS A
------------
FOR THE
YEAR ENDED
FEBRUARY 29,
1996
------------
<S> <C>
Net asset value,
beginning of period.... $ 10.68
--------
Net investment income.... 0.57
Net realized and
unrealized gains
(losses) from
investments and
futures................ 0.34
--------
Net increase (decrease)
from investment
operations............. 0.91
--------
Dividends from net
investment income...... (0.57)
Distributions from net
realized gains from
investment
transactions........... --
--------
Total dividends and
distributions to
shareholders........... (0.57)
--------
Net asset value, end of
period................. $ 11.02
========
Total investment
return(1).............. 8.68%
========
Ratios/Supplemental data:
Net assets, end of period
(000's)................ $151,684
Expenses to average net
assets, net of waivers
from adviser........... 0.94%
Expenses to average net
assets, before waivers
from adviser........... 0.94%
Net investment income to
average net assets, net
of waivers from
adviser................ 5.21%
Net investment income to
average net assets,
before waivers from
adviser................ 5.21%
Portfolio turnover
rate................... 32%
</TABLE>
------------
+ Commencement of issuance of shares
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include any applicable sales charges or program fees; results would be
lower if they were included. Total investment return for a period of less
than one year has not been annualized.
--------------------------------------------------------------------------------
Prospectus Page 28
<PAGE>
--------------------------------------------------------------------------------
------------------------
PaineWebber California Tax-Free Income Fund
FINANCIAL HIGHLIGHTS
(Continued)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE INCOME FUND
----------------------------------------------------------------------------------------------------
CLASS B CLASS C
----------------------------------------------------------- ---------------------------------------
FOR THE FOR THE YEARS FOR THE FOR THE FOR THE YEARS
YEAR ENDED ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED ENDED FEBRUARY 28,
FEBRUARY 29, ------------------------------- FEBRUARY 29, FEBRUARY 29, -------------------------
2000 1999 1998 1997 1996 2000 1999 1998 1997
------------ --------- --------- --------- ------------ ------------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 11.18 $ 11.39 $ 10.92 $ 11.03 $ 10.69 $ 11.17 $ 11.38 $ 10.90 $ 11.02
------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income.... 0.43 0.43 0.42 0.44 0.48 0.46 0.46 0.45 0.47
Net realized and
unrealized gains
(losses) from
investments and
futures................ (0.94) 0.11 0.47 (0.11) 0.34 (0.94) 0.11 0.48 (0.12)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net increase (decrease)
from investment
operations............. (0.51) 0.54 0.89 0.33 0.82 (0.48) 0.57 0.93 0.35
------- ------- ------- ------- ------- ------- ------- ------- -------
Dividends from net
investment income...... (0.43) (0.43) (0.42) (0.44) (0.48) (0.46) (0.46) (0.45) (0.47)
Distributions from net
realized gains from
investment
transactions........... (0.06) (0.32) -- -- -- (0.06) (0.32) -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total dividends and
distributions to
shareholders........... (0.49) (0.75) (0.42) (0.44) (0.48) (0.52) (0.78) (0.45) (0.47)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
period................. $ 10.18 $ 11.18 $ 11.39 $ 10.92 $ 11.03 $ 10.17 $ 11.17 $ 11.38 $ 10.90
======= ======= ======= ======= ======= ======= ======= ======= =======
Total investment
return(1).............. (4.60)% 5.06% 8.33% 3.14% 7.86% (4.36)% 5.35% 8.71% 3.30%
======= ======= ======= ======= ======= ======= ======= ======= =======
Ratios/Supplemental data:
Net assets, end of period
(000's)................ $10,547 $13,756 $16,783 $20,943 $27,175 $16,237 $18,682 $16,522 $17,624
Expenses to average net
assets, net of waivers
from adviser........... 1.52% 1.59% 1.75% 1.74% 1.70% 1.26% 1.33% 1.50% 1.49%
Expenses to average net
assets, before waivers
from adviser........... 1.72% 1.72% 1.75% 1.74% 1.70% 1.46% 1.47% 1.50% 1.49%
Net investment income to
average net assets, net
of waivers from
adviser................ 4.06% 3.81% 3.79% 4.08% 4.45% 4.34% 4.08% 4.05% 4.34%
Net investment income to
average net assets,
before waivers from
adviser................ 3.86% 3.68% 3.79% 4.08% 4.45% 4.14% 3.94% 4.05% 4.34%
Portfolio turnover
rate................... 24% 45% 107% 73% 32% 24% 45% 107% 73%
<CAPTION>
CALIFORNIA TAX-FREE INCOME FUND
-------------------------------------------------------
CLASS C CLASS Y
------------ -----------------------------------------
FEBRUARY 5,
FOR THE FOR THE FOR THE 1998+
YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
FEBRUARY 29, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 2000 1999 1998
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 10.67 $11.18 $11.38 $11.42
------- ------ ------ ------
Net investment income.... 0.51 0.54 0.55 0.04
Net realized and
unrealized gains
(losses) from
investments and
futures................ 0.35 (0.95) 0.12 (0.04)
------- ------ ------ ------
Net increase (decrease)
from investment
operations............. 0.86 (0.41) 0.67 0.00
------- ------ ------ ------
Dividends from net
investment income...... (0.51) (0.54) (0.55) (0.04)
Distributions from net
realized gains from
investment
transactions........... -- (0.06) (0.32) --
------- ------ ------ ------
Total dividends and
distributions to
shareholders........... (0.51) (0.60) (0.87) (0.04)
------- ------ ------ ------
Net asset value, end of
period................. $ 11.02 $10.17 $11.18 $11.38
======= ====== ====== ======
Total investment
return(1).............. 8.22% (3.73)% 6.28% (0.34)%
======= ====== ====== ======
Ratios/Supplemental data:
Net assets, end of period
(000's)................ $22,155 $ 356 $ 312 $ 114
Expenses to average net
assets, net of waivers
from adviser........... 1.46% 0.48% 0.55% 0.76%*
Expenses to average net
assets, before waivers
from adviser........... 1.46% 0.68% 0.71% 0.76%*
Net investment income to
average net assets, net
of waivers from
adviser................ 4.69% 5.16% 4.87% 5.07%*
Net investment income to
average net assets,
before waivers from
adviser................ 4.69% 4.96% 4.71% 5.07%*
Portfolio turnover
rate................... 32% 24% 45% 107%
</TABLE>
------------
--------------------------------------------------------------------------------
Prospectus Page 29
<PAGE>
--------------------------------------------------------------------------------
------------------------
PaineWebber New York Tax-Free Income Fund
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NEW YORK TAX-FREE INCOME FUND
-----------------------------------------------------------
CLASS A
-----------------------------------------------------------
FOR THE FOR THE YEARS ENDED FOR THE
YEAR ENDED FEBRUARY 28, YEAR ENDED
FEBRUARY 29, ------------------------------- FEBRUARY 29,
2000 1999 1998 1997 1996
------------ --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 11.03 $ 11.12 $ 10.66 $ 10.71 $ 10.27
------- ------- ------- ------- -------
Net investment income.... 0.48 0.53 0.51 0.51 0.54
Net realized and
unrealized gains
(losses) from
investments and
futures................ (0.95) 0.15 0.46 (0.05) 0.45
------- ------- ------- ------- -------
Net increase (decrease)
from investment
operations............. (0.47) 0.68 0.97 0.46 0.99
------- ------- ------- ------- -------
Dividends from net
investment income...... (0.48) (0.53) (0.51) (0.51) (0.55)
Distributions from net
realized gains from
investment
transactions........... (0.09) (0.24) -- -- --
------- ------- ------- ------- -------
Total dividends and
distributions to
shareholders........... (0.57) (0.77) (0.51) (0.51) (0.55)
------- ------- ------- ------- -------
Net asset value, end of
period................. $ 9.99 $ 11.03 $ 11.12 $ 10.66 $ 10.71
======= ======= ======= ======= =======
Total investment
return(1).............. (4.33)% 6.24% 9.36% 4.49% 9.83%
======= ======= ======= ======= =======
Ratios/Supplemental data:
Net assets, end of period
(000's)................ $22,810 $27,171 $23,694 $23,160 $28,734
Expenses to average net
assets, net of waivers
from adviser........... 1.02% 1.02% 1.02% 1.02% 1.02%
Expenses to average net
assets, before waivers
from adviser........... 1.34% 1.27% 1.28% 1.50% 1.15%
Net investment income to
average net assets, net
of waivers from
adviser................ 4.56% 4.46% 4.74% 4.91% 5.11%
Net investment income to
average net assets,
before waivers and
reimbursements from
adviser................ 4.24% 4.21% 4.48% 4.42% 4.98%
Portfolio turnover
rate................... 19% 44% 34% 40% 13%
</TABLE>
-----------
+ Commencement of issuance of shares
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include any applicable sales charges or program fees; results would be
lower if they were included. Total investment return for periods of less
than one year has not been annualized.
--------------------------------------------------------------------------------
Prospectus Page 30
<PAGE>
--------------------------------------------------------------------------------
------------------------
PaineWebber New York Tax-Free Income Fund
FINANCIAL HIGHLIGHTS
(Continued)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NEW YORK TAX-FREE INCOME FUND
-------------------------------------------------------------------
CLASS B CLASS C
----------------------------------------------------- ------------
FOR THE FOR THE YEARS ENDED FOR THE FOR THE
YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED
FEBRUARY 29, ------------------------- FEBRUARY 29, FEBRUARY 29,
2000 1999 1998 1997 1996 2000
------------ ------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $11.03 $11.12 $10.65 $10.71 $ 10.27 $ 11.04
------ ------ ------ ------ ---------- ----------
Net investment income.... 0.40 0.44 0.43 0.44 0.47 0.42
Net realized and
unrealized gains
(losses) from
investments and
futures................ (0.95) 0.15 0.47 (0.06) 0.44 (0.95)
------ ------ ------ ------ ---------- ----------
Net increase (decrease)
from investment
operations............. (0.55) 0.59 0.90 0.38 0.91 (0.53)
------ ------ ------ ------ ---------- ----------
Dividends from net
investment income...... (0.40) (0.44) (0.43) (0.44) (0.47) (0.42)
Distributions from net
realized gains from
investment
transactions........... (0.09) (0.24) -- -- -- (0.09)
------ ------ ------ ------ ---------- ----------
Total dividends and
distributions to
shareholders........... (0.49) (0.68) (0.43) (0.44) (0.47) (0.51)
------ ------ ------ ------ ---------- ----------
Net asset value, end of
period................. $ 9.99 $11.03 $11.12 $10.65 $ 10.71 $ 10.00
====== ====== ====== ====== ========== ==========
Total investment
return(1).............. (5.05)% 5.40% 8.65% 3.62% 9.01% (4.80)%
====== ====== ====== ====== ========== ==========
Ratios/Supplemental data:
Net assets, end of period
(000's)................ $3,692 $6,013 $7,829 $9,462 $ 11,862 $ 9,344
Expenses to average net
assets, net of waivers
from adviser........... 1.77% 1.77% 1.77% 1.76% 1.77% 1.52%
Expenses to average net
assets, before waivers
from adviser........... 2.09% 2.02% 2.05% 2.27% 1.89% 1.83%
Net investment income to
average net assets, net
of waivers from
adviser................ 3.77% 3.70% 3.99% 4.16% 4.36% 4.06%
Net investment income to
average net assets,
before waivers and
reimbursements from
adviser................ 3.45% 3.45% 3.70% 3.65% 4.24% 3.75%
Portfolio turnover
rate................... 19% 44% 34% 40% 13% 19%
<CAPTION>
NEW YORK TAX-FREE INCOME FUND
---------------------------------------------------------------------
CLASS C CLASS Y
--------------------------------------- ----------------------------
FOR THE PERIOD
FOR THE YEARS ENDED FOR THE FOR THE MAY 21,
FEBRUARY 28, YEAR ENDED YEAR ENDED 1998+ THROUGH
------------------------- FEBRUARY 29, FEBRUARY 29, FEBRUARY 28,
1999 1998 1997 1996 2000 1999
------- ------- ------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 11.12 $ 10.66 $ 10.71 $ 10.28 $ 11.03 $ 11.08
------- ------- ------- ---------- ---------- ----------
Net investment income.... 0.47 0.46 0.46 0.49 0.50 0.40
Net realized and
unrealized gains
(losses) from
investments and
futures................ 0.16 0.46 (0.05) 0.43 (0.95) 0.19
------- ------- ------- ---------- ---------- ----------
Net increase (decrease)
from investment
operations............. 0.63 0.92 0.41 0.92 (0.45) 0.59
------- ------- ------- ---------- ---------- ----------
Dividends from net
investment income...... (0.47) (0.46) (0.46) (0.49) (0.50) (0.40)
Distributions from net
realized gains from
investment
transactions........... (0.24) -- -- -- (0.09) (0.24)
------- ------- ------- ---------- ---------- ----------
Total dividends and
distributions to
shareholders........... (0.71) (0.46) (0.46) (0.49) (0.59) (0.64)
------- ------- ------- ---------- ---------- ----------
Net asset value, end of
period................. $ 11.04 $ 11.12 $ 10.66 $ 10.71 $ 9.99 $ 11.03
======= ======= ======= ========== ========== ==========
Total investment
return(1).............. 5.78% 8.82% 3.98% 9.17% (4.10)% 5.39%
======= ======= ======= ========== ========== ==========
Ratios/Supplemental data:
Net assets, end of period
(000's)................ $11,802 $12,966 $13,786 $ 17,849 $ 65 $ 21
Expenses to average net
assets, net of waivers
from adviser........... 1.52% 1.52% 1.52% 1.52% 0.77% 0.77%*
Expenses to average net
assets, before waivers
from adviser........... 1.77% 1.78% 2.04% 1.64% 1.05% 1.03%*
Net investment income to
average net assets, net
of waivers from
adviser................ 3.97% 4.24% 4.41% 4.61% 4.92% 4.71%*
Net investment income to
average net assets,
before waivers and
reimbursements from
adviser................ 3.72% 3.98% 3.89% 4.50% 4.64% 4.44%*
Portfolio turnover
rate................... 44% 34% 40% 13% 19% 44%
</TABLE>
-----------
--------------------------------------------------------------------------------
Prospectus Page 31
<PAGE>
--------------------------------------------------------------------------------
------------------------
National Tax-Free Income Fund Municipal High Income Fund
California Tax-Free Income Fund New York Tax-Free Income Fund
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
TICKER SYMBOL: National Tax-Free Income Class: A: PTFAX.Q Municipal High Income Class: A: PMHAX.Q
B: PTFBX.Q B: PMHBX.Q
C: PWNDX.Q C: PMIDX.Q
Y: None Y: None
California Tax-Free Income Class: A: PCIAX.Q New York Tax-Free Income Class: A: PNYAX.Q
B: PCIBX.Q B: PNYBX.Q
C: PCIDX.Q C: PNYDX.Q
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 may obtain information about the operations of the SEC's Public
Reference Room by calling the SEC at 1-202-942-8090. You can get text-only
copies of reports and other information about the funds:
- For a fee, by electronic request at [email protected] or by writing the SEC's
Public Reference Room, Washington, D.C. 20549-0102; or
- Free, from the EDGAR Database on the SEC's Internet website at:
http://www.sec.gov
PaineWebber Mutual Fund Trust
--PaineWebber California Tax-Free Income Fund
--PaineWebber National Tax-Free Income Fund
Investment Company Act File No. 811-4312
PaineWebber Municipal Series
--PaineWebber Municipal High Income Fund
--PaineWebber New York Tax-Free Income Fund
Investment Company Act File No. 811-5014
-C-2000 PaineWebber Incorporated. All rights reserved.
--------------------------------------------------------------------------------
_______________
<PAGE>
PAINEWEBBER NATIONAL TAX-FREE INCOME FUND
PAINEWEBBER MUNICIPAL HIGH INCOME FUND
PAINEWEBBER CALIFORNIA TAX-FREE INCOME FUND
PAINEWEBBER NEW YORK TAX-FREE INCOME FUND
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
STATEMENT OF ADDITIONAL INFORMATION
The four funds named above are series of professionally managed,
open-end management investment companies (each a "Trust"). PaineWebber
National Tax-Free Income Fund and PaineWebber California 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 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
("SAI" ). The Annual Report accompanies this SAI. You may obtain an
additional copy of a fund's Annual Report by calling toll-free 1-800-647-1568.
This SAI is not a prospectus and should be read only in conjunction
with the funds' current Prospectus, dated June 30, 2000. 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, 2000.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
The Funds and Their Investment Policies..................................................................... 2
The Funds' Investments, Related Risks and Limitations....................................................... 3
Strategies Using Derivative Instruments..................................................................... 29
Organization of Trusts; Trustees and Officers and Principal Holders and Management Ownership of Securities.. 35
Investment Advisory; Administration and Distribution Arrangements........................................... 44
Portfolio Transactions...................................................................................... 50
Reduced Sales Charges, Additional Exchange and Redemption Information and Other Services.................... 52
Conversion of Class B Shares................................................................................ 57
Valuation of Shares......................................................................................... 57
Performance Information..................................................................................... 58
Taxes....................................................................................................... 62
Other Information........................................................................................... 68
Financial Statements........................................................................................ 69
Appendix.................................................................................................... A-1
</TABLE>
<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.
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
bonds. Except under unusual market conditions, the fund invests at least 80%
of its net assets in municipal bonds that pay interest that is not an item of
tax preference for purposes of the federal alternative minimum tax ("AMT
exempt interest").
National Tax-Free Income Fund normally invests at least 65% of its
total assets in investment grade municipal bonds. The fund may invest up to
35% of its total assets in municipal bonds that are not investment grade. The
fund may not invest more than 10% of its total assets in inverse floaters and
may not invest more than 5% of its total assets in uninsured
"non-appropriation" municipal lease obligations. 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 bonds and may invest without limit in
municipal bonds that are below investment grade. The fund also may invest
without limit in municipal bonds 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 bonds. The fund may not invest
more than 10% of its total assets in inverse floaters and may not invest more
than 5% of its total assets in uninsured "non-appropriation" municipal lease
obligations. 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.
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 municipal bonds that pay interest that is exempt from those
taxes ("California Obligations"). The fund normally invests at least 80% of
its net assets in California Obligations that pay AMT exempt interest.
California Tax-Free Income Fund normally invests at least 65% of its
total assets in investment grade municipal bonds. The fund may invest up to
35% of its total assets in municipal bonds that are not investment grade. The
fund may not invest more than 10% of its total assets in inverse floaters and
may not invest more than 5% of its total assets in uninsured
"non-appropriation" municipal lease obligations. 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
2
<PAGE>
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 New York State and New
York City personal income taxes. The fund seeks to invest substantially all
of its net assets in municipal bonds issued by the State of New York, its
municipalities and public authorities or by other issuers that pay interest
that is exempt from those 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 bonds. The fund may invest up to
35% of its total assets in municipal bonds that are not investment grade. The
fund may not invest more than 10% of its total assets in inverse floaters and
may not invest more than 5% of its total assets in uninsured
"non-appropriation" municipal lease obligations. 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 SAI, the funds have
established no policy limitations on their ability to use the investments or
techniques discussed in these documents.
TYPES OF MUNICIPAL BONDS. Each fund may invest in a variety of
municipal bonds, as described below:
MUNICIPAL BONDS. Municipal bonds are municipal obligations that are
issued by states, municipalities, public authorities or other issuers and
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.
Municipal bonds also include "moral obligation" bonds, which are normally
issued by special purpose authorities. For these bonds, a government unit is
regarded as morally obligated to support payment of the debt service, which
is usually subject to annual budget appropriations. Various types of
municipal bonds are described in the following sections.
