<PAGE>
As filed with the Securities and Exchange Commission on July 1, 1997
1933 Act Registration No. 33-11611
1940 Act Registration No. 811-5014
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. 22 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 22
PAINEWEBBER MUNICIPAL SERIES
(Exact name of registrant as specified in charter)
1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 713-2000
DIANNE E. O'DONNELL, Esq.
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)
Copies to:
ELINOR W. GAMMON, Esq.
BENJAMIN J. HASKIN, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036-1800
Second Floor
Telephone: (202) 778-9000
It is proposed that this filing will become effective:
[ ] Immediately upon filing pursuant to Rule 485(b)
[X] On July 1, 1997 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[ ] On pursuant to Rule 485(a)(i)
[ ] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] On _________________ pursuant to Rule 485(a)(ii)
Registrant has filed a declaration pursuant to Rule 24f-2 under the Investment
Company Act of 1940 and filed the notice required by such Rule for its most
recent fiscal year on April 25, 1997.
<PAGE>
<PAGE>
PaineWebber Municipal Series
Contents of Registration Statement
This registration statement consists of the following papers and documents.
Cover Sheet
Table of Contents
Cross Reference Sheets
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
<PAGE>
PaineWebber Municipal High Income Fund
PaineWebber New York Tax-Free Income Fund
Form N-1A Cross Reference Sheet
<TABLE>
<CAPTION>
Part A Item No. and Caption Prospectus Caption
--------------------------- ------------------
<S> <C>
1. Cover Page Cover Page
2. Synopsis The Funds at a Glance; Expense Table
3. Condensed Financial Information Financial Highlights; Performance
4. General Description of Registrant The Funds at a Glance; Investment
Objectives & Policies; Investment
Philosophy & Process; The Funds'
Investments; General Information
5. Management of the Fund Management; General Information
5A. Management's Discussion of Fund Performance Financial Highlights
6. Capital Stock and Other Securities Cover Page; Flexible Pricing;
Dividends & Taxes; General
Information
7. Purchase of Securities Being Offered Flexible Pricing; How to Buy Shares;
Other Services; Determining the
Shares' Net Asset Value
8. Redemption or Repurchase How to Sell Shares; Other Services
9. Pending Legal Proceedings Not Applicable
<CAPTION>
Part B Item No. Statement of Additional Information
and Caption Caption
----------- -------
<S> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Other Information
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Part B Item No. Statement of Additional Information
and Caption Caption
----------- -------
<S> <C>
13. Investment Objectives and Policies Investment Policies and
Restrictions; Hedging and Other
Strategies Using Derivative
Contracts; Portfolio Transactions
14. Management of the Fund Trustees and Officers; Principal
Holders of Securities
15. Control Persons and Principal Holders of Trustees and Officers; Principal
Securities Holders of Securities
16. Investment Advisory and Other Services Investment Advisory and Distribution
Arrangements; Other Information
17. Brokerage Allocation Portfolio Transactions
18. Capital Stock and Other Securities Conversion of Class B Shares; Other
Information
19. Purchase, Redemption and Pricing of Reduced Sales Charges, Additional
Securities Being Offered Exchange and Redemption Information
and Other Services; Valuation of
Shares
20. Tax Status Taxes
21. Underwriters Investment Advisory and Distribution
Arrangements
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statements
</TABLE>
Part C
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of this Registration Statement.
<PAGE>
<PAGE>
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PaineWebber California Tax-Free Income Fund
PaineWebber National Tax-Free Income Fund
PaineWebber Municipal High Income Fund
PaineWebber New York Tax-Free Income Fund
1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10019
PROSPECTUS -- JULY 1, 1997
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PaineWebber Tax-Free Bond Funds are designed for investors generally seeking
high current income exempt from federal income tax and, in some cases, certain
state personal income taxes. PaineWebber California Tax-Free Income Fund invests
primarily in investment grade bonds issued by the State of California, its
municipalities and public authorities. PaineWebber National Tax-Free Income Fund
invests primarily in investment grade bonds issued by various states,
municipalities and public authorities. PaineWebber Municipal High Income Fund
invests primarily in high yield, high risk, medium and lower grade bonds issued
by various states, municipalities and public authorities. PaineWebber New York
Tax-Free Income Fund invests primarily in investment grade bonds issued by the
State of New York, its municipalities and public authorities.
This Prospectus concisely sets forth information that a prospective investor
should know about the Funds before investing. Please read it carefully and
retain a copy of this Prospectus for future reference.
A Statement of Additional Information dated July 1, 1997 has been filed with the
Securities and Exchange Commission and is legally part of this Prospectus. The
Statement of Additional Information can be obtained without charge, and further
inquiries can be made, by contacting an individual Fund, your investment
executive at PaineWebber or one of its correspondent firms or by calling
toll-free 1-800-647-1568.
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THE PAINEWEBBER FAMILY OF MUTUAL FUNDS
The PaineWebber Family of Mutual Funds consists of six broad categories,
which are presented here. Generally, investors seeking to maximize return must
assume greater risk. The Funds in this Prospectus are in the TAX-FREE BOND
category.
MONEY MARKET FUND for income and stability by investing in high-quality,
short-term investments.
BOND FUNDS for income by investing mainly in bonds.
TAX-FREE BOND FUNDS for income exempt from federal income tax and, in some
cases, state and local income tax, by investing in municipal bonds.
ASSET ALLOCATION FUNDS for high total return by investing in stocks and
bonds.
STOCK FUNDS for long-term growth by investing mainly in equity securities.
GLOBAL FUNDS for long-term growth by investing mainly in foreign stocks or
high current income by investing mainly in global debt instruments.
A complete listing of the PaineWebber Family of Mutual Funds is found on the
back cover of this Prospectus.
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INVESTORS SHOULD RELY ON THE INFORMATION CONTAINED OR REFERRED TO IN THIS
PROSPECTUS. THE FUNDS AND THEIR DISTRIBUTOR HAVE NOT AUTHORIZED ANYONE TO
PROVIDE INVESTORS WITH INFORMATION THAT IS DIFFERENT. THE PROSPECTUS IS NOT AN
OFFER TO SELL SHARES OF THE FUNDS IN ANY JURISDICTION WHERE THE FUNDS OR THEIR
DISTRIBUTOR MAY NOT LAWFULLY SELL THOSE SHARES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PAINEWEBBER MUNICIPAL HIGH INCOME FUND MAY INVEST PREDOMINANTLY, AND EACH OTHER
FUND MAY INVEST UP TO 35% OF ITS NET ASSETS, IN LOWER RATED MUNICIPAL
OBLIGATIONS, COMMONLY REFERRED TO AS MUNICIPAL 'JUNK BONDS.' MUNICIPAL
OBLIGATIONS OF THIS TYPE ARE CONSIDERED TO BE SPECULATIVE WITH RESPECT TO THE
PAYMENT OF INTEREST AND RETURN OF PRINCIPAL. PURCHASERS SHOULD CAREFULLY ASSESS
THE RISKS ASSOCIATED WITH AN INVESTMENT IN THESE FUNDS.
----------------
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Prospectus Page 1
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<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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TABLE OF CONTENTS
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<TABLE>
<S> <C>
Page
-----
The Funds at a Glance............................................................ 3
Expense Table.................................................................... 6
Financial Highlights............................................................. 10
Investment Objectives & Policies................................................. 18
Investment Philosophy & Process.................................................. 19
Performance...................................................................... 20
The Funds' Investments........................................................... 24
Flexible PricingSM............................................................... 30
How to Buy Shares................................................................ 33
How to Sell Shares............................................................... 35
Other Services................................................................... 36
Management....................................................................... 36
Determining the Shares' Net Asset Value.......................................... 39
Dividends & Taxes................................................................ 39
General Information.............................................................. 41
Appendix......................................................................... 43
</TABLE>
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Prospectus Page 2
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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THE FUNDS AT A GLANCE
- --------------------------------------------------------------------------------
The Funds (each a 'Fund') offered by this Prospectus are not intended to provide
a complete or balanced investment program, but one or more of them may be
appropriate as a component of an investor's overall portfolio. Some common
reasons to invest in these Funds are to finance college educations, plan for
retirement or diversify a portfolio. The Funds are not suitable for tax-exempt
institutions or qualified retirement plans because those investors cannot take
advantage of the tax-exempt character of the Funds' dividends. When selling
shares, investors should be aware that they may get more or less for their
shares than they originally paid for them. As with any mutual fund, there is no
assurance that the Funds will achieve their goals.
CALIFORNIA TAX-FREE INCOME FUND
GOAL: Current income that is exempt from federal income tax and California
personal income tax.
INVESTMENT OBJECTIVE: High current income exempt from federal income tax and
California personal income tax, consistent with the preservation of capital and
liquidity within the Fund's quality standards.
WHO SHOULD INVEST: Investors seeking current income that is exempt from federal
income tax and California personal income tax.
SIZE: On May 31, 1997, the Fund had over $155.1 million in assets.
NATIONAL TAX-FREE INCOME FUND
GOAL: Current income that is exempt from federal income tax.
INVESTMENT OBJECTIVE: High current income exempt from federal income tax,
consistent with the preservation of capital and liquidity within the Fund's
quality standards.
WHO SHOULD INVEST: Investors seeking current income that is exempt from federal
income tax.
SIZE: On May 31, 1997, the Fund had over $334 million in assets.
MUNICIPAL HIGH INCOME FUND
GOAL: Current income that is exempt from federal income tax by investing
primarily in high yield, high risk medium and lower grade municipal securities.
INVESTMENT OBJECTIVE: High current income exempt from federal income tax.
WHO SHOULD INVEST: Investors seeking high current income that is exempt from
federal income tax and who can assume the greater risks associated with the
types of securities in which the Fund invests.
SIZE: On May 31, 1997, the Fund had over $87 million in assets.
NEW YORK TAX-FREE INCOME FUND
GOAL: Current income that is exempt from federal income tax and New York State
and New York City personal income taxes.
INVESTMENT OBJECTIVE: High current income exempt from federal income tax and
from New York State and New York City personal income taxes.
WHO SHOULD INVEST: Investors seeking current income that is exempt from federal
income tax and New York State and New York City personal income tax.
SIZE: On May 31, 1997, the Fund had over $43.9 million in assets.
RISKS
Investors may lose money by investing in the Funds; your investment is not
guaranteed.
INTEREST RATE RISK. The municipal bonds in which each Fund invests are subject
to interest rate risk, which means that their values and, therefore, the net
asset value of the Fund may be expected to fall when interest rates rise. Each
Fund attempts to reduce this risk through diversification, credit analysis and
attention to interest rate trends and other factors. However, efforts to limit
this risk may not be successful.
---------------------
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Prospectus Page 3
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<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOMEFUND
CREDIT RISK. The value of the municipal securities in which each Fund invests
may be affected by many factors, including adverse changes in the issuer's own
financial condition or in economic conditions.
QUALITY RISK. Below investment grade municipal securities in which Municipal
Income Fund may invest without limit are considered predominately speculative
and involve major risk exposure to adverse conditions. California Tax-Free
Income Fund, National Tax-Free Income Fund and New York Tax-Free Income Fund may
each invest up to 35% of its net assets in these types of municipal securities.
Some lower-tier investment grade municipal securities also have speculative
characteristics.
MARKET RISK. During periods of market uncertainty, the values of municipal
securities can become volatile.
CALIFORNIA OBLIGATIONS. The concentration of California Tax-Free Income Fund's
investments in securities issued by the State of California, its municipalities
and public authorities may subject the Fund to greater risks than a fund that
has a broad range of investments. The State of California and many of its
agencies and local governments have been experiencing, and continue to
experience, financial difficulties, and the credit standings of California and
certain local governments have been, and could be further, reduced.
NEW YORK OBLIGATIONS. The concentration of New York Tax-Free Income Fund's
investments in securities issued by the State of New York, its municipalities
and public authorities may subject the Fund to greater risks than a fund that
has a broad range of investments. The State of New York and many of its agencies
and local governments (including New York City) have been experiencing, and
continue to experience, financial difficulties and the credit standings of New
York, and certain local governments have been, and could be further, reduced.
DERIVATIVES. Each Fund may use derivatives, such as options and futures in its
investment activities, each of which involve special risks.
MANAGEMENT
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), an asset
management subsidiary of PaineWebber Incorporated ('PaineWebber'), is the
investment adviser and administrator of each Fund.
MINIMUM INVESTMENT
To open an account, investors need $1,000; to add to an account, investors need
only $100.
HOW TO PURCHASE SHARES OF THE FUNDS
Investors may select among these classes of shares:
CLASS A SHARES
The price is the net asset value plus the initial sales charge (the maximum
sales charge is 4% of the public offering price). Although investors pay an
initial sales charge when they buy Class A shares, the ongoing expenses for this
class are lower than the ongoing expenses of Class B and Class C shares.
CLASS B SHARES
The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class B shares. As a result, 100% of their purchase is immediately
invested. However, Class B shares have higher ongoing expenses than Class A
shares. Depending upon how long they own the shares, investors may have to pay a
sales charge when they sell Class B shares. This sales charge is called a
'contingent deferred sales charge' and applies when investors sell their Class B
shares within six years after purchase. After six years, Class B shares convert
to Class A shares, which have lower ongoing expenses and no contingent deferred
sales charge.
CLASS C SHARES
The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class C shares. As a result, 100% of their purchase is immediately
invested. However, Class C shares have higher ongoing expenses than Class A
shares. A contingent deferred sales charge of 0.75% is charged on shares sold
within one year
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Prospectus Page 4
<PAGE>
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOMEFUND
of purchase. Class C shares never convert to any other class of shares.
CLASS Y SHARES
Class Y shares are currently offered only to limited groups of investors. See
'How to Buy Shares.' Eligible investors may purchase Class Y shares of the Funds
as follows:
The price is the net asset value calculated after PaineWebber's New York City
headquarters or the Transfer Agent receives the purchase order.
Investors do not pay an initial sales charge when they buy Class Y shares. As a
result, 100% of their purchase is immediately invested. Investors also do not
pay a redemption fee or contingent deferred sales charge when they sell Class Y
shares.
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Prospectus Page 5
<PAGE>
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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EXPENSE TABLE
- --------------------------------------------------------------------------------
The following tables are intended to assist investors in understanding the
expenses associated with investing in each class of shares of the Funds.
Expenses shown below represent those incurred for the most recent fiscal year.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y(1)(2)
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Maximum sales charge on purchases of shares (as a % of offering
price)................................................................ 4% None None None
Sales charge on reinvested dividends (as a % of offering price)......... None None None None
Maximum contingent deferred sales charge (as a % of offering price or
net asset value at the time of sale, whichever is less)............... None 5% 0.75% None
Exchange fee............................................................ None None None None
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
CALIFORNIA TAX-FREE INCOME FUND
Management fees......................................................... 0.50% 0.50% 0.50% 0.50%
12b-1 fees.............................................................. 0.25 1.00 0.75 None
Other expenses.......................................................... 0.22 0.24 0.24 0.22
------- ------- ------- ------
Total operating expenses................................................ 0.97% 1.74% 1.49% 0.72%
------- ------- ------- ------
------- ------- ------- ------
NATIONAL TAX-FREE INCOME FUND
Management fees......................................................... 0.50% 0.50% 0.50% 0.50%
12b-1 fees.............................................................. 0.25 1.00 0.75 None
Other expenses.......................................................... 0.16 0.17 0.17 0.15
------- ------- ------- ------
Total operating expenses................................................ 0.91% 1.67% 1.42% 0.65%
------- ------- ------- ------
------- ------- ------- ------
MUNICIPAL HIGH INCOME FUND
Management fees......................................................... 0.60% 0.60% 0.60% 0.60%
12b-1 fees.............................................................. 0.25 1.00 0.75 None
Other expenses.......................................................... 0.30 0.30 0.31 0.30
------- ------- ------- ------
Total operating expenses................................................ 1.15% 1.90% 1.66% 0.90%
------- ------- ------- ------
------- ------- ------- ------
NEW YORK TAX-FREE INCOME FUND(3)
Management fees......................................................... 0.60% 0.60% 0.60% 0.60%
12b-1 fees.............................................................. 0.25 1.00 0.75 None
Other expenses.......................................................... 0.65 0.67 0.69 0.65
------- ------- ------- ------
Total operating expenses................................................ 1.50% 2.27% 2.04% 1.25%
------- ------- ------- ------
------- ------- ------- ------
</TABLE>
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(1) Class Y shares may be purchased by participants in the INSIGHT Investment
Advisory Program ('INSIGHT') sponsored by PaineWebber, when purchased
through that program. Participation in INSIGHT is subject to payment of an
advisory fee at the maximum annual rate of 1.50% of assets held through
INSIGHT (generally charged quarterly in advance), which may be charged to
the INSIGHT participant's PaineWebber account. This account charge is not
included in the table because non-INSIGHT participants are permitted to
purchase Class Y shares of the Fund.
(2) For the fiscal year ended February 28, 1997, California Tax-Free Income
Fund, Municipal High Income Fund and New York Tax-Free Income Fund had no
Class Y shares outstanding; therefore, 'Other Expenses' and 'Total Operating
Expenses' have been estimated.
(3) All expenses for New York Tax-Free Income Fund are those that would have
been experienced by the Fund for the fiscal year ended February 28, 1997 had
Mitchell Hutchins and PaineWebber not waived a portion of their fees.
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Prospectus Page 6
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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EXPENSE TABLE
(Continued)
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CLASS A SHARES: Sales charge waivers and a reduced sales charge purchase plan
are available. Purchases of $1 million or more are not subject to an initial
sales charge. However, if an investor sells these shares within one year after
purchase, a contingent deferred sales charge of 1% of the offering price or the
net asset value of the shares at the time of sale, whichever is less, is
imposed.
CLASS B SHARES: Sales charge waivers are available. The maximum 5% contingent
deferred sales charge applies to sales of shares during the first year after
purchase. The charge generally declines by 1% annually, reaching zero after six
years.
CLASS C SHARES: If an investor sells these shares within one year after
purchase, a contingent deferred sales charge of 0.75% of the offering price or
the net asset value of the shares at the time of sale, whichever is less, is
imposed.
CLASS Y SHARES: No initial or contingent deferred sales charge is imposed, nor
are Class Y shares subject to 12b-1 distribution or service fees.
12b-1 distribution fees are asset-based sales charges. Long-term Class B and
Class C shareholders may pay more in direct and indirect sales charges
(including 12b-1 distribution fees) than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc. 12b-1 fees have two components, as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
12b-1 service fees............................................................... 0.25% 0.25% 0.25% None
12b-1 distribution fees.......................................................... 0.00 0.75 0.50 None
</TABLE>
For more information, see 'Management' and 'Flexible Pricing'sm'.'
