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PAINEWEBBER NATIONAL TAX-FREE INCOME FUND
PAINEWEBBER MUNICIPAL HIGH INCOME FUND
PAINEWEBBER CALIFORNIA TAX-FREE INCOME FUND
PAINEWEBBER NEW YORK TAX-FREE INCOME FUND
SUPPLEMENT TO PROSPECTUS DATED JUNE 30, 2000
October 10, 2000
Dear Investor,
This supplement to the Prospectus dated June 30, 2000 for the
above-referenced funds (each a "PW fund") describes important changes affecting
your fund. These changes were proposed by Mitchell Hutchins Asset Management
Inc. ("Mitchell Hutchins") and approved by your fund's board as in the best
interests of fund shareholders. If you have any questions about these changes,
you should contact your Financial Advisor.
The purpose of this supplement is to notify you of
- the proposed merger of each PW fund into a series of another mutual
fund and
- changes in the investment management arrangements for PaineWebber
National Tax-Free Income Fund and related investment strategy changes
that became effective on October 10, 2000.
The boards of trustees of the proposed merger partners for PaineWebber
Municipal High Income Fund, PaineWebber California Tax-Free Income Fund and
PaineWebber New York Tax-Free Income Fund must approve the proposed
reorganizations before they can be submitted to the shareholders of these PW
funds.
The shareholders of each PW fund must approve its proposed merger before the
transaction can be effected. The proposed mergers will be submitted to
shareholders at meetings expected to be held in January or February 2001. If
approved by a PW fund's shareholders, the merger for that PW fund is expected to
become effective in March or April 2001.
More information about the proposed merger for each PW fund is set out
below, along with more information about the new investment management
arrangements and related investment strategy changes for PaineWebber National
Tax-Free Income Fund.
The investment advisory arrangements and investment strategies for
PaineWebber Municipal High Income Fund, PaineWebber California Tax-Free Income
Fund and PaineWebber New York Tax-Free Income Fund are unchanged. Mitchell
Hutchins Asset Management Inc. will continue to manage the investment portfolios
of these PW funds until the proposed mergers are effected, assuming that all
necessary approvals are obtained.
PROPOSED MERGERS
On October 6, 2000, the board of trustees for each PW fund approved the
submission to its shareholders of an Agreement and Plan of Reorganization and
Termination ("Plan") under which the PW fund would transfer substantially all of
its assets and liabilities to a series of another open-end investment company.
For PaineWebber National Tax-Free Income Fund, the proposed merger partner is a
series ("PACE fund") of PaineWebber PACE Select Advisors Trust. For the other PW
funds, the proposed merger partners (each an "MFS fund") are series of either
MFS Series Trust III or MFS Municipal Series Trust. The reorganizations of these
PW funds will be submitted to their shareholders only if the reorganizations are
also approved by the boards of trustees of MFS Series Trust III or MFS Municipal
Series Trust, as applicable.
If a PW fund's shareholders approve the proposed merger, they will receive
shares of the PACE fund or MFS fund, as applicable, in exchange for their shares
in the PW fund, and the PW fund will cease operations. Each merger is expected
to be a tax-free transaction, which means that no gain or loss will be
recognized by either fund and that the PW fund's shareholders will not realize
any gain or loss on their receipt of PACE fund or MFS fund shares in the merger.
More information about the proposed merger for each PW fund will be provided to
its shareholders in proxy solicitation materials that are expected to be mailed
in December 2000.
Item #ZS75
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The parties to each proposed merger are identified below, along with each
fund's investment objective and primary investment strategies.
<TABLE>
PW Fund Fund Proposed as Merger Partner
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PAINEWEBBER NATIONAL TAX-FREE INCOME FUND (A PACE MUNICIPAL FIXED INCOME INVESTMENTS (A
SERIES OF PAINEWEBBER MUTUAL FUND TRUST) SERIES OF PAINEWEBBER PACE SELECT ADVISORS
TRUST)
INVESTMENT OBJECTIVE: High current income INVESTMENT OBJECTIVE: High current income
exempt from federal income tax, consistent exempt from federal income tax.
with the preservation of capital and
liquidity within the fund's quality
standards.
Invests primarily in investment grade Invests primarily in investment grade
municipal bonds. May invest to a lesser municipal bonds within the three highest
extent in lower rated bonds. May invest up to rating categories. May invest up to 15% of
20% of total assets in municipal bonds that total assets in municipal bonds in the lowest
are subject to the federal alternative investment grade rating category. May invest
minimum tax. Has no specific limitation on up to 25% of total assets in municipal bonds
portfolio duration. that are subject to the federal alternative
minimum tax. Normally limits portfolio
duration to between three and seven years.