MUNICIPAL LEASE OBLIGATIONS. Municipal bonds include 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 its 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.
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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 considered 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. Each fund may invest more than 25% of its net
assets in IDBs and PABs.
FLOATING RATE AND VARIABLE RATE OBLIGATIONS. Floating rate and
variable rate obligations are municipal bonds that bear interest at rates
that are not fixed, but that vary with changes in specified market rates or
indices. The interest rate on floating rate or variable rate securities
ordinarily is readjusted on the basis of the prime rate of the bank that
originated the financing or some other index or published rate, such as the
90-day U.S. Treasury bill rate, or is otherwise reset to reflect market rates
of interest. Generally, these interest rate adjustments cause the market
value of floating rate and variable rate municipal securities to fluctuate
less than the market value of fixed rate obligations. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation
or capital depreciation is less than for fixed rate obligations. 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 a 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.
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, a fund expects to exercise the demand under the letters
of credit or other guarantees (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
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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
bonds 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 bonds.
Therefore, a fund's ability to exercise the tender option will be affected by
the credit standing of both the bank involved and the issuer of the
underlying securities.
PUT BONDS. A put bond is a municipal bond that 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.
Municipal bonds include tax-exempt commercial paper and short-term municipal
notes, such as 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 bonds on which
the rate of interest varies inversely with interest rates on other municipal
bonds or an index. Such obligations include components of securities on which
interest is paid in two separate parts - an auction component, which pays
interest at a market rate that is set periodically through an auction process
or other method, and a residual component, or "inverse floater," which pays
interest at a rate equal to the difference between the rate that the issuer
would have paid on a fixed-rate obligation at the time of issuance and the
rate paid on the auction component. The market value of an inverse floater
will be more volatile than that of a fixed-rate obligation and, like most
debt obligations, will vary inversely with changes in interest rates. Because
of the market volatility associated with inverse floaters, no fund will
invest more than 10% of its total assets in inverse floaters.
Because the interest rate paid to holders of inverse floaters is
generally determined by subtracting the interest rate paid to 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 bond
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 bonds 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.
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YIELD FACTORS AND CREDIT RATINGS; NON-INVESTMENT GRADE BONDS. The
yield of a municipal bond 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 bonds 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 bond, the higher the rate
of interest paid and the greater the volatility.
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's, a
division of The McGraw-Hill Companies, Inc. ( "S&P"), and other nationally
recognized statistical rating agencies ("rating agencies") are private
services that provide ratings of the credit quality of bonds and certain
other securities, including municipal bonds. 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 bonds and to the
exemption of interest thereon from federal income tax and (when available)
from the federal alternative minimum tax, California personal income tax and
New York State and New York City personal income taxes are rendered by bond
counsel to the respective issuing authorities at the time of issuance.
Neither the funds nor Mitchell Hutchins reviews the proceedings relating to
the issuance of municipal bonds or the basis for such opinions. An issuer's
obligations under its municipal bonds are subject to the 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 bonds 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 ability of issuers to meet their obligations for the payment of
principal of and interest on their municipal bonds may be materially and
adversely affected.
Investment grade municipal bonds are rated in one of the four
highest rating categories or one of the two highest short-term 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.
Non-investment grade municipal bonds (commonly known as municipal
"junk bonds" and sometimes referred to as "high yield" municipal bonds) are
rated Ba or lower by Moody's, BB or lower by S&P, comparably rated by another
rating agency or determined by Mitch ell Hutchins to be of comparable
quality. The non-investment grade municipal bonds in which the funds may
invest may be rated Ba, B or MIG-3 by Moody's or BB, B or SP-3 by S&P, have
an equivalent rating from another rating agency, or, 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
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they are more sensitive to adverse changes market conditions. During periods
of economic downturn or rising interest rates, their issuers may experience
financial stress that 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 these bonds 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. Each fund may
acquire such commitments 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 municipal
bonds 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 bonds. Stand-by commitments acquired by a fund would
be valued at zero in determining net asset value. Whether the fund paid
directly or indirectly for a stand-by commitment, its cost would be treated
as unrealized depreciation and would be amortized over the period the
commitment is held by the fund.
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 a fund will be considered illiquid unless the options are
sold to qualified dealers who agree that the fund may repurchase the options 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. A
fund may not be able to readily liquidate its investments in illiquid securities
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
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Hutchins does not believe that investing in such securities presents the same
liquidity issues as direct investments in municipal lease obligations.
Mitchell Hutchins monitors each fund's overall holdings of illiquid
securities. If a fund's holdings of illiquid securities exceeds its
limitation on investments in illiquid securities for any reason (such as a
particular security becoming illiquid, changes in relative market values of
liquid and illiquid portfolio securities or shareholder redemptions),
Mitchell Hutchins will consider what action would be in the best interest of
the fund and its shareholders. Such action may include engaging in an orderly
disposition of securities to reduce the fund's holdings of illiquid
securities. However, a fund is not required immediately to dispose of
illiquid securities under these circumstances and Mitchell Hutchins, with the
concurrence of the fund's board, may determine that it is in the best
interests of the fund and its shareholders to continue to hold the illiquid
securities.
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 intends to enter into repurchase
agreements only with counterparties in transactions believed by Mitchell
Hutchins to present minimum credit risks.
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
a normal settlement date at a stated price and yield. 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.
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's
when-issued and delayed delivery purchase commitments could cause its net
asset value per share to be more volatile.
DURATION. Duration is a measure of the expected life of a bond on a
present value basis. Duration incorporates the bond's yield, coupon interest
payments, final maturity and call features into one measure and is one of the
fundamental tools used by Mitchell Hutchins in portfolio selection and yield
curve positioning for a
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fund's bond investments. Duration was developed as a more precise alternative
to the concept "term to maturity." Traditionally, a bond'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
the scheduled final payment on the bond, taking no account of the pattern of
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 bond, expected to be made, and weights them by the
present values of the cash to be received at each future point in time. For
any bond with interest payments occurring prior to the payment of principal,
duration is always less than maturity. 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 bonds. For example, when the level of interest rates
increases by 1%, a bond 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 bonds 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 periods of market volatility. Accordingly, the net asset value of
a fund's portfolio of bonds 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 including other investment companies. A fund also may reinvest
cash collateral in private investment vehicles similar to money market funds,
including one managed by Mitchell Hutchins. In determining whether to lend
securities to a particular broker-dealer or institutional investor, Mitchell
Hutchins will consider, and during the period of the loan will monitor, all
relevant facts and circumstances, including the creditworthiness of the
borrower. Each fund will retain authority to terminate any of its loans at
any time. Each fund may pay reasonable fees in connection with a loan and may
pay the borrower or placing broker a negotiated
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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 bonds available,
each fund may temporarily and without percentage limit hold cash and invest
in money market instruments that pay taxable interest, including repurchase
agreements. If a fund holds cash, the cash would not earn income and would
reduce the fund's yield. In addition, for temporary defensive purposes, each
of California Tax-Free Income Fund, National Tax-Free Income Fund and New
York Tax-Free Income Fund may invest more than 20% of its net assets in
municipal obligations that pay interest that is exempt from federal income
tax but is subject to California personal income tax (in the case of
California Tax-Free Income Fund), New York State and New York City personal
income taxes (in the case of New York Tax-Free Income Fund) or is not AMT
exempt interest.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES.
The following information provides only a brief summary of the complex
factors affecting the financial situation in California (the "State") and is
derived from sources that are generally available to investors and is
believed to be accurate. It is based in part on information obtained from
various State and local agencies in California. It should be noted that the
creditworthiness of obligations issued by local California issuers may be
unrelated to the creditworthiness of obligations issued by the State of
California, and there is no obligation on the part of the State to make
payment on local government obligations in the event of default or financial
difficulty.
GENERAL
During the early 1990's, California experienced significant
financial difficulties, which reduced its credit standing, but the State's
finances have improved significantly since 1994, with ratings increases since
1996. The ratings of certain related debt of other issuers for which
California has an outstanding lease purchase, guarantee or other contractual
obligation (such as for state-insured hospital bonds) are generally linked
directly to California's rating. Should the financial condition of California
deteriorate again, its credit ratings could be reduced, and the market value
and marketability of all outstanding notes and bonds issued by California,
its public authorities or local governments could be adversely affected.
ECONOMIC FACTORS
California's economy is the largest among the 50 states and one of
the largest in the world. The State's population of over 34 million
represents about 12-1/2% of the total United States population and grew by
26% in the 1980s, more than double the national rate. Population growth
slowed to less than 1% annually in 1994 and 1995, but rose to almost 2% in
the final years of the 1990's. During the early 1990's, net population growth
in the State was due to births and foreign immigration, but in recent years,
in-migration from the other states has increased and once more represents net
positive growth.
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Total personal income in the State, at an estimated $964 billion in
1999, accounts for almost 13% of all personal income in the nation. Total
employment is over 15 million, the majority of which is in the service, trade
and manufacturing sectors.
From mid-1990 to late 1993, the State suffered a recession with the
worst economic, fiscal and budget conditions since the 1930s. Construction,
manufacturing (especially aerospace), and financial services, among others,
were all severely affected, particularly in Southern California. Recovery did
not begin in California until 1994, later than the rest of the nation, but
since that time California's economy has outpaced the national average. By
the end of 1999, unemployment in the State was at its lowest level in three
decades. Economic indicators show a steady and strong recovery underway in
California since the start of 1994 particularly in high technology
manufacturing and services, including computer software, electronic
manufacturing and motion picture/television production, and other services,
entertainment and tourism, and both residential and commercial construction.
International economic problems starting in 1997 had some moderating impact
on California's economy, but negative impacts, such as a sharp drop in
exports to Asia which hurt the manufacturing and agricultural sectors, were
offset by increased exports to Latin American and other nations, and a
greater strength in services, computer software and construction. With
economic conditions in many Asian countries recovering in 1999, that year had
the strongest economic growth in the State for the entire decade. Current
forecasts predict continued strong growth of the State's economy in 2000,
with slower growth predicted in 2001 and beyond. Any delay or reversal of the
recovery may create new shortfalls in State revenues.
CONSTITUTIONAL LIMITATIONS ON TAXES, OTHER CHARGES AND APPROPRIATIONS
LIMITATION ON PROPERTY TAXES. Certain California Municipal
Obligations may be obligations of issuers which rely in whole or in part,
directly or indirectly, on AD VALOREM property taxes as a source of revenue.
The taxing powers of California local governments and districts are limited
by Article XIIIA of the California Constitution, enacted by the voters in
1978 and commonly known as "Proposition 13." Briefly, Article XIIIA limits to
1% of full cash value of the rate of AD VALOREM property taxes on real
property and generally restricts the reassessment of property to 2% per year,
except under new construction or change of ownership (subject to a number of
exemptions). Taxing entities may, however, raise AD VALOREM taxes above the
1% limit to pay debt service on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% AD VALOREM tax levy is applied
against the assessed value of property as of the owner's date of acquisition
(or as of March 1, 1975, if acquired earlier), subject to certain
adjustments. This system has resulted in widely varying amounts of tax on
similarly situated properties. Several lawsuits have been filed challenging
the acquisition-based assessment system of Proposition 13, but it was upheld
by the U.S. Supreme Court in 1992.
Article XIIIA prohibits local governments from raising revenues
through AD VALOREM taxes above the 1% limit; it also requires voters of any
governmental unit to give two-thirds approval to levy any "special tax."
Court decisions, however, allowed a non-voter approved levy of "general
taxes" which were not dedicated to a specific use.
LIMITATIONS ON OTHER TAXES, FEES AND CHARGES. On November 5, 1996,
the voters of the State approved Proposition 218, called the "Right to Vote
on Taxes Act." Proposition 218 added Articles XIIIC and XIIID to the State
Constitution, which contain a number of provisions affecting the ability of
local agencies to levy and collect both existing and future taxes,
assessments, fees and charges.
Article XIIIC requires that all new or increased local taxes be
submitted to the electorate before they become effective. Taxes for general
governmental purposes require a majority vote and taxes for specific purposes
require a two-thirds vote. Further, any general purpose tax which was
imposed, extended or increased without voter approval after December 31, 1994
must be approved by a majority vote within two years.
Article XIIID contains several new provisions making it generally
more difficult for local agencies to levy and maintain "assessments" for
municipal services and programs. Article XIIID also contains several new
provisions affecting "fees" and "charges", defined for purposes of Article
XIIID to mean "any levy other than an ad valorem tax, a special tax, or an
assessment, imposed by a [local government] upon a parcel or upon a person as
an
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incident of property ownership, including a user fee or charge for a property
related service." All new and existing property related fees and charges must
conform to requirements prohibiting, among other things, fees and charges
which generate revenues exceeding the funds required to provide the property
related service or are used for unrelated purposes. There are new notice,
hearing and protest procedures for levying or increasing property related
fees and charges, and, except for fees or charges for sewer, water and refuse
collection services (or fees for electrical and gas service, which are not
treated as "property related" for purposes of Article XIIID), no property
related fee or charge may be imposed or increased without majority approval
by the property owners subject to the fee or charge or, at the option of the
local agency, two-thirds voter approval by the electorate residing in the
affected area.
In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes, assessments,
fees and charges. Consequently, local voters could, by future initiative,
repeal, reduce or prohibit the future imposition or increase of any local
tax, assessment, fee or charge. It is unclear how this right of local
initiative may be used in cases where taxes or charges have been or will be
specifically pledged to secure debt issues.
The interpretation and application of Proposition 218 will
ultimately be determined by the courts with respect to a number of matters,
and it is not possible at this time to predict with certainty the outcome of
such determinations. Proposition 218 is generally viewed as restricting the
fiscal flexibility of local governments, and for this reason, some ratings of
California cities and counties have been, and others may be, reduced.
APPROPRIATIONS LIMITS. The State and its local governments are
subject to an annual "appropriations limit" imposed by Article XIIIB of the
California Constitution, enacted by the voters in 1979 and significantly
amended by Propositions 98 and 111 in 1988 and 1990, respectively. Article
XIIIB prohibits the State or any covered local government from spending
"appropriations subject to limitation" in excess of the appropriations limit
imposed. "Appropriations subject to limitation" are authorizations to spend
"proceeds of taxes," which consist of tax revenues and certain other funds,
including proceeds from regulatory licenses, user charges or other fees, to
the extent that such proceeds exceed the cost of providing the product or
service, but "proceeds of taxes" exclude most State subventions to local
governments. No limit is imposed on appropriations of funds which are not
"proceeds of taxes," such as reasonable user charges or fees, and certain
other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB
appropriations limit are (1) the debt service cost of bonds issued or
authorized prior to January 1, 1979, or subsequently authorized by the
voters, (2) appropriations arising from certain emergencies declared by the
Governor, (3) appropriations for certain capital outlay projects, (4)
appropriations by the State of post-1989 increases in gasoline taxes and
vehicle weight fees, and (5) appropriations made in certain cases of
emergency.
The appropriations limit for each year is adjusted annually to
reflect changes in cost of living and population, and any transfers of
service responsibilities between government units. The definitions for such
adjustments were liberalized in 1990 to follow more closely growth in the
State's economy.
"Excess" revenues are measured over a two year cycle. Local
governments must return any excess to taxpayers by rate reductions. The State
must refund 50% of any excess, with the other 50% paid to schools and
community colleges. With more liberal annual adjustment factors since 1988,
and depressed revenues in the early 1990's because of the recession, few
governments have been operating near their spending limits, but this
condition may change over time. Local governments may by voter approval
exceed their spending limits for up to four years. For the last ten years,
appropriations subject to limitation have been under the State's limit.
However, because of extraordinary revenue receipts estimated for fiscal years
1999-2000 and 2000-01, State appropriations are now estimated to be close the
limit. See "Recent Financial Results - FY 1999-2000 Budget" below. As noted,
the State has several options to make expenditures in categories which are
exempt from the limit, if needed to avoid a tax rebate.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and
XIIID of the California Constitution, the ambiguities and possible
inconsistencies in their terms, and the impossibility of predicting future
appropriations or changes in population and cost of living, and the
probability of continuing legal challenges, it is not currently possible to
determine fully the impact of these Articles on California municipal
obligations or on the ability of the State or local governments to pay debt
service on such California municipal obligations. It is not possible, at the
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present time, to predict the outcome of any pending litigation with respect
to the ultimate scope, impact or constitutionality of these Articles or the
impact of any such determinations upon State agencies or local governments,
or upon their ability to pay debt service on their obligations. Further
initiatives or legislative changes in laws or the California Constitution may
also affect the ability of the State or local issuers to repay their
obligations.
OBLIGATIONS OF THE STATE OF CALIFORNIA.
Under the California Constitution, debt service on outstanding
general obligation bonds is the second charge to the General Fund after
support of the public school system and public institutions of higher
education. As of April 1, 2000, the State had outstanding approximately $20.6
billion of long-term general obligation bonds, plus $679 million of general
obligation commercial paper which will be refunded by long-term bonds in the
future, and $6.7 billion of lease-purchase debt supported by the State
General Fund. The State also had about $15.7 billion of authorized and
unissued long-term general obligation bonds and lease-purchase debt. In FY
1998-99, debt service on general obligation bonds and lease purchase debt was
approximately 4.4% of General Fund revenues.
RECENT FINANCIAL RESULTS.
The principal sources of General Fund revenues in 1998-1999 were the
California personal income tax (53 percent of total revenues), the sales tax
(32 percent), bank and corporation taxes (10 percent), and the gross premium
tax on insurance (2 percent). An estimated 20% of personal income tax
receipts (10% of total General Fund) is derived from capital gains
realizations and stock option income. While these sources have been
extraordinarily strong in the past few years, they are particularly volatile;
any sustained drop in stock market levels could have a significant impact on
these revenues.
The State maintains a Special Fund for Economic Uncertainties (the
"SFEU"), derived from General Fund revenues, as a reserve to meet cash needs
of the General Fund, but which is required to be replenished as soon as
sufficient revenues are available. Year-end balances in the SFEU are included
for financial reporting purposes in the General Fund balance. Because of the
recession and an accumulated budget deficit, no reserve was budgeted in the
SFEU from 1992-93 to 1995-96.
Throughout the 1980's, State spending increased rapidly as the State
population and economy also grew rapidly, including increased spending for
many assistance programs to local governments, which were constrained by
Proposition 13 and other laws. The largest State program is assistance to
local public school districts. In 1988, an initiative (Proposition 98) was
enacted which (subject to suspension by a two-thirds vote of the Legislature
and the Governor) guarantees local school districts and community college
districts a minimum share of State General Fund revenues (currently about 35
percent).
RECENT BUDGETS. As a result of the severe economic recession from
1990-94 and other factors, during this period the State experienced
substantial revenue shortfalls, and greater than anticipated social service
costs. The State accumulated and sustained a budget deficit in the budget
reserve, the SFEU, approaching $2.8 billion at its peak at June 30, 1993. The
Legislature and Governor responded to these deficits by enacting a series of
fiscal steps between FY1991-92 and FY1994-95, including significant cuts in
health and welfare and other program expenditures, tax increases, transfers
of program responsibilities and some funding sources from the State to local
governments, and transfer of about $3.6 billion in annual local property tax
revenues primarily from cities and counties to local school districts,
thereby reducing State funding for schools. The budget deficits also led to
cash flow shortfalls which led the State to use external cash flow borrowing
over the end of the fiscal year for several years to fund the deficit.
With the economic recovery which began in 1994, the State's
financial condition improved markedly in the years from FY1995-96 onward,
with a combination of better than expected revenues, slowdown in growth of
social welfare programs, and continued spending restraint based on the
actions taken in earlier years. The State's cash position also improved, and
no external deficit borrowing has occurred over the fiscal year since FY
1994-95.