EXAMPLES OF EFFECT OF FUND EXPENSES
The following examples should assist investors in understanding various costs
and expenses they would incur as shareholders of a Fund. The assumed 5% annual
return shown in the examples is required by regulations of the Securities and
Exchange Commission ('SEC') applicable to all mutual funds. THESE EXAMPLES
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES OF A FUND MAY BE MORE OR LESS THAN THOSE SHOWN.
An investor would, directly or indirectly, pay the following expenses on a
$1,000 investment in a Fund, assuming a 5% annual return:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CALIFORNIA TAX-FREE INCOME FUND
EXAMPLE
Class A.................................................................. $ 50 $ 70 $ 91 $ 154
Class B (Assuming sale of all shares at end of period)................... $ 68 $ 85 $ 114 $ 166
Class B (Assuming no sale of shares)..................................... $ 18 $ 55 $ 94 $ 166
Class C (Assuming sale of all shares at end of period)................... $ 23 $ 47 $ 81 $ 178
Class C (Assuming no sale of shares)..................................... $ 15 $ 47 $ 81 $ 178
Class Y.................................................................. $ 7 $ 23 $ 40 $ 89
</TABLE>
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Prospectus Page 7
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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EXPENSE TABLE
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ----------- -----------
NATIONAL TAX-FREE INCOME FUND
<S> <C> <C> <C> <C>
EXAMPLE
Class A.................................................................. $ 49 $ 68 $ 88 $ 147
Class B (Assuming sale of all shares at end of period)................... $ 67 $ 83 $ 111 $ 159
Class B (Assuming no sale of shares)..................................... $ 17 $ 53 $ 91 $ 159
Class C (Assuming sale of all shares at end of period)................... $ 22 $ 45 $ 78 $ 170
Class C (Assuming no sale of shares)..................................... $ 14 $ 45 $ 78 $ 170
Class Y.................................................................. $ 7 $ 21 $ 36 $ 81
MUNICIPAL HIGH INCOME FUND
EXAMPLE
Class A.................................................................. $ 51 $ 75 $ 101 $ 174
Class B (Assuming sale of all shares at end of period)................... $ 69 $ 90 $ 123 $ 185
Class B (Assuming no sale of shares)..................................... $ 19 $ 60 $ 103 $ 185
Class C (Assuming sale of all shares at end of period)................... $ 24 $ 52 $ 90 $ 197
Class C (Assuming no sale of shares)..................................... $ 17 $ 52 $ 90 $ 197
Class Y.................................................................. $ 9 $ 29 $ 50 $ 11
NEW YORK TAX-FREE INCOME FUND
EXAMPLE
Class A.................................................................. $ 55 $ 86 $ 119 $ 212
Class B (Assuming sale of all shares at end of period)................... $ 73 $ 101 $ 142 $ 223
Class B (Assuming no sale of shares)..................................... $ 23 $ 71 $ 122 $ 223
Class C (Assuming sale of all shares at end of period)................... $ 28 $ 64 $ 110 $ 237
Class C (Assuming no sale of shares)..................................... $ 21 $ 64 $ 110 $ 237
Class Y.................................................................. $ 12 $ 40 $ 69 $ 151
ASSUMPTIONS MADE IN THE EXAMPLES
ALL CLASSES: Reinvestment of all dividends and distributions; percentage amounts listed under 'Annual Fund Operating
Expenses' remain the same for years shown.
CLASS A SHARES: Deduction of the maximum 4% initial sales charge at the time of purchase.
CLASS B SHARES: Deduction of the maximum applicable contingent deferred sales charge at the time of redemption, which
declines over a period of six years. Ten-year figures assume that Class B shares convert to Class A shares at the end
of the sixth year.
CLASS C SHARES: Deduction of a 0.75% contingent deferred sales charge for sales of shares within one year of
purchase.
</TABLE>
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Prospectus Page 9
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
CALIFORNIA TAX-FREE INCOME FUND
The following tables provide investors with data and ratios for one Class A,
Class B and Class C share for each of the periods shown. This information is
supplemented by the financial statements, accompanying notes and the report of
Ernst & Young LLP, independent auditors, which appear in the Fund's Annual
Report to Shareholders for the fiscal year ended February 28, 1997, and are
incorporated by reference into the Statement of Additional Information. The
financial statements and notes, as well as the information in the table below
relating to each of the four fiscal years in the period ended February 28, 1997,
the fiscal period ended February 28, 1993 and the fiscal year ended November 30,
1992 have been audited by Ernst & Young LLP. Further information about the
Fund's performance is included in the Annual Report to Shareholders, which may
be obtained without charge by calling 1-800-647-1568. The information appearing
below for periods prior to the year ended November 30, 1992 also has been
audited by Ernst & Young LLP, whose reports thereon were unqualified. The Fund
had no Class Y shares outstanding during the periods shown.
<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE INCOME FUND
---------------------------------------------------------------------
CLASS A
---------------------------------------------------------------------
FOR THE
FOR THE FOR THE FOR THE YEARS THREE
YEAR YEAR ENDED MONTHS
ENDED ENDED FEBRUARY 28, ENDED
FEBRUARY 28, FEBRUARY 29, -------------------- FEBRUARY 28,
1997 1996 1995 1994 1993
------------ ------------ -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period..... $ 11.02 $ 10.68 $ 11.41 $ 11.80 $ 11.39
------------ ------------ -------- -------- ------------
Net investment income.... 0.52 0.57 0.58 0.60 0.16
Net realized and
unrealized gains
(losses) from
investments............. (0.11) 0.34 (0.63) (0.08) 0.58
------------ ------------ -------- -------- ------------
Net increase (decrease)
from investment
operations.............. 0.41 0.91 (0.05) 0.52 0.74
------------ ------------ -------- -------- ------------
Dividends from net
investment income....... (0.52) (0.57) (0.58) (0.60) (0.16)
Distributions from net
realized gains from
investment
transactions............ -- -- (0.10) (0.31) (0.17)
------------ ------------ -------- -------- ------------
Total dividends and
distributions to
shareholders............ (0.52) (0.57) (0.68) (0.91) (0.33)
------------ ------------ -------- -------- ------------
Net asset value, end of
period.................. $ 10.91 $ 11.02 $ 10.68 $ 11.41 $ 11.80
------------ ------------ -------- -------- ------------
------------ ------------ -------- -------- ------------
Total investment
return (1).............. 3.92% 8.68% (0.18)% 4.46% 6.52%
------------ ------------ -------- -------- ------------
------------ ------------ -------- -------- ------------
Ratios/Supplemental data:
Net assets, end of
period (000's)...... $ 127,040 $ 151,684 $178,234 $227,179 $247,025
Expenses to average
net assets.......... 0.97% 0.94% 0.88% 0.90% 0.99%*
Net investment income
to average net
assets.............. 4.85% 5.21% 5.55% 5.10% 5.61%*
Portfolio turnover
rate................ 73% 32% 11% 37% 3%
<CAPTION>
CALIFORNIA TAX-FREE INCOME FUND
---------------------------------------------------------------------
CLASS A
---------------------------------------------------------------------
FOR THE YEARS ENDED NOVEMBER 30,
-------------------------------------------------------------------
1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period..... 11.13 $ 10.94 $ 10.95 $ 10.67 $ 10.40 $ 11.23
-------- -------- -------- -------- -------- --------
Net investment income.... 0.66 0.71 0.78 0.74 0.75 0.75
Net realized and
unrealized gains
(losses) from
investments............. 0.29 0.22 (0.01) 0.28 0.27 (0.83)
-------- -------- -------- -------- -------- --------
Net increase (decrease)
from investment
operations.............. 0.95 0.93 0.77 1.02 1.02 (0.08)
-------- -------- -------- -------- -------- --------
Dividends from net
investment income....... (0.66) (0.71) (0.78) (0.74) (0.75) (0.75)
Distributions from net
realized gains from
investment
transactions............ (0.03) (0.03) -- -- -- --
-------- -------- -------- -------- -------- --------
Total dividends and
distributions to
shareholders............ (0.69) (0.74) (0.78) (0.74) (0.75) (0.75)
-------- -------- -------- -------- -------- --------
Net asset value, end of
period..................$ 11.39 $ 11.13 $ 10.94 $ 10.95 $ 10.67 $ 10.40
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Total investment
return (1).............. 8.73% 8.84% 6.89% 9.85% 10.02% (0.74)%
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Ratios/Supplemental data:
Net assets, end of
period (000's)......$239,851 $231,987 $211,701 $200,398 $163,651 $158,272
Expenses to average
net assets.......... 0.93% 0.83% 0.68% 0.76% 0.73% 0.71%
Net investment income
to average net
assets.............. 5.80% 6.46% 6.78% 6.82% 6.98% 6.96%
Portfolio turnover
rate................ 25% 2% 23% 4% 8% 10%
</TABLE>
- ------------
`D' Commencement of issuance of shares
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results for each class would be lower if sales
charges were included. Total investment return for periods of less than one
year has not been annualized.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 10
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE INCOME FUND
--------------------------------------------------------------------------------------------
CLASS B
--------------------------------------------------------------------------------------------
FOR THE
FOR THE PERIOD
FOR THE FOR THE FOR THE YEARS THREE FOR THE JULY 1,
YEAR YEAR ENDED MONTHS YEAR 1991`D'
ENDED ENDED FEBRUARY 28, ENDED ENDED THROUGH
FEBRUARY 28, FEBRUARY 29, ----------------- FEBRUARY 28, NOVEMBER 30, NOVEMBER 30,
1997 1996 1995 1994 1993 1992 1991
------------ ------------ ------- ------- ------------ ------------ ------------
<C> <C> <C> <C> <C> <C> <C>
$ 11.03 $ 10.69 $ 11.41 $ 11.81 $ 11.39 $ 11.14 $ 10.95
------ ------ ------- ------- ------ ------ ------
0.44 0.48 0.50 0.51 0.14 0.57 0.25
(0.11) 0.34 (0.62) (0.09) 0.59 0.28 0.19
------ ------ ------- ------- ------ ------ ------
0.33 0.82 (0.12) 0.42 0.73 0.85 0.44
------ ------ ------- ------- ------ ------ ------
(0.44) (0.48) (0.50) (0.51) (0.14) (0.57) (0.25)
-- -- (0.10) (0.31) (0.17) (0.03) --
------ ------ ------- ------- ------ ------ ------
(0.44) (0.48) (0.60) (0.82) (0.31) (0.60) (0.25)
------ ------ ------- ------- ------ ------ ------
$ 10.92 $ 11.03 $ 10.69 $ 11.41 $ 11.81 $ 11.39 $ 11.14
------ ------ ------- ------- ------ ------ ------
------ ------ ------- ------- ------ ------ ------
3.14% 7.86% (0.85)% 3.56% 6.50% 7.80% 3.69%
------ ------ ------- ------- ------ ------ ------
------ ------ ------- ------- ------ ------ ------
$ 20,943 $ 27,175 $33,007 $41,979 $ 36,693 $ 30,205 $ 10,743
1.74% 1.70% 1.64% 1.65% 1.74%* 1.68% 1.62%*
4.08% 4.45% 4.78% 4.32% 4.81%* 4.91% 5.02%*
73% 32% 11% 37% 3% 25% 2%
<CAPTION>
CALIFORNIA TAX-FREE INCOME FUND
-------------------------------------------------------------------------
CLASS C
---------------------------------------------------------------------------
FOR THE
FOR THE FOR THE FOR THE PERIOD
YEAR FOR THE YEARS THREE JULY 2,
ENDED YEAR ENDED MONTHS 1992`D'
FEBRUARY ENDED FEBRUARY 28, ENDED THROUGH
28, FEBRUARY 29, ----------------- FEBRUARY 28, NOVEMBER 30,
1997 1996 1995 1994 1993 1992
----------- ------------ ------- ------- ------------ ------------
<C> <C> <C> <C> <C> <C>
$ 11.02 $ 10.67 $ 11.40 $ 11.79 $ 11.38 $ 11.41
----------- ------ ------- ------- ------ ------
0.47 0.51 0.53 0.54 0.14 0.21
(0.12) 0.35 (0.63) (0.08) 0.58 (0.03)
----------- ------ ------- ------- ------ ------
0.35 0.86 (0.10) 0.46 0.72 0.18
----------- ------ ------- ------- ------ ------
(0.47) (0.51) (0.53) (0.54) (0.14) (0.21)
-- -- (0.10) (0.31) (0.17) --
----------- ------ ------- ------- ------ ------
(0.47) (0.51) (0.63) (0.85) (0.31) (0.21)
----------- ------ ------- ------- ------ ------
$ 10.90 $ 11.02 $ 10.67 $ 11.40 $ 11.79 $ 11.38
----------- ------ ------- ------- ------ ------
----------- ------ ------- ------- ------ ------
3.30% 8.22% (0.70)% 3.91% 6.49% 1.28%
----------- ------ ------- ------- ------ ------
----------- ------ ------- ------- ------ ------
$ 17,624 $ 22,155 $28,217 $53,874 $ 39,029 $ 30,141
1.49% 1.46% 1.40% 1.39% 1.48%* 1.39%*
4.34% 4.69% 5.05% 4.55% 5.06%* 4.79%*
73% 32% 11% 37% 3% 25%
</TABLE>
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 11
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
NATIONAL TAX-FREE INCOME FUND
The following tables provide investors with data and ratios for one Class A,
Class B, Class C and Class Y share for each of the periods shown. This
information is supplemented by the financial statements, accompanying notes and
the report of Ernst & Young LLP, independent auditors, which appear in the
Fund's Annual Report to Shareholders for the fiscal year ended February 28,
1997, and are incorporated by reference into the Statement of Additional
Information. The financial statements and notes, as well as the information in
the table below relating to each of the four fiscal years in the period ended
February 28, 1997, the fiscal period ended February 28, 1993 and the fiscal year
ended November 30, 1992 have been audited by Ernst & Young LLP. Further
information about the Fund's performance is included in the Annual Report to
Shareholders, which may be obtained without charge by calling 1-800-647-1568.
The information appearing below for periods prior to the year ended November 30,
1992 also has been audited by Ernst & Young LLP, whose reports thereon were
unqualified.
<TABLE>
<CAPTION>
NATIONAL TAX-FREE INCOME FUND
----------------------------------------------------------------------
CLASS A
----------------------------------------------------------------------
FOR THE
FOR THE YEARS ENDED THREE
------------------------------------------------------ MONTHS
FEBRUARY 28, ENDED
FEBRUARY 28, FEBRUARY 29, -------------------- FEBRUARY 28,
1997 1996 1995 1994 1993
------------ ------------ -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period..... $ 11.64 $ 11.26 $ 12.00 $ 12.09 $ 11.67
------------ ------------ -------- -------- ------------
Net investment income.... 0.55 0.58 0.63 0.64 0.17
Net realized and
unrealized gains
(losses) from
investments............. (0.09) 0.39 (0.73) 0.03 0.55
------------ ------------ -------- -------- ------------
Net increase (decrease)
from investment
operations.............. 0.46 0.97 (0.10) 0.67 0.72
------------ ------------ -------- -------- ------------
Dividends from net
investment income....... (0.55) (0.59) (0.63) (0.64) (0.17)
Distributions from net
realized gains from
investment
transactions............ -- -- (0.01) (0.12) (0.13)
------------ ------------ -------- -------- ------------
Total dividends and
distributions to
shareholders............ (0.55) (0.59) (0.64) (0.76) (0.30)
------------ ------------ -------- -------- ------------
Net asset value, end of
period.................. $ 11.55 $ 11.64 $ 11.26 $ 12.00 $ 12.09
------------ ------------ -------- -------- ------------
------------ ------------ -------- -------- ------------
Total investment return
(1)..................... 4.14% 8.75% (0.63)% 5.65% 6.31%
------------ ------------ -------- -------- ------------
------------ ------------ -------- -------- ------------
Ratios/Supplemental data:
Net assets, end of
period (000's)....... $263,425 $315,899 $346,579 $432,825 $419,596
Expenses to average
net assets........... 0.91% 0.93%(2) 0.88% 0.89% 0.88%*
Net investment income
to average net
assets............... 4.85% 5.06%(2) 5.62% 5.28% 5.86%*
Portfolio turnover
rate................. 81% 74% 60% 16% 5%
<CAPTION>
NATIONAL TAX-FREE INCOME FUND
-------------------------------------------------------------------
CLASS A
-------------------------------------------------------------------
FOR THE YEARS ENDED NOVEMBER 30,
---------------------------------------------------------------------
1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.....$ 11.40 $ 11.20 $ 11.21 $ 10.98 $ 10.64 $ 11.48
-------- -------- -------- -------- -------- --------
Net investment income.... 0.71 0.76 0.78 0.81 0.79 0.78
Net realized and
unrealized gains
(losses) from
investments............. 0.31 0.20 (0.01) 0.23 0.34 (0.84)
-------- -------- -------- -------- -------- --------
Net increase (decrease)
from investment
operations.............. 1.02 0.96 0.77 1.04 1.13 (0.06)
-------- -------- -------- -------- -------- --------
Dividends from net
investment income....... (0.71) (0.76) (0.78) (0.81) (0.79) (0.78)
Distributions from net
realized gains from
investment
transactions............ (0.04) -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total dividends and
distributions to
shareholders............ (0.75) (0.76) (0.78) (0.81) (0.79) (0.78)
-------- -------- -------- -------- -------- --------
Net asset value, end of
period..................$ 11.67 $ 11.40 $ 11.20 $ 11.21 $ 10.98 $ 10.64
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Total investment return
(1)..................... 9.21% 8.85% 7.17% 9.77% 10.85% (0.50)%
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Ratios/Supplemental data:
Net assets, end of
period (000's).......$396,587 $366,300 $343,539 $333,314 $307,954 $322,325
Expenses to average
net assets........... 0.91% 0.83% 0.69% 0.62% 0.75% 0.78%
Net investment income
to average net
assets............... 6.13% 6.66% 7.08% 7.32% 7.14% 7.07%
Portfolio turnover
rate................. 21% 27% 24% 11% 1% 16%
</TABLE>
- ------------
`D' Commencement of issuance of shares
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results for each class (other than Class Y) would be
lower if sales charges were included. Total investment return for periods of
less than one year has not been annualized.