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PAINEWEBBER MUNICIPAL HIGH INCOME FUND (A MFS MUNCIPAL HIGH INCOME FUND (A SERIES OF
SERIES OF PAINEWEBBER MUNICIPAL SERIES) MFS SERIES TRUST III)
INVESTMENT OBJECTIVE: High current income INVESTMENT OBJECTIVE: High current income
exempt from federal income tax. exempt from federal income tax.
Normally invests at least 80% of assets in Normally invests 80% of assets in municipal
municipal bonds and normally invests at least securities and participation interests in
65% of assets in municipal bonds that are municipal securities issued by banks.
medium or low credit quality, including high Normally invests at least 65% in municipal
yield bonds that are not investment grade securities that offer a current yield above
(sometimes called "junk bonds"). May invest the yield generally available on municipal
without limit in municipal bonds that are securities in the three highest credit rating
subject to the federal alternative minimum categories. Municipal securities offering the
tax. high current income sought by the fund are
ordinarily in the medium and lower rating
categories.
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PAINEWEBBER CALIFORNIA TAX-FREE INCOME FUND MFS CALIFORNIA MUNICIPAL BOND FUND (A SERIES
(A SERIES OF PAINEWEBBER MUTUAL FUND TRUST) OF MFS MUNICIPAL SERIES TRUST)
INVESTMENT OBJECTIVE: High current income INVESTMENT OBJECTIVE: Current income exempt
exempt from federal income tax and California from federal income tax and California
personal income tax, consistent with the (state) personal income tax.
preservation of capital and liquidity within
the fund's quality standards.
Normally invests at least 80% of net assets Normally invests at least 80% of net assets
and seeks to invest substantially all net in municipal securities and participation
assets in municipal bonds and similar interests in municipal securities issued by
securities that are exempt from federal banks, the interest on which is exempt from
income tax and California personal income federal and California personal income tax.
tax. May invest up to 35% of total assets in Normally invests substantially all assets in
municipal bonds that are not investment municipal securities rated in one of the top
grade. May invest up to 20% of total assets three credit ratings, securities of issuers
in municipal bonds that are subject to the who have securities rated in one of the top
federal alternative minimum tax. three credit ratings and speculative and
lower rated securities. Speculative
securities and lower rated securities may not
exceed one-third of the fund's net assets.
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</TABLE>
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<TABLE>
PW Fund Fund Proposed as Merger Partner
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PAINEWEBBER NEW YORK TAX-FREE INCOME FUND (A MFS NEW YORK MUNICIPAL BOND FUND (A SERIES OF
SERIES OF PAINEWEBBER MUNICIPAL SERIES) MFS MUNICIPAL SERIES TRUST)
INVESTMENT OBJECTIVE: High current income INVESTMENT OBJECTIVE: Current income exempt
exempt from federal income tax and from New from federal income tax and New York State
York State and New York City personal income personal income tax.
taxes.
Normally invests at least 80% of net assets Normally invests at least 80% of net assets
and seeks to invest substantially all net in municipal securities and participation
assets in municipal bonds and similar interests in municipal securities issued by
securities that are exempt from federal banks, the interest on which is exempt from
income tax and New York State and New York federal and New York State personal income
City personal income taxes. May invest up to tax. Normally invests substantially all
35% of total assets in municipal bonds that assets in municipal securities rated in one
are not investment grade. May invest up to of the top three credit ratings, securities
20% of total assets in municipal bonds that of issuers who have securities rated in one
are subject to the federal alternative of the top three credit ratings and
minimum tax. speculative and lower rated securities.
Speculative securities and lower rated
securities may not exceed one-third of the
fund's net assets. New York City personal
income taxes are not a consideration.
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</TABLE>
You may continue to buy and sell shares in the PW funds and exchange your PW
fund Class A, Class B and Class C shares for shares of the corresponding class
of other PaineWebber funds prior to the shareholder meetings. When you sell or
exchange your PW fund shares, you generally will be subject to federal income
tax on any gain you realize. If the merger proposal is approved for a PW fund,
that PW fund expects to close to new purchases and exchange purchases
approximately five business days prior to the date on which the merger is
effected.
NEW INVESTMENT MANAGEMENT ARRANGEMENTS FOR PAINEWEBBER NATIONAL TAX-FREE INCOME
FUND
On October 6, 2000, the board of trustees for PaineWebber National Tax-Free
Income Fund terminated the existing Investment Advisory and Administration
Contract ("Old Advisory Contract") with Mitchell Hutchins Asset Management Inc.