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The economy grew strongly during these fiscal years, and as a
result, the General Fund took in substantially greater tax revenues (around
$2.2 billion in 1995-96, $1.6 billion in 1996-97, $2.1 billion in 1997-98,
and $1.6 billion in 1998-99) than were initially planned when the budgets
were enacted. These additional funds were largely directed to school spending
as mandated by Proposition 98, and to make up shortfalls from reduced federal
health and welfare aid in 1995-96 and 1996-97. The accumulated budget deficit
from the recession years was finally eliminated. The Department of Finance
estimates that the State's budget reserve (the SFEU) totaled about $1.8
billion at June 30, 1998 and $3.1 billion at June 30, 1999.
The growth in General Fund revenues since the end of the recession
resulted in significant increases in State funding for local school districts
under Proposition 98. From the recession level of about $4,300 per pupil,
annual State funding has increased to over $6,000 per pupil in FY 1999-2000.
A significant amount of the new moneys have been directed to specific
educational reforms, including reduction of class sizes in many grade levels.
The improved budget condition also allowed annual increases in support for
higher education in the State, permitting increased enrollment and reduction
of student fees.
Part of the 1997-98 Budget Act was completion of State welfare
reform legislation to implement the new federal law passed in 1996. The new
State program, called "CalWORKs," became effective January 1, 1998, and
emphasizes programs to bring aid recipients into the workforce. As required
by federal law, new time limits are placed on receipt of welfare aid.
Generally, health and welfare costs have been contained even during the
recent period of economic recovery, with the first real increases (after
inflation) in welfare support levels occurring in 1999-2000.
One of the most important elements of the 1998-99 Budget Act was
agreement on substantial tax cuts. The largest of these was a phased-in cut
in the Vehicle License Fee (an annual tax on the value of cars registered in
the State, the "VLF"). Starting on January 1, 1999, the VLF has been reduced
by 25 percent. Under pre-existing law, VLF funds are automatically
transferred to cities and counties, so the new legislation provided for the
General Fund to make up the reductions. If State General Fund revenues
continue to grow above certain targeted levels in future years, the cut could
reach as much as 67.5 percent by the year 2003. The initial 25 percent VLF
cut will be offset by about $500 million in General Fund money in FY 1998-99,
and $1 billion annually for future years. Other tax cuts in FY 1998-99
included an increase in the dependent credit exemption for personal income
tax filers, restoration of a renter's tax credit for taxpayers, and a variety
of business tax relief measures. The total cost of these tax cuts was
estimated at $1.4 billion for FY 1998-99.
FY 1999-2000 BUDGET. The 1999-00 Budget Act was signed on June 29,
1999, only the second time in the decade the budget was in place at the start
of the fiscal year. After the Governor used his line-item veto power to
reduce expenditures by about $581 million, the final spending plan called for
about $63.7 billion of General Fund expenditures, $16.1 billion of Special
Fund expenditures, and $1.5 billion in bond funded expenditures. The
Governor's final budget actions left the SFEU with an estimated balance of
$881 million at June 30, 2000, but the Governor also reduced spending to set
aside $300 million for future appropriation for either employee pay raises or
potential litigation costs.
The final Budget Act generally provided increased funding for a wide
range of programs. Education spending under Proposition 98 received the
largest increase (over $2.3 billion above 1998-99), with other significant
increases for higher education, health and welfare, natural resources and
capital outlay. The budget provides several hundred million dollars in direct
new aid to cities and counties.
The final spending plan includes several targeted tax cuts for
businesses, totaling under $100 million in 1999-00. The plan also includes a
one-time, one-year additional cut of 10 percent in the Vehicle License Fee
for calendar year 2000. This cut will cost the General Fund about $500
million in each of 1999-00 and 2000-01 to make up lost funds for local
governments. Under the 1998 law, the VLF cut to 35 percent would become
permanent in the year 2001 if General Fund revenues reach a certain specified
level in 2000-01. Current estimates indicate this level will be reached.
In January, 2000, the Governor released his proposed budget for
fiscal year 2000-01 (the "January Governor's Budget"). In May, 2000, the
State Department of Finance released its update of the January Governor's
Budget (the "May Revision), which also included updated revenue and
expenditure projections for 1999-2000 and
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2000-01. The May Revision reported that State's economy remained very strong;
1999 had the greatest growth since the end of the recession in 1994. This
growth, together with the strong stock market, resulted in extraordinary
growth in revenues, particular personal income taxes. The Administration
revised its revenue estimates for 1999-2000 upward to $70.9 billion, an
increase of $8 billion above the original Budget Act estimate, and $5.7
billion above the previous estimate in the January Governor's Budget.
Expenditures were projected to increase to about $67.3 billion. The
Administration's projected balance in the SFEU at June 30, 2000 increased
from about $880 million at the time of the original Budget Act to over $6.9
billion. Much of this balance will be spent in 2000-01. As noted above under
"Constitutional Limitations on Taxes, Other Charges and Appropriations," the
extraordinary and rapid growth of State revenues now places the State close
to its appropriations limit under Article XIIIB of the State Constitution.
Although, as noted, the Administration projected a budget reserve in
the SFEU of about $6.9 billion on June 30, 1999, the General Fund fund
balance on that date also reflects $1.0 billion of "loans" which the General
Fund made to local schools in the recession years, representing cash outlays
above the mandatory minimum funding level. Settlement of litigation over
these transactions in July 1996 calls for repayment of these loans over the
period ending in 2001-02, about equally split between outlays from the
General Fund and from schools' entitlements. The 1999-2000 Budget Act
contained a $350 million appropriation from the General Fund toward this
settlement.
PROPOSED FY 2000-01 BUDGET. In the 2000 Governor's Budget, the
Administration proposed General Fund expenditures of $68.8 billion, based on
expected revenues of $68.2 billion (including $390 million from the tobacco
litigation settlement and sale of assets). In the May Revision, the Governor
increased proposed spending in FY 2000-01 to $78.2 billion, based on
anticipated revenues of $73.8 billion. The revised proposal included a
balance in the SFEU at June 30, 2001 of $1.8 billion, plus set-aside of an
additional $600 million for legal contingencies and legislative initiatives.
The Governor proposed substantial additional funding for K-12 schools, higher
education, health and social services, tax relief, transportation and other
capital outlay and other programs. About $7.2 billion of the proposed
expenditures are one-time items. Final decisions for the 2000-01 Budget will
be made by the Governor and Legislature by July, 2000.
Although the State's strong economy is producing record revenues to
the State government, the State's budget continues to be marked by mandated
spending on education, a rising prison population, and social needs of a
growing population with many immigrants. These factors which limit State
spending growth also put pressure on local governments. There can be no
assurances that, if economic conditions weaken, or other factors intercede,
the State will not experience budget gaps in the future.
BOND RATING
The ratings on California's long-term general obligation bonds were
reduced in the early 1990's from "AAA" levels which had existed prior to the
recession. After 1996, the three major rating agencies raised their ratings
of California's general obligation bonds, which as of June, 2000 were
assigned ratings of "AA- " from Standard & Poor's, "Aa3" from Moody's and
"AA" from Fitch.
There can be no assurance that such ratings will be maintained in the
future. It should be noted that the creditworthiness of obligations issued by
local California issuers may be unrelated to creditworthiness of obligations
issued by the State of California, and that there is no obligation on the part
of the State to make payment on such local obligations in the event of default.
LEGAL PROCEEDINGS
The State is involved in certain legal proceedings (described in the
State's recent financial statements) that, if decided against the State, may
require the State to make significant future expenditures or may
substantially impair revenues. Trial courts have recently entered tentative
decisions or injunctions which would overturn several parts of the State's
recent budget compromises. The matters covered by these lawsuits include
reductions in welfare payments and the use of certain cigarette tax funds for
health costs. All of these cases are subject to further proceedings and
appeals, and if California eventually loses, the final remedies may not have
to be implemented in one year. The State recently lost cases involving a smog
impact fee on out-of-state automobiles (total liability of
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about $630 million) and certain corporate tax credits ($100 million). The
Administration has proposed, and the Legislature has approved, payment of the
smog impact fee claims from current revenues.
OBLIGATIONS OF OTHER ISSUERS
OTHER ISSUERS OF CALIFORNIA MUNICIPAL OBLIGATIONS. There are a
number of State agencies, instrumentalities and political subdivisions of the
State that issue Municipal Obligations, some of which may be conduit revenue
obligations payable from payments from private borrowers. These entities are
subject to various economic risks and uncertainties, and the credit quality
of the securities issued by them may vary considerably from the credit
quality of obligations backed by the full faith and credit of the State.
STATE ASSISTANCE. Property tax revenues received by local
governments declined more than 50% following passage of Proposition 13.
Subsequently, the California Legislature enacted measures to provide for the
redistribution of the State's General Fund surplus to local agencies, the
reallocation of certain State revenues to local agencies and the assumption
of certain governmental functions by the State to assist municipal issuers to
raise revenues. Total local assistance from the State's General Fund was
budgeted at approximately 75% of General Fund expenditures in recent years,
including the effect of implementing reductions in certain aid programs. To
reduce State General Fund support for school districts, the 1992-93 and
1993-94 Budget Acts caused local governments to transfer $3.9 billion of
property tax revenues to school districts, representing loss of the
post-Proposition 13 "bailout" aid. Local governments have in return received
greater revenues and greater flexibility to operate health and welfare
programs.
In 1997, a new program provided for the State to substantially take
over funding for local trial courts (saving cities and counties some $400
million annually). For the last several years, the State has also provided
$100 million annually to support local law enforcement costs. In 1999-2000,
the State provided $150 million in grants to cities and counties, and an
additional $50 million to cities for jail booking costs. The Legislature has
enacted a more comprehensive plan to restore some funds to local governments,
contained in a proposed constitutional amendment which will be on the
November, 2000 ballot for voter approval.
To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or
other fiscal considerations, the absolute level, or the rate of growth, of
State assistance to local governments may continue to be reduced. Any such
reductions in State aid could compound the serious fiscal constraints already
experienced by many local governments, particularly counties. Los Angeles
County, the largest in the State, was forced to make significant cuts in
services and personnel, particularly in the health care system, in order to
balance its budget in FY1995-96 and FY1996-97. Orange County, which emerged
from Federal Bankruptcy Court protection in June 1996, has significantly
reduced county services and personnel, and faces strict financial conditions
following large investment fund losses in 1994 which resulted in bankruptcy.
Counties and cities may face further budgetary pressures as a result
of changes in welfare and public assistance programs, which were enacted in
August, 1997 in order to comply with the federal welfare reform law.
Generally, counties play a large role in the new system, and are given
substantial flexibility to develop and administer programs to bring aid
recipients into the workforce. Counties are also given financial incentives
if either at the county or statewide level, the "Welfare-to-Work" programs
exceed minimum targets; counties are also subject to financial penalties for
failure to meet such targets. Counties remain responsible to provide "general
assistance" for able-bodied indigents who are ineligible for other welfare
programs. The long-term financial impact of the new CalWORKs system on local
governments is still unknown.
ASSESSMENT BONDS. California Municipal Obligations which are
assessment bonds may be adversely affected by a general decline in real
estate values or a slowdown in real estate sales activity. In many cases,
such bonds are secured by land which is undeveloped at the time of issuance
but anticipated to be developed within a few years after issuance. In the
event of such reduction or slowdown, such development may not occur or may be
delayed, thereby increasing the risk of a default on the bonds. Because the
special assessments or taxes securing these bonds are not the personal
liability of the owners of the property assessed, the lien on the property is
the only security for the bonds. Moreover, in most cases the issuer of these
bonds is not required to make payments on the bonds in the event of
delinquency in the payment of assessments or taxes, except from amounts, if
any, in a reserve fund established for the bonds.
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CALIFORNIA LONG TERM LEASE OBLIGATIONS. Based on a series of court
decisions, certain long-term lease obligations, though typically payable from
the general fund of the State or a municipality, are not considered
"indebtedness" requiring voter approval. Such leases, however, are subject to
"abatement" in the event the facility being leased is unavailable for
beneficial use and occupancy by the municipality during the term of the
lease. Abatement is not a default, and there may be no remedies available to
the holders of the certificates evidencing the lease obligation in the event
abatement occurs. The most common cases of abatement are failure to complete
construction of the facility before the end of the period during which lease
payments have been capitalized and uninsured casualty losses to the facility
(E.G., due to earthquake). In the event abatement occurs with respect to a
lease obligation, lease payments may be interrupted (if all available
insurance proceeds and reserves are exhausted) and the certificates may not
be paid when due. Although litigation is brought from time to time which
challenges the constitutionality of such lease arrangements, the California
Supreme Court issued a ruling in August, 1998 which reconfirmed the legality
of these financing methods.
OTHER CONSIDERATIONS
The repayment of industrial development securities secured by real
property may be affected by California laws limiting foreclosure rights of
creditors. Securities backed by health care and hospital revenues may be
affected by changes in State regulations governing cost reimbursements to
health care providers under Medi-Cal (the State's Medicaid program),
including risks related to the policy of awarding exclusive contracts to
certain hospitals.
Limitations on AD VALOREM property taxes may particularly affect
"tax allocation" bonds issued by California redevelopment agencies. Such
bonds are secured solely by the increase in assessed valuation of a
redevelopment project area after the start of redevelopment activity. In the
event that assessed values in the redevelopment project decline (E.G.,
because of a major natural disaster such as an earthquake), the tax increment
revenue may be insufficient to make principal and interest payments on these
bonds. Both Moody's and S&P suspended ratings on California tax allocation
bonds after the enactment of Articles XIIIA and XIIIB, and only resumed such
ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that
all revenues produced by a tax rate increase go directly to the taxing entity
which increased such tax rate to repay that entity's general obligation
indebtedness. As a result, redevelopment agencies (which, typically, are the
issuers of tax allocation securities) no longer receive an increase in tax
increment when taxes on property in the project area are increased to repay
voter-approved bonded indebtedness.
The effect of these various constitutional and statutory changes
upon the ability of California municipal securities issuers to pay interest
and principal on their obligations remains unclear. Furthermore, other
measures affecting the taxing or spending authority of California or its
political subdivisions may be approved or enacted in the future. Legislation
has been or may be introduced which would modify existing taxes or other
revenue-raising measures or which either would further limit or,
alternatively, would increase the abilities of state and local governments to
impose new taxes or increase existing taxes. It is not possible, at present,
to predict the extent to which any such legislation will be enacted. Nor is
it possible, at present, to determine the impact of any such legislation on
California Municipal Obligations in which the Fund may invest, future
allocations of state revenues to local governments or the abilities of state
or local governments to pay the interest on, or repay the principal of, such
California Municipal Obligations.
Substantially all of California is within an active geologic region
subject to major seismic activity. Northern California in 1989 and Southern
California in 1994 experienced major earthquakes causing billions of dollars
in damages. The federal government provided more than $13 billion in aid for
both earthquakes, and neither event has had any long-term negative economic
impact. Any California Municipal Obligation in the Fund could be affected by
an interruption of revenues because of damaged facilities, or, consequently,
income tax deductions for casualty losses or property tax assessment
reductions. Compensatory financial assistance could be constrained by the
inability of (i) an issuer to have obtained earthquake insurance coverage
rates; (ii) an insurer to perform on its contracts of insurance in the event
of widespread losses; or (iii) the federal or State government to appropriate
sufficient funds within their respective budget limitations.
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SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL SECURITIES.
The financial condition of the State of New York ("New York State" or the
"State"), its public authorities and public benefit corporations (the
"Authorities") and its local governments, particularly The City of New York
(the "City"), could affect the market values and marketability of, and
therefore the net asset value per share and the interest income of a fund, or
result in the default of existing obligations, including obligations which
may be held by the fund. The following section provides only a brief summary
of the complex factors affecting the financial situation in New York and is
based on information obtained from New York State, certain of its
Authorities, the City and certain other localities as publicly available on
the date of this SAI. The information contained in such publicly available
documents has not been independently verified. It should be noted that the
creditworthiness of obligations issued by local issuers may be unrelated to
the creditworthiness of New York State, and that there is no obligation on
the part of New York State to make payment on such local obligations in the
event of default in the absence of a specific guarantee or pledge provided by
New York State.
ECONOMIC FACTORS. New York is the third most populous state in the
nation and has a relatively high level of personal wealth. The State's
economy is diverse, with a comparatively large share of the nation's finance,
insurance, transportation, communications and services employment, and a very
small share of the nation's farming and mining activity. The State's location
and its excellent air transport facilities and natural harbors have made it
an important link in international commerce. Travel and tourism constitute an
important part of the economy. Like the rest of the nation, New York has a
declining proportion of its workforce engaged in manufacturing, and an
increasing proportion engaged in service industries.
Both the State and the City experienced substantial revenue
increases in the mid-1980s and late 1990s attributable directly (corporate
income and financial corporations taxes) and indirectly (personal income and
a variety of other taxes) to growth in new jobs, rising profits and capital
appreciation derived from the finance sector of the City's economy. Economic
activity in the City has experienced periods of growth and recession and can
be expected to experience periods of growth and recession in the future. In
recent years, the City has experienced increases in employment. Real per
capita personal income (i.e., per capita personal income adjusted for the
effects of inflation and the differential in living costs) has generally
experienced fewer fluctuations than employment in the City. Although the City
periodically experienced declines in real per capita personal income between
1969 and 1981, real per capita personal income in the City has generally
increased from the mid-1980s until the present. In nearly all of the years
between 1969 and 1990 the City experienced strong increases in retail sales.
However, from 1991 to 1993, the City experienced a weak period of retail
sales. Since 1994, the City has returned to a period of growth in retail
sales. Overall, the City's economic improvement continued strongly into
fiscal year 2000. Much of the increase can be traced to the performance of
the securities industry, but the City' s economy also produced gains in the
retail trade sector, the hotel and tourism industry, and business services,
with private sector employment higher than previously forecasted. The City's
current Financial Plan assumes that, after strong growth in 1998--1999,
moderate economic growth will exist through calendar year 2003, with
moderating job growth and wage increases. However, there can be no assurance
that the economic projections assumed in the Financial Plan will occur or
that the tax revenues projected in the Financial Plan to be received will be
received in the amounts anticipated. Additionally, the securities industry is
more important to the New York economy than the national economy, potentially
amplifying the impact of a downturn. In 1997, the finance, insurance and real
estate sector accounted for 30.4 percent of nonfarm labor and proprietors'
income statewide, compared to 8.6 percent nationwide.
During the calendar years 1987 through 1998, the State's rate of
economic expansion was somewhat slower than that of the nation as a whole. In
the 1990-1991 national recession and post-recession period, the economy of
the Northeast region in general and the State in particular was more heavily
damaged than that of the rest of the nation and has been slower to recover.
However, the situation has been improving in the recent years. In 1999, the
employment growth rate of the State surpassed the national growth rate for
the first time in 13 years. Although the State unemployment rate has been
higher than the national rate since 1991, the gap between them has narrowed
in recent years.
The forecast of the State's economy shows continued expansion
throughout 2000. Most major sectors recorded significant employment gains for
the first quarter of 2000, with the services sector accounting for most of
the increase. Much of this increase occurred in business services. The
employment growth rate in 2000 is expected to be 2.1 percent, which, although
lower than 1999's 2.6 percent, represents another strong year relative to
recent
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historical performance. The unemployment rate is expected to be 4.9 percent
in 2000, down from 5.1 percent in 1999.
Personal income is expected to rise 6.1 percent in 2000, with a 7.5
percent increase in wages. Two major factors are working to produce this
impressive growth in wages. One is the overall tightness in the labor market,
and the other is strong growth in financial sector bonus payments.