(2) These ratios include non-recurring acquisition expenses of 0.03%.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 12
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(Concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NATIONAL TAX-FREE INCOME FUND
- ----------------------------------------------------------------------------------------------
CLASS B
- ----------------------------------------------------------------------------------------------
FOR THE
FOR THE PERIOD
FOR THE YEARS ENDED THREE FOR THE JULY 1,
- ------------------------------------------------- MONTHS YEAR 1991`D'
FEBRUARY 28, ENDED ENDED THROUGH
FEBRUARY 28, FEBRUARY 29, ------------------ FEBRUARY 28, NOVEMBER 30, NOVEMBER 30,
1997 1996 1995 1994 1993 1992 1991
- ------------ ------------ ------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
$ 11.64 $ 11.26 $ 11.99 $ 12.08 $ 11.67 $ 11.40 $11.19
------ ------ ------- ------- ------ ------ -----
0.46 0.49 0.54 0.55 0.15 0.62 0.27
(0.09 ) 0.39 (0.72) 0.03 0.54 0.31 0.21
------ ------ ------- ------- ------ ------ -----
0.37 0.88 (0.18) 0.58 0.69 0.93 0.48
------ ------ ------- ------- ------ ------ -----
(0.46 ) (0.50) (0.54) (0.55) (0.15) (0.62) (0.27)
-- -- (0.01) (0.12) (0.13) (0.04) --
------ ------ ------- ------- ------ ------ -----
(0.46 ) (0.50) (0.55) (0.67) (0.28) (0.66) (0.27)
------ ------ ------- ------- ------ ------ -----
$ 11.55 $ 11.64 $ 11.26 $ 11.99 $ 12.08 $ 11.67 $11.40
------ ------ ------- ------- ------ ------ -----
------ ------ ------- ------- ------ ------ -----
3.35% 7.94% (1.29% 4.87% 6.02% 8.36% 4.06%
------ ------ ------- ------- ------ ------ -----
------ ------ ------- ------- ------ ------ -----
$ 40,949 $ 51,546 $58,958 $70,988 $ 50,064 $ 39,564 $8,620
1.67% 1.68%(2) 1.64% 1.63% 1.63%* 1.65% 1.65%*
4.09% 4.31%(2) 4.86% 4.50% 5.08%* 5.16% 5.26%*
81% 74% 60% 16% 5% 21% 27%
<CAPTION>
CLASS C CLASS Y
- -------------------------------------------------------------------------------------- ---------------------------
FOR THE
FOR THE PERIOD FOR THE PERIOD
FOR THE YEARS ENDED THREE JULY 2, FOR THE NOVEMBER 3,
- --------------------------------------------------- MONTHS 1992`D' YEAR 1995`D'
FEBRUARY 28, ENDED THROUGH ENDED THROUGH
FEBRUARY 28, FEBRUARY 29,------------------------- FEBRUARY 28, NOVEMBER 30, FEBRUARY 28, FEBRUARY 29,
1997 1996 1995 1994 1993 1992 1997 1996
- ------------------------ ------------ -------- ----------- ------------ ------------ --------------
<C> <C> <C> <C> <C> <C> <C> <C>
$ 11.64 $ 11.26 $ 12.00 $ 12.09 $ 11.67 $ 11.71 $11.65 $11.62
------ ------ -------- -------- ------ ------ ----- -----
0.49 0.52 0.57 0.58 0.15 0.23 0.58 0.19
(0.09) 0.39 (0.73) 0.03 0.55 (0.04) (0.10) 0.01
------ ------ -------- -------- ------ ------ ----- -----
0.40 0.91 (0.16) 0.61 0.70 0.19 0.48 0.20
------ ------ -------- -------- ------ ------ ----- -----
(0.49) (0.53) (0.57) (0.58) (0.15) (0.23) (0.58) (0.17)
-- -- (0.01) (0.12) (0.13) -- -- --
------ ------ -------- -------- ------ ------ ----- -----
(0.49) (0.53) (0.58) (0.70) (0.28) (0.23) (0.58) (0.17)
------ ------ -------- -------- ------ ------ ----- -----
$ 11.55 $ 11.64 $ 11.26 $ 12.00 $ 12.09 $ 11.67 $11.55 $11.65
------ ------ -------- -------- ------ ------ ----- -----
------ ------ -------- -------- ------ ------ ----- -----
3.61% 8.19% (1.13)% 5.13% 6.18% 1.41% 4.32% 1.70%
------ ------ -------- -------- ------ ------ ----- -----
------ ------ -------- -------- ------ ------ ----- -----
$ 59,652 $ 75,076 $101,642 $187,778 $138,989 $105,854 $ 246 $ 341
1.42% 1.45%(2) 1.40% 1.37% 1.37%* 1.42%* 0.65% 0.64%(2)*
4.34% 4.57%(2) 5.13% 4.75% 5.30%* 5.17%* 5.13% 5.19%(2)*
81% 74% 60% 16% 5% 21% 81% 74%
</TABLE>
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 13
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
MUNICIPAL HIGH INCOME FUND
The following tables provide investors with data and ratios for one Class A,
Class B and Class C share for each of the periods shown. This information is
supplemented by the financial statements, accompanying notes and the report of
Ernst & Young LLP, independent auditors, which appear in the Fund's Annual
Report to Shareholders for the fiscal year ended February 28, 1997, and are
incorporated by reference into the Statement of Additional Information. The
financial statements and notes, as well as the information in the table below
relating to each of the five fiscal years in the period ended February 28, 1997
have been audited by Ernst & Young LLP. Further information about the Fund's
performance is included in the Annual Report to Shareholders, which may be
obtained without charge by calling 1-800-647-1568. The information appearing
below for periods prior to the year ended February 28, 1993 also has been
audited by Ernst & Young LLP, whose reports thereon were unqualified. The Fund
had no Class Y shares outstanding during the periods shown.
<TABLE>
<CAPTION>
MUNICIPAL HIGH INCOME FUND
---------------------------------------------------------
CLASS A
---------------------------------------------------------
FOR THE YEARS ENDED
---------------------------------------------------------
FEBRUARY 28,
FEBRUARY 28, FEBRUARY 29, ---------------------------
1997 1996 1995 1994 1993
------------ ------------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period..... $ 10.29 $ 9.92 $ 10.77 $ 10.96 $ 10.29
------------ ------------ ------- ------- -------
Net investment income.... 0.56 0.62 0.59 0.61 0.67
Net realized and
unrealized gains
(losses) from
investments............. 0.10 0.37 (0.82) 0.01 0.81
------------ ------------ ------- ------- -------
Net increase (decrease)
from investment
operations.............. 0.66 0.99 (0.23) 0.62 1.48
------------ ------------ ------- ------- -------
Dividends from net
investment income....... (0.56) (0.62) (0.59) (0.61) (0.67)
Distributions from net
realized gains from
investment
transactions............ -- -- (0.03) (0.20) (0.14)
------------ ------------ ------- ------- -------
Total dividends and
distributions to
shareholders............ (0.56) (0.62) (0.62) (0.81) (0.81)
------------ ------------ ------- ------- -------
Net asset value, end of
period.................. $ 10.39 $ 10.29 $ 9.92 $ 10.77 $ 10.96
------------ ------------ ------- ------- -------
------------ ------------ ------- ------- -------
Total investment
return(1)............... 6.61% 10.18% (2.03)% 5.77% 15.05%
------------ ------------ ------- ------- -------
------------ ------------ ------- ------- -------
Ratios/Supplemental data:
Net assets, end of
period (000's)........ $ 52,593 $ 57,280 $63,287 $82,248 $82,251
Expenses to average net
assets, net of waivers
from adviser.......... 1.15% 1.10% 1.13% 1.03% 0.87%
Expenses to average net
assets, before waivers
from adviser.......... 1.15% 1.10% 1.13% 1.16% 1.29%
Net investment income to
average net assets,
net of waivers from
adviser............... 5.49% 5.94% 5.96% 5.52% 6.31%
Net investment income to
average net assets,
before waivers from
adviser............... 5.49% 5.94% 5.96% 5.39% 5.89%
Portfolio turnover
rate.................. 64% 48% 28% 23% 10%
<CAPTION>
MUNICIPAL HIGH INCOME FUND
------------------------------------------------------------
CLASS A
------------------------------------------------------------
FOR THE YEARS ENDED
------------------------------------------
FOR THE PERIOD
FEBRUARY 28, JUNE 23, 1987`D'
FEBRUARY 29, --------------------------- TO
1992 1991 1990 1989 FEBRUARY 29, 1988
------------ ------- ------- ------- ---------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.....$ 9.92 $ 10.00 $ 9.91 $ 9.80 $ 9.58
------------ ------- ------- ------- -------
Net investment income.... 0.71 0.72 0.74 0.75 0.50
Net realized and
unrealized gains
(losses) from
investments............. 0.44 (0.08) 0.09 0.11 0.22
------------ ------- ------- ------- -------
Net increase (decrease)
from investment
operations.............. 1.15 0.64 0.83 0.86 0.72
------------ ------- ------- ------- -------
Dividends from net
investment income....... (0.71 ) (0.72) (0.74) (0.75) (0.50)
Distributions from net
realized gains from
investment
transactions............ (0.07 ) -- -- -- --
------------ ------- ------- ------- -------
Total dividends and
distributions to
shareholders............ (0.78 ) (0.72) (0.74) (0.75) (0.50)
------------ ------- ------- ------- -------
Net asset value, end of
period..................$ 10.29 $ 9.92 $ 10.00 $ 9.91 $ 9.80
------------ ------- ------- ------- -------
------------ ------- ------- ------- -------
Total investment
return(1)............... 11.94% 6.69% 8.74% 9.11% 7.23%
------------ ------- ------- ------- -------
------------ ------- ------- ------- -------
Ratios/Supplemental data:
Net assets, end of
period (000's)........$ 68,830 $62,559 $61,067 $54.512 $48,515
Expenses to average net
assets, net of waivers
from adviser.......... 0.75% 0.69% 0.65% 0.60% 0.12%*
Expenses to average net
assets, before waivers
from adviser.......... 1.25% 1.54% 1.49% 1.46% 1.40%*
Net investment income to
average net assets,
net of waivers from
adviser............... 6.99% 7.32% 7.35% 7.64% 7.63%*
Net investment income to
average net assets,
before waivers from
adviser............... 6.49% 6.47% 6.51% 6.78% 6.35%*
Portfolio turnover
rate.................. 45% 20% 17% 14% 0%
</TABLE>
- ------------
`D' Commencement of issuance of shares
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period, 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 sales charges;
results for each class would be lower if sales charges were included. Total
investment return for periods of less than one year has not been annualized.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 14
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MUNICIPAL HIGH INCOME FUND
-----------------------------------------------------------------------------
CLASS B
-----------------------------------------------------------------------------
FOR THE PERIOD
FOR THE YEARS ENDED JULY 1,
------------------------------------------------------------- 1991`D'
FEBRUARY 28, THROUGH
FEBRUARY 28, FEBRUARY 29, ------------------------------- FEBRUARY 29,
1997 1996 1995 1994 1993 1992
------------ ------------ ------- ------- ------- --------------
<C> <C> <C> <C> <C> <C>
$ 10.29 $ 9.92 $ 10.76 $ 10.96 $ 10.29 $ 10.05
------------ ------------ ------- ------- ------- -------
0.48 0.54 0.52 0.52 0.59 0.42
0.10 0.37 (0.81) -- 0.81 0.31
------------ ------------ ------- ------- ------- -------
0.58 0.91 (0.29) 0.52 1.40 0.73
------------ ------------ ------- ------- ------- -------
(0.48) (0.54) (0.52) (0.52) (0.59) (0.42)
-- -- (0.03) (0.20) (0.14) (0.07)
------------ ------------ ------- ------- ------- -------
(0.48) (0.54) (0.55) (0.72) (0.73) (0.49)
------------ ------------ ------- ------- ------- -------
$ 10.39 $ 10.29 $ 9.92 $ 10.76 $ 10.96 $ 10.29
------------ ------------ ------- ------- ------- -------
------------ ------------ ------- ------- ------- -------
5.82% 9.36% (2.67)% 4.88% 14.81% 6.89%
------------ ------------ ------- ------- ------- -------
------------ ------------ ------- ------- ------- -------
$ 19,427 $ 23,868 $25,823 $32,287 $22,922 $ 8,176
1.90% 1.85% 1.87% 1.79% 1.63% 1.50%*
1.90% 1.85% 1.87% 1.90% 2.01% 1.98%*
4.73% 5.19% 5.21% 4.72% 5.48% 5.80%*
4.73% 5.19% 5.21% 4.61% 5.10% 5.32%*
64% 48% 28% 23% 10% 46%
<CAPTION>
MUNICIPAL HIGH INCOME FUND
- ---------------------------------------------------------------------
CLASS C
------------------------------------------------------------
FOR THE PERIOD
FOR THE YEARS ENDED JULY 2,
------------------------------------------ 1992`D'
FEBRUARY FEBRUARY 28, THROUGH
28, FEBRUARY 28, ------------------ FEBRUARY 28,
1997 1996 1995 1994 1993
------- ------------ ------- ------- --------------
<C> <C> <C> <C> <C>
$10.29 $ 9.92 $ 10.77 $ 10.96 $ 10.50
------- ------------ ------- ------- -------
0.51 0.56 0.55 0.55 0.36
0.10 0.37 (0.82) 0.01 0.47
------- ------------ ------- ------- -------
0.61 0.93 (0.27) 0.56 0.83
------- ------------ ------- ------- -------
(0.51) (0.56) (0.55) (0.55) (0.36)
-- -- (0.03) (0.20) (0.01)
------- ------------ ------- ------- -------
(0.51) (0.56) (0.58) (0.75) (0.37)
------- ------------ ------- ------- -------
$10.39 $ 10.29 $ 9.92 $ 10.77 $ 10.96
------- ------------ ------- ------- -------
------- ------------ ------- ------- -------
6.08% 9.64% (2.51)% 5.24% 7.72%
------- ------------ ------- ------- -------
------- ------------ ------- ------- -------
$16,967 $ 20,700 $23,158 $35,872 $ 21,638
1.66% 1.60% 1.63% 1.54% 1.40%*
1.66% 1.60% 1.63% 1.64% 1.69%*
4.98% 5.45% 5.48% 4.95% 5.26%*
4.98% 5.45% 5.48% 4.85% 4.97%*
64% 48% 28% 23% 10%
</TABLE>
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 15
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
NEW YORK TAX-FREE INCOME FUND
The following tables provide investors with data and ratios for one Class A,
Class B and Class C share for each of the periods shown. This information is
supplemented by the financial statements, accompanying notes and the report of
Ernst & Young LLP, independent auditors, which appear in the Fund's Annual
Report to Shareholders for the fiscal year ended February 28, 1997 and are
incorporated by reference into the Statement of Additional Information. The
financial statements and notes, as well as the information in the table below
relating to each of the five fiscal years in the period ended February 28, 1997
have been audited by Ernst & Young LLP. Further information about the Fund's
performance is included in the Annual Report to Shareholders, which may be
obtained without charge by calling 1-800-647-1568. The information appearing
below for periods prior to the year ended February 28, 1993 also has been
audited by Ernst & Young LLP, whose reports thereon were unqualified. The Fund
had no Class Y shares outstanding during the periods shown.