("Mitchell Hutchins") relating to the fund and approved new interim investment
management arrangements that became effective on October 10, 2000. These interim
investment management arrangements consist of a new Interim Investment
Management and Administration Contract ("Interim Management Contract") with
Mitchell Hutchins and an Interim Sub-Advisory Contract between Mitchell Hutchins
and Standish, Ayer & Wood, Inc. Under the Interim Management Contract, Mitchell
Hutchins' primary portfolio management responsibility is to identify one or more
appropriate sub-advisers to manage the fund's assets and to supervise and
monitor the performance of those sub-advisers and make recommendations about the
retention or replacement of sub-advisers. These new interim contracts terminate
automatically 150 days after their effective dates. The fees payable by the fund
to Mitchell Hutchins under its Interim Management Contract are identical to the
fees under the Old Advisory Contract. Mitchell Hutchins (not the fund) pays the
sub-adviser for its services under the Interim Sub-Advisory Contract.
AS A RESULT OF THESE CHANGES, THE PROSPECTUS DATED JUNE 30, 2000 IS REVISED AS
FOLLOWS:
FOR PAINEWEBBER NATIONAL TAX-FREE FUND, THE THIRD PARAGRAPH IN THE SECTION
CAPTIONED "PRINCIPAL INVESTMENT STRATEGIES" ON P. 3 OF THE PROSPECTUS IS
REPLACED IN ITS ENTIRETY BY THE FOLLOWING:
The fund's manager, Mitchell Hutchins Asset Management
Inc., has appointed Standish, Ayer & Wood, Inc.
("Standish") as sub-adviser for the fund's investments. In
deciding which securities to buy or sell for the fund,
Standish seeks to identify undervalued sectors or
geographical regions of the municipal market or
undervalued individual securities. To do this, Standish
uses credit research and valuation analysis and monitors
the relationship of the municipal yield curve to the
treasury yield curve. Standish also uses credit quality
assessments from its in-house analysts to identify
potential rating changes, undervalued issues and macro
trends with regard to market sectors and geographical
regions. Standish may make modest duration adjustments
based on economic analyses and interest rate forecasts.
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THE SECTIONS AT P. 22 OF THE PROSPECTUS CAPTIONED "INVESTMENT ADVISER" AND
"PORTFOLIO MANAGERS" ARE REPLACED WITH THE FOLLOWING:
INVESTMENT ADVISER/MANAGER AND SUB-ADVISER
Mitchell Hutchins Asset Management Inc. is the manager and
administrator for National Tax-Free Income Fund and the
investment adviser and administrator for the other 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. ("PW Group"), a
publicly owned financial services holding company. On
August 31, 2000, Mitchell Hutchins was adviser or
sub-adviser of 31 investment companies with 75 separate
portfolios and aggregate assets of approximately
$57.5 billion.
On July 12, 2000, PW Group and UBS AG ("UBS") announced
that they had entered into an agreement and plan of merger
under which PW Group will merge into a wholly owned
subsidiary of UBS. If all required approvals are obtained
and the required conditions are satisfied, PW Group and
UBS expect to complete the transaction in November 2000.
UBS, with headquarters in Zurich, Switzerland, is an
internationally diversified organization with operations
in many areas of the financial services industry.
Standish, Ayer & Wood, Inc. ("Standish") is the
sub-adviser for National Tax-Free Income Fund. Standish is
located at One Financial Center, Boston, Massachusetts
02111. Standish was founded in 1933.
PORTFOLIO MANAGERS
NATIONAL TAX-FREE INCOME FUND. Christine L. Todd is
primarily responsible for the day-to-day management of the
fund. She has held her fund responsibilities since
October 10, 2000. Ms. Todd is an associate director of
Standish. She joined Standish in 1995 from Gannett,
Welsh & Kotler, where she was a vice president responsible
for municipal bond research and trading.
MUNICIPAL HIGH INCOME FUND, CALIFORNIA TAX-FREE INCOME
FUND AND NEW YORK TAX-FREE INCOME FUND. Elbridge (Ebby) T.
Gerry III, a managing director at Mitchell Hutchins, is
responsible for overseeing all active fixed income
investments, including tax-exempt mutual funds. Mr. Gerry
has portfolio management responsibility for over $4
billion in municipal assets at Mitchell Hutchins,
including municipal bond and money funds and private
accounts. Mr. Gerry has been with Mitchell Hutchins since
January 1996 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.
Mr. Gerry is the sole portfolio manager and has day-to-day
responsibility for California Tax-Free Income Fund and New
York Tax-Free Income Fund. Mr. Gerry is also co-portfolio
manager for Municipal High Income Fund.
William W. Veronda, a senior vice president of Mitchell
Hutchins, is co-portfolio manager of Municipal High Income
Fund 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.
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