Given the importance of the securities industry in the New York State
economy, a significant change in stock market performance during the forecast
horizon could result in financial sector profits and bonuses that are
significantly different from those embodied in the forecast. Any actions by the
Federal Reserve Board to moderate inflation by increasing interest rates more
than anticipated may have an adverse impact in New York given the sensitivity of
financial markets to interest rate shifts and the prominence of these markets in
the New York economy. In addition, there is a possibility that
greater-than-anticipated mergers, downsizing, and relocation of firms caused by
deregulation and global competition may have a significant adverse effect on
employment growth.
In 2000-01, General Fund disbursements, including transfers to
support capital projects, debt service and other funds, are estimated at
$38.92 billion, an increase of $1.75 billion or 4.72 percent over 1999-2000.
Projected spending under the 2000-01 enacted budget is $992 million above the
Governor's Executive Budget recommendations, including 30-day amendments
submitted January 31, 2000.
The 2000-01 Financial Plan projects closing balances in the General
Fund and other reserves of $3.2 billion, including $1.71 billion in the
General Fund. This closing balance is comprised of $675 million in reserves
for potential labor costs resulting from new collective bargaining agreements
and other spending commitments, $547 million in the Tax Stabilization Reserve
Fund (for use in case of unanticipated deficits), $150 million in the
Contingency Reserve Fund (which helps offset litigation risks), and $338
million in the Community Projects Fund (which finances legislative
initiatives). In addition to the $1.71 billion balance in the General Fund,
$1.2 billion is projected for reserve in the STAR Special Revenue Fund and
$250 million in the Debt Reduction Reserve Fund (DRRF).
Several developments arising from negotiations on the budget will
affect State finances in subsequent years. First, a portion of Legislative
additions to the 2000-01 Executive Budget will recur at higher spending
levels in 2001-02 and beyond, including increased funding for school aid,
tuition assistance, and prescription drug coverage for the elderly. Second,
the Legislature enacted the Debt Reform Act of 2000 (Debt Reform Act). The
Debt Reform Act, which applies to new State-supported debt issued on or after
April 1, 2000, imposes caps on new debt outstanding and new debt service
costs, restricts the use of debt to capital purposes only, and restricts the
maximum term of State debt issuances to no more than 30 years. Finally, the
State adopted an additional tax relief package that will reduce tax receipts
by $1.2 billion when fully effective; this package includes the elimination
or reduction of gross receipts taxes on energy ($330 million), the expansion
of the "Power for Jobs" energy tax credit program ($125 million), a college
tuition deduction or credit taken against personal income taxes ($200
million), and reduction of the marriage penalty for taxpayers who file
jointly ($200 million).
SPECIAL CONSIDERATIONS. Despite recent budgetary surpluses recorded
by the State, actions affecting the level of receipts and disbursements, the
relative strength of the State and regional economy, and actions by the
federal government could impact projected budget gaps for the State. These
gaps would result from a disparity between recurring revenues and the costs
of increasing the level of support for State programs. To address a potential
imbalance in any given fiscal year, the State would be required to take
actions to increase receipts and/or reduce disbursements as it enacts the
budget for that year, and, under the State Constitution, the Governor is
required to propose a balanced budget each year. There can be no assurance,
however, that the Legislature will enact the Governor's proposals or that the
State's actions will be sufficient to preserve budgetary balance in a given
fiscal year or to align recurring receipts and disbursements in future fiscal
years.
Many complex political, social and economic forces influence the
State's economy and finances, which may in turn affect the 2000-01 Financial
Plan. These forces may affect the State unpredictably from fiscal year to
fiscal year and are influenced by governments, institutions, and events that
are not subject to the State's control. The 2000-01 Financial Plan is based
upon forecasts of national and State economic activity developed through both
internal analysis and review of national and State economic forecasts
prepared by commercial forecasting services
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and other public and private forecasters. Many uncertainties exist in
forecasts of both the national and State economies, including consumer
attitudes toward spending, the extent of corporate and governmental
restructuring, the condition of the financial sector, federal fiscal and
monetary policies, the level of interest rates, and the condition of the
world economy, which could have an adverse effect on the State. There can be
no assurance that the State economy will not experience results in the
current fiscal year that are worse than predicted, with corresponding
material and adverse effects on the State's projections of receipts and
disbursements.
An additional risk to the State Financial Plan arises from the
potential impact of certain litigation and of federal disallowances now
pending against the State, which could adversely affect the State's
projections of receipts and disbursements. The State Financial Plan assumes
no significant litigation or federal disallowance or other federal actions
that could affect State finances, but has significant reserves in the event
of such an action.
REVENUE BASE. The State's principal revenue sources are economically
sensitive, and include the personal income tax, user taxes and fees and
business taxes. Total General Fund receipts and transfers from other funds in
2000-01 are projected to be $39.72 billion, an increase of $2.32 billion from
the $37.40 billion recorded in 1999-2000. This total includes $36.35 billion
in tax receipts, $1.34 billion in miscellaneous receipts, and $2.03 billion
in transfers from other funds. The transfer of $3.4 billion in net resources
through the tax refund reserve account from 1999-2000 to the 2000-01 fiscal
period has the effect of exaggerating the growth in State receipts from year
to year by depressing reported 1999-2000 figures and inflating 2000-01
projections.
The Personal Income Tax is imposed on the income of individuals,
estates and trusts and is based, with certain modifications, on federal
definitions of income and deductions. Net General Fund personal income tax
collections are projected to reach $24.33 billion in 2000-01, well over half
of all General Fund receipts and nearly $4 billion above the reported
1999-2000 collection total. Much of this increase is associated with the $3.4
billion net impact of the transfer of the surplus from 1999-2000 to the
current year as partially offset by the diversion of an additional $1.99
billion in income tax receipts to the STAR Fund. The STAR program was created
in 1998 as a State-funded local property tax relief program funded through
the use of personal income tax receipts. Adjusted for these transactions, the
growth in net income tax receipts is roughly $1.3 billion, an increase of
nearly 5 percent. This growth is largely a function of two factors: (i) the 9
percent growth in income tax liability projected for tax year 2000; and
(ii) the impact of the 1999 tax year settlement recorded early in this fiscal
year. The most significant statutory changes made this fiscal year provide
for: an increase, phased in over two years, in the earned income tax credit
from 25 percent to 30 percent of the federal credit; a three-year phased-in
reduction of the marriage penalty; a four-year phased-in deduction or credit
for college tuition; and enhancement of the child and dependent care credit
effective January 1, 2000.
USER TAXES AND FEES are comprised of three-quarters of the State's
four percent sales and use tax, cigarette, tobacco products, alcoholic
beverage, and auto rental taxes, and a portion of the motor fuel excise
levies. This category also includes receipts from the motor vehicle fees and
alcoholic beverage license fees. Dedicated transportation funds outside of
the General Fund receive a portion of the motor fuel tax and motor vehicle
registration fees and all of the highway use taxes and fees. Receipts from
user taxes and fees are projected to total $7.02 billion, a decrease of $583
million below reported collections in 1999-2000.
The sales tax and cigarette tax components of this category
account for virtually all of the 2000-01 decline. Growth in base sales tax
yield, after adjusting for tax law changes and other factors, is projected at
4.5 percent. The projected decrease in sales tax cash receipts of 3.4 percent
reflects, in large part, the impact of the permanent exemption for clothing
and footwear items costing under $110. Cigarette tax and tobacco products tax
receipts are projected to decline by $146 million primarily due to reduced
taxable consumption associated with the increase in the cigarette tax of 55
cents per pack imposed on March 1, 2000. The decline in the motor fuel taxes
and motor vehicle fees in the General Fund largely reflect the increased
dedication of these revenue sources to the Dedicated Highway and Bridge Trust
Fund and the Dedicated Mass Transportation Trust Fund. Alcoholic beverage
taxes are expected to decline modestly, consistent with historical trends.
Alcoholic beverage license fees are projected to increase significantly as
2000-01 is the final year in the transition to the new license renewal
schedule. A modest increase in auto rental tax receipts over 1999-2000 levels
is projected.
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BUSINESS TAXES include franchise taxes based generally on net
income of general business, bank and insurance corporations, as well as gross
receipts-based taxes on utilities and gallonage-based petroleum business
taxes.
Total business tax collections in 2000-01 are now projected to be
$4.23 billion, $332 million below results for the prior fiscal year. The
category includes receipts from: (1) franchise tax levies imposed on general
business corporations, banks, and insurance companies; (2) gross receipts
taxes on energy and telecommunication service providers; and (3) a tax
imposed at various rates on petroleum businesses.
The year-over-year decline in projected receipts in business tax
collections is largely attributable to statutory changes. These include the
first year impact of a scheduled bank and insurance franchise tax rate
reduction, a reduction in the cap on tax liability for non-life insurers, and
the expansion of the economic development zone (renamed Empire Zones,
effective May 19, 2000) and zone equivalent areas tax credits. Ongoing tax
reductions include the second year of the corporation franchise rate
reduction, the gross receipts tax rate cut from 3.25 percent to 2.5 percent,
the continuation of the "Power for Jobs" program, and the use of tax credits
for investments in certified capital companies.
Legislation enacted this fiscal year affecting receipts in this
category include: a phased reduction in the gross receipts tax, an expansion
of the "Power for Jobs" program, expansion of the tax credit for investments
in certified capital companies, establishment of the Empire Zones program,
reforms to allocation rules for financial service companies, tax rate
reductions for small businesses and S-corporations, a new tax credit for
investments in "green buildings," and a new tax credit for investment in low
and moderate-income housing.
OTHER TAXES include the estate and gift tax, the real property gains
tax and pari-mutuel taxes. Other tax receipts are now projected to total $766
million, $341 million below 1999-2000 levels. The primary factors accounting
for this decline are legislation enacted previously that repealed both the
real property gains tax and the gift tax, and significantly reduced estate
tax rates, and the incremental effects of tax reductions in the pari-mutuel
tax.
MISCELLANEOUS RECEIPTS include investment income, abandoned property
receipts, medical provider assessments, minor federal grants, receipts from
public authorities, and certain other license and fee revenues. Total
miscellaneous receipts are expected to reach $1.34 billion, down $309 million
from the prior year amount. This reflects the absence in 2000-01 of
non-recurring receipts received in 1999-2000 and the phase-out of the medical
provider assessments, completed in January 2000. The State Comptroller has
restated medical provider assessments in the General Fund, which has the
effect of increasing reported miscellaneous receipts and spending in grants
to local governments by $120 million in 1997-98 and $82 million in 1998-99.
TRANSFERS FROM OTHER FUNDS to the General Fund consist primarily of
tax revenues in excess of debt service requirements, including the one
percent sales tax used to support payments to Local Government Assistance
Corporation (LGAC). Transfers from other funds are expected to total $2.03
billion, or $108 million less than total receipts from this category during
1999-2000. Total transfers of sales taxes in excess of LGAC debt service
requirements are expected to decrease by $74 million consistent with the
sales tax projections described above, while transfers from all other funds
are expected to decrease by $34 million.
STATE DEBT. The State's 2000-01 borrowing plan projects issuances of
$367 million in general obligation bonds, including $45 million for purposes
of redeeming the remaining outstanding BANs. The State does not anticipate
issuing new BANs during the 2000-01 fiscal year. The State is expected to
issue up to $276 million in COPs to finance equipment purchases (including
costs of issuance, reserve funds, and other costs) during the 2000-01 fiscal
year. Of this amount, it is anticipated that approximately $76 million will
be used to finance agency equipment acquisitions. Approximately $200 million
is expected to finance the purchase of new welfare computer systems designed
to improve case management, fraud detection and child support collection
capabilities.
Borrowings by public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total approximately $2.91 billion, including costs of issuance,
reserve funds, and other costs, net of anticipated refundings and other
adjustments in 2000-01.
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NONRECURRING SOURCES. The Division of the Budget estimates that
the 2000-01 Financial Plan contains new actions in the enacted budget that
provide non-recurring resources totaling approximately $36 million, excluding
use of the 1999-2000 surplus.
OUTYEAR PROJECTIONS OF RECEIPTS AND DISBURSEMENTS. State law
requires the Governor to propose a balanced budget each year. Preliminary
analysis by the Division of Budget indicates that the State will have a
2001-02 budget gap of approximately $2 billion, which is comparable with gaps
projected following enactment of recent budgets. This estimate includes the
projected costs of new collective bargaining agreements, no assumed operating
efficiencies, and the planned application of approximately $1.2 billion in
STAR tax reduction reserves.
In recent years, the State has closed projected budget gaps which
have ranged from $5 billion to less than $1 billion (as estimated by the
Division of Budget). Sustained growth in the State's economy could contribute
to closing potential budget imbalances over the next several years, both in
terms of higher-than-projected tax receipts and in lower-than-expected
entitlement spending. Savings from initiatives by State agencies to deliver
services more efficiently, workforce management efforts, and maximization of
federal and non-General Fund spending offsets could also help bring projected
disbursements and receipts into balance.
The Division of the Budget will formally update its projections of
receipts and disbursements for future years as part of the Governor's 2001-02
Executive Budget submission. The revised expectations for these years will
reflect updated estimates of receipts and disbursements as well as new
2001-02 Executive Budget recommendations.
TOBACCO SETTLEMENT PROCEEDS AND USES. On November 23, 1998, the
attorneys general for forty-six states (including New York) entered into a
master settlement agreement (MSA) with the nation's largest tobacco
manufacturers. Under the terms of the MSA, the states agreed to release the
manufacturers from all smoking-related claims in exchange for specified
payments and the imposition of restrictions on tobacco advertising and
marketing. New York is projected to receive $25 billion over 25 years under
the MSA, with payments apportioned among the State (51 percent), counties (22
percent), and New York City (27 percent). The projected payments (but not the
apportionment of the payments) are an estimate and subject to adjustments
for, among other things, the annual change in the volume of cigarette
shipments and the rate of inflation. From 1999-2000 through 2002-03, the
State expects to receive $1.54 billion under the nationwide settlement with
cigarette manufacturers. Counties, including New York City, are projected to
receive settlement payments of $1.47 billion over the same period.
The 2000-01 Financial Plan utilizes certain resources from HCRA 2000,
the successor legislation to the Health Care Reform Act of 1996. HCRA 2000
continues the negotiated reimbursement system for non-governmental payors, and
provides funding for, among other things, graduate medical education, indigent
care, and the expansion of health insurance coverage for uninsured adults and
children. HCRA 2000 will help finance several health-related programs, including
prescription drug assistance for the elderly, supplemental Medicare insurance,
and other public health services that were previously funded from the General
Fund. Programs under HCRA 2000 will be financed with revenues generated from the
financing mechanisms continued from HCRA 1996, a share of the State's tobacco
settlement and revenues from an increased excise tax on cigarettes.
The State plans to use $1.29 billion in tobacco settlement
money over the next three years to finance health programs under HCRA 2000
($1.01 billion) and projected increased costs in Medicaid ($274 million). The
remaining $250 million in one-time tobacco payments from 1999-2000 will be
deposited to DRRF.
LABOR COSTS. The State government workforce is mostly unionized,
subject to the Taylor Law which authorizes collective bargaining and
prohibits (but has not, historically, prevented) strikes and work slowdowns.
Costs for employee health benefits have increased substantially, and can be
expected to further increase. The State has completed or is currently
negotiating with various unions to establish new agreements as most of the
labor contracts expired on March 31, 1999. The 2000-01 Financial Plan has
reserved sufficient money for the added costs incurred under collective
bargaining agreements, and reserves are contained in the preliminary outyear
projections for 2001-02 to cover the projected recurring costs of new
agreements.
Since January 1995, the State's workforce has been reduced by about 10
percent, and is projected to be approximately 195,000 persons in 2000-01.
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The New York State and Local Retirement Systems (the "Systems")
provide coverage for public employees of the State and its localities (except
employees of New York City and teachers, who are covered by separate plans).
Net assets available for benefits were $112.7 billion as of March 31, 1999.
Under the funding method used by the Systems, according to the Division of
Budget, the net assets, plus future actuarially determined contributions, are
expected to be sufficient to pay for the anticipated benefits of current
members, retirees and beneficiaries.
PUBLIC ASSISTANCE. Spending on welfare is projected in the 2000-01
fiscal year at $1.20 billion, a decline of $77 million from the prior year.
Since 1994-95, State spending on welfare has fallen by more than 25 percent,
driven by significant welfare changes initiated at the Federal and State
levels and a large, steady decline in the number of people receiving benefits.
Federal law enacted in 1996 abolished the federal Aid to Families
with Dependent Children program (AFDC) and created a new Temporary Assistance
to Needy Families with Dependent Children program (TANF) funded with a fixed
federal block grant to states. The law also imposes (with certain exceptions)
a five-year durational limit on TANF recipients, requires that virtually all
recipients be engaged in work or community service activities within two
years of receiving benefits, and limits assistance provided to certain
immigrants and other classes of individuals.
MEDICAID. New York participates in the federal Medicaid program
under a state plan approved by the Health Care Financing Administration. The
federal government provides a substantial portion of eligible program costs,
with the remainder shared by the State and its counties (including the City).
Basic program eligibility and benefits are determined by federal guidelines,
but the State provides a number of optional benefits and expanded
eligibility. Program costs have increased substantially in recent years, and
account for a rising share of the State budget. Federal law requires that the
State adopt reimbursement rates for hospitals and nursing homes that are
reasonable and adequate to meet the costs that must be incurred by
efficiently and economically operated facilities in providing patient care, a
standard that has led to past litigation by hospitals and nursing homes
seeking higher reimbursement from the State. Medicaid is the second largest
program, after grants to local governments, in the General Fund. Payments for
Medicaid are projected to be $5.59 billion in 2000-01.
THE STATE AUTHORITIES. The fiscal stability of the State is related
in part to the fiscal stability of its public authorities. Public authorities
refer to public benefit corporations, created pursuant to State law, other
than local authorities. Public authorities are not subject to the
constitutional restrictions on the incurrence of debt which apply to the
State itself and may issue bonds and notes within the amounts and
restrictions set forth in legislative authorization. The State's access to
the public credit markets could be impaired and the market price of its
outstanding debt may be materially and adversely affected if any of its
public authorities were to default on their respective obligations,
particularly those using the financing techniques referred to as
State-supported or State-related debt. As of December 31, 1999, there were 17
public authorities with outstanding debt of $100 million or more, and the
aggregate outstanding debt, including refunding bonds, of all State public
authorities was $95 billion, only a portion of which constitutes
State-supported or State-related debt.
The State has numerous public authorities with various
responsibilities, including those which finance, construct and/or operate
revenue producing public facilities. Public authority operating expenses and
debt service costs are generally paid by revenues generated by the projects
financed or operated, such as tolls charged for the use of highways, bridges
or tunnels, charges for public power, electric and gas utility services,
rentals charged for housing units, and charges for occupancy at medical care
facilities.
In addition, State legislation authorizes several financing
techniques for public authorities. Also there are statutory arrangements
providing for State local assistance payments otherwise payable to localities
to be made under certain circumstances to public authorities. Although the
State has no obligation to provide additional assistance to localities whose
local assistance payments have been paid to public authorities under these
arrangements, the affected localities may seek additional State assistance if
local assistance payments are diverted. Some authorities also receive moneys
from State appropriations to pay for the operating costs of certain of their
programs. The MTA receives the bulk of this money in order to provide transit
and commuter services.
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Beginning in 1998, the Long Island Power Authority (LIPA) assumed
responsibility for the provision of electric utility services previously
provided by Long Island Lighting Company for Nassau, Suffolk and a portion of
Queens Counties, as part of an estimated $7 billion financing plan. As of May
31, 2000, LIPA has issued over $7 billion in bonds secured solely by ratepayer
charges. LIPA's debt is not considered either State-supported or State-related
debt.