<TABLE>
<CAPTION>
NEW YORK TAX-FREE INCOME FUND
---------------------------------------------------------------
CLASS A
---------------------------------------------------------------
FOR THE YEARS ENDED
---------------------------------------------------------------
FEBRUARY 28,
FEBRUARY 28, FEBRUARY 29, -----------------------------
1997 1996 1995 1994 1993
------------ ------------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period..... $ 10.71 $ 10.27 $ 11.03 $ 10.99 $ 10.12
------ ------ ------- ------- -------
Net investment income.... 0.51 0.54 0.54 0.57 0.63
Net realized and
unrealized gains
(losses) from
investments............. (0.05) 0.45 (0.66) 0.07 0.87
------ ------ ------- ------- -------
Net increase (decrease)
from investment
operations.............. 0.46 0.99 (0.12) 0.64 1.50
------ ------ ------- ------- -------
Dividends from net
investment income....... (0.51) (0.55) (0.54) (0.57) (0.63)
Distributions from net
realized gains from
investment
transactions............ -- -- (0.10) (0.03) --
------ ------ ------- ------- -------
Total dividends and
distributions to
shareholders............ (0.51) (0.55) (0.64) (0.60) (0.63)
------ ------ ------- ------- -------
Net asset value, end of
period.................. $ 10.66 $ 10.71 $ 10.27 $ 11.03 $ 10.99
------ ------ ------- ------- -------
------ ------ ------- ------- -------
Total investment return
(1)..................... 4.49% 9.83% (0.83)% 5.89% 15.44%
------ ------ ------- ------- -------
------ ------ ------- ------- -------
Ratios/Supplemental data:
Net assets, end of period
(000's)................. $ 23,160 $ 28,734 $32,475 $45,033 $43,443
Expenses to average net
assets, net of waivers
and reimbursements from
adviser................. 1.02% 1.02% 1.01% 0.75% 0.34%
Expenses to average net
assets, before waivers
and reimbursements from
adviser................. 1.50% 1.15% 1.26% 1.25% 1.47%
Net investment income to
average net assets, net
of waivers and
reimbursements from
adviser................. 4.91% 5.11% 5.38% 5.13% 6.07%
Net investment income to
average net assets,
before waivers and
reimbursements from
adviser................. 4.42% 4.98% 5.13% 4.63% 4.94%
Portfolio turnover
rate.................... 40% 13% 6% 8% 6%
<CAPTION>
NEW YORK TAX-FREE INCOME FUND
-----------------------------------------------------------
CLASS A
-----------------------------------------------------------
FEBRUARY 28, FOR THE PERIOD
FEBRUARY 29, ------------------ SEPTEMBER 30, 1988`D'
1992 1991 1990 TO FEBRUARY 28, 1989
------------ ------- ------- ---------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period..... $ 9.76 $ 9.72 $ 9.59 $ 9.60
------ ------- ------- ------
Net investment income.... 0.66 0.67 0.70 0.28
Net realized and
unrealized gains
(losses) from
investments............. 0.36 0.04 0.13 (0.01)
------ ------- ------- ------
Net increase (decrease)
from investment
operations.............. 1.02 0.71 0.83 0.27
------ ------- ------- ------
Dividends from net
investment income....... (0.66) (0.67) (0.70) (0.28)
Distributions from net
realized gains from
investment
transactions............ -- -- -- --
------ ------- ------- ------
Total dividends and
distributions to
shareholders............ (0.66) (0.67) (0.70) (0.28)
------ ------- ------- ------
Net asset value, end of
period.................. $ 10.12 $ 9.76 $ 9.72 $ 9.59
------ ------- ------- ------
------ ------- ------- ------
Total investment return
(1)..................... 10.80% 7.59% 8.94% 2.25%
------ ------- ------- ------
------ ------- ------- ------
Ratios/Supplemental data:
Net assets, end of period
(000's)................. $ 35,961 $30,173 $21,999 $11,222
Expenses to average net
assets, net of waivers
and reimbursements from
adviser................. 0.25 % 0.21% 0.00% 0.00%*
Expenses to average net
assets, before waivers
and reimbursements from
adviser................. 1.53 % 1.84% 2.20% 3.04%*
Net investment income to
average net assets, net
of waivers and
reimbursements from
adviser................. 6.65 % 6.93% 7.07% 6.96%*
Net investment income to
average net assets,
before waivers and
reimbursements from
adviser................. 5.37 % 5.30% 4.87% 3.92%*
Portfolio turnover
rate.................... 6 % 3% 0% 0.00%*
</TABLE>
- ------------
`D' Commencement of issuance of shares
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions at net asset value on the payable dates, and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results for each class would be lower if sales
charges were included. Total investment return for periods of less than one
year has not been annualized.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 16
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(Concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NEW YORK TAX-FREE INCOME FUND
- -----------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------
FOR THE YEARS ENDED FOR THE PERIOD
----------------------------- JULY 1,
FOR THE YEAR FOR THE YEAR 1991`D'
ENDED ENDED FEBRUARY 28, THROUGH
FEBRUARY 28, FEBRUARY 29, ----------------------------- FEBRUARY 29,
1997 1996 1995 1994 1993 1992
- ------------------------- ------------ ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C>
$ 10.71 $ 10.27 $ 11.03 $ 10.98 $ 10.12 $ 9.81
-------- ------ ------- ------- ------- ------
0.44 0.47 0.47 0.49 0.56 0.39
(0.06) 0.44 (0.66) 0.08 0.86 0.31
-------- ------ ------- ------- ------- ------
0.38 0.91 (0.19) 0.57 1.42 0.70
-------- ------ ------- ------- ------- ------
(0.44) (0.47) (0.47) (0.49) (0.56) (0.39)
-- -- (0.10) (0.03) -- --
-------- ------ ------- ------- ------- ------
(0.44) (0.47) (0.57) (0.52) (0.56) (0.39)
-------- ------ ------- ------- ------- ------
$ 10.65 $ 10.71 $ 10.27 $ 11.03 $ 10.98 $10.12
-------- ------ ------- ------- ------- ------
-------- ------ ------- ------- ------- ------
3.62% 9.01% (1.57)% 5.19% 14.35% 6.80%
-------- ------ ------- ------- ------- ------
-------- ------ ------- ------- ------- ------
$ 9,462 $ 11,862 $14,660 $19,193 $13,776 $6,026
1.76% 1.77% 1.76% 1.51% 1.10% 1.00%*
2.27% 1.89% 2.01% 1.99% 2.19% 2.20%*
4.16% 4.36% 4.63% 4.34% 5.22% 5.59%*
3.65% 4.24% 4.83% 3.86% 4.13% 4.39%*
40% 13% 6% 8% 6% 6%
<CAPTION>
NEW YORK TAX-FREE INCOME FUND
- -----------------------------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------------------------
FOR THE YEARS ENDED FOR THE PERIOD
--------------------------------- JULY 2,
FOR THE YEAR FOR THE YEAR 1992`D'
ENDED ENDED FEBRUARY 28, THROUGH
FEBRUARY 28, FEBRUARY 29, ------------------ FEBRUARY 28,
1997 1996 1995 1994 1993
------------- ------- ------- -------- ------------
<S> <C> <C> <C> <C>
$ 10.71 $ 10.28 $ 11.03 $ 10.99 $ 10.45
------ ------ ------- ------- ------
0.46 0.49 0.49 0.51 0.36
(0.05) 0.43 (0.65) 0.07 0.54
------ ------ ------- ------- ------
0.41 0.92 (0.16) 0.58 0.90
------ ------ ------- ------- ------
(0.46) (0.49) (0.49) (0.51) (0.36)
-- -- (0.10) (0.03) --
------ ------ ------- ------- ------
(0.46) (0.49) (0.59) (0.54) (0.36)
------ ------ ------- ------- ------
10.66 $ 10.71 $ 10.28 $ 11.03 $ 10.99
------ ------ ------- ------- ------
------ ------ ------- ------- ------
3.98% 9.17% (1.20)% 5.35% 8.38%
------ ------ ------- ------- ------
------ ------ ------- ------- ------
$ 13,786 $17,849 $21,095 $38,165 $ 19,553
1.52% 1.52% 1.52% 1.27% 0.90%*
2.04% 1.64% 1.75% 1.72% 1.83%*
4.41% 4.61% 4.89% 4.55% 5.04%*
3.89% 4.50% 4.65% 4.10% 4.11%*
40% 13% 6% 8% 6%
</TABLE>
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 17
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
The Funds' investment objectives may not be changed without shareholder
approval. Their other investment policies, except where noted, are not
fundamental and may be changed by the Funds' boards of trustees.
CALIFORNIA TAX-FREE INCOME FUND
The investment objective of California Tax-Free Income Fund is to provide high
current income exempt from federal income tax and California personal income
tax, consistent with the preservation of capital and liquidity within the Fund's
quality standards. The Fund seeks to invest substantially all of its net assets
in securities issued by the State of California, its municipalities, and public
authorities or by other issuers if such obligations pay interest that is exempt
from federal income tax and California personal income tax ('California
Obligations') and, except under unusual market conditions, the Fund invests at
least 80% of its net assets in California Obligations that pay interest that is
not an item of tax preference for purposes of the federal alternative minimum
tax ('AMT exempt interest'). Although the Fund invests primarily in investment
grade municipal securities, it may invest up to 35% of its net assets in
municipal securities rated below investment grade.
NATIONAL TAX-FREE INCOME FUND
The investment objective of National Tax-Free Income Fund is to provide high
current income exempt from federal income tax, consistent with the preservation
of capital and liquidity within the Fund's quality standards. The Fund seeks to
invest substantially all of its net assets in municipal securities with varying
maturities. Except under unusual market conditions, the Fund invests at least
80% of its net assets in municipal securities that pay AMT exempt interest.
Although the Fund invests primarily in investment grade municipal securities, it
may invest up to 35% of its net assets in municipal securities rated below
investment grade.
MUNICIPAL HIGH INCOME FUND
The investment objective of Municipal High Income Fund is to provide high
current income exempt from federal income tax. Except under unusual market
conditions, the Fund invests at least 80% of its assets in municipal securities
and may invest without limit in municipal securities that are below investment
grade. The Fund also may invest without limit in municipal securities that pay
interest that is not AMT exempt interest and does so when Mitchell Hutchins
believes that such securities offer attractive yields relative to AMT exempt
municipal obligations with similar credit and market characteristics and risks.
NEW YORK TAX-FREE INCOME FUND
The investment objective of New York Tax-Free Income Fund is to provide high
current income exempt from federal income tax and from New York State and New
York City personal income taxes. The Fund seeks to invest substantially all of
its net assets in securities issued by the State of New York, its municipalities
and public authorities or by other issuers if such obligations pay interest that
is exempt from federal income tax and New York State and New York City personal
income taxes ('New York Obligations') and, except under unusual market
conditions, invests at least 80% of its net assets in New York Obligations that
pay AMT exempt interest. Although the Fund invests primarily in investment grade
municipal securities, it may invest up to 35% of its net assets in municipal
securities rated below investment grade.
* * * *
As with any mutual fund, there is no assurance that any of these Funds will
achieve its investment objective. Each Fund's net asset value fluctuates based
upon changes in the value of its portfolio securities.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 18
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY & PROCESS
- --------------------------------------------------------------------------------
In selecting municipal securities for the Funds that will provide investors with
high current income exempt from federal and/or state income tax, Mitchell
Hutchins relies on the expertise of its team of analysts and portfolio managers.
The Municipal Investment Team's investment process for each Fund employs a
'top-down' investment process. This process consists of analyzing three
fundamental factors: to determine duration, sector and security. Duration is set
based on the direction of interest rates and the shape of the yield curve.
Sector is determined by analyzing the spread between the prevailing yields of
municipal and U.S. Treasury securities, investment opportunities within the
municipal market and state tax exemption. Finally, security selection is
established by performing an analysis of both credit quality and structure of
individual issues.
All aspects of the Municipal Investment Team's investment process rely on solid
research, which is broken down into four types: economic, credit, quantitative
and market. Mitchell Hutchins' analysts monitor these components on a daily
basis. This research provides the Team with increased information to assist it
in effectively managing municipal portfolios. The municipal bond market is a
fragmented, inefficient market that, in Mitchell Hutchins' opinion, offers
opportunities for active management. With the information garnered by extensive
research, active management may capitalize on these inefficiencies and
potentially increase portfolio value.
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 19
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
PERFORMANCE
- --------------------------------------------------------------------------------
These charts show the total returns for the Funds. Sales charges have not been
deducted from total returns for Class A, B and C shares. Returns would be lower
if sales charges were deducted. Total returns are shown for Class Y shares of
National Tax-Free Income Fund. The other Funds did not have any Class Y shares
outstanding during the periods shown. Past results are not a guarantee of future
results.
Total returns both before and after deducting the maximum sales charges are
shown below in the tables that follow the performance charts.
CALIFORNIA TAX-FREE INCOME FUND
[GRAPH]
As Class A shares commenced operations on September 16, 1985, the 1985 return
represents the period from September 16, 1985 through December 31, 1985. The
inception date of Class B shares was July 1, 1991; thus, the 1991 return for
Class B shares represents the period from July 1, 1991 through December 31,
1991. The inception date of Class C shares was July 2, 1992; thus, the 1992
return for Class C shares represents the period from July 2, 1992 through
December 31, 1992.
AVERAGE ANNUAL RETURNS
As of February 28, 1997
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
Inception Date........................................................... 9/16/85 7/1/91 7/2/92
ONE YEAR
Without deducting maximum sales charges................................ 3.92% 3.14% 3.30%
After deducting maximum sales charges.................................. (0.24)% (1.86)% 2.55%
FIVE YEARS
Without deducting maximum sales charges................................ 5.89% 5.11% N/A
After deducting maximum sales charges.................................. 5.02% 4.78% N/A
TEN YEARS (OR LIFE OF CLASS)
Without deducting maximum sales charges................................ 6.27% 5.57% 4.79%
After deducting maximum sales charges.................................. 5.83% 5.43% 4.79%
</TABLE>
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 20
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
NATIONAL TAX-FREE INCOME FUND
[GRAPH]
As Class A shares commenced operations on December 3, 1984, the 1984 return
represents the period from December 3, 1984 through December 31, 1984. The
inception date of Class B shares is July 1, 1991; thus, the 1991 return for
Class B shares represents the period from July 1, 1991 through December 31,
1991. The inception date of Class C shares was July 2, 1992; thus, the 1992
return for Class C shares represents the period from July 2, 1992 through
December 31, 1992. The inception date of Class Y shares is November 3, 1995;
thus, the 1995 return for Class Y shares represents the period from November 3,
1995 through December 31, 1995.
AVERAGE ANNUAL RETURNS
As of February 28, 1997
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Y SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Inception Date........................................... 12/3/84 7/1/91 7/2/92 11/3/95
ONE YEAR
Without deducting maximum sales charges................ 4.14% 3.35% 3.61% 4.32%
After deducting maximum sales charges.................. (0.07)% (1.65)% 2.86% 4.32%
FIVE YEARS
Without deducting maximum sales charges................ 6.20% 5.40% N/A N/A
After deducting maximum sales charges.................. 5.33% 5.07% N/A N/A
TEN YEARS (OR LIFE OF CLASS)
Without deducting maximum sales charges................ 6.54% 5.85% 4.98% 4.56%
After deducting maximum sales charges.................. 6.11% 5.71% 4.98% 4.56%
</TABLE>
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 21
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND
[GRAPH]
As Class A shares commenced operations on June 23, 1987, the 1987 return
represents the period from June 23, 1987 through December 31, 1987. The
inception date of Class B shares is July 1, 1991; thus, the 1991 return for
Class B shares represents the period from July 1, 1991 through December 31,
1991. The inception date of Class C shares was July 2, 1992; thus, the 1992
return for Class C shares represents the period from July 2, 1992 through
December 31, 1992.
AVERAGE ANNUAL RETURNS
As of February 28, 1997
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
Inception Date........................................................... 6/23/87 7/1/91 7/2/92
ONE YEAR
Without deducting maximum sales charges................................ 6.61% 5.82% 6.08%
After deducting maximum sales charges.................................. 2.34% 0.82% 5.33%
FIVE YEARS
Without deducting maximum sales charges................................ 6.96% 6.16% N/A
After deducting maximum sales charges.................................. 6.09% 5.85% N/A
LIFE
Without deducting maximum sales charges................................ 8.10% 6.66% 5.53%
After deducting maximum sales charges.................................. 7.65% 6.53% 5.53%
</TABLE>
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 22
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
NEW YORK TAX-FREE INCOME FUND
[GRAPH]
As Class A shares commenced operations on September 23, 1988, the 1988 return
represents the period from September 23, 1988 through December 31, 1988. The
inception date of Class B shares is July 1, 1991; thus, the 1991 return for
Class B shares represents the period from July 1, 1991 through December 31,
1991. The inception date of Class C shares was July 2, 1992; thus, the 1992
return for Class C shares represents the period from July 2, 1992 through
December 31, 1992.
AVERAGE ANNUAL RETURNS
As of February 28, 1997
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
Inception Date........................................................... 9/23/88 7/1/91 7/2/92
ONE YEAR
Without deducting maximum sales charges................................ 4.49% 3.62% 3.98%
After deducting maximum sales charges.................................. 0.31% (1.38)% 3.23%
FIVE YEARS
Without deducting maximum sales charges................................ 6.82% 6.01% N/A
After deducting maximum sales charges.................................. 5.96% 5.69% N/A
LIFE
Without deducting maximum sales charges................................ 7.54% 6.51% 5.45%
After deducting maximum sales charges.................................. 7.03% 6.38% 5.45%
</TABLE>
---------------------
- --------------------------------------------------------------------------------
Prospectus Page 23
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
PERFORMANCE INFORMATION
The Funds perform a standardized computation of annualized total return and may
show this return in advertisements or promotional materials. Standardized return
shows the change in value of an investment in a Fund as a steady compound annual
rate of return. Actual year-by-year returns fluctuate and may be higher or lower
than standardized return. Standardized returns for Class A shares of the Funds
reflect deduction of the Funds' maximum initial sales charge of 4% at the time
of purchase, and standardized returns for the Class B and Class C shares of the
Funds reflect deduction of the applicable contingent deferred sales charge
imposed on the sale of shares held for the period. One-, five- and ten-year
periods will be shown, unless the Fund or Class has been in existence for a
shorter period. If so, returns will be shown for the period since inception,
known as 'Life.' Total return calculations assume reinvestment of dividends and
other distributions.
The Funds may use other total return presentations in conjunction with
standardized return. These may cover the same or different periods as those used
for standardized return and may include cumulative returns, average annual
rates, actual year-by-year rates or any combination thereof. Non-standardized
return does not reflect initial or contingent deferred sales charges and would
be lower if such charges were deducted.
The Funds also may advertise their yields or tax-equivalent yields. Yield
reflects investment income net of expenses over a 30-day (or one month) period
on a Fund share. Yield is expressed as an annualized percentage of the maximum
offering price for a Fund share at the end of the period. For Class B, C and Y
shares, the maximum offering price is the same as the net asset value per share.
Tax-equivalent yield shows the yield that would produce the same income after a
stated rate of taxes as a Fund's tax-exempt yield (that is, yield excluding
taxable income). Yield computations differ from other accounting methods and may
differ from dividends actually paid or reported net income.
Total return information reflects past performance and does not indicate future
results. The investment return and principal value of shares of the Funds will
fluctuate. The amount investors receive when selling shares may be more or less
than what they paid. Further information about each Fund's performance is
contained in its Annual Report to Shareholders, which may be obtained without
charge by contacting the Fund, your PaineWebber investment executive or
PaineWebber's correspondent firms or by calling toll-free 1-800-647-1568.
- --------------------------------------------------------------------------------
THE FUNDS' INVESTMENTS
- --------------------------------------------------------------------------------
MUNICIPAL SECURITIES
Each Fund may invest in a variety of municipal securities, as described below:
MUNICIPAL BONDS. Municipal bonds are debt obligations issued to obtain funds for
various public purposes that pay interest that is exempt from federal income tax
in the opinion of bond issuer's counsel. Municipal bonds include general
obligation bonds, revenue bonds and 'moral obligation' issues. Municipal bonds
also include municipal lease obligations, which are issued by state and local
governments and authorities to purchase land and various types of equipment or
facilities.
INDUSTRIAL DEVELOPMENT BONDS ('IDBS') AND PRIVATE ACTIVITY BONDS ('PABS'). IDBs
and PABs are issued by or on behalf of public authorities to finance various
privately operated facilities, such as airport or pollution control facilities,
and are considered to be 'municipal bonds' if the interest paid on the bond is
exempt from federal income tax in the opinion of bond issuer's counsel.
---------------------
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Prospectus Page 24
<PAGE>
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
FLOATING RATE AND VARIABLE RATE OBLIGATIONS. Floating rate and variable rate
obligations pay interest at rates that are not fixed, but that vary with changes
in specified market rates or indices. These obligations typically permit the
holder to demand payment of principal from the issuer at par value prior to
maturity and may permit the issuer to prepay principal plus accrued interest.
PARTICIPATION INTERESTS. Participation interests are interests in municipal
bonds that are owned by banks, and typically carry a demand feature permitting
the holder to sell them back to the bank.
TENDER OPTION BONDS. Tender option bonds are long-term municipal securities sold
by a bank subject to a 'tender option' that gives the purchaser the right to
sell them to the bank at par plus accrued interest at designated times.
PUT BONDS. A put bond is a municipal bond that gives the holder the
unconditional right to sell the bond back to the issuer at a specified price and
exercise date, which is typically well in advance of the bond's maturity date.
TAX-EXEMPT COMMERCIAL PAPER AND SHORT-TERM MUNICIPAL NOTES. Tax-exempt
commercial paper and short-term municipal notes are issued with a short-term
maturity in anticipation of the receipt of tax funds, the proceeds of bond
placements and other revenues.
INVERSE FLOATERS. Inverse floaters are municipal securities on which the rate of
interest varies inversely with interest rates on other municipal obligations or
an index. The interest rate paid to holders of inverse floaters will decrease as
market rates increase and increase as market rates decrease. The market value of
an inverse floater will be more volatile than that of a fixed rate obligation.
Because of this market volatility, no Fund will invest more than 10% of its
total assets in inverse floaters.
RISKS
Under normal circumstances, each Fund invests primarily in municipal securities.