METROPOLITAN TRANSPORTATION AUTHORITY. Since 1980, the State has
enacted several taxes -- including a surcharge on the profits of banks,
insurance corporations and general business corporations doing business in
the 12 county Metropolitan Transportation Region served by the MTA and a
special one quarter of 1 percent regional sales and use tax -- that provide
revenues for mass transit purposes, including assistance to the MTA. Since
1987 State law has required that the proceeds of a one quarter of 1 percent
mortgage recording tax paid on certain mortgages in the Metropolitan
Transportation Region be deposited in a special MTA fund for operating or
capital expenses. In 1993, the State dedicated a portion of certain
additional State petroleum business tax receipts to fund operating or capital
assistance to the MTA. The 2000-01 enacted budget provides State assistance
to the MTA totaling approximately $1.35 billion and initiates a five-year
State transportation plan that includes nearly $2.2 billion in dedicated
revenue support for the MTA's capital plan for the 2000 through 2004 calendar
years (the "2000-04 Capital Program"). This capital commitment includes an
additional $800 million of newly dedicated State petroleum business tax
revenues, motor vehicle fees and motor fuel taxes not previously dedicated to
the MTA.
State legislation accompanying the 2000-01 adopted State budget
authorized the MTA, Triborough Bridge and Tunnel Authority and Transit
Authority to issue an aggregate of $16.5 billion in bonds to finance a
portion of the $17.1 billion 2000-04 Capital Program. On May 4, 2000, the
Capital Program Review Board (CPRB) approved the 2000-04 Capital Program,
which is the fifth capital plan since the Legislature authorized procedures
for the adoption, approval and amendment of MTA capital programs and is
designed to upgrade the performance of the MTA's transportation systems by
investing in new rolling stock, maintaining replacement schedules for
existing assets, bringing the MTA system into a state of good repair, and
making major investments in system expansion projects.
The 2000-04 Capital Program assumes the issuance of an estimated
$8.9 billion in bonds under this $16.5 billion aggregate bonding authority.
The remainder of the plan is projected to be financed through assistance from
the State, the federal government, and the City of New York, and from various
other revenues generated from actions taken by the MTA. In addition, the
enacted State budget authorized the MTA to undertake a major debt
restructuring initiate which will enable the MTA to refund approximately
$13.7 billion in bonds, consolidate its credit sources, and obviate the need
for debt service reserves. The authorization for debt restructuring includes
outstanding bonds secured by service contract with the State.
There can be no assurance that all the necessary governmental
actions for future capital programs will be taken, that funding sources
currently identified will not be decreased or eliminated, or that the 2000-04
Capital Program, or parts thereof, will not be delayed or reduced. Should
funding levels fall below current projections, the MTA would have to revise
its 2000-04 Capital Program accordingly. If the 2000-04 Capital Program is
delayed or reduced, ridership and fare revenues may decline, which could
impair the MTA's ability to meet its operating expenses without additional
assistance.
THE CITY OF NEW YORK. The fiscal health of the State may also be
affected by the fiscal health of New York City (the "City "), which continues
to receive significant financial assistance from the State. State aid
contributes to the City's ability to balance its budget and meet its cash
requirements. The State may also be affected by the ability of the City and
certain entities issuing debt for the benefit of the City to market their
securities successfully in the public credit markets.
The City has achieved balanced operating results for each of its
fiscal years since 1981 as measured by the GAAP standards in force at that
time. However, in the early 1970s, the City incurred substantial operating
deficits, and its financial controls, accounting practices and disclosure
policies were widely criticized. In response to the City's fiscal crisis in
1975, the State took action to assist the City in returning to fiscal
stability. Among these actions, the State established the Municipal
Assistance Corporation for The City of New York ("MAC") to provide financing
assistance for the City; the New York State Financial Control Board (the
"Control Board") to oversee the City's financial affairs; and the Office of
the State Deputy Comptroller for the City of New York ("OSDC") to assist
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the Control Board in exercising its powers and responsibilities. A "control
period" existed from 1975 to 1986, during which the City was subject to
certain statutorily imposed conditions. State law requires the Control Board
to reimpose a control period upon the occurrence, or "substantial likelihood
and imminence' of the occurrence, of certain events, including (but not
limited to) a City operating budget deficit of more than $100 million or
impaired access to the public credit markets.
The City provides services usually undertaken by counties, school
districts or special districts in other large urban areas, including the
provision of social services such as day care, foster care, health care,
family planning, services for the elderly and special employment services for
needy individuals and families who qualify for such assistance. State law
requires the City to allocate a large portion of its total budget to Board of
Education operations, and mandates that the City assume the local share of
public assistance and Medicaid costs. For each of the 1981 through 1999
fiscal years, the City achieved balanced operating results as reported in
accordance with then applicable generally accepted accounting principles
("GAAP"). The City was required to close substantial budget gaps between
forecasted revenues and forecasted expenditures in order to maintain balanced
operating results. There can be no assurance that the City will continue to
maintain a balanced budget as required by State law without additional tax or
other revenue increases or additional reductions in City services or
entitlement programs, which could adversely affect the City's economic base.
Pursuant to the New York State Financial Emergency Act for The City
of New York (the "Financial Emergency Act" or the "Act"), the City prepares a
four year annual financial plan, which is reviewed and revised on a quarterly
basis and which includes the City's capital, revenue and expense projections
and outlines proposed gap closing programs for years with projected budget
gaps. The City's projections set forth in the 1999-2003 Financial Plan are
based on various assumptions and contingencies which are uncertain and which
may not materialize. Changes in major assumptions could significantly effect
the City's ability to balance its budget and to meet its annual cash flow and
financing requirements. Such assumptions and contingencies include the timing
and pace of a regional and local economic recovery, increases in tax
revenues, employment growth, the ability to implement proposed reductions in
City personnel and other cost reduction initiatives which may require in
certain cases the cooperation of the City's municipal unions, the ability of
New York City Health and Hospitals Corporation and the Board of Education to
take actions to offset reduced revenues, the ability to complete revenue
generating transactions, provision of State and federal aid and mandate
relief, and the impact on City revenues of proposals for federal and State
welfare reform. No assurance can be given that the assumptions used by the
City in the 1999-2003 Financial Plan will be realized.
In January of 1999, the City released the Financial Plan for fiscal
years 2000-2003. It projects total revenues in FY 2000 of $35.46 billion, of
which federal categorical grants provide $3.9 billion and State categorical
grants provide $7.0 billion. The City's Financial Plan projects that
expenditures will grow to $38.21 billion in FY 2003. While the Financial Plan
projects revenues and expenditures for the 2000 fiscal year balanced in
accordance with GAAP, it projects budget gaps of $1.44 billion, $1.64 billion
and $1.17 billion in the 2001, 2002 and 2003 fiscal years, respectively.
Although the City has maintained balanced budgets in each of its
last nineteen fiscal years and is projected to achieve balanced operating
results for the 2000 fiscal year, there can be no assurance that the gap
closing actions proposed in the Financial Plan can be successfully
implemented or that the City will maintain a balanced budget in future years
without additional State aid, revenue increases or expenditure reductions.
Additional tax increases and reductions in essential City services could
adversely affect the City's economic base.
The 1999-2003 Financial Plan reflects the goal of boosting local
economic activity by providing a wide array of tax relief. To that end, the
Financial Plan reflects actual and proposed tax reduction programs totaling
$338 million, $410 million, $461 million and $473 million in fiscal years
2000 through 2003.
The City derives its revenues from a variety of local taxes, user
charges and miscellaneous revenues, as well as from Federal and State
unrestricted and categorical grants. State aid as a percentage of the City's
revenues has remained relatively constant over the period from 1980 to 1999,
while unrestricted Federal aid has been sharply reduced. The City projects
that local revenues will provide approximately 67.6% of total revenues in FY
2000, while federal and State aid, including unrestricted aid and categorical
grants, will provide 32.4% in the same year.
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The City since 1981 has fully satisfied its seasonal financing needs
in the public credit markets, repaying all short term obligations within
their fiscal year of issuance. The City issued $500 million of short term
obligations in fiscal year 1999 to finance the City's projected cash flow
needs for the 1999 fiscal year. In previous years, the City's short term
obligations have been $1.075 billion, $2.4 billion, $2.4 billion and $2.2
billion in fiscal years 1998, 1997, 1996 and 1995, respectively. The delay in
the adoption of the State's budget in certain past fiscal years has required
the City to issue short term notes in amounts exceeding those expected early
in such fiscal years.
The City makes substantial capital expenditures to reconstruct,
rehabilitate and expand the city's infrastructure and physical assets,
including City mass transit facilities, sewers, streets, bridges and tunnels,
and to make capital investments that will improve productivity in City
operations. The City utilizes a three tiered capital planning process
consisting of the Ten Year Capital Strategy, the Four Year Capital Program
and the current year Capital Budget. The Ten Year Capital Strategy is a long
term planning tool designed to reflect fundamental allocation choices and
basic policy objectives. The Four Year Capital Program translates mid-range
policy goals into specific projects. The Capital Budget defines specific
projects and the timing of their initiation, design, construction and
completion.
The City is nearing the constitutionally-permissible limit on its
general obligation debt. Under the State constitution, the City may not
contract indebtedness in an amount greater than 10 percent of the average
full value of taxable real estate in the City for the most recent five years.
To provide for the City's capital program, State legislation was enacted in
1997 which created the Transitional Finance Authority ("TFA"), the debt of
which is not subject to the general debt limit of the City. Without TFA or
other legislative relief, new contractual commitments for the City's general
obligation financed capital program would have been virtually brought to a
halt during the Financial Plan period beginning early in the 1998 fiscal year.
In 1999, the City created TSASC, Inc., a not-for-profit
corporation, empowered to issue tax-exempt debt backed by tobacco settlement
revenues. TSASC, Inc. is expected to issue approximately $2.8 billion of
bonds.
Even with the increased borrowing ability, the City may reach the
limit of its capacity to enter into new contractual commitments. In order to
continue its capital program, the City will need additional financing
capacity beginning in City fiscal year 2000-01, which could be provided
through increasing TFA's borrowing authority or amending the State
constitutional debt limit.
Future developments concerning the City or entities issuing debt for
the benefit of the City, and public discussion of such developments, as well
as prevailing market conditions and securities credit ratings, may affect the
ability or cost to sell securities issued by the City or such entities, and
may also effect the market for their outstanding securities.
In addition to general obligation debt, the City has other long-term
obligations, including capital leases and bond transactions of public benefit
corporations that are components of the City or whose debt is guaranteed by
the City.
The City is the largest municipal debt issuer in the nation, and has
more than doubled its debt load since the end of FY 1988, in large measure to
rehabilitate its extensive, aging physical plant. The City's Financial Plan
projects $22.3 billion of long-term borrowings for the period of FY 1999
through FY 2003 to support the City's current capital plan. The City's
Preliminary Ten-Year Capital Strategy dated January 1999 has identified $48
billion in additional capital expenditures over the next ten years.
Additionally, a report of the City Comptroller indicates the Preliminary
Ten-Year Capital Strategy significantly underestimates the actual capital
needs of the City for reconstructing and rehabilitating the City's
infrastructure and physical assets.
OTHER LOCALITIES. Certain localities outside New York City have
experienced financial problems and have requested and received additional
State assistance during the last several State fiscal years. The potential
impact on the State of any future requests by localities for additional
oversight or financial assistance is not included in the projections of the
State's receipts and disbursements for the State's 2000-01 fiscal year.
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The State is considering various measures to help resolve persistent
fiscal difficulties in Nassau County. The Governor has proposed actions which
would, if legislation is enacted, establish a Nassau County Interim Finance
Authority. The Authority would be empowered to issue bonds, backed solely by
diverted Nassau County sales tax revenues, to achieve short-term budget
relief and ensure credit market access for the County. Such Authority would
also impose financial plan requirements on Nassau County. The Governor has
also proposed that transitional State assistance be appropriated in State
fiscal year 2000-01, and in four subsequent State fiscal years. Allocation of
such assistance would be subject to the Authority's approval of Nassau
County's financial plan. There is no assurance that such proposals will be
enacted, or that future actions will not be required by the State to assist
Nassau County, resulting in increased State expenditures for extraordinary
local assistance.
The State has provided extraordinary financial assistance to select
municipalities, primarily cities, since the 1996-97 fiscal year. Funding has
essentially been continued or increased in each subsequent fiscal year, and
in 2000-01 totals $200.4 million. The 2000-01 enacted budget also increased
General Purpose State Aid for local governments by $11 million to $562
million.
While the distribution of General Purpose State Aid for local
governments was originally based on a statutory formula, in recent years both
the total amount appropriated and the shares appropriated to specific
localities have been determined by the Legislature. A State commission
established to study the distribution and amounts of general purpose local
government aid failed to agree on any recommendations for a new formula.
Counties, cities, towns, villages, school districts and fire
districts have engaged in substantial short-term and long-term borrowings. In
1998, the total indebtedness of all localities in the State, other than New
York City, was approximately $20.3 billion. A small portion (approximately
$80 million) of that indebtedness represented borrowing to finance budgetary
deficits and was issued pursuant to enabling State legislation. State law
requires the Comptroller to review and make recommendations concerning the
budgets of those local government units (other than New York City) authorized
by State law to issue debt to finance deficits during the period that such
deficit financing is outstanding. Twenty-three localities had outstanding
indebtedness for deficit financing at the close of their fiscal year ending
in 1998.
Like the State, local governments must respond to changing
political, economic and financial influences over which they have little or
no control. Such changes may adversely affect the financial condition of
certain local governments. For example, the federal government may reduce (or
in some cases eliminate) federal funding of some local programs which, in
turn, may require local governments to fund these expenditures from their own
resources. It is also possible that the State, New York City, Nassau County,
or any of their respective public authorities may suffer serious financial
difficulties that could jeopardize local access to the public credit markets,
which may adversely affect the marketability of notes and bonds issued by
localities within the State. Localities may also face unanticipated problems
resulting from certain pending litigation, judicial decisions and long-range
economic trends. Other large-scale potential problems, such as declining
urban populations, increasing expenditures, and the loss of skilled
manufacturing jobs, may also adversely affect localities and necessitate
State assistance.
OTHER ISSUERS OF NEW YORK MUNICIPAL OBLIGATIONS. There are a number
of State agencies, instrumentalities and political subdivisions of the State
that issue Municipal Obligations, some of which may be conduit revenue
obligations payable from payments from private borrowers. These entities are
subject to various economic risks and uncertainties, and the credit quality
of the securities issued by them may vary considerably from the credit
quality of obligations backed by the full faith and credit of the State. For
example, the repayment of securities secured by real property may be affected
by New York laws with respect to foreclosure rights of creditors. Securities
backed by the revenues of a particular multi-family rental project or other
project are subject to the feasibility of such project. Securities backed by
health care and hospital revenues may be affected by changes in regulations
governing cost reimbursements to health care providers under the federal and
State laws, the expansion of the role of managed care companies, and
competition and consolidation occurring in the health care industry.
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
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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. With regard to the borrowings limitation in
fundamental limitation (2), each fund will comply with the applicable
restrictions of Section 18 of the Investment Company Act.
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.
(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 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;
(b) in the case of Municipal High Income Fund, in municipal obligations;
(c) 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 AMT exempt interest; 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
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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, National Tax-Free Income Fund and California Tax-Free
Income Fund each will not:
(8)purchase securities of any one issuer if, as a result, more than 5%
of the fund's total assets would be invested in securities of that issuer or
the fund would own or hold more than 10% of the outstanding voting securities
of that issuer, except that up to 25% of the fund's total assets may be
invested without regard to this limitation, and except that this limitation
does not apply to securities issued or guaranteed by the U.S. government, its
agencies and instrumentalities or to securities issued by other investment
companies.
The following interpretation applies to, but is not a part of,
fundamental limitation (8): Each state, territory and possession of the
United States (including the District of Columbia and Puerto Rico), each
political subdivision, agency, instrumentality and authority thereof, and
each multi-state agency of which a state is a member, is a separate "issuer."
When the assets and revenues of an agency, authority, instrumentality or
other political subdivision are separate from the government creating the
subdivision and the security is backed only by the assets and revenues of the
subdivision, such subdivision would be deemed to be the sole issuer.
Similarly, in the case of an IDB or PAB, if that bond is backed only by the
assets and revenues of the non-governmental user, then that non-governmental
user would be deemed to be the sole issuer. However, if the creating
government or another entity guarantees a security, then to the extent that
the value of all securities issued or guaranteed by that government or entity
and owned by the fund exceeds 10% of the fund's total assets, the guarantee
would be considered a separate security and would be treated as issued by
that government or entity.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions are
non-fundamental and may be changed by the vote of the appropriate board without
shareholder approval. 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) 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.
(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 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.
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 contract. 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.
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A fund 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 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 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 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 at the exercise price.
OPTIONS ON DEBT SECURITIES INDICES--A securities 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 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. A
fund may use Derivative Instruments to attempt to hedge its portfolio and
also to attempt to enhance income or return or realize gains and to manage
the duration of its bond portfolio. A fund may use Derivative Instruments to
maintain exposure to bonds while maintaining a cash balance for fund
management purposes (such as to provide liquidity to meet anticipated
shareholder sales or fund shares and for fund operating expenses), to
facilitate trading or to adjust its exposure to different asset classes.
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.
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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).
The use of Derivative Instruments is subject to applicable
regulations of the Securities and Exchange Commission ("SEC"), the several
options and futures exchanges upon which they are traded and the Commodity
Futures Trading Commission ("CFTC"). In addition, a fund's ability to use
Derivative Instruments 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 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 conside rations 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
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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 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. In addition, 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
32
<PAGE>
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, the over-the-counter debt
options used by the funds are European-style options. This means that the
option is only exercisable immediately prior to its expiration. This is in
contract to American-style options, which are exercisable at any time prior
to the expiration date of the option. There are also other types of options
exercisable 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 bonds 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 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.
33
<PAGE>
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, either as a hedge or to enhance return or realize gains.
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 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 a 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.
34
<PAGE>
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) The aggregate initial margin and premiums on futures contracts and
related options that are not for bona fide hedging purposes (as defined by the
CFTC), excluding the amount by which options are "in-the-money," may not exceed
5% of a fund's net assets.
(2) 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.
(3) The aggregate margin deposits on all futures contracts and options
thereon held at any time by a fund will not exceed 5% of its total assets.
ORGANIZATION OF TRUSTS; TRUSTEES AND OFFICERS
AND PRINCIPAL HOLDERS AND MANAGEMENT OWNERSHIP OF SECURITIES
Mutual Fund Trust was formed on November 21, 1986 and Municipal Series
was formed on January 28, 1987 as business trusts 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.
35
<PAGE>
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*+; 53 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
31 investment companies for which
Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment
adviser.
Richard Q. Armstrong; 65 Trustee Mr. Armstrong is chairman and principal
R.Q.A. Enterprises of R.Q.A. Enterprises (management
One Old Church Road consulting firm) (since April 1991 and
Unit #6 principal occupation since March 1995).
Greenwich, CT 06830 Mr. Armstrong was chairman of the board,
chief executive officer and co-owner of
Adirondack Beverages (producer and
distributor of soft drinks and
sparkling/still waters) (October
1993-March 1995). He was a partner of
The New England Consulting Group
(management consulting firm) (December
1992-September 1993). He was managing
director of LVMH U.S. Corporation (U.S.
subsidiary of the French luxury goods
conglomerate, Louis Vuitton Moet
Hennessey Corporation) (1987-1991) and
chairman of its wine and spirits
subsidiary, Schieffelin & Somerset
Company (1987-1991). Mr. Armstrong is a
director or trustee of 30 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
E. Garrett Bewkes, Jr.** +; 73 Trustee and Chairman of the Mr. Bewkes is a director of Paine Webber
Board of Trustees Group Inc. ("PW Group") (holding company
of PaineWebber and Mitchell Hutchins).