Following is a discussion of certain risks that may affect each Fund:
INTEREST RATE AND CREDIT RISK. Interest rate risk is the risk that interest
rates will rise and that, as a result, municipal security prices will fall,
lowering the value of the Funds' investments. In general, municipal securities
having longer durations are more sensitive to interest rate changes than are
bonds with shorter durations. See 'Duration.'
Credit risk is the risk that the issuer or a guarantor may be unable to pay
interest or repay principal on the bond. This can be affected by many factors,
including adverse changes in the issuer's own financial conditions or in
economic conditions.
CREDIT RATINGS; LOWER RATED MUNICIPAL SECURITIES. Credit ratings attempt to
evaluate the safety of principal and interest payments, but they do not evaluate
the volatility of a bond's value or its liquidity and do not guarantee the
performance of the issuer. Rating agencies may fail to make timely changes in
credit ratings in response to subsequent events, so that an issuer's current
financial condition may be better or worse than the rating indicates. There is a
risk that rating agencies may downgrade municipal securities.
Each Fund other than Municipal High Income Fund normally invests at least 65% of
its total assets in municipal securities that:
have an investment grade long-term rating or one of the two highest short-term
ratings from a nationally recognized ratings agency, such as Moody's Investor
Services, Inc. ('Moody's') or Standard & Poor's, a division of The McGraw-Hill
Companies, Inc. ('S&P'), or
if unrated, are determined by Mitchell Hutchins to be of comparable quality.
Investment grade securities are rated in one of the four highest rating
categories by a nationally recognized rating agency, such as S&P or Moody's, or,
if unrated, are considered to be of comparable quality by Mitchell Hutchins.
Municipal High Income Fund normally invests at least 65% of its total assets,
and seeks to invest substantially all of its assets, in medium and lower grade
municipal securities. Medium grade municipal securities are investment grade
and:
are rated A, BBB or SP-2 by S&P or A, Baa or MIG-2 by Moody's,
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Prospectus Page 25
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
have received an equivalent rating from another nationally recognized ratings
agency, or
if unrated, are considered to be of comparable quality by Mitchell Hutchins.
Moody's considers securities rated Baa (its lowest investment grade rating) to
have speculative characteristics. This means that changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case for higher rated bonds.
Municipal High Income Fund may invest without limit in municipal securities
rated below investment grade. The other Funds each may invest up to 35% of its
net assets in such securities. These lower rated municipal securities may be
rated:
Ba, B, MIG-3 or MIG-4 by Moody's or BB, B or SP-3 by S&P,
have an equivalent rating from another nationally recognized ratings agency, or
if unrated, are determined by Mitchell
Hutchins to be of comparable quality.
The Appendix to this Prospectus contains further information about Moody's and
S&P ratings.
Moody's and S&P consider municipal securities rated below investment grade to be
predominately speculative with respect to the issuer's capacity to pay interest
and repay principal and may involve major risk exposure to adverse conditions.
Such securities are commonly referred to as municipal 'junk bonds.' A Fund's
investments in these lower rated securities entail greater risk than its
investments in higher rated bonds. Lower rated municipal bonds may be less
sensitive to interest rate changes than higher rated investments but are more
sensitive to adverse market conditions. During an economic downturn or period of
rising interest rates, their issuers may experience financial stress that
adversely affects their ability to pay interest and principal and may increase
the possibility of default. The prices for lower rated municipal bonds often are
more volatile than those of higher rated securities in response to changes in
interest rates or market conditions. The market for these municipal bonds is
thinner and less active, which may limit the Funds' ability to sell them at fair
value in response to changes in the economy or financial markets.
Although Mitchell Hutchins will attempt to minimize the speculative risks
associated with investing in lower rated securities through credit analysis and
monitoring and attention to current trends in interest rates and other factors,
investors should carefully review the investment objective and policies of
Municipal High Income Fund and the other Funds and consider their ability to
assume the investment risks involved before making an investment.
During the fiscal year ended February 28, 1997, the Funds invested their average
annual net assets as follows:
<TABLE>
<CAPTION>
MUNICIPAL
HIGH
% OF THE AVERAGE ANNUAL NET INCOME
ASSETS INVESTED IN FUND
- ----------------------------------------------- ---------
<S> <C>
Debt securities rated by S&P or Moody's 88.32
Debt Securities not so rated 11.6
Securities rated AAA/Aaa 0
Securities rated AA/Aa 0
Securities rated A/A 0
Securities rated BBB/Baa 54.8
Securities rated BB/Ba
Securities rated B/B
Securities rated CCC/Caa
Securities rated CC/Ca
Securities rated C/C
Securities rated D
</TABLE>
Municipal securities that received different ratings from Moody's and S&P were
assigned to the higher rating category. It should be noted that this information
reflects the average composition of a Fund's assets during the fiscal year ended
February 28, 1997, and is not necessarily representative of the Fund's assets at
the end of that fiscal year, in the current fiscal year or at any time in the
future.
MARKET RISK. During periods of market uncertainty, the prices of municipal
securities can become volatile.
DURATION. Duration is a measure of the expected life of a bond on a present
value basis. Duration incorporates a bond's yield, coupon interest payments,
final maturity and call features into one
---------------------
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Prospectus Page 26
<PAGE>
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
measure and is one of the fundamental tools used by Mitchell Hutchins in
portfolio selection and yield curve positioning for the Funds.
Duration takes the length of the time intervals between the present time and the
time that the interest and principal payments are scheduled or, in the case of a
callable bond, expected to be made, and weights them by the present values of
the cash to be received at each future point in time. For any bond with interest
payments occurring prior to the payment of principal, duration is always less
than maturity.
Duration allows Mitchell Hutchins to make certain predictions as to the effect
that changes in the level of interest rates will have on the value of a Fund's
portfolio. For example, when the level of interest rates increases by 1%, a
fixed income security having a positive duration of three years generally will
decrease by approximately 3%. Thus, if Mitchell Hutchins calculates the duration
of the Fund's portfolio 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
complex securities, duration calculations are estimates and are not precise.
This is particularly true during periods of market volatility. Accordingly, the
net asset value of a Fund's portfolio may vary in relation to interest rates by
a greater or lesser percentage than indicated by the above example.
DERIVATIVES. Some of the instruments in which the Funds may invest may be
referred to as 'derivatives,' because their value depends on (or 'derives' from)
the value of an underlying asset, reference rate or index. These instruments
include options, futures contracts and similar instruments that may be used in
hedging strategies. There is only limited consensus as to what constitutes a
'derivative' security. However, in Mitchell Hutchins' view, derivative
securities also include inverse floaters. The market value of derivative
instruments and securities sometimes is more volatile than that of other
investments, and each type of derivative instrument may pose its own special
risks. Mitchell Hutchins takes these risks into account in its management of the
Funds.
CHANGE IN LAWS. New federal, state and local laws, or changes in existing laws,
may adversely affect the tax-exempt status of interest on a Fund's portfolio
securities or of the exempt-interest dividends paid by a Fund, extend the time
for an issuer's payment of principal or interest or otherwise constrain
enforcement of such obligations.
RELATED SECURITIES. Each Fund may invest more than 25% of its total assets in
municipal securities that are related in such a way that an economic, business
or political development or change affecting one such security also might affect
the other securities, such as securities the interest on which is paid from
revenues of similar types of projects. The Funds may be subject to greater risk
than other funds that do not follow this practice.
NON-DIVERSIFIED STATUS. Municipal High Income Fund and New York Tax-Free Income
Fund are each 'non-diversified,' as that term is defined in the Investment
Company Act of 1940. This means, in general, that more than 5% of the Fund's
total assets may be invested in the securities of one issuer, but only if, at
the close of each quarter of the Fund's taxable year, the aggregate amount of
such holdings does not exceed 50% of the value of its total assets and no more
than 25% of the value of its total assets is invested in the securities of a
single issuer. When the Fund's portfolio is comprised of securities of a smaller
number of issuers than if it were 'diversified,' the Fund will be subject to
greater risk because changes in the financial condition or market assessment of
a single issuer may have a greater effect on the Fund's total return and the
price of Fund shares.
RISKS OF CALIFORNIA OBLIGATIONS. California Tax-Free Income Fund's investment
concentration in California Obligations involves greater risks than if it
invested in the securities of a broader range
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Prospectus Page 27
<PAGE>
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
of issuers. The Fund's yield and net asset value per share can be affected by
political and economic developments within California, and by the financial
condition of California, its public authorities and political subdivisions.
California suffered a severe recession between 1990-1993, resulting in
significant revenue shortfalls for both the State and local government, and
increased social service expenses. However, since the start of 1994,
California's economy has rebounded strongly, with corresponding improvements in
tax revenues. Further, in the past California voters have passed amendments to
the California Constitution and other measures that limit the taxing and
spending authority of California governmental entities, and future voter
initiatives could result in adverse consequences affecting California
Obligations. A more detailed discussion of the risks of investing in California
Obligations is included in the Statement of Additional Information.
RISKS OF NEW YORK OBLIGATIONS. New York Tax-Free Income Fund's investment
concentration in New York Obligations involves greater risks than if it invested
in the securities of a broader range of issuers. The Fund's yield and net asset
value per share can be affected by political and economic developments within
the State of New York, its public authorities and political subdivisions,
particularly New York City. Although employment in New York State has grown at a
modest rate since 1993 and the State's economy continued its slow recovery in
1996, New York State has experienced slower employment growth than the nation as
a whole. Although New York City has closed substantial budget gaps in recent
years to maintain a balanced budget as required by State law, additional tax
increases or additional reductions in essential City services or entitlement
programs could adversely affect the City's economic base. A more detailed
discussion of the risks of investing in New York Obligations is included in the
Statement of Additional Information.
INVESTMENT TECHNIQUES AND STRATEGIES
HEDGING AND OTHER STRATEGIES USING DERIVATIVE CONTRACTS. Each Fund may use
derivative contracts, such as options (both exchange-traded and
over-the-counter) and futures contracts in strategies intended to enhance income
or to reduce the overall risk of its investments ('hedge'). Use of these
derivative contracts solely to enhance income may be considered a form of
speculation. The use of derivative contracts also may generate taxable income.
New financial products and risk management techniques continue to be developed
and may be used if consistent with a Fund's investment objective and policies.
The Statement of Additional Information contains further information on these
derivative contracts and related strategies.
The Funds might not use any derivative contract or related strategy, and there
can be no assurance that any strategy will succeed. If Mitchell Hutchins is
incorrect in its judgment on market values, interest rates or other economic
factors in using a hedging strategy, a Fund may have lower net income and a net
loss on the investment. Each strategy involves certain risks, which include:
the fact that the skills needed to implement a strategy using derivative
instruments are different from those needed to select securities for the Funds;
the possibility of imperfect correlation, or even no correlation, between price
movements of derivative contracts used in hedging strategies and price
movements of the securities being hedged;
possible constraints placed on a Fund's ability to purchase or sell portfolio
investments at advantageous times due to the need for the Fund to maintain
'cover' or to segregate securities; and
the possibility that a Fund is unable to close out or liquidate its hedged
position.
DEFENSIVE POSITIONS. When Mitchell Hutchins believes that unusual circumstances
warrant a defensive posture and that there are not enough suitable municipal
obligations available, each
---------------------
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Prospectus Page 28
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<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
Fund may temporarily and without percentage limit hold cash and invest in money
market instruments that pay taxable interest, including repurchase agreements.
If a Fund holds cash, the cash would not earn income and would reduce the Fund's
yield. In addition, for temporary defensive purposes, each of California
Tax-Free Income Fund, National Tax-Free Income Fund and New York Tax-Free Income
Fund may invest more than 20% of its net assets in municipal obligations that
pay interest that is exempt from federal income tax but is subject to California
personal income tax (in the case of California Tax-Free Income Fund), New York
personal income tax (in the case of New York Tax-Free Income Fund) or is not AMT
exempt interest.
ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets in
illiquid securities. These include, among other things, municipal lease
obligations (including certificates of participation) other than those Mitchell
Hutchins has determined are liquid pursuant to guidelines established by each
Fund's board.
LENDING PORTFOLIO SECURITIES. Each Fund may lend its securities to qualified
broker-dealers or institutional investors in an amount up to 331/3% of the
Fund's total assets taken at market value. Lending securities enables a Fund to
earn additional income but could result in a loss or delay in recovering
securities. Because the income generated by securities lending activities is
taxable, the Funds do not expect to engage in securities lending except under
unusual circumstances.
OTHER INFORMATION. Each Fund may purchase bonds on a when-issued basis or may
purchase or sell securities for delayed delivery. A Fund generally would not pay
for such securities or start earning interest on them until they are delivered,
but it would immediately assume the risks of ownership, including the risk of
price fluctuation. Each Fund may borrow money for temporary or emergency
purposes, but not in excess of 10% of its total assets.
New forms of bonds, derivatives and hedging instruments continue to be
developed. Each Fund may invest in such securities to the extent consistent with
its investment objections.
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Prospectus Page 29
<PAGE>
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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FLEXIBLE PRICING'sm'
- --------------------------------------------------------------------------------
Each Fund offers through this Prospectus four classes of shares that differ in
terms of sales charges and expenses. An investor can select the class that is
best suited to his or her investment needs, based upon the holding period and
the amount of investment.
CLASS A SHARES
HOW PRICE IS CALCULATED: The price is the net asset value plus the initial
sales charge (the maximum is 4% of the public offering price) next calculated
after PaineWebber's New York City headquarters or PFPC Inc., the Funds' transfer
agent ('Transfer Agent'), receives the purchase order. Although investors pay an
initial sales charge when they buy Class A shares, the ongoing expenses for this
class are lower than the ongoing expenses of Class B and Class C shares. Class A
shares sales charges are calculated as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS A
PERCENTAGE OF
----------------------- DISCOUNT TO
NET SELECTED DEALERS
OFFERING AMOUNT AS PERCENTAGE
AMOUNT OF INVESTMENT PRICE INVESTED OF OFFERING PRICE
- ---------------------------------------------- -------- -------- -----------------
<S> <C> <C> <C>
Less than $100,000 4.00% 4.17% 3.75%
$100,000 to $249,999 3.00 3.09 2.75
$250,000 to $499,999 2.25 2.30 2.00
$500,000 to $999,999 1.75 1.78 1.50
$1,000,000 and over(1) None None 1.00(2)
</TABLE>
- ------------------
(1) A contingent deferred sales charge of 1% of the shares' offering price or
the net asset value at the time of sale by the shareholder whichever is
less, is charged on sales of shares made within one year of the purchase
date. However, Class A shares representing reinvestment of any dividends or
other distributions are not subject to the 1% charge. Withdrawals under the
Systematic Withdrawal Plan are not subject to this charge. However,
investors may not withdraw annually more than 12% of the value of the Fund
account under the Plan in the first year after purchase.
(2) Mitchell Hutchins pays 1% to PaineWebber.
SALES CHARGE REDUCTIONS & WAIVERS
Investors purchasing Class A shares in more than one PaineWebber mutual fund may
combine those purchases to get a reduced sales charge. Investors who already own
Class A shares in one or more PaineWebber mutual funds may combine the amount
they are currently purchasing with the value of such previously owned shares to
qualify for a reduced sales charge. To determine the sales charge reduction in
either case, please refer to the chart above.
Investors may also qualify for a lower sales charge when they combine their
purchases with those of:
their spouses, parents or children under age 21;
their Individual Retirement Accounts (IRAs);
certain employee benefit plans, including 401(k) plans;
any company controlled by the investor;
trusts created by the investor;
Uniform Gifts to Minors Act/Uniform Transfers to Minors Act accounts created by
the investor or group of investors for the benefit of the investors' children;
or
accounts with the same adviser.
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Prospectus Page 30
<PAGE>
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
Employers who own Class A shares for one or more of their qualified retirement
plans may also qualify for the reduced sales charge.
The sales charge will not apply when the investor:
is an employee, director, trustee or officer of PaineWebber, its affiliates or
any PaineWebber mutual fund;
is the spouse, parent or child of any of the above;
buys these shares through a PaineWebber investment executive who was formerly
employed as a broker with a competing brokerage firm that was registered as a
broker-dealer with the SEC; and
was the investment executive's client at the competing brokerage firm;
within 90 days of buying Class A shares in a Fund, the investor sells shares
of one or more mutual funds that (a) were principally underwritten by the
competing brokerage firm or its affiliates and (b) the investor either paid
a sales charge to buy those shares, paid a contingent deferred sales charge
when selling them or held those shares until the contingent deferred sales
charge was waived; and
the amount that the investor purchases does not exceed the total amount of
money the investor received from the sale of the other mutual fund;
is a certificate holder of unit investment trusts sponsored by PaineWebber and
has elected to have dividends and other distributions from that investment
automatically invested in Class A shares;
is an employer establishing an employee benefit plan qualified under section
401, including a salary reduction plan qualified under section 401(k) or 403(b)
of the Internal Revenue Code ('Code') (each a 'qualified pension plan'). (This
waiver is subject to minimum requirements, with respect to the number of
employees and amount of plan assets, established by Mitchell Hutchins.
Currently, a plan must have 50 or more eligible employees and at least $1
million in plan assets. For investments made pursuant to this waiver, Mitchell
Hutchins may make a payment to PaineWebber out of its own resources in an
amount not to exceed 1% of the amount invested;
is a participant in the PaineWebber Members Only Program'tm'. For
investments made pursuant to this waiver, Mitchell Hutchins may make
payments out of its own resources to PaineWebber and to participating
membership organizations in a total amount not to exceed 1% of the amount
invested;
is a variable annuity offered only to qualified pension plans. For
investments made pursuant to this waiver, Mitchell Hitchins may make
payments out of its own resources to PaineWebber and to the variable
annuity's sponsor, adviser or distributor in a total amount not to exceed
1% of the amount invested;
acquires Class A shares through an investment program that is not sponsored
by PaineWebber or its affiliates and that charges participants a fee for
program services, provided that the program sponsor has entered into a
written agreement with PaineWebber permitting the sale of Class A shares at
net asset value to that program. For investments made pursuant to this
waiver, Mitchell Hutchins may make a payment to PaineWebber out of its own
resources in an amount not to exceed 1% of the amount invested. For
subsequent investments or exchanges made to implement a rebalancing feature
of such an investment program, the mimimum subsequent investment requirement
is also waived; or
acquires Class A shares in connection with a reorganization pursuant to which a
Fund acquires substantially all of the assets and liabilities of another
investment company in exchange solely for shares of the Fund.
For more information on how to get a reduced sales charge, investors should
contact their investment executive at PaineWebber or one of its correspondent
firms or call 1-800-647-1568. Investors must provide satisfactory information to
PaineWebber or a fund if they seek any of these waivers.
CLASS B SHARES
HOW PRICE IS CALCULATED: The price is the net asset value next calculated after
PaineWebber's New York City headquarters or the Transfer Agent receives the
purchase order. The ongoing expenses investors pay for Class B shares are higher
than those of Class A shares. Because investors do not pay an initial sales
charge when they buy Class B shares, 100% of their purchase is immediately
invested.
Depending on how long they own their Fund investment, investors may have to pay
a sales charge when they sell their Fund shares. This sales charge is called a
'contingent deferred sales charge.' The amount of the charge depends on how long
the investor owned the shares. The sales charge is calculated by multiplying the
offering price (net asset value of the shares at the time of purchase) or the
net asset value at the time of sale by the shareholder, whichever is less, by
the percentage shown on the following table. Investors who own shares for more
than six years do not have to pay a sales charge when selling those shares.
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Prospectus Page 31
<PAGE>
<PAGE>
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
PERCENTAGE BY WHICH
THE SHARES' NET
ASSET
IF THE INVESTOR VALUE IS
SELLS SHARES WITHIN: MULTIPLIED:
- --------------------------------- -------------------
<S> <C>
1st year since purchase 5%
2nd year since purchase 4
3rd year since purchase 3
4th year since purchase 2
5th year since purchase 2
6th year since purchase 1
7th year since purchase None
</TABLE>
CONVERSION OF CLASS B SHARES
Class B shares automatically convert to the appropriate number of Class A shares
of equal dollar value after the investor has owned them for six years. Dividends
and other distributions paid to the investor by the Fund in the form of
additional Class B shares will also convert to Class A shares on a pro-rata
basis. This benefits shareholders because Class A shares have lower ongoing
expenses than Class B shares. If the investor has exchanged Class B shares
between PaineWebber funds, the Fund uses the purchase date at which the initial
investment was made to determine the conversion date.
MINIMIZING THE CONTINGENT DEFERRED SALES CHARGE
When investors sell Class B shares they have owned for less than six years, the
Fund automatically will minimize the sales charge by assuming the investors are
selling:
First, Class B shares owned through reinvested dividends and capital gain
distributions; and
Second, Class B shares held in the portfolio the longest.
WAIVERS OF THE CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will not apply to:
sales of shares under the Fund's 'Systematic Withdrawal Plan' (investors may
not withdraw annually more than 12% of the value of the Fund account under the
Plan);
a distribution from an IRA, a self-employed individual retirement plan ('Keogh
Plan') or a custodial account under Section 403(b) of the Internal Revenue Code
(after the investor reaches age 59 1/2);
a tax-free return of an excess IRA contribution;
a tax-qualified retirement plan distribution following retirement; or
Class B shares sold within one year of an investor's death if the investor
owned the shares at the time of death either as the sole shareholder or with
his or her spouse as a joint tenant with the right of survivorship.
An investor must provide satisfactory information to PaineWebber or the Fund if
the investor seeks any of these waivers.
CLASS C SHARES
HOW PRICE IS CALCULATED: The price of Class C shares is the net asset value
next calculated after PaineWebber's New York City headquarters or the Transfer
Agent receives the purchase order. Investors do not pay an initial sales charge
when they buy Class C shares, but the ongoing expenses of Class C shares are
higher than those of Class A shares. Class C shares never convert to any other
Class of shares. Because investors do not pay an initial sales charge when they
buy Class C shares, 100% of their purchase is immediately invested. Class C
shares never convert to any other class.
A contingent deferred sales charge of 0.75% of the offering price (net asset
value at the time of the purchase) or net asset value of the shares at the time
of sale by the shareholder, whichever is less, is charged on sales of shares
made within one year of the purchase date. Other PaineWebber mutual funds may
impose a different contingent deferred sales charge on Class C shares sold
within one year of the purchase date. A sale of Class C shares acquired through
an exchange and held less than one year will be subject to the same contingent
deferred sales charge that would have been imposed on the Class C shares of the
PaineWebber mutual fund originally purchased. Class C shares representing
reinvestment of any dividends or capital gains are not subject to the 0.75%
charge. Withdrawals under the Systematic Withdrawal Plan also are not subject to
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
this charge. However, investors may not withdraw annually more than 12% of the
value of the Fund account under the Plan in the first year after purchase.
CLASS Y SHARES
HOW PRICE IS CALCULATED: Class Y shares are sold to eligible investors at the
net asset value next determined after PaineWebber's New York City headquarters
or the Transfer Agent receives the purchase order. Because investors do not pay
an initial sales charge when they buy Class Y shares, 100% of their purchase is
immediately invested. No contingent deferred sales charge is imposed on Class Y
shares, and the ongoing expenses for Class Y shares are lower than for the other
classes because Class Y shares are not subject to rule 12b-1 distribution or
service fees.
LIMITED GROUPS OF INVESTORS. Only the following investors are eligible to buy
Class Y shares:
a participant in INSIGHT when Class Y shares are purchased through that
program;
an investor who buys $10 million or more at any one time in any combination of
PaineWebber mutual funds in the Flexible Pricing'sm' System;
an employee benefit plan qualified under section 401 (including a salary
reduction plan, qualified under section 401(k)) or 403(b) of the Internal
Revenue Code that has either 5,000 or more eligible employees or $50 million or
more in assets; and
an investment company advised by PaineWebber or an affiliate of PaineWebber.
INSIGHT. An investor who purchases $50,000 or more of shares of the mutual funds
that are available to INSIGHT participants (which include the PaineWebber mutual
funds in the Flexible Pricing'sm' System and certain other specified mutual
funds) may take part in INSIGHT, a total portfolio asset allocation program
sponsored by PaineWebber, and thus become eligible to purchase Class Y shares.
INSIGHT offers comprehensive investment services, including a personalized asset
allocation investment strategy using an appropriate combination of funds,
monitoring of investment performance and comprehensive quarterly reports that
cover market trends, portfolio summaries and personalized account information.
Participation in INSIGHT is subject to payment of an advisory fee to PaineWebber
at the maximum annual rate of 1.5% of assets held through the program (generally
charged quarterly in advance), which covers all INSIGHT investment advisory
services and program administration fees. Employees of PaineWebber and its
affiliates are entitled to a 50% reduction in the fee otherwise payable for
participation in INSIGHT. INSIGHT clients may elect to have their INSIGHT fees
charged to their PaineWebber accounts (by the automatic redemption of money
market fund shares) or, if a qualified plan, invoiced.
Please contact your PaineWebber investment executive or PaineWebber's
correspondent firms for more information concerning mutual funds that are
available to INSIGHT participants or for other INSIGHT Information.
ACQUISITION OF CLASS Y SHARES BY OTHERS. Each Fund is authorized to offer Class
Y shares to certain other investment programs that are sponsored by PaineWebber
and that may invest in PaineWebber mutual funds. At present, however, INSIGHT
participants are the only purchasers in this category.
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HOW TO BUY SHARES
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Prices are calculated for each class of a Fund's shares once each Business Day,
at the close of regular trading on the New York Stock Exchange (currently 4:00
p.m., Eastern time). A 'Business Day' is any day, Monday through Friday, on
which the New York Stock Exchange is open for business. Shares are purchased at
the next share
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
price calculated after the purchase order is received.
The Funds and Mitchell Hutchins reserve the right to reject any purchase order
and to suspend the offering of Fund shares for a period of time.
When placing an order to buy shares, investors should specify which class of
shares they want to buy. If investors fail to specify the class, they will
automatically receive Class A shares, which include an initial sales charge.
Investors in Class Y shares must provide satisfactory information to PaineWebber
or an individual Fund that they are eligible to purchase Class Y shares.
PAINEWEBBER CLIENTS
Investors who are PaineWebber clients may buy shares through PaineWebber
investment executives or its correspondent firms. Investors may buy shares in
person, by mail, by telephone or by wire (the minimum wire purchase is $1
million). PaineWebber investment executives and correspondent firms are
responsible for promptly sending investors' purchase orders to PaineWebber's New
York City headquarters.
Investors may pay for their purchases with checks drawn on U.S. banks or with
funds they have in their brokerage accounts at PaineWebber or its correspondent
firms. Payment is due on the third Business Day after PaineWebber's New York
City headquarters office receives the purchase order.
OTHER INVESTORS
Investors who are not PaineWebber clients may purchase Fund shares and set up an
account through the Transfer Agent (PFPC Inc.) by completing an account
application, which may be obtained by calling 1-800-647-1568. The application
and check must be mailed to PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box
8950, Wilmington, DE 19899.
Investors who already have money invested in a PaineWebber mutual fund, and want
to invest in another PaineWebber mutual fund, can:
mail an application with a check; or
open an account by exchanging from another PaineWebber mutual fund.
Investors do not have to send an application when making additional investments
in a Fund.
MINIMUM INVESTMENTS
<TABLE>
<S> <C>
To open an account............................. $1,000
To add to an account........................... $ 100
</TABLE>
A Fund may waive or reduce these minimums for:
employees of PaineWebber or its affiliates; or
participants in certain pension plans, retirement accounts, unaffiliated
investment programs or the Fund's automatic investment plan.
HOW TO EXCHANGE SHARES
As shareholders, investors have the privilege of exchanging Class A, B and C
shares for the same class of other PaineWebber mutual fund shares. For classes
of shares where no initial sales charge is imposed, a contingent deferred sales
charge may apply if the investor sells the shares acquired through the exchange.
Class Y shares are not exchangeable.
Exchanges may be subject to minimum investment requirements of the fund into
which exchanges are made.
Investors who purchased their shares through an investment executive at
PaineWebber or one of its correspondent firms may exchange their shares by
contacting their investment executive in person or by telephone, mail or wire.
Investors who do not have an account with an investment executive at
PaineWebber or one of its correspondent firms may exchange their shares by
writing a 'letter of instruction' to the Transfer Agent. The letter of
instruction must include:
the investor's name and address;
the Fund's name;
the Fund account number;
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Prospectus Page 34
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
the dollar amount or number of shares to be sold; and
a guarantee of each registered owner's signature by an eligible institution,
such as a commercial bank, trust company or stock exchange member.
The letter must be mailed to PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box
8950, Wilmington, DE 19899.
No contingent deferred sales charge is imposed when shares are exchanged for the
corresponding class of shares of other PaineWebber mutual funds. A Fund will use
the purchase date of the initial investment to determine any contingent deferred
sales charge due when the acquired shares are sold. Fund shares may be exchanged
only after the settlement date has passed and payment for the shares has been
made. The exchange privilege is available only in those jurisdictions where the
sale of the fund shares to be acquired is authorized. This exchange privilege
may be modified or terminated at any time and, when required by SEC rules, upon
60 days' notice. See the back cover of this prospectus for a listing of other
PaineWebber mutual funds.
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HOW TO SELL SHARES
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Investors can sell (redeem) shares at any time. Shares will be sold at the share
price for that class as next calculated after the order is received and accepted
(less any applicable contingent deferred sales charge). Share prices are
normally calculated at the close of regular trading on the New York Stock
Exchange (currently 4:00 p.m., Eastern time).
Investors who own more than one class of shares should specify which class they
are selling. If they do not, the Fund will assume they are first selling their
Class A shares, then Class C, and last, Class B.
If a shareholder wants to sell shares which were purchased recently, the Fund
may delay payment until it verifies that good payment was received. In the case
of purchases by check, this can take up to 15 days.
Investors who have an account with PaineWebber or one of PaineWebber's
correspondent firms can sell their shares by contacting their investment
executive. Investors who do not have an account and have bought their shares
through PFPC Inc., the Fund's Transfer Agent, may sell shares by writing a
'letter of instruction,' as detailed in 'How to Exchange Shares.'
Because the Funds incur certain fixed costs in maintaining shareholder accounts,
each Fund reserves the right to purchase back all of its shares in any
shareholder account with a net asset value of less than $500. If the Fund elects
to do so, it will notify the shareholder of the opportunity to increase the
amount invested to $500 or more within 60 days of the notice. A Fund will not
purchase back accounts that fall below $500 solely due to a reduction in net
asset value per share.
REINSTATEMENT PRIVILEGE
Shareholders who sell their Class A shares may reinstate their Fund account
without a sales charge up to the dollar amount sold by purchasing the Fund's
Class A shares within 365 days after the sale. To take advantage of this
reinstatement privilege, shareholders must notify their investment executive at
PaineWebber or one of its correspondent firms at the time of purchase.
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Prospectus Page 35
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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OTHER SERVICES
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Investors should consult their investment executives at PaineWebber or one of
its correspondent firms to learn more about the following services available
with respect to the Funds' Class A, Class B and C shares:
AUTOMATIC INVESTMENT PLAN
Investing on a regular basis helps investors meet their financial goals.
PaineWebber offers an Automatic Investment Plan with a minimum initial
investment of $1,000 through which a Fund will deduct $50 or more each month
from the investor's bank account to invest directly in the Fund. In addition to
providing a convenient and disciplined manner of investing, participation in the
Automatic Investment Plan enables the investor to use the technique of 'dollar
cost averaging.'
SYSTEMATIC WITHDRAWAL PLAN
The Systematic Withdrawal Plan allows investors to set up monthly, quarterly
(March, June, September and December), semiannual (June and December) or annual
(December) withdrawals from their PaineWebber Mutual Fund accounts. Minimum
balances and withdrawals vary according to the class of shares:
CLASS A AND CLASS C SHARES. Minimum value of Fund shares is $5,000; minimum
withdrawals of $100.
CLASS B SHARES. Minimum value of Fund shares is $20,000; minimum monthly,
quarterly, semiannual and annual withdrawals of $200, $400, $600 and $800
respectively.
Withdrawals under the Systematic Withdrawal Plan will not be subject to a
contingent deferred sales charge. An investor may not withdraw more than 12% of
the value of the Fund account when the investor signed up for the Plan (for
Class B shares annually; for Class A and C shares, during the first year under
the Plan). Shareholders who elect to receive dividends or other distributions in
cash may not participate in the Plan.
INDIVIDUAL RETIREMENT ACCOUNTS
Self-Directed IRAs are available though PaineWebber in which purchases of
PaineWebber mutual funds and other investments may be made. Investors
considering establishing an IRA should review applicable tax laws and should
consult their tax advisers.
TRANSFER OF ACCOUNTS
If investors holding shares of a Fund in a PaineWebber brokerage account
transfer their brokerage accounts to another firm, the Fund shares will be moved
to an account with the Transfer Agent. However, if the other firm has entered
into a selected dealer agreement with Mitchell Hutchins relating to the Fund,
the shareholder may be able to hold Fund shares in an account with the other
firm.
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MANAGEMENT
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Each Fund is governed by its board of trustees, which oversees the Fund's
operations. Each board has appointed Mitchell Hutchins as investment adviser and
administrator responsible for the Fund's operations (subject to the authority of
the board). As investment adviser and administrator, Mitchell Hutchins
supervises all aspects of each Fund's operations and makes and implements all
investment decisions for that Fund.
The boards, as part of their overall management responsibility, oversee various
organizations
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Prospectus Page 36
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
responsible for the day-to-day management of each Fund.
In accordance with procedures adopted by the boards, brokerage transactions for
the Funds may be conducted through PaineWebber or its affiliates and the Funds
may pay fees to PaineWebber for its services as lending agent in their portfolio
securities lending programs.
ABOUT THE INVESTMENT ADVISER
Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York,
10019, is an asset management subsidiary of PaineWebber, which is wholly owned
by Paine Webber Group Inc., a publicly owned financial services holding company.
On May 31, 1997, Mitchell Hutchins was adviser or sub-adviser of 30 investment
companies with 65 separate portfolios and aggregate assets of approximately
$32.7 billion.
Personnel of Mitchell Hutchins may engage in securities transactions for their
own accounts pursuant to Mitchell Hutchins' code of ethics that establishes
procedures for personal investing and restricts certain transactions.
Dennis L. McCauley is a managing director and chief investment officer of fixed
income of Mitchell Hutchins responsible for overseeing all active fixed income
investments, including domestic and global taxable and tax-exempt mutual funds.
Prior to joining Mitchell Hutchins in 1994, Mr. McCauley worked for IBM
Corporation, where he was director of fixed income investments responsible for
developing and managing investment strategy for all fixed income and cash
management investments of IBM's pension fund and self-insured medical funds. Mr.
McCauley has also served as vice president of IBM Credit Corporation's mutual
funds and as a member of the retirement fund investment committee.
Elbridge (Ebby) T. Gerry III, a senior vice president of Mitchell Hutchins, is
the co-portfolio manager and has day-to-day responsibility for New York Tax-Free
Income Fund, California Tax-Free Income Fund and National Tax-Free Income Fund.
Mr. Gerry is also a portfolio manager for Municipal High Income Fund. In the
case of California Tax-Free Income Fund, Cynthia N. Bow, a vice president of
Mitchell Hutchins, is the co-portfolio manager and also has day-to-day
responsibility for the Fund. In the case of New York Tax-Free Income Fund and
National Tax-Free Income Fund, Richard S. Murphy, a senior vice president of
Mitchell Hutchins, is the co-portfolio manager and also has day-to-day
responsibility for the Funds. In the case of Municipal High Income Fund, William
W. Veronda, a senior vice president of Mitchell Hutchins, is a portfolio manager
and has day-to-day responsibility for the Fund. Mr. Gerry has held his Fund
responsibilities since January 1996. Ms. Bow and Mr. Veronda have held their
Fund responsibilities since April 1993 and September 1995, respectively. Mr.
Murphy has held his Fund responsibilities since July 1994 and January 1996 for
National Tax-Free Income Fund and New York Tax-Free Income Fund, respectively.
Mr. Gerry has portfolio management responsibility for over $4 billion in
municipal assets at Mitchell Hutchins, including municipal bond and money funds
and private accounts. Mr. Gerry has been with Mitchell Hutchins since January
1996. Prior to January 1996, Mr. Gerry had been associated with J.P. Morgan
Private Banking since 1981, where he was responsible for managing municipal
assets, including several municipal bond funds. Ms. Bow has been with Mitchell
Hutchins since 1982. Mr. Murphy has been with Mitchell Hutchins since April
1994. From 1990 to March 1994, he was a vice president at American International
Group, where he managed the municipal bond portfolio. Mr. Veronda has been with
Mitchell Hutchins since September 1995. From 1984 to August 1995, he was a
senior vice president and general manager at Invesco Funds Group, where he
managed municipal bond and high yield corporate bond portfolios.