Prior to 1996, he was a consultant to PW
Group. As of May 1, 1999, he serves as a
consultant to PaineWebber. 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 39 investment companies for
which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
36
<PAGE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------ ----------------------------------------
<S> <C> <C>
Richard R. Burt; 53 Trustee Mr. Burt is chairman of IEP Advisors,
1275 Pennsylvania Ave, N.W. Inc. (international investments and
Washington, D.C. 20004 consulting firm) (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.
(gold mining), six investment companies
in the Deutsche Bank family of funds,
nine investment companies in the Flag
Investors family of funds, The Central
European Fund, Inc. and The Germany
Fund, Inc., vice chairman of Anchor
Gaming (provides technology to gaming
and wagering industry (since July 1999)
and chairman of Weirton Steel Corp.
(makes and finishes steel products)
(since April 1996). He was the chief
negotiator in the Strategic Arms
Reduction Talks with the former Soviet
Union (1989-1991) and the U.S.
Ambassador to the Federal Republic of
Germany (1985-1989). Mr. Burt is a
director or trustee of 30 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Mary C. Farrell**+; 50 Trustee Ms. Farrell is a managing director,
senior invest ment 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 29 investment companies for
which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Meyer Feldberg; 58 Trustee Mr. Feldberg is Dean and Professor of
Columbia University Management of the Graduate School of
101 Uris Hall Business, Columbia University. Prior to
New York, NY 10027 1989, he was president of the Illinois
Institute of Technology. Dean Feldberg
is also a director of Primedia, Inc.
(publishing), Federated Department
Stores, Inc. (operator of department
stores) and Revlon, Inc. (cosmetics).
Dean Feldberg is a director or trustee
of 36 investment companies for which
Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment
adviser.
37
<PAGE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------ ----------------------------------------
<S> <C> <C>
George W. Gowen; 70 Trustee Mr. Gowen is a partner in the law firm
666 Third Avenue of Dunnington, Bartholow & Miller. Prior
New York, NY 10017 to May 1994, he was a partner in the law
firm of Fryer, Ross & Gowen. Mr. Gowen
is a director or trustee of 36
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Frederic V. Malek; 63 Trustee Mr. Malek is chairman of Thayer Capital
1455 Pennsylvania Ave, N.W. Partners (merchant bank) and chairman of
Suite 350 Thayer Hotel Investors II and Lodging
Washington, D.C. 20004 Opportunities Fund (hotel investment
partnerships). From January 1992 to
November 1992, he was campaign manager
of Bush-Quayle `92. From 1990 to 1992,
he was vice chairman and, from 1989 to
1990, he was president of Northwest
Airlines Inc. and NWA Inc. (holding
company of Northwest Airlines 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
Aegis Communications, Inc.
(tele-services), American Management
Systems, Inc. (management consulting and
computer related services), Automatic
Data Processing, Inc. (computing
services), CB Richard Ellis, Inc. (real
estate services), FPL Group, Inc.
(electric services), Global Vacation
Group (packaged vacations), HCR/Manor
Care, Inc. (health care), SAGA Systems,
Inc. (software company) and Northwest
Airlines Inc. Mr. Malek is a director or
trustee of 30 investment companies for
which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
38
<PAGE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------ ----------------------------------------
<S> <C> <C>
Carl W. Schafer; 64 Trustee Mr. Schafer is president of the Atlantic
66 Witherspoon Street, #1100 Foundation (charitable foundation
Princeton, NJ 08542 supporting mainly oceanographic
exploration and research). He is a
director of Labor Ready, Inc. (temporary
employment), Roadway Express, Inc.
(trucking), The Guardian Group of Mutual
Funds, the Harding, Loevner Funds,
E.I.I. Realty Trust (investment
company), Evans Systems, Inc. (motor
fuels, convenience store and diversified
company), Electronic Clearing House,
Inc. (financial transactions
processing), Frontier Oil Corporation
and Nutraceutix, Inc. (biotechnology
company). Prior to January 1993, he was
chairman of the Investment Advisory
Committee of the Howard Hughes Medical
Institute. Mr. Schafer is a director or
trustee of 30 investment companies for
which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Brian M. Storms* +; 45 Trustee Mr. Storms is president and chief
operating officer of Mitchell Hutchins
(since March 1999). Mr. Storms was
president of Prudential Investments
(1996-1999). Prior to joining
Prudential, he was a managing director
at Fidelity Investments. Mr. Storms is
director or trustee of 30 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Cynthia N. Bow*; 41 Vice President Ms. Bow is a vice president and a
(Mutual Fund Trust only) portfolio manager of Mitchell Hutchins.
Ms. Bow has been with Mitchell Hutchins
since 1982. Ms. Bow is a vice president
of two investment companies for which
Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment
adviser.
Thomas Disbrow***; 34 Vice President and Mr. Disbrow is a first vice president
Assistant Treasurer and a senior manager of the mutual fund
finance department of Mitchell Hutchins.
Prior to November 1999, he was a vice
president of Zweig/Glaser Advisers. Mr.
Disbrow is a vice president and
assistant treasurer of 31 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Elbridge T. Gerry III*; 43 Vice President Mr. Gerry is a managing director 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
six investment companies for which
Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment
adviser.
39
<PAGE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------ ----------------------------------------
<S> <C> <C>
John J. Lee***; 31 Vice President and Mr. Lee is a vice president and a
Assistant Treasurer manager of 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 31 investment companies for
which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as an
investment adviser.
Kevin J. Mahoney***; 34 Vice President and Mr. Mahoney is a first vice president
Assistant Treasurer and a senior manager of the mutual fund
finance department of Mitchell Hutchins.
From August 1996 through March 1999, he
was the manager of the mutual fund
internal control group of Salomon Smith
Barney. Prior to August 1996, he was an
associate and assistant treasurer of
BlackRock Financial Management L.P. Mr.
Mahoney is a vice president and
assistant treasurer of 31 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Dennis McCauley*; 53 Vice President Mr. McCauley is a managing director and
chief investment officer--fixed income
of Mitchell Hutchins. Mr. McCauley is a
vice president of 21 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Ann E. Moran***; 42 Vice President and Ms. Moran is a vice president and a
Assistant Treasurer manager of the mutual fund finance
department of Mitchell Hutchins. Ms.
Moran is a vice president and assistant
treasurer of 31 investment companies for
which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Dianne E. O'Donnell**; 48 Vice President Ms. O'Donnell is a senior vice president
and Secretary and deputy general counsel of Mitchell
Hutchins. Ms. O'Donnell is a vice
president and secretary of 31 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Paul H. Schubert***; 37 Vice President Mr. Schubert is a senior vice president
and Treasurer and director of the mutual fund finance
department of Mitchell Hutchins. Mr.
Schubert is a vice president and
treasurer of 31 investment companies for
which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
40
<PAGE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------ ----------------------------------------
<S> <C> <C>
Barney A. Taglialatela***; 39 Vice President and Mr. Taglialatela is a vice president and
Assistant Treasurer a manager of the mutual fund finance
department of Mitchell Hutchins. Mr.
Taglialatela is a vice president and
assistant treasurer of 31 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
William W. Veronda*; 54 Vice President Mr. Veronda is a senior vice president
(PW Municipal Series only) of Mitchell Hutchins. Prior to September
1995, he 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**; 38 Vice President and Mr. Weller is a first vice president and
Assistant Secretary associate general counsel of Mitchell
Hutchins. Mr. Weller is a vice president
and assistant secretary of 30 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
</TABLE>
-----------------------
* This person's business address is 51 West 52nd Street, New York, New York
10019-6114.
** This person's business address is 1285 Avenue of the Americas, New York,
New York 10019.
*** This person's business address is Newport Center III, 499 Washington Blvd.,
14th Floor, Jersey City, New Jersey 07310-1998.
+ Mrs. Alexander, Mr. Bewkes, Ms. Farrell, and Mr. Storms are "interested
persons" of each fund as defined in the Investment Company Act by virtue of
their positions with Mitchell Hutchins, PaineWebber, and/or PW Group.
Each Trust pays trustees who are not "interested persons" of the Trust
$1,000 annually for each series and $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. Because Mitchell Hutchins and PaineWebber perform
substantially all of the services necessary for the operation of the Trusts and
the funds, neither Trust requires any employees. No officer, director or
employee of Mitchell Hutchins or PaineWebber presently receives any compensation
from the Trusts for acting as a trustee or officer.
The table below includes certain information relating to the
compensation of the current board members who held office with the Trusts or
with other PaineWebber funds during the periods indicated:
41
<PAGE>
COMPENSATION TABLE+
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE
COMPENSATION COMPENSATION TOTAL COMPENSATION
FROM MUTUAL FROM MUNICIPAL FROM THE TRUSTS AND
NAME OF PERSON, POSITION FUND TRUST* SERIES* THE FUND COMPLEX**
------------------------ ----------- -------------- -------------------
<S> <C> <C> <C>
Richard Q. Armstrong,
Trustee............................ $3,560 $3,560 $104,650
Richard R. Burt,
Trustee............................ 3,560 3,560 102,850
Meyer Feldberg,
Trustee............................ 3,560 3,560 119,650
George W. Gowen,
Trustee............................ 4,344 4,344 119,650
Frederic V. Malek,
Trustee............................ 3,560 3,560 104,650
Carl W. Schafer,
Trustee............................ 3,500 3,500 104,650
</TABLE>
--------------------
+ Only independent board members are compensated by the PaineWebber funds and
identified above; board members who are "interested persons," as defined by
the Investment Company Act, do not receive compensation from the funds.
* Represents fees paid to each board member from the Trust indicated for the
fiscal year ended February 29, 2000.
** Represents total compensation paid during the calendar year ended
December 31, 1999, to each board member by 31 investment companies (34 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.
PRINCIPAL HOLDERS AND MANAGEMENT OWNERSHIP OF SECURITIES
As of June 6, 2000, trustees and officers owned in the aggregate less
than 1% of the outstanding shares of any class of each fund.
As of June 6, 2000, the following shareholders were shown in the funds'
records as owning 5% or more of any class of a fund's shares:
<TABLE>
<CAPTION>
NAME AND ADDRESS* PERCENTAGE OF SHARES BENEFICIALLY
----------------- OWNED AS OF JUNE 6, 2000
---------------------------------
<S> <C>
NATIONAL TAX-FREE INCOME FUND
George T. Westwood TTEE 9.35% of
UA 6/22/83 Class B shares
Helen Polinger TTEE 5.23% of
FBO Benjamin Polinger Class B shares
Charlsia L. Brown TTEE for 38.96% of
Sam M. Brown Irrevocable Class Y shares
Educational Life Insurance Trust
U/A/D 2/28/94
Edith M. Buss TTEE 14.64% of
FBO Buss Family Revocable Class Y shares
Trust U/A dated 11/8/90
42
<PAGE>
<CAPTION>
NAME AND ADDRESS* PERCENTAGE OF SHARES BENEFICIALLY
----------------- OWNED AS OF JUNE 6, 2000
---------------------------------
<S> <C>
Gilbert C. Powers & 9.80% of
Pamela M. Powers Com Prop Class Y shares
MUNICIPAL HIGH INCOME FUND
Joseph L. Wisne TTEE 7.28% of
UAD 7/9/91 by Joseph L. Wisne Class A shares
Antony Von Elbe 5.14% of
Class A shares
PaineWebber Cust 20.61% of
Theoginia K. Duffy IRA RLVR Class Y shares
Jacob J. Kornberg 19.98% of
Margaret R. Kornberg JT TEN Class Y shares
Stephen M. Brickley 7.41% of
Class Y shares
Sanober H. Mumtaz 5.95% of
Class Y shares
Jay T. Landgren 5.77% of
Class Y shares
CALIFORNIA TAX-FREE INCOME FUND
Thomas G. Donahue and Patricia A. Donahue TTEES FBO 8.57% of
The Donahue Living Revocable Class B shares
Trust dtd 8/11/95
Elsie J. Fabiano 50.35% of
Class Y shares
Robert E. Maloney 8.95% of
Nina B. Maloney Comm Prop Class Y shares
Comerica Bank TTEE 8.82% of
FBO Trust C under the Class Y shares
Franklin Bond and Edna D. Bond
Trust dtd April 2, 1992
Margaret Crane Trustee 7.37% of
F/T Edward and Margaret Crane Class Y shares
Survivor's Trust dtd 12/02/93
Carolyn L. Worthington TTEE 6.88% of
UA DTD 07-16-90 Class Y shares
43
<PAGE>
<CAPTION>
NAME AND ADDRESS* PERCENTAGE OF SHARES BENEFICIALLY
----------------- OWNED AS OF JUNE 6, 2000
---------------------------------
<S> <C>
NEW YORK TAX-FREE INCOME FUND
Trust U/W/O Vito Monitto 7.83% of
Frances Monitto Manfredi TTEE Class A shares
Mrs. Marguerite Rossetto 17.16% of
Class B shares
Wolf Kahn 6.83% of
Class B shares
Harold Wasserman and 39.62% of
Joan Wasserman JTWROS Class Y shares
The Michael Gerard DiNapoli 26.28% of
Revocable Trust DTD 4/3/00 Class Y shares
Sherry Crespin-DiNapoli TTEE
Margaret L. Kawecki 13.40% of
Living Trust DTD 4/8/96 Class Y shares
Margaret L. Kawecki TTEE
Stephen A. Castellano 9.26% of
Class Y shares
Issac Malina 7.45% of
Class Y shares
</TABLE>
* The shareholders listed above may be contacted c/o Mitchell Hutchins Asset
Management Inc., 51 West 52nd Street, New York, NY 10019-6114.
INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY AND ADMINISTRATION ARRANGEMENTS. Mitchell Hutchins acts as
the investment adviser and administrator pursuant to a separate contracts (each
an "Advisory Contract") with each Trust. 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 National
Tax-Free Income Fund and California 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.
44
<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,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
National Tax-Free Income Fund.......... $ 1,376,862 $1,522,045 $ 1,634,990
Municipal High Income Fund............. 636,525 632,526 551,107
California Tax-Free Income Fund........ 704,250 754,659 776,955
(of which (of which 200,824
281,706 was waived) was waived)
New York Tax-Free Income Fund.......... 238,369 273,412 264,754
(of which (of which 112,366 (of which 117,350
125,371 was waived) was waived) was 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.
TRANSFER AGENCY-RELATED SERVICES. PFPC Inc. ("PFPC"), the funds'
transfer agent, (not the funds) pays PaineWebber for certain transfer
agency-related services that PFPC has delegated to PaineWebber. Prior to August
1, 1997, under an agreement between the applicable Trust and PaineWebber,
PaineWebber provided those services to each fund not otherwise provided by its
transfer agent. Under these agreements, PaineWebber earned (or accrued) the
amounts set forth below during the period indicated:
45
<PAGE>
<TABLE>
<CAPTION>
FOR THE FIVE MONTHS
ENDED JULY 31, 1997
-------------------
<S> <C>
National Tax-Free Income Fund......... $15,757
Municipal High Income Fund............ 5,104
California Tax-Free Income Fund....... 5,924
New York Tax-Free Income Fund......... 2,077
</TABLE>
SECURITIES LENDING. During the fiscal years ended February 29, 2000,
February 28, 1999 and February 28, 1998, the funds paid (or accrued) no fees to
PaineWebber for its services as securities lending agent.
NET ASSETS. The following table shows the approximate net assets as of
May 31, 2000, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser or sub-adviser. An
investment company may fall into more than one of the categories below.
<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY ($MIL)
------------------- ------
<S> <C>
Domestic (excluding Money Market)................................ $9,269.6
Global........................................................... 4,658.6
Equity/Balanced.................................................. 9,676.7
Fixed Income (excluding Money Market)............................ 4,251.5
Taxable Fixed Income.................................... 2,858.1
Tax-Free Fixed Income................................... 1,393.4
Money Market Funds............................................... 38,814.8
</TABLE>
PERSONAL TRADING POLICIES. The funds, their investment adviser and
their principal underwriter each have adopted a code of ethics under rule 17j-1
of the Investment Company Act, which permits personnel covered by the rule to
invest in securities that may be purchased or held by a fund but prohibits
fraudulent, deceptive or manipulative conduct in connection with that personal
investing.
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 dealer agreements between
Mitchell Hutchins and PaineWebber relating to each class of shares of the
funds (collectively, "PW Dealer Agreements"), PaineWebber and its
correspondent firms sell each fund's shares. Mitchell Hutchins is located at
51 West 52nd Street, New York, New York 10019-6114 and PaineWebber is located
at 1285 Avenue of the Americas, New York, New York 10019.
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 (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 and the funds pay no service or distribution fees with
respect to their Class Y shares.
Mitchell Hutchins uses the service fees under the Plans for Class A,
Class B and Class C shares primarily to pay PaineWebber for shareholder
servicing, currently at the annual rate of 0.25% of the aggregate investment
46
<PAGE>
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,
including related overhead expenses.
Mitchell Hutchins uses the distribution fees under the Class B and
Class C Plans to:
- Offset the commissions it pays to PaineWebber for selling each
fund's Class B and Class C shares, respectively.
- Offset each fund's marketing costs attributable to such
classes, such as preparation, printing and distribution of
sales literature, advertising and prospectuses to prospective
investors and related overhead expenses, such as employee
salaries and bonuses.
PaineWebber compensates 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 as compensation for its service- and distribution-related
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 of the
fund and (4) while the Plan remains in effect, the selection and nomination of
board members who are not "interested persons" of the Trust shall be committed
to the discretion of the board members who are not "interested persons" of that
Trust.
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 29, 2000:
47
<PAGE>
<TABLE>
<CAPTION>
NATIONAL TAX-FREE MUNICIPAL HIGH CALIFORNIA TAX-FREE NEW YORK TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
----------------- -------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Class A................. $ 526,472 $ 164,945 $276,573 $ 60,508
Class B................. 194,904 168,537 120,852 47,379
Class C................. 335,657 171,172 133,731 80,640
</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 29, 2000:
<TABLE>
<CAPTION>
CALIFORNIA NEW YORK
NATIONAL TAX-FREE MUNICIPAL HIGH TAX-FREE INCOME TAX-FREE INCOME
INCOME FUND INCOME FUND FUND FUND
----------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
CLASS A
Marketing and advertising................. $241,310 $185,990 $198,054 $106,366
Amortization of commissions............... 0 0 0 0
Printing of prospectuses and statements
of additional information................. 2,725 858 1,105 350
Branch network costs allocated and
interest expense.......................... 695,709 191,845 352,658 81,103
Service fees paid to PaineWebber
Financial Advisors........................ 205,324 64,328 107,863 23,598
CLASS B
Marketing and advertising................. 22,330 47,413 21,556 20,794
Amortization of commissions............... 72,241 118,094 44,477 17,443
Printing of prospectuses and statements
of additional information................. 252 221 121 100
Branch network costs allocated and
interest expense.......................... 73,433 58,094 45,176 18,075
Service fees paid to PaineWebber
Financial Advisors........................ 19,004 16,432 11,783 4,620
CLASS C
Marketing and advertising................. 51,302 64,214 31,986 47,221
Amortization of commissions............... 87,272 44,505 34,770 20,966
Printing of prospectuses and statements
of additional information................. 581 304 178 170
Branch network costs allocated and
interest expense.......................... 149,660 67,134 57,653 36,435
Service fees paid to PaineWebber
Financial Advisors........................ 43,635 22,252 17,385 10,483
</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.
48
<PAGE>
In approving each fund's overall Flexible Pricing-SM- 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 the
PW 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 the PW 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
of having no initial sales charges deducted from fund purchase payments and
instead having the entire amount of such 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 payments immediately in Class C
shares, 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 the PW 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 after Class C shares have been held more than one year
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.