Other members of Mitchell Hutchins' municipal investments group provide input on
market outlook, interest rate forecasts, and other considerations pertaining to
municipal investments. This group, together with the municipal portfolio
managers, comprise the Municipal Investment Team that sets the strategy for the
management
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Prospectus Page 37
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
of PaineWebber municipal bond funds. The Municipal Investment Term is
complemented by a team of research analysts specializing in economic, credit,
quantitative and market research.
MANAGEMENT FEES & OTHER EXPENSES
Each Fund pays Mitchell Hutchins a monthly fee for its services. For the fiscal
year ended February 28, 1997, Mitchell Hutchins received a monthly fee for these
services from each of California Tax-Free Income Fund and National Tax-Free
Income Fund at the annual rate of 0.50% of that Fund's average daily net assets
and from each of Municipal High Income Fund and New York Tax-Free Income Fund at
the annual rate of 0.60% of that Fund's average daily net assets.
Each Fund pays PaineWebber an annual fee of $4.00 per active shareholder account
held at PaineWebber for services not provided by the Transfer Agent.
DISTRIBUTION ARRANGEMENTS
Mitchell Hutchins is the distributor of each Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. There is no
distribution plan with respect to the Funds' Class Y shares. Under distribution
plans for Class A, Class B and Class C shares ('Class A Plan,' 'Class B Plan'
and 'Class C Plan,' collectively, 'Plans'), each Fund pays Mitchell Hutchins:
Monthly service fees at the annual rate of 0.25% of the average daily net
assets of each class of shares.
Monthly distribution fees at the annual rate of 0.75% of the average daily net
assets of Class B shares and 0.50% of the average daily net assets of the Class
C Shares.
Under the Plans, Mitchell Hutchins primarily uses the service fees to pay
PaineWebber for shareholder servicing, currently at the annual rate of 0.25% of
the aggregate investment amounts maintained in each Fund's Class A, Class B and
Class C shares by PaineWebber clients. PaineWebber then compensates its
investment executives for shareholder servicing that they perform and offsets
its own expenses in servicing and maintaining shareholder accounts.
Mitchell Hutchins uses the distribution fees under the Class B and Class C Plans
to:
Offset the commissions it pays to PaineWebber for selling each Fund's Class B
and Class C shares, respectively.
Offset each Fund's marketing costs attributable to such classes, such as
preparation, printing and distribution of sales literature, advertising and
prospectuses to prospective investors and related overhead expenses, such as
employee salaries and bonuses.
PaineWebber compensates investment executives when Class B and Class C shares
are bought by investors, as well as on an ongoing basis. Mitchell Hutchins
receives no special compensation from any of the Funds or investors at the time
Class B or C shares are bought.
Mitchell Hutchins receives the proceeds of the initial sales charge paid when
Class A shares are 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 each class of shares
('Distribution Contracts') specify that each Fund must pay service and
distribution fees to Mitchell Hutchins for its activities, not as reimbursement
for specific expenses incurred. Therefore, even if Mitchell Hutchins' expenses
exceed the service or distribution fees it receives, the Funds will not be
obligated to pay more than those fees. On the other hand, if Mitchell Hutchins'
expenses are less than such fees, it will retain its full fees and realize a
profit. Expenses in excess of service and distribution fees received or accrued
through the termination date of any Plan will be Mitchell Hutchins' sole
responsibility and not that of the Funds. Annually, the board of each Fund
reviews each Plan and Mitchell Hutchins' corresponding expenses for each class
separately from the Plans and expenses of the other classes.
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Prospectus Page 38
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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DETERMINING THE SHARES' NET ASSET VALUE
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The net asset value of a Fund's shares fluctuates and is determined separately
for each class as of the close of regular trading on the New York Stock Exchange
(currently 4:00 p.m., Eastern time) each Business Day. Each Fund's net asset
value per share is determined by dividing the value of the securities held by
the Fund, plus any cash or other assets, minus all liabilities, by the total
number of Fund shares outstanding.
Each Fund values its assets based on their current market value when market
quotations are readily available or, when such market quotations are not
available, based upon appraisals received from a pricing system using a
computerized matrix system or based upon appraisals derived from information
from recognized dealers. If such value cannot be established, assets are valued
at fair value as determined in good faith by or under the direction of each
Fund's board. The amortized cost method generally is used to value debt
obligations with 60 days or less remaining to maturity, unless the board
determines that this does not represent fair value. It should be recognized that
judgment plays a greater role in valuing below investment grade municipal
securities in which the Funds may invest because there is less reliable,
objective data available.
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DIVIDENDS AND TAXES
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DIVIDENDS
Dividends from each Fund's net investment income are declared daily and paid
monthly.
Net investment income includes accrued interest and discount, less amortization
of premium and accrued expenses, with respect to municipal securities. Each Fund
distributes annually substantially all of its net capital gain (the excess of
net long-term capital gain over net short-term capital loss), if any, together
with any other taxable income (including any net short-term capital gain). A
Fund may make additional distributions if necessary to avoid a 4% excise tax on
certain undistributed income and capital gain.
Dividends and other distributions paid on each class of shares of each Fund are
calculated at the same time and in the same manner. Dividends on Class A, B and
C shares of a Fund are expected to be lower than those on its Class Y shares
because the other shares have higher expenses resulting from their service fees
and, in the case of Class B and Class C shares, their distribution fees.
Dividends on Class B and Class C shares of a Fund are expected to be lower than
those on its Class A shares because Class B and Class C shares have higher
expenses resulting from their distribution fees. For the same reason, dividends
on a Fund's Class B shares are expected to be lower than those on its Class C
shares. Dividends on each class also might be affected differently by the
allocation of other class-specific expenses. See 'General Information.'
The Funds' dividends and other distributions are paid in additional Fund shares
of the same class at net asset value, unless the shareholder has requested cash
payments. Shareholders who wish to receive dividends and other distributions in
cash, either mailed to the shareholder by check or credited to their PaineWebber
accounts, should contact their investment executives at PaineWebber or one of
its correspondent firms
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Prospectus Page 39
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
or complete the appropriate section of the account application.
TAXES
Each Fund intends to continue to qualify for treatment as a regulated investment
company ('RIC') under the Internal Revenue Code ('Code') so that it will not
have to pay federal income tax on the part of its investment company taxable
income (generally consisting of taxable net investment income and net short-term
capital gain) and net capital gain that it distributes to its shareholders.
Shareholders generally may exclude from gross income for federal income tax
purposes distributions by a Fund that it designates as 'exempt-interest
dividends.' In order to pay exempt-interest dividends to its shareholders, a
Fund must (and each Fund intends to continue to) satisfy the requirement that,
at the close of each quarter of its taxable year, at least 50% of the value of
its total assets consists of municipal securities.
If a Fund realizes capital gains as a result of market transactions, any
distribution of those gains is taxable to its shareholders.
Shareholders may not deduct interest on indebtedness they incur or continue in
order to purchase or carry Fund shares. If a Fund invests in certain PABs,
shareholders must include a portion of their exempt-interest dividends from that
Fund in calculating their liability for the federal alternative minimum tax.
Corporate shareholders must include all of their exempt-interest dividends in
calculating their liability for that tax.
YEAR-END TAX REPORTING
Following the end of each calendar year, each Fund notifies its shareholders of
the amounts of exempt-interest dividends, any portion of those dividends that is
not AMT exempt interest, taxable dividends and other distributions paid (or
deemed paid) that year.
BACKUP WITHHOLDING
Each Fund must withhold 31% of all dividends, capital gain distributions and
redemption proceeds payable to individuals and certain other non-corporate
shareholders who do not provide the Fund with a correct taxpayer identification
number. Withholding at that rate is also required from dividends and capital
gain distributions payable to such shareholders who otherwise are subject to
backup withholding.
TAX ON THE SALE OR EXCHANGE OF FUND SHARES
A sale (redemption) by shareholders of their Fund shares may result in a taxable
gain or loss. This depends upon whether the shareholders receive more or less
than their 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 that Fund (regardless of class) at a loss, all
or a portion of that loss will not be deductible and will increase the basis of
the newly purchased shares.
SPECIAL TAX RULES FOR CLASS A SHAREHOLDERS
Special tax rules apply when a shareholder sells (redeems) or exchanges Class A
shares within 90 days of purchase and subsequently acquires Class A shares of
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.
CALIFORNIA TAXES
If California Tax-Free Income Fund continues to qualify as a RIC under the Code
and at the end of each quarter of its taxable year at least 50% of the value of
its total assets consists of California Obligations, the exempt-interest
dividends it
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Prospectus Page 40
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
pays that are derived from interest on qualifying California Obligations will be
exempt from California personal income tax ('California exempt-interest
dividends'), but not California franchise tax. Dividends and other distributions
derived from interest on other municipal securities, taxable income and capital
gains are taxable under California law at ordinary income rates. Shareholders
may not deduct interest on indebtedness they incur to purchase or carry shares
of the Fund for California personal income tax purposes. Shareholders receive
annual notification of the portion of the Fund's tax-exempt income attributable
to issuers in California and other states. California exempt-interest dividends
may affect the calculation of certain adjustments to alternative minimum taxable
income for corporate shareholders. The Fund itself will not be subject to
California franchise or corporate income tax on interest income or net capital
gain distributed to its shareholders.
NEW YORK STATE AND NEW YORK CITY TAXES
If New York Tax-Free Income Fund continues to qualify as a RIC under the Code
and at the end of each quarter of its taxable year at least 50% of the value of
its total assets consists of New York Obligations, the exempt-interest dividends
it pays that are derived from interest on qualifying New York Obligations will
be exempt from New York State and New York City personal income taxes, but not
corporate franchise taxes. Dividends and other distributions derived from
taxable income and capital gains are not exempt from New York State and New York
City taxes. Shareholders may not deduct interest on indebtedness they incur or
continue in order to purchase or carry shares of the Fund for New York State or
New York City personal income tax purposes. Shareholders receive annual
notification of the portion of the Fund's tax-exempt income attributable to
issuers in New York State and other states. The Fund's interest income that is
distributed to shareholders will generally not be taxable to the Fund for
purposes of the New York State corporation franchise tax or the New York City
general corporation tax.
* * * *
The foregoing only summarizes some of the important federal income tax and
California, New York State and New York City personal income tax considerations
generally affecting each Fund and its shareholders. Please see the further
discussion in the Statement of Additional Information. Prospective shareholders
are urged to consult their tax advisers.
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GENERAL INFORMATION
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ORGANIZATION
California Tax-Free Income Fund and National Tax-Free Income Fund are
diversified series of PaineWebber Mutual Fund Trust, an open-end management
investment company formed on November 21, 1986 as a business trust under the
laws of the Commonwealth of Massachusetts. Municipal High Income Fund and New
York Tax-Free Income Fund are diversified series of PaineWebber Municipal
Series, an open-end management investment company formed on January 28, 1987 as
a business trust under the laws of the Commonwealth of Massachusetts. The
trustees of PaineWebber Mutual Fund Trust and PaineWebber Municipal Series (each
a 'Trust') have authority to issue an unlimited number of shares of beneficial
interest of separate series, with a par value of $0.001 per share.
SHARES
The shares of each Fund are divided into four classes, designated Class A, Class
B, Class C and Class Y shares. Each class of shares of a Fund
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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. The different
sales charges and other expenses applicable to the different classes of shares
of a Fund will affect the performance of those classes.
Each share of each 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 on a Fund's Class A, B, and Y
Shares will differ.
Although each Trust is offering only the shares of its Funds, it is possible
that a Trust could become liable for misstatement in this Prospectus about a
Fund of the other Trust. The Board of each Trust considered this factor in
approving the use of a combined Prospectus.
VOTING RIGHTS
Shareholders of each Fund are entitled to one vote for each full share held and
fractional votes for fractional shares held. Voting rights are not cumulative,
and, as a result, the holders of more than 50% of all the shares of a Trust may
elect all of its board members. The shares of a Fund will be voted together
except that only the shareholders of a particular class of a Fund may vote on
matters affecting only that class, such as the terms of a Plan as it relates to
a class. The shares of each series of a Trust will be voted separately, except
when an aggregate vote of all the securities is required by law.
SHAREHOLDER MEETINGS
The Funds do not hold annual meetings.
Shareholders of record of no less than two-thirds of the outstanding shares of a
Trust may remove a board member through a declaration in writing or by vote cast
in person or by proxy at a meeting called for that purpose. A meeting will be
called to vote on the removal of a board member at the written request of
holders of 10% of a Trust's outstanding shares.
REPORTS TO SHAREHOLDERS
Each Fund sends its shareholders audited annual and unaudited semiannual
reports, each of which includes a list of the investment securities held by the
Fund as of the end of the period covered by the report. The Statement of
Additional Information, which is incorporated herein by reference, is available
to shareholders upon request.
CUSTODIAN & RECORDKEEPING AGENT; TRANSFER & DIVIDEND AGENT
State Street Bank and Trust Company, located at One Heritage Drive, North
Quincy, Massachusetts 02171, serves as custodian and recordkeeping agent for the
Funds. PFPC Inc., a subsidiary of PNC Bank, N.A., serves as the Funds' transfer
and dividend disbursing agent. It is located at 400 Bellevue Parkway,
Wilmington, DE 19809.
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
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APPENDIX
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Municipal bonds are rated by Moody's and S&P. Moody's and S&P also publish
separate ratings for municipal notes and tax-exempt commercial paper.
Descriptions of these ratings are set forth below.
DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS:
AAA. Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as 'gilt edge.'
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA. Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A. Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa. Bonds rated Baa are considered as medium grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba. Bonds rated Ba are judged to have speculative elements; their future cannot
be considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
B. Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa. Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca. Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C. Bonds rated C are the lowest rated class of bonds, and issues so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the issue ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic category.
DESCRIPTION OF S&P'S MUNICIPAL BOND RATINGS:
'AAA' An obligation rated 'AAA' has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
'AA' An obligation rated 'AA' differs from the highest-rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
'A' An obligation rated 'A' is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
obligor's capacity to meet its financial commitment on the obligation is still
strong.
'BBB' An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
'BB' An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions, which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
'B' An obligation rated 'B' is more vulnerable to nonpayment than obligations
rated 'BB', but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
'CCC' An obligation rated 'CCC' is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
'CC' An obligation rated 'CC' is currently highly vulnerable to nonpayment.
'C' The 'C' rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this obligation
are being continued.
'D' An obligation rated 'D' is in payment default. The 'D' rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF MOODY'S RATINGS OF STATE AND MUNICIPAL SHORT-TERM OBLIGATIONS:
Moody's ratings for state and municipal short-term obligations are designated
Moody's Investment Grade (MIG). Such ratings recognize the differences between
short-term credit risk and long-term risk. Factors affecting the liquidity of
the borrower and short-term cyclical elements are critical in short-term
ratings, while other factors may be of major importance in bond risk, long-term
secular trends, for example, may be less important over the short run. A
short-term rating may also be assigned on an issue having a demand
feature -- variable rate demand obligation (VRDO). Such ratings are designated
as VMIG, SG or, if the demand features is not rated, NR. Short-term ratings on
issues with demand features are differentiated by use of the VMIG symbol to
reflect such characteristics as payment upon periodic demand rather than fixed
maturity dates and payment relying on external liquidity. Additionally,
investors should be alert to the fact that the source of payment may be limited
to the external liquidity with no or limited legal recourse to the issuer in the
event the demand is not met.
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. All security elements
are accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity
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PAINEWEBBER
CALIFORNIA TAX-FREE INCOME FUND NATIONAL TAX-FREE INCOME FUND
MUNICIPAL HIGH INCOME FUND NEW YORK TAX-FREE INCOME FUND
and cash flow protection may be narrow and market access for refinancing is
likely to be less well established.
MIG-4/VMIG-4. This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
SG. This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
DESCRIPTION OF S&P'S RATINGS OF STATE AND MUNICIPAL NOTES AND OTHER SHORT-TERM
LOANS:
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment.
-- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
SP-1. Strong capacity to pay principal and interest. An issue determined to
possess very strong characteristics are given a plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3. Speculative capacity to pay principal and interest.
DESCRIPTION OF SHORT-TERM DEBT COMMERCIAL PAPER RATINGS
Issuers rated PRIME-1 by Moody's (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally 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 earning coverage of fixed financial charges and high internal
cash generation.
Well established access to a range of financial markets and assured sources of
alternate liquidity.
Issuers rated PRIME-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by rating of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Commercial paper rated A by S&P have the following characteristics.
A-1. This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the 'relative' degree of safety is not as high as for
issues designated 'A-1'.
A-3. Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse side effects of
changes in circumstances than obligations carrying the higher designations.
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PaineWebber California Tax-Free Income Fund
PaineWebber National Tax-Free Income Fund
PaineWebber New York Tax-Free Income Fund
PaineWebber Municipal High Income Fund
PROSPECTUS -- JULY 1, 1997
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<TABLE>
<S> <C>
PAINEWEBBER BOND FUNDS PAINEWEBBER STOCK FUNDS
High Income Fund Capital Appreciation Fund
Investment Grade Income Fund Financial Services Growth Fund
Low Duration U.S. Government Growth Fund
Income Fund Growth and Income Fund
Strategic Income Fund Small Cap Fund
U.S. Government Income Fund Utility Income Fund
PAINEWEBBER TAX-FREE BOND FUNDS PAINEWEBBER GLOBAL FUNDS
California Tax-Free Income Fund Asia Pacific Growth Fund
Municipal High Income Fund Emerging Markets Equity Fund
National Tax-Free Income Fund Global Equity Fund
New York Tax-Free Income Fund Global Income Fund
PAINEWEBBER ASSET ALLOCATION PAINEWEBBER MONEY MARKET FUND
FUNDS
Balanced Fund
Tactical Allocation Fund
</TABLE>
A prospectus containing more complete information for any
of these funds, including charges and expenses, can be
obtained from a PaineWebber investment executive or
correspondent firm. Please read it carefully before
investing. It is important you have all the information
you need to make a sound investment decision.
'c'1997 PaineWebber Incorporated
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PAINEWEBBER CALIFORNIA TAX-FREE INCOME FUND
PAINEWEBBER NATIONAL TAX-FREE INCOME FUND
PAINEWEBBER MUNICIPAL HIGH INCOME FUND
PAINEWEBBER NEW YORK TAX-FREE INCOME FUND
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
The four funds named above (each a 'Fund' and, collectively, 'Funds') are
series of either PaineWebber Mutual Fund Trust or PaineWebber Municipal Series
(each a 'Trust'), professionally managed, open-end management investment
companies organized as Massachusetts business trusts. These Funds are designed
for investors generally seeking high current income exempt from federal income
tax and, in some cases, certain state personal income taxes. PaineWebber
California Tax-Free Income Fund ('California Tax-Free Income Fund') invests
primarily in investment grade bonds issued by the State of California, its
municipalities and public authorities. PaineWebber National Tax-Free Income Fund
('National Tax-Free Income Fund') invests primarily in investment grade bonds
issued by various states, municipalities and public authorities. PaineWebber
Municipal High Income Fund ('Municipal High Income Fund') invests primarily in
high yield, high risk medium and lower grade bonds issued by various states,
municipalities and public authorities. PaineWebber New York Tax-Free Income Fund
('New York Tax-Free Income Fund') invests primarily in investment grade bonds
issued by the State of New York, its municipalities and public authorities.