49
<PAGE>
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 dealer.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28/29,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
NATIONAL TAX-FREE INCOME FUND
Earned................................... $ 94,940 $ 141,884 $ 79,748
Retained................................. 8,798 12,438 6,357
MUNICIPAL HIGH INCOME FUND
Earned................................... 39,934 66,403 121,988
Retained................................. 2,931 5,007 7,764
CALIFORNIA TAX-FREE INCOME FUND
Earned................................... 102,363 105,681 79,848
Retained................................. 9,421 8,900 6,304
NEW YORK TAX-FREE INCOME FUND
Earned................................... 22,184 35,695 47,579
Retained................................. 1,775 3,239 3,962
</TABLE>
Mitchell Hutchins earned and retained the following contingent
deferred sales charges paid upon certain redemptions of shares for the fiscal
year ended February 29, 2000:
<TABLE>
<CAPTION>
NATIONAL TAX-FREE MUNICIPAL HIGH CALIFORNIA TAX-FREE NEW YORK TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
----------------- -------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Class A............... $ 0 $ 0 $ 0 $ 0
Class B............... 68,963 71,092 47,867 12,492
Class C............... 8,999 6,700 5,907 945
</TABLE>
PORTFOLIO TRANSACTIONS
Subject to policies established by each board, Mitchell Hutchins is
responsible for the execution of each fund's portfolio transactions and the
allocation of brokerage transactions. In executing portfolio transactions,
Mitchell Hutchins seeks to obtain the best net results for a fund, taking
into account such factors as the price (including the applicable 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. During the fiscal years
ended February 29, 2000, February 28, 1999 and February 28, 1998, the funds
did not pay any brokerage commissions.
The funds have no obligation to deal with any broker or group of
brokers in the execution of portfolio transactions. The funds contemplate
that, consistent with the policy of obtaining the best net results, brokerage
transactions may be conducted through Mitchell Hutchins or its affiliates,
including PaineWebber. Each board has adopted procedures in conformity with
Rule 17e-1 under the Investment Company Act to ensure that all brokerage
commissions paid to PaineWebber are reasonable and fair. Specific provisions
in the Advisory Contracts authorize Mitchell Hutchins and any of its
affiliates that is a member of a national securities exchange to effect
portfolio transactions for the applicable fund on such exchange and to retain
compensation in connection with such transactions. Any such transactions will
be effected and related compensation paid only in accordance with
50
<PAGE>
applicable SEC regulations. During the fiscal years ended February 29, 2000,
February 28, 1999 and February 28, 1998, none of the funds paid brokerage
commissions to PaineWebber.
Transactions in futures contracts are executed through futures
commission merchants ("FCMs"), who receive brokerage commissions for their
services. The funds' procedures in selecting FCMs to execute their
transactions in futures contracts, including procedures permitting the use of
Mitchell Hutchins and its affiliates, are similar to those in effect with
respect to brokerage transactions in securities.
In selecting brokers, Mitchell Hutchins will consider the full range
and quality of a broker's services. Consistent with the interests of the
funds and subject to the review of each board, Mitchell Hutchins may cause a
fund to purchase and sell portfolio securities through brokers who provide
Mitchell Hutchins with brokerage or research services. The funds may pay
those brokers a higher commission than may be charged by other brokers,
provided that Mitchell Hutchins determines in good faith that such commission
is reasonable in terms either of that particular transaction or of the
overall responsibility of Mitchell Hutchins, to that fund and its other
clients.
Research services obtained from brokers may include written reports,
pricing and appraisal services, analysis of issues raised in proxy
statements, educational seminars, subscriptions, portfolio attribution and
monitoring services, and computer hardware, software and access charges which
are directly related to investment research. Research services may be
received in the form of written reports, online services, telephone contacts
and personal meetings with securities analysts, economists, corporate and
industry spokespersons and government representatives.
For the fiscal year ended February 29, 2000, the funds did not
direct any portfolio transactions to brokers chosen because they provide
research, analysis, advice and similar services.
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 were attributed to the services provided by the executing dealer.
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 pursuant to procedures that are designed to ensure 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.
Research services and information received from brokers or dealers
are supplemental to Mitchell Hutchins' own research efforts and, when
utilized, are subject to internal analysis before being incorporated into
their investment process. 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.
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 a fund is concerned, or upon its ability to complete its entire order,
in other cases it is believed that simultaneous transactions and the ability
to participate in volume transactions will benefit 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. 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.
51
<PAGE>
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.
The funds' respective portfolio turnover rates for the fiscal years
shown were:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED FEBRUARY 28/29
2000 1999
---- ----
<S> <C> <C>
National Tax-Free Income Fund.................... 29% 43%
Municipal High Income Fund....................... 19% 26%
California Tax-Free Income Fund.................. 24% 45%
New York Tax-Free Income Fund.................... 19% 44%
</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:
- 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;
- 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;
- 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
- 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
52
<PAGE>
such other funds will be at the rates applicable to the total amount of the
combined concurrent purchases.
An "eligible group of related fund investors" can consist of any
combination of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her individual retirement account
("IRA");
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25% or
more of the outstanding voting securities of a corporation will be deemed to
control the corporation, and a partnership will be deemed to be controlled by
each of its general partners);
(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by the individual(s);
(e) an individual (or eligible group of individuals) and a trust
created by the individual(s), the beneficiaries of which are the individual
and/or the individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers
to Minors Act account created by the individual or the individual's spouse;
(g) an employer (or group of related employers) and one or more
qualified retirement plans of such employer or employers (an employer
controlling, controlled by or under common control with another employer is
deemed related to that other employer); or
(h) individual accounts related together under one registered
investment adviser having full discretion and control over the accounts. The
registered investment adviser must communicate at least quarterly through a
newsletter or investment update establishing a relationship with all of the
accounts.
RIGHTS OF ACCUMULATION -- CLASS A SHARES. Reduced sales charges are
available through a right of accumulation, under which investors and eligible
groups of related fund investors (as defined above) are permitted to purchase
Class A shares of the funds among related accounts at the offering price
applicable to the total of (1) the dollar amount then being purchased plus
(2) an amount equal to the then-current net asset value of the purchaser's
combined holdings of Class A fund shares and Class A shares of any other
PaineWebber mutual fund. The purchaser must provide sufficient information to
permit confirmation of his or her holdings, and the acceptance of the
purchase order is subject to such confirmation. The right of accumulation may
be amended or terminated at any time.
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 will not be deductible to the extent the reinstatement privilege
is exercised within 30 days after redemption, in which event an adjustment
will be made to the shareholder's tax basis for shares acquired pursuant to
the reinstatement privilege. Gain or loss on a redemption also will be
readjusted for federal income tax purposes by the amount of any sales charge
paid on Class A shares, under the circumstances and to the extent described
in "Taxes --Special Rule for Class A Shareholders," 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
53
<PAGE>
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-SM- MULTI ADVISOR
PROGRAM. An investor who participates in the PACE-SM- Multi Advisor Program is
eligible to purchase Class Y shares. The PACE-SM- 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-SM- Multi
Advisor Program is subject to payment of an advisory fee at the effective
maximum annual rate of 1.5% of assets. Employees of PaineWebber and its
affiliates are entitled to a waiver of this fee. Please contact your
PaineWebber Financial Advisor or PaineWebber's correspondent firms for more
information concerning mutual funds that are available through the PACE-SM-
Multi Advisor Program.
PURCHASES OF CLASS A SHARES THROUGH THE PAINEWEBBER INSIGHTONE-SM-
PROGRAM. Investors who purchase shares through the PaineWebber InsightOne-SM-
Program are eligible to purchase Class A shares without a sales load. The
PaineWebber InsightOne-SM- Program offers a nondiscretionary brokerage account
to investors for an asset-based fee at an annual rate of up to 1.50% of the
assets in the account. Account holders may purchase or sell certain
investment products without paying commissions or other markups/markdowns.
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, 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" in accordance with the policies of those service
organizations. 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
54
<PAGE>
amount each month under the plan, the investor will purchase more shares when
a fund's net asset value per share is low and fewer shares when the net asset
value per share is high. Using this technique, an investor's average purchase
price per share over any given period will be lower than if the investor
purchased a fixed number of shares on a monthly basis during the period. Of
course, investing through the automatic investment plan does not assure a
profit or protect against loss in declining markets. Additionally, because
the automatic investment plan involves continuous investing regardless of
price levels, an investor should consider his or her financial ability to
continue purchases through periods of both 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:
- Class A and Class C shares. Minimum value of fund shares is
$5,000; minimum withdrawals of $100.
- Class B shares. Minimum value of fund shares is $10,000;
minimum monthly, quarterly, and semi-annual and annual
withdrawals of $100, $200, $300 and $400, 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.
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-SM-;
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT-Registered Trademark-
(RMA)-Registered Trademark-
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 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
55
<PAGE>
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:
- 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;
- comprehensive year-end summary statements that provide
information on account activity for use in tax planning and tax
return preparation;
- automatic "sweep" of uninvested cash into the RMA
accountholder's choice of 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.
- check writing, with no per-check usage charge, no minimum amount
on checks and no maximum number of checks that can be written.
RMA accountholders can code their checks to classify
expenditures. All canceled checks are returned each month;
- Gold MasterCard, with or without a line of credit, which
provides RMA accountholders with direct access to their accounts
and can be used with automatic teller machines worldwide.
Purchases on the Gold MasterCard are debited to the RMA account
once monthly, permitting accountholders to remain invested for a
longer period of time;
- unlimited electronic funds transfers and a bill payment service
for an additional fee;
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<PAGE>
- 24-hour access to account information through toll-free numbers,
and more detailed personal assistance during business hours from
the RMA Service Center;
- expanded account protection for the net equity securities
balance in the event of the liquidation of PaineWebber. This
protection does not apply to shares of funds that are held at
PFPC and not through PaineWebber; and
- automatic direct deposit of checks into your RMA account and
automatic withdrawals from the account.
The annual account fee for an RMA account is $85, which includes the
Gold MasterCard, with an additional fee of $40 if the investor selects an
optional line of credit with the Gold MasterCard.
CONVERSION OF CLASS B SHARES
Class B shares of 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 (1) the date on which such
Class B shares were issued or (2) for Class B shares obtained through an
exchange, or a series of exchanges, the date on which the original Class B
shares were issued. 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 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") 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
57
<PAGE>
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:
n
P(1 + T) = 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 sales charge of 4.0%, 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.
58
<PAGE>
NATIONAL TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
CLASS CLASS A CLASS B CLASS C CLASS Y
----- ------- ------- ------- -------
(INCEPTION DATE) (12/03/84) (07/01/91) (07/02/92 (11/03/95)
---------------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Year ended February 29, 2000:
Standardized Return*.............. (7.77)% (9.22)% (5.10)% (3.77)%
Non-Standardized Return........... (3.91)% (4.68)% (4.42)% (3.77)%
Five Years ended February 29, 2000:
Standardized Return*.............. 3.79% 3.50% 4.10% N/A
Non-Standardized Return........... 4.64% 3.83% 4.10% N/A
Ten Years ended February 29, 2000:
Standardized Return*.............. 5.44% N/A N/A N/A
Non-Standardized Return........... 5.86% N/A N/A N/A
Inception to February 29,2000:
Standardized Return*.............. 7.26% 4.98% 4.17% 3.96%
Non-Standardized Return........... 7.55% 4.98% 4.17% 3.96%
<CAPTION>
MUNICIPAL HIGH INCOME FUND
CLASS CLASS A CLASS B CLASS C CLASS Y
----- ------- ------- ------- -------
(INCEPTION DATE) (06/23/87) (07/01/91) (07/02/92) (02/05/98)
---------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended February 29, 2000:
Standardized Return*.............. (7.73)% (9.18)% (5.17)% (3.73)%
Non-Standardized Return........... (3.91)% (4.65)% (4.49)% (3.73)%
Five Years ended February 29, 2000:
Standardized Return*.............. 4.76% 4.45% 5.06% N/A
Non-Standardized Return........... 5.61% 4.79% 5.06% N/A
Ten Years ended February 29, 2000:
Standardized Return*.............. 6.03% N/A N/A N/A
Non-Standardized Return........... 6.46% N/A N/A N/A
Inception to February 29, 2000:
Standardized Return*.............. 6.72% 5.62% 4.62% 0.46%
Non-Standardized Return........... 7.07% 5.62% 4.62% 0.46%
<CAPTION>
CALIFORNIA TAX-FREE INCOME FUND
CLASS CLASS A CLASS B CLASS C CLASS Y
----- ------- ------- ------- -------
(INCEPTION DATE) (09/16/85) (07/01/91) (07/02/92) (02/05/98)
---------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended February 29, 2000:
Standardized Return*.............. (7.84)% (9.16)% (5.04)% (3.73)%
Non-Standardized Return........... (3.96)% (4.60)% (4.36)% (3.73)%
Five Years ended February 29, 2000:
Standardized Return*.............. 3.79% 3.52% 4.13% N/A
Non-Standardized Return........... 4.65% 3.85% 4.13% N/A
Ten Years ended February 29, 2000:
Standardized Return*.............. 5.34% N/A N/A N/A
Non-Standardized Return........... 5.77% N/A N/A N/A
Inception to February 29, 2000
Standardized Return*.............. 6.82% 4.84% 4.12% 0.95%
Non-Standardized Return........... 7.13% 4.84% 4.12% 0.95%
59
<PAGE>
<CAPTION>
NEW YORK TAX-FREE INCOME FUND
CLASS CLASS A CLASS B CLASS C CLASS Y
----- ------- ------- ------- -------
(INCEPTION DATE) (09/23/88) (07/01/91) (07/02/92) (05/21/98)
---------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended February 29, 2000:
Standardized Return*.............. (8.16)% (9.58)% (5.48)% (4.10)%
Non-Standardized Return........... (4.33)% (5.05)% (4.80)% (4.10)%
Five Years ended February 29, 2000:
Standardized Return*.............. 4.13% 3.86% 4.46% N/A
Non-Standardized Return........... 4.99% 4.20% 4.46% N/A
Ten Years ended February 29, 2000:
Standardized Return*.............. 5.87% N/A N/A N/A
Non-Standardized Return........... 6.31% N/A N/A N/A
Inception to February 29, 2000:
Standardized Return*.............. 6.11% 5.43% 4.52% 0.60%
Non-Standardized Return........... 6.49% 5.43% 4.52% 0.60%
</TABLE>
------------------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charges 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.
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 = 2[( a - b +1) to the power of 6 -1]
------
cd
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.
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.
60
<PAGE>
The following table shows the yield for each class of shares of each
fund for the 30-day period ended February 29, 2000:
<TABLE>
<CAPTION>
NATIONAL TAX-FREE MUNICIPAL HIGH CALIFORNIA TAX-FREE NEW YORK TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
----------------- -------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Class A............. 5.10% 5.38% 5.08% 4.61%
Class B............. 4.51% 4.85% 4.51% 4.04%
Class C............. 4.79% 5.11% 4.78% 4.30%
Class Y............. 5.55% 5.73% 5.56% 5.05%
</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:
E
TAX EQUIVALENT YIELD = ( ----- ) + t
1 - p
E = tax-exempt yield of a class of shares
p = stated income tax rate
t = taxable yield of a Class of shares
The tax-equivalent yield of California Tax-Free Income Fund assumes
a 45.22% combined effective California and federal tax rate. The
tax-equivalent yield of New York Tax-Free Income Fund assumes a 46.10%
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 29, 2000:
<TABLE>
<CAPTION>
NATIONAL TAX-FREE MUNICIPAL HIGH CALIFORNIA TAX-FREE NEW YORK TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
----------------- -------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Class A............. 9.52% 8.91% 9.27% 8.55%
Class B............. 8.41% 8.03% 8.23% 7.50%
Class C............. 8.94% 8.46% 8.73% 7.98%
Class Y............. 10.36% 9.49% 10.15% 9.37%
</TABLE>
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 Smith Barney
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
61
<PAGE>
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-Registered Trademark-
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 taxable 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 fund 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.
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. Each fund intends
to continue to qualify for treatment as a regulated investment company ("RIC")
under the Internal Revenue Code. To so qualify, a fund must distribute to its
shareholders for each taxable year at least 90% of the sum of its net interest
income excludable from gross income under section 103(a) of the Internal
Revenue Code plus its investment company taxable income (consisting generally
of taxable net investment income 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
62
<PAGE>
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, (a) it would be taxed as an ordinary
corporation on its taxable income for that year without being able to deduct the
distributions it makes to its shareholders and (b) the shareholders would treat
all those distributions, including distributions that otherwise would be
"exempt-interest dividends" described in the following paragraph and
distributions of net capital gain (the excess of net long-term capital gain over
net short-term capital loss), as dividends (that is, ordinary income) to the
extent of the fund's earnings and profits. In addition, the fund could be
required to recognize unrealized gains, pay substantial taxes and interest and
make substantial distributions before requalifying for RIC treatment.
Dividends paid by a fund will qualify as "exempt-interest dividends,"
and thus will be excludable from gross income for federal income tax purposes by
its shareholders, if the fund satisfies the requirement that, at the close of
each quarter of its taxable year, at least 50% of the value of its total assets
consists of securities the interest on which is excludable from gross income
under section 103(a); each fund intends to continue to satisfy this requirement.
The aggregate dividends designated for any year by a fund as exempt-interest
dividends may not exceed its net tax-exempt income for the year. Shareholders'
treatment of dividends from a fund under state and local income tax laws may
differ from the treatment thereof under the Internal Revenue Code. Investors
should consult their tax advisers concerning this matter.
Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by IDBs or PABs should consult their
tax advisers before purchasing fund shares because, for users of certain of
these facilities, the interest on those bonds is not exempt from federal income
tax. For these purposes, "substantial user" is defined to include a "non-exempt
person" who regularly uses in a trade or business a part of a facility financed
from the proceeds of IDBs or PABs.
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income (including
income from tax-exempt sources such as a fund) plus 50% of their benefits
exceeds certain base amounts. Exempt-interest dividends from a fund still would
be tax-exempt to the extent described above; 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. The
respective portions will be determined by the "actual earned" method, under
which the portion of any dividend that qualifies as an exempt-interest dividend
may vary, depending on the relative proportions of tax-exempt and taxable
interest earned during the dividend period. Moreover, if a fund realizes capital
gain as a result of market transactions, any distributions of the gain will be
taxable to its shareholders.
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 distributions paid by any
fund will be eligible for the dividends-received deduction allowed to
corporations.
63
<PAGE>
Each fund will be subject to a nondeductible 4% excise tax to the
extent it fails to distribute by the end of any calendar year substantially all
of its ordinary (taxable) income for the calendar year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
The use of hedging and option income strategies, such as writing
(selling) and purchasing options and futures, involves complex rules that will
determine for income tax purposes the amount, character and timing of
recognition of the gains and losses a fund realizes in connection therewith.
Gains from options and futures derived by a fund with respect to its business of
investing in securities will qualify as permissible income under the Income
Requirement.
If a fund has an "appreciated financial position" - generally, an
interest (including an interest through an option, futures contract or short
sale) with respect to any stock, debt instrument (other than "straight debt") or
partnership interest the fair market value of which exceeds its adjusted basis -
and enters into a "constructive sale" of the position, 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 a futures contract entered into by
a fund or a related person with respect to the same or substantially identical
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
identical property will be deemed a constructive sale. The foregoing will not
apply, however, to any transaction of a fund during any taxable year that
otherwise would be treated as a constructive sale if the transaction is closed
within 30 days after the end of that year and the fund holds the appreciated
financial position unhedged for 60 days after that closing (I.E., at no time
during that 60-day period is the fund's risk of loss regarding that position
reduced by reason of certain specified transactions with respect to
substantially identical or related property, such as having an option to sell,
being contractually obligated to sell, making a short sale, or granting an
option to buy substantially identical stock or securities).
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 product of (1) 0.25% of the redemption
price at maturity times (2) the number of complete years to maturity after the
taxpayer acquired the bond, then no market discount is considered to exist. Gain
on the disposition of a municipal market discount bond purchased by a fund after
April 30, 1993 (other than a bond with a fixed maturity date within one year
from its issuance) generally is treated as ordinary (taxable) income, rather
than capital gain, to the extent of the bond's accrued market discount at the
time of disposition. Market discount on such a bond generally is accrued
ratably, on a daily basis, over the period from the acquisition date to the date
of maturity. In lieu of treating the disposition gain as above, a fund may elect
to include market discount in its gross income currently, for each taxable year
to which it is attributable.
CALIFORNIA TAXES. Individual shareholders of California Tax-Free Income
Fund who reside in California will not be subject to California personal income
tax on distributions received from the Fund to the extent such distributions are
attributable to interest on tax-exempt obligations issued by the State of
California or a California local government (or interest earned on obligations
of U.S. possessions or territories) ("exempt-interest dividends"), provided that
the fund qualifies as a RIC under the Internal Revenue Code and satisfies the
requirement of California law that at least 50% of its assets at the close of
each quarter of its taxable year be invested in obligations the interest on
which is exempt from personal income taxation under the laws or Constitution of
California or the laws of the United States. Distributions from the fund which
are attributable to sources other than those described in the preceding sentence
will generally be taxable to such shareholders as ordinary income. However,
distributions by California Tax-Free Income Fund, if any, that are derived from
interest on obligations of the U.S. government may also be designated by the
fund and treated by its shareholders as exempt from California personal income
tax, provided that the foregoing 50% requirement is satisfied. Moreover, under
California legislation incorporating certain provisions of the Code applicable
to RICs, amounts treated as capital gain distributions for federal income tax
purposes generally will be treated as long-term capital gains for California
personal income tax purposes. In addition, distributions to shareholders other
than exempt-interest dividends are includable in income subject to California
alternative minimum tax.
64
<PAGE>
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 Internal Revenue 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 not be subject to
the unincorporated business taxation imposed by the City solely by reason of
their ownership of shares in the fund. If a shareholder is subject to the
unincorporated business tax, income and gains distributed by the fund will be
subject to such tax except in general to the extent such distributions are
directly attributable to interest earned on tax-exempt obligations issued by New
York State or any political subdivision thereof (including the City).
Shares of New York Tax-Free Income Fund will not be subject to property
taxes imposed by New York State or the City.
Interest on indebtedness incurred by shareholders to purchase or carry
shares of the New York Tax-Free Income Fund (and certain other expenses relating
thereto) generally will not be deductible for New York State and City personal
income tax purposes.
Interest income of New York Tax-Free Income Fund which is distributed
to shareholders will generally not be taxable to the fund for purposes of the
New York State corporation franchise tax or the New York City general
corporation tax.
The fund is subject to the corporation franchise (income) tax measured
by the entire net income base, the minimum taxable income base or the fixed
dollar minimum, whichever is greater. "Entire net income" of the fund is federal
"investment company taxable income" with certain modifications. In addition, the
fund is permitted to deduct dividends paid to its shareholders in determining
its federal taxable income.
The foregoing is a general summary of certain provisions of federal,
California and New York State and City tax laws currently in effect as they
directly govern the taxation of shareholders of the funds. These provisions are
subject to change by legislative or administrative action, and any such change
may be retroactive with respect to
65
<PAGE>
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 2000 federal individual income tax rates. For
example, a couple with taxable income of $90,000 in 2000, or a single individual
with taxable income of $55,000 in 2000, whose investments earned a 6% tax-free
yield, would have had to earn approximately an 8.33% taxable yield to receive
the same benefit.
TABLE I. 2000 FEDERAL TAXABLE VS. TAX-FREE YIELDS*
<TABLE>
<CAPTION>
TAXABLE INCOME (000'S) A TAX-FREE YIELD OF
-------------------------------------- ------------------------------------------------------------
FEDERAL 4.00% 5.00% 6.00% 7.00% 8.00%
SINGLE JOINT TAX ----- ----- ----- ----- -----
RETURN RETURN BRACKET IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
------------------ ------------------ ------------- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 26.3 $ 0 - 43.9 15.00% 4.71% 5.88% 7.06% 8.24% 9.41%
26.3 - 63.6 43.9 - 106.0 28.00 5.56 6.94 8.33 9.72 11.11
63.6 - 132.6 106.0 - 161.5 31.00 5.80 7.25 8.70 10.14 11.59
132.6 - 288.4 161.5 - 288.4 36.00 6.25 7.81 9.38 10.94 12.50
Over $288.4 Over $288.4 39.60 6.62 8.28 9.93 11.59 13.25
</TABLE>
------------------------
* See note following Table III.
TAX-FREE INCOME VS. TAXABLE INCOME-CALIFORNIA TAX-FREE INCOME FUND.
Table II below illustrates approximate equivalent taxable and tax-free yields
at the 2000 federal individual and 1999+ California personal income tax
rates. For example, a California couple with taxable income of $90,000 in
1999, or a single California individual with taxable income of $55,000 in
1999, whose investments earned a 6% tax-free yield, would have had to earn
approximately a 9.19% taxable yield to receive the same benefit.
TABLE II. 2000 FEDERAL AND 1999 CALIFORNIA TAXABLE VS. TAX-FREE YIELDS*
<TABLE>
<CAPTION>
EFFECTIVE
TAXABLE INCOME (000'S) CALIFORNIA A TAX-FREE YIELD OF
-------------------------------------- AND ------------------------------------------------------------
FEDERAL 4.00% 5.00% 6.00% 7.00% 8.00%
SINGLE JOINT TAX ----- ----- ----- ----- -----
RETURN RETURN BRACKET IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
------------------ ------------------ ------------- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$19.7 - 26.3 $39.4 - 43.9 20.10% 5.01% 6.26% 7.51% 8.76% 10.01%
26.3 - 27.3 43.9 - 54.7 32.32 5.91 7.39 8.87 10.34 11.82
27.3 - 34.5 54.7 - 69.1 33.76 6.04 7.55 9.06 10.57 12.08
34.5 - 63.6 69.1 - 106.0 34.70 6.13 7.66 9.19 10.72 12.25
</TABLE>
66
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
63.6 - 132.6 106.0 - 161.5 37.42 6.39 7.99 9.59 11.19 12.78
132.6 - 288.4 161.5 - 288.4 41.95 6.89 8.61 10.34 12.06 13.78
Over $288.4 Over $288.4 45.22 7.30 9.13 10.95 12.78 14.60
</TABLE>
------------------------
* See note following Table III.
+ The rates shown reflect federal rates for 2000 and California rates for 1999
in effect as of the date thereof. Inflation adjusted income brackets for 2000
for California are not yet available, and the California rates thus are still
subject to change with retroactive effect for 2000.
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 2000 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 2000, whose investments earned a 4% tax-free yield,
would have had to earn approximately a 6.22% 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 2000 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 2000, who
lives in New York City and whose investments earn a 4% tax-free yield, would
have had to earn approximately a 6.22% taxable yield to receive the same
benefit. A single individual with a taxable income of $55,000 in 2000, 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 III. 2000 FEDERAL AND NEW YORK TAXABLE VS. TAX-FREE YIELDS*
<TABLE>
<CAPTION>
EFFECTIVE
TAXABLE INCOME (000'S) COMBINED A TAX-FREE YIELD OF
-------------------------------------- FEDERAL -----------------------------------------------------------
NYS/NYC 4.00% 5.00% 6.00% 7.00% 8.00%
SINGLE JOINT TAX ----- ----- ----- ----- -----
RETURN RETURN BRACKET IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
------------------ ------------------ --------------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 26.3 $ 0 - 43.9 23.99% 5.26% 6.58% 7.89% 9.20% 10.52%
26.3 - 63.6 43.9 - 106.0 35.65 6.22 7.77 9.32 10.88 12.43
63.6 - 132.6 106.0 - 161.5 38.33 6.49 8.11 9.73 11.35 12.97
132.6 - 288.4 161.5 - 288.4 42.80 6.99 8.74 10.49 12.24 13.99
Over $288.4 Over $288.4 46.02 7.41 9.26 11.12 12.97 14.82
<CAPTION>
TAXABLE INCOME (000'S) EFFECTIVE A TAX-FREE YIELD OF
-------------------------------------- COMBINED -----------------------------------------------------------
FEDERAL 4.00% 5.00% 6.00% 7.00% 8.00%
SINGLE JOINT NYS TAX ----- ----- ----- ----- -----
RETURN RETURN BRACKET IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
------------------ ------------------ --------------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 26.3 $0 - 43.9 20.82% 5.05% 6.31% 7.58% 8.84% 10.10%
26.3 - 63.6 43.9 - 106.0 32.93 5.96 7.46 8.95 10.44 11.93
63.6 - 132.6 106.0 - 161.5 35.73 6.22 7.78 9.34 10.89 12.45
</TABLE>
67
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
132.6 - 288.4 161.5 - 288.4 40.38 6.71 8.39 10.06 11.74 13.42
Over $288.4 Over $288.4 43.74 7.11 8.89 10.66 12.44 14.22
</TABLE>
-------------------
* Certain simplifying assumptions have been made in the tables. 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 federal alternative minimum tax, limitations on federal or
state itemized deductions, the phase out of deductions for personal
exemptions, the taxability of social security or railroad retirement
benefits or any state or local taxes payable on fund distributions (other
than California, New York State and New York City personal income taxes in
the cases of Tables II and III).
The yields listed above 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.
68
<PAGE>
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
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. The law firm of Orrick, Herrington &
Sutcliffe, 400 Sansome Street, San Francisco, California 94111, serves as
counsel to California Tax-Free Income Fund with respect to California law. The
law firm of Orrick, Herrington & Sutcliffe, 666 Fifth Avenue, New York, New
York, 10103, serves as counsel to New York Tax-Free Income Fund with respect to
New York law.
AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York,
New York 10019, serves as independent auditors for the Funds.
FINANCIAL STATEMENTS
The funds' Annual Reports to Shareholders for their last fiscal years
ended February 29, 2000 are separate documents supplied with this SAI, and the
financial statements, accompanying notes and report of independent auditors
appearing therein are incorporated herein by this reference.
69
<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
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
<PAGE>
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
adverse financial and economic changes over the term of the notes. SP-3.
Speculative capacity to pay principal and interest.
A-2
<PAGE>
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 ating 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>
[This page intentionally left blank]
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR REFERRED TO IN THE
PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION. THE FUNDS AND THEIR
DISTRIBUTOR HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS
DIFFERENT. THE PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION ARE NOT
AN OFFER TO SELL SHARES OF THE FUNDS IN ANY JURISDICTION WHERE THE FUNDS OR
THEIR DISTRIBUTOR MAY NOT LAWFULLY SELL THOSE SHARES.
------------
PaineWebber
National Tax-Free Income Fund
PaineWebber
Municipal High Income Fund
PaineWebber
California Tax-Free Income Fund
PaineWebber
New York Tax-Free Income Fund
------------------------------------------
Statement of Additional Information
June 30, 2000
------------------------------------------
PAINEWEBBER
-C- 2000 PaineWebber Incorporated. All rights reserved.
<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) PaineWebber Dealer Agreement (Class A Shares)(1)
(f) PaineWebber Dealer Agreement (Class B Shares)(1)
(g) PaineWebber Dealer Agreement (Class C Shares)(3)
(h) PaineWebber 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 (filed herewith)
(10) Other opinions, appraisals, rulings, and consents:
(a) Auditor's consent (filed herewith)
(b) Consent of Special Counsel with respect to California law
(filed herewith)
(11) Financial statements omitted from prospectus - none
(12) Letter of investment intent(1)
(13) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class A Shares(4)
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class B Shares(4)
(c) Plan of Distribution pursuant to Rule 12b-1 with respect
to Class C Shares(4)
(14) and
(27) Financial Data Schedule (not applicable)
(15) Plan pursuant to Rule 18f-3(5)
(16) Code of Ethics for Registrant, its investment adviser and its
principal distributor (filed herewith)
--------------------------------
(1) Incorporated by reference from Post-Effective Amendment No. 26 to the
registration statement, 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 the
registration statement, SEC File No. 2-98149, filed July 1, 1996.
(4) Incorporated by reference from Post-Effective Amendment No. 28 to the
registration statement, SEC File No. 2-98149, filed June 30, 1999.
(5) Incorporated by reference from Post-Effective Amendment No. 22 to the
registration statement, 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
("Advisory 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 Advisory 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 Advisory Contract. Section 10 of the Advisory Contract provides
that the trustees shall not be liable for any obligations of the Registrant
under the Advisory 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
C-2
<PAGE>
required to be stated in it or necessary to make the statements in it, in
light of the circumstances under which they were made, not misleading, except
insofar as liability arises from untrue statements or omissions made in
reliance upon and in conformity with information furnished by Mitchell
Hutchins to the Registrant for use in the Registration Statement; and provided
that this indemnity agreement shall not protect any such persons against
liabilities arising by reason of their bad faith, gross negligence or willful
misfeasance and shall not inure to the benefit of any such persons unless a
court of competent jurisdiction or controlling precedent determines that such
result is not against public policy as expressed in the Securities Act of
1933. Section 9 also provides that Mitchell Hutchins agrees to indemnify,
defend and hold the Registrant, its officers and trustees free and harmless of
any claims arising out of any alleged untrue statement or any alleged omission
of material fact contained in information furnished by Mitchell Hutchins for
use in the Registration Statement or arising out of an agreement between
Mitchell Hutchins and any retail dealer, or arising out of supplementary
literature or advertising used by Mitchell Hutchins in connection with the
Distribution Contract.
Section 9 of each PaineWebber 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 Advisory 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.
INSURED MUNICIPAL INCOME FUND INC.
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
MANAGED HIGH YIELD PLUS FUND INC.
MITCHELL HUTCHINS LIR MONEY SERIES
MITCHELL HUTCHINS PORTFOLIOS
MITCHELL HUTCHINS SECURITIES TRUST
MITCHELL HUTCHINS SERIES TRUST
PAINEWEBBER AMERICA FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PAINEWEBBER INDEX TRUST
C-3
<PAGE>
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 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.
<TABLE>
<CAPTION>
Positions and Office With Underwriter or
Name Position With Registrant Dealer
---- ------------------------ ----------------------------------------
<S> <C> <C>
Margo N. Alexander* Trustee and President Chairman, 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
Brian M. Storms* Trustee President and Chief Operating Officer of
Mitchell Hutchins
Cynthia Bow* Vice President Vice President and a Portfolio Manager of
Mitchell Hutchins
Thomas Disbrow*** Vice President and Assistant First Vice President and a Senior Manager of
Treasurer the Mutual Fund Finance Department of
Mitchell Hutchins
Elbridge T. Gerry III* Vice President Managing Director 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
Kevin J. Mahoney*** Vice President and Assistant First Vice President and a Senior Manager of
Treasurer the Mutual Fund Finance Department of
Mitchell Hutchins
Dennis McCauley* Vice President Managing Director and Chief Investment
Officer - Fixed Income of Mitchell Hutchins
C-4
<PAGE>
<CAPTION>
Positions and Office With Underwriter or
Name Position With Registrant Dealer
---- ------------------------ ----------------------------------------
<S> <C> <C>
Ann E. Moran*** Vice President and Assistant Vice President and a Manager of the Mutual
Treasurer Fund Finance Department of Mitchell Hutchins
Dianne E. O'Donnell** Vice President and Secretary Senior Vice President and Deputy General
Counsel of Mitchell Hutchins
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>
---------------------------
* This person's business address is 51 West 52nd Street, New York, New York
10019-6114.
** This person's business address is 1285 Avenue of the Americas, New York,
New York 10019.
*** This person's business address is Newport Center III, 499 Washington Blvd.,
14th Floor, Jersey City, New Jersey 07310-1998.
(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. at 1285 Avenue of
the Americas, New York, New York 10019 and 51 West 52nd Street New York, New
York 10019-6114. 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>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all the requirements
for effectiveness of this Post-Effective Amendment to its Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Post-Effective Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York and State of New York, on the
27th day of June, 2000.
PAINEWEBBER MUTUAL FUND TRUST
By: /s/ Dianne E. O'Donnell
-----------------------
Dianne E. O'Donnell
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment has been signed below by the following persons in the capacities and
on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Margo N. Alexander President and Trustee June 27, 2000
--------------------------- (Chief Executive Officer)
Margo N. Alexander *
/s/ E. Garrett Bewkes, Jr. Trustee and Chairman June 27, 2000
--------------------------- of the Board of Trustees
E. Garrett Bewkes, Jr. *
/s/ Richard Q. Armstrong Trustee June 27, 2000
---------------------------
Richard Q. Armstrong *
/s/ Richard R. Burt Trustee June 27, 2000
---------------------------
Richard R. Burt *
/s/ Mary C. Farrell Trustee June 27, 2000
---------------------------
Mary C. Farrell *
/s/ Meyer Feldberg Trustee June 27, 2000
---------------------------
Meyer Feldberg *
/s/ George W. Gowen Trustee June 27, 2000
---------------------------
George W. Gowen *
/s/ Frederic V. Malek Trustee June 27, 2000
---------------------------
Frederic V. Malek *
/s/ Carl W. Schafer Trustee June 27, 2000
---------------------------
Carl W. Schafer *
/s/ Brian M. Storms Trustee June 27, 2000
---------------------------
Brian M. Storms **
/s/ Paul H. Schubert Vice President and Treasurer June 27, 2000
--------------------------- (Chief Financial and
Paul H. Schubert Accounting Officer)
C-6
<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.
** Signature affixed by Elinor W. Gammon pursuant to power of attorney dated
May 14, 1999 and incorporated by reference from Post-Effective Amendment
No. 61 to the registration statement of PaineWebber Managed Investments
Trust, SEC File 2-91362, filed June 1, 1999.
C-7
<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) PaineWebber Dealer Agreement (Class A Shares)(1)
(f) PaineWebber Dealer Agreement (Class B Shares)(1)
(g) PaineWebber Dealer Agreement (Class C Shares)(3)
(h) PaineWebber 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 (filed herewith)
(10) Other opinions, appraisals, rulings, and consents:
(a) Auditor's consent (filed herewith)
(b) Consent of Special Counsel with respect to California law
(filed herewith)
(11) Financial statements omitted from prospectus - none
(12) Letter of investment intent(1)
(13) (a) Plan of Distribution pursuant to Rule 12b-1 with respect
to Class A Shares(4)
(b) Plan of Distribution pursuant to Rule 12b-1 with respect
to Class B Shares(4)
(c) Plan of Distribution pursuant to Rule 12b-1 with respect
to Class C Shares(4)
(14) and
(27) Financial Data Schedule (not applicable)
(15) Plan pursuant to Rule 18f-3(5)
(16) Code of Ethics for Registrant, its investment adviser and its
principal distributor (filed herewith)
----------------------
(1) Incorporated by reference from Post-Effective Amendment No. 26 to the
registration statement, SEC File No. 2-98149, filed July 1, 1998.
C-8
<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 the
registration statement, SEC File No. 2-98149, filed July 1, 1996.
(4) Incorporated by reference from Post-Effective Amendment No. 28 to
the registration statement, SEC File No. 2-98149, filed June 30, 1999.
(5) Incorporated by reference from Post-Effective Amendment No. 22 to the
registration statement, SEC File No. 2-98149, filed September 23, 1996.
C-9