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), a wholly
owned subsidiary of PaineWebber Incorporated ('PaineWebber'), serves as
investment adviser, administrator and distributor for each Fund. As distributor,
Mitchell Hutchins has appointed PaineWebber as the exclusive dealer for the sale
of Fund shares.
This Statement of Additional Information ('SAI') is not a prospectus and
should be read only in conjunction with the Funds' current Prospectus, dated
July 1, 1997. A copy of the Prospectus may be obtained by calling any
PaineWebber investment executive or correspondent firm or by calling toll-free
1-800-647-1568. This Statement of Additional Information is dated July 1, 1997.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Funds' investment policies and limitations.
YIELD FACTORS AND RATINGS. The yield of a municipal security depends on a
variety of factors, including general municipal and fixed-income security market
conditions, the financial condition of the issuer, the size of the particular
offering, the maturity, credit quality and rating of the issue and expectations
regarding changes in tax rates. Each Fund may invest in municipal securities
with a broad range of maturities, based on Mitchell Hutchins' judgment of
current and future market conditions as well as other factors, such as the
Fund's liquidity needs. Generally, the longer the maturity of a municipal
security, the higher the rate of interest paid and the greater the volatility.
Moody's Investors Service, Inc. ('Moody's'), Standard & Poor's, a division of
The McGraw-Hill Companies, Inc. ('S&P') and other nationally recognized
statistical rating organizations ('NRSROs') are private services that provide
ratings of the credit quality of debt obligations, including issues of municipal
securities. A description of the range of ratings assigned to municipal
securities by Moody's and S&P is included in the Appendix to the Funds'
Prospectus. The Funds may use these ratings in determining whether to purchase,
sell or hold a security. It should be emphasized, however, that ratings are
general and are not absolute standards of quality. Consequently, municipal
securities with the same maturity, interest rate and rating may have different
market prices. Also, rating agencies may fail to make timely changes in credit
ratings in response to subsequent events, so that an issuer's current financial
condition may be better or worse than the rating indicates. The rating assigned
to a security by a NRSRO does not reflect
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an assessment of the volatility of the security's market value or of the
liquidity of an investment in the security. Subsequent to its purchase by a
Fund, an issue of municipal securities may cease to be rated or its rating may
be reduced below the minimum rating required for purchase by the Fund.
Opinions relating to the validity of municipal securities and to the
exemption of interest thereon from federal income tax (and, when available, from
the federal alternative minimum tax ('AMT')) and (where applicable) California
personal income tax and New York State and New York City personal income taxes
are rendered by bond counsel to the respective issuing authorities at the time
of issuance. Neither the Funds nor Mitchell Hutchins review the proceedings
relating to the issuance of municipal securities or the basis for such opinions.
An issuer's obligations under its municipal securities are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors (such as the federal bankruptcy laws) and federal, state
and local laws that may be enacted that adversely affect the tax-exempt status
of interest on the municipal securities held by a Fund or of the exempt-interest
dividends received by a Fund's shareholders, extend the time for payment of
principal or interest, or both, or impose other constraints upon enforcement of
such obligations. There is also the possibility that, as a result of litigation
or other conditions, the power or ability of issuers to meet their obligations
for the payment of principal of and interest on their municipal securities may
be materially and adversely affected.
Medium and lower grade municipal securities are frequently traded only in
markets where the number of potential purchasers and sellers, if any, is
limited. This factor may limit a Fund's ability to acquire such securities and
also may limit its ability to sell such securities at their fair value in
response to changes in the economy or the financial markets. Adverse publicity
and investor perceptions, whether or not based on fundamental analysis, may also
decrease the values and liquidity of lower rated securities, especially in
thinly traded markets.
TYPES OF MUNICIPAL SECURITIES. Each Fund may invest in a variety of
municipal securities, as described below:
Municipal Bonds. Municipal bonds are debt obligations issued to obtain
funds for various public purposes that pay interest that is exempt from federal
income tax in the opinion of issuer's counsel. The two principal classifications
of municipal bonds are 'general obligation' and 'revenue' bonds. General
obligation bonds are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source such as from the user of the facility being financed.
The term 'municipal bonds' also includes 'moral obligation' issues, which are
normally issued by special purpose authorities. In the case of such issues, an
express or implied 'moral obligation' of a related government unit is pledged to
the payment of the debt service, but is usually subject to annual budget
appropriations.
Municipal Lease Obligations. The term 'municipal bonds' also includes
municipal lease obligations, such as leases, installment purchase contracts and
conditional sales contracts, and certificates of participation therein.
Municipal lease obligations are issued by state and local governments and
authorities to purchase land or various types of equipment or facilities and may
be subject to annual budget appropriations. The Funds generally invest in
municipal lease obligations through certificates of participation. No Fund
intends to invest more than 5% of its total assets in uninsured 'non-
appropriation' municipal lease obligations (defined below). There is no
percentage limitation on the Funds' ability to invest in other municipal lease
obligations.
Although municipal lease obligations do not constitute general obligations
of the municipality for which the municipality's taxing power is pledged, they
ordinarily are backed by the municipality's covenant to budget for, appropriate
and make the payments due under the lease obligation. The leases underlying
certain municipal lease obligations, however, provide that lease payments are
subject to partial or full abatement if, because of material damage or
destruction of the leased property, there is substantial interference with the
lessee's use or occupancy of such property. This 'abatement risk' may 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 included within the term 'municipal
bonds' if the interest paid thereon is exempt from federal income tax in the
opinion of the bond issuer's counsel. IDBs and PABs are in most cases revenue
bonds and thus are not payable from the unrestricted revenues of the issuer. The
credit quality of IDBs and PABs is usually directly related to the credit
standing of the user of the facilities being financed. IDBs issued after August
15, 1986 generally are considered PABs, and to the extent a Fund invests in such
PABs, shareholders generally will be required to include a portion of their
exempt-interest dividends from that Fund in calculating their liability for the
AMT. See 'Dividends and Taxes' in the Prospectus. Each Fund is authorized to
invest more than 25% of its net assets in IDBs and PABs.
Floating Rate and Variable Rate Obligations. Floating rate and variable
rate obligations bear interest at rates that are not fixed, but that vary with
changes in specified market rates or indices. Accordingly, as interest rates
decrease or increase, the potential for capital appreciation or capital
depreciation is less than for fixed rate obligations. Floating rate or variable
rate obligations typically permit the holder to demand payment of principal from
the issuer or remarketing agent at par value prior to maturity and may permit
the issuer to prepay principal, plus accrued interest, at its discretion after a
specified notice period. Frequently, floating rate or variable rate obligations
and/or the demand features thereon are secured by letters of credit or other
credit support arrangements provided by banks or other financial institutions,
the credit standing of which affects the credit quality of the obligations.
Changes in the credit quality of these institutions could cause losses to a Fund
and adversely affect its share price.
A demand feature gives the Fund the right to sell the securities to a
specified party, usually a remarketing agent, on a specified date. A demand
feature is often backed by a letter of credit from a bank or guarantee or other
liquidity support arrangement from a bank or other financial institution. As
discussed under 'Participation Interests,' to the extent that payment of an
obligation is backed by a letter of credit, guarantee or other liquidity support
that may be drawn upon demand, such payment may be subject to that institution's
ability to satisfy that commitment. The interest rate on floating rate or
variable rate securities ordinarily is readjusted on the basis of the prime rate
of the bank that originated the financing or some other index or published rate,
such as the 90-day U.S. Treasury bill rate, or is otherwise reset to reflect
market rates of interest. Generally, these interest rate adjustments cause the
market value of floating rate and variable rate municipal securities to
fluctuate less than the market value of fixed rate obligations. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation or
capital depreciation is less than for fixed rate obligations.
Participation Interests. Participation interests are interests in
municipal bonds, including IDBs and PABs, and floating and variable rate
obligations that are owned by banks. These interests carry a demand feature
permitting the holder to tender them back to the bank, which demand feature
generally is backed by an irrevocable letter of credit or guarantee of the bank.
The credit standing of such bank affects the credit quality of the participation
interests.
A participation interest gives a Fund an undivided interest in a municipal
bond owned by a bank. The Fund has the right to sell the instrument back to the
bank. Such right generally is backed by the bank's irrevocable letter of credit
or guarantee and permits the Fund to draw on the letter of credit on demand,
after specified notice, for all or any part of the principal amount of the
Fund's participation interest plus accrued interest. Generally, each Fund
intends to exercise the demand under the letters of credit or other guarantees
only (1) upon a default under the terms of the underlying bond, (2) to
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maintain the Fund's portfolio in accordance with its investment objective and
policies or (3) as needed to provide liquidity to the Fund in order to meet
redemption requests. The ability of a bank to fulfill its obligations under a
letter of credit or guarantee might be affected by possible financial
difficulties of its borrowers, adverse interest rate or economic conditions,
regulatory limitations or other factors. Mitchell Hutchins will monitor the
pricing, quality and liquidity of the participation interests held by a Fund,
and the credit standing of banks issuing letters of credit or guarantees
supporting such participation interests on the basis of published financial
information reports of rating services and bank analytical services.
Tender Option Bonds. Tender option bonds are long-term municipal
securities sold by a bank subject to a 'tender option' that gives the purchaser
the right to tender them to the bank at par plus accrued interest at designated
times (the 'tender option'). The tender option may be excercisable at intervals
ranging from bi-weekly to semi-annually, and the interest rate on the bonds is
typically reset at the end of the applicable interval in an attempt to cause the
bonds to have a market value that approximates their par value. The tender
option generally would not be exercisable in the event of a default on, or
significant downgrading of, the underlying municipal securities. Therefore, a
Fund's ability to exercise the tender option will be affected by the credit
standing of both the bank involved and the issuer of the underlying securities.
Put Bonds. A put bond is a municipal bond which gives the holder the
unconditional right to sell the bond back to the issuer or a remarketing agent
at a specified price and exercise date, which is typically well in advance of
the bond's maturity date. The obligation to purchase the bond on the exercise
date may be supported by a letter of credit or other credit support arrangement
from a bank, insurance company or other financial institution, the credit
standing of which affects the credit quality of the obligation.
If the put is a 'one time only' put, the Fund ordinarily will either sell
the bond or put the bond, depending upon the more favorable price. If the bond
has a series of puts after the first put, the bond will be held as long as, in
the judgment of Mitchell Hutchins, it is in the best interest of the Fund to do
so. There is no assurance that the issuer of a put bond acquired by a Fund will
be able to repurchase the bond upon the exercise date, if the Fund chooses to
exercise its right to put the bond back to the issuer.
Tax-Exempt Commercial Paper and Short-Term Municipal Notes. Tax-exempt
commercial paper and short-term municipal notes include tax anticipation notes,
bond anticipation notes, revenue anticipation notes and other forms of
short-term loans. Such notes are issued with a short-term maturity in
anticipation of the receipt of tax funds, the proceeds of bond placements and
other revenues.
Inverse Floaters. Each Fund may invest in municipal obligations on which
the rate of interest varies inversely with interest rates on other municipal
obligations or an index. Such obligations include components of securities on
which interest is paid in two separate parts -- an auction component, which pays
interest at a market rate that is set periodically through an auction process or
other method, and a residual component, or 'inverse floater,' which pays
interest at a rate equal to the difference between the rate that the issuer
would have paid on a fixed-rate obligation at the time of issuance and the rate
paid on the auction component. The market value of an inverse floater will be
more volatile than that of a fixed-rate obligation and, like most debt
obligations, will vary inversely with changes in interest rates. Because of the
market volatility associated with inverse floaters, no Fund will invest more
than 10% of its total assets in inverse floaters.
Because the interest rate paid to holders of inverse floaters is generally
determined by subtracting the interest rate paid to the holders of auction
components from a fixed amount, the interest rate paid to holders of inverse
floaters will decrease as market rates increase and increase as market rates
decrease. Moreover, the extent of the increases and decreases in the market
value of inverse floaters may be larger than comparable changes in the market
value of an equal principal amount of a fixed rate municipal obligation having
similar credit quality redemption provisions and maturity. In a declining
interest rate environment, inverse floaters can provide a Fund with a means of
increasing or maintaining the level of tax-exempt interest paid to shareholders.
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Mortgage Subsidy Bonds. The Funds also may purchase mortgage subsidy bonds
that are normally issued by special purpose public authorities. In some cases
the repayment of such bonds depends upon annual legislative appropriations; in
other cases repayment is a legal obligation of the issuer and, if the issuer is
unable to meet its obligations, repayment becomes a moral commitment of a
related government unit (subject, however, to such appropriations). The types of
municipal securities identified above and in the Prospectus may include
obligations of issuers whose revenues are primarily derived from mortgage loans
on housing projects for moderate to low income families.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. As stated in the Prospectus,
the Funds may purchase securities on a 'when-issued' or delayed delivery basis.
A security purchased on a when-issued or delayed delivery basis is recorded as
an asset on the commitment date and is subject to changes in market value,
generally based upon changes in the level of interest rates. Thus, fluctuation
in the value of the security from the time of the commitment date will affect a
Fund's net asset value. When a Fund commits to purchase securities on a
when-issued or delayed delivery basis, its custodian segregates assets to cover
the amount of the commitment. See 'Investment Policies and
Restrictions -- Segregated Accounts.' The Funds purchase when-issued securities
only with the intention of taking delivery, but may sell the right to acquire
the security prior to delivery if Mitchell Hutchins deems it advantageous to do
so, which may result in capital gain or loss to a Fund.
STAND-BY COMMITMENTS. Each Fund may acquire stand-by commitments pursuant
to which a bank or other municipal bond dealer agrees to purchase securities
that are held in the Fund's portfolio or that are being purchased by the Fund,
at a price equal to (1) the acquisition cost (excluding any accrued interest
paid on acquisition), less any amortized market premium or plus any accrued
market or original issue discount, plus (2) all interest accrued on the
securities since the last interest payment date or the date the securities were
purchased by the Fund, whichever is later. Although the Funds do not currently
intend to acquire stand-by commitments with respect to municipal securities held
in their portfolios, each Fund may acquire such commitments under unusual market
conditions to facilitate portfolio liquidity.
A Fund would enter into stand-by commitments only with those banks or other
dealers that, in the opinion of Mitchell Hutchins, present minimal credit risk.
A Fund's right to exercise stand-by commitments would be unconditional and
unqualified. A stand-by commitment would not be transferable by a Fund, although
the Fund could sell the underlying securities to a third party at any time. A
Fund may pay for stand-by commitments either separately in cash or by paying a
higher price for the securities that are acquired subject to such a commitment
(thus reducing the yield to maturity otherwise available for the same
securities). The acquisition of a stand-by commitment would not ordinarily
affect the valuation or maturity of the underlying municipal securities.
Stand-by commitments acquired by a Fund would be valued at zero in determining
net asset value. Whether the Fund paid directly or indirectly for a stand-by
commitment, its cost would be treated as unrealized depreciation and would be
amortized over the period the commitment is held by the Fund.
REPURCHASE AGREEMENTS. The Funds do not intend to enter into repurchase
agreements except as a temporary measure and under unusual circumstances,
because repurchase agreements generate taxable income. Each Fund is, however,
authorized to enter into repurchase agreements with U.S. banks and dealers with
respect to any obligation issued or guaranteed by the U.S. government, its
agencies or instrumentalities and also with respect to commercial paper, bank
certificates of deposit and bankers' acceptances. Repurchase agreements are
transactions in which a Fund purchases securities from a bank or recognized
securities dealer and simultaneously commits to resell the securities to the
bank or dealer at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest unrelated to the coupon rate or maturity of the
purchased securities. The Fund maintains custody of the underlying securities
prior to their repurchase; thus, the obligation of the bank or dealer to pay the
repurchase price on the date agreed to or upon demand is, in effect, secured by
such securities. If the value of these securities is less than the repurchase
price, plus any agreed-upon additional amount, the other party to the agreement
must provide additional collateral so that at all times the collateral is at
least equal to the repurchase price, plus any agreed-upon additional amount. The
difference between the total amount to be received upon repurchase of the
securities and the price which was paid by the Fund upon acquisition is accrued
as interest and included in the Fund's net investment income.
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Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to the Fund if the other party to
a repurchase agreement becomes insolvent. Each Fund intends to enter into
repurchase agreements only with banks and dealers in transactions believed by
Mitchell Hutchins to present minimal credit risks in accordance with guidelines
established by the appropriate Trust's board of trustees (sometimes referred to
as a 'board'). Mitchell Hutchins reviews and monitors the creditworthiness of
those institutions under each board's general supervision.
ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets in
illiquid securities. The term 'illiquid securities' for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities and includes, among other things, repurchase agreements maturing in
more than seven days and municipal lease obligations (including certificates of
participation) other than those Mitchell Hutchins has determined are liquid
pursuant to guidelines established by the appropriate board.
Each board has delegated the function of making day-to-day determinations
of liquidity to Mitchell Hutchins, pursuant to guidelines approved by the board.
Mitchell Hutchins takes into account a number of factors in reaching liquidity
decisions, including (1) the frequency of trades for the security, (2) the
number of dealers that make quotes for the security, (3) the number of dealers
that have undertaken to make a market in the security, (4) the number of other
potential purchasers and (5) the nature of the security and how trading is
effected (e.g., the time needed to sell the security, how offers are solicited
and the mechanics of transfer). Mitchell Hutchins monitors the liquidity of
securities in each Fund's portfolio and reports periodically on liquidity
decisions to each board.
In making determinations as to the liquidity of municipal lease
obligations, Mitchell Hutchins will distinguish between direct investments in
municipal lease obligations (or participations therein) and investments in
securities that may be supported by municipal lease obligations or certificates
of participation therein. Since these municipal lease obligation-backed
securities are based on a well-established means of securitization, Mitchell
Hutchins does not believe that investing in such securities presents the same
liquidity issues as direct investments in municipal lease obligations. The
assets used as cover for any over-the-counter ('OTC') options written by a Fund
would be considered illiquid unless the OTC options are sold to qualified
dealers who agree that the Fund may repurchase any OTC option it writes at a
maximum price to be calculated by a formula set forth in the option agreement.
The cover for an OTC option written subject to this procedure will be considered
illiquid only to the extent that the maximum repurchase price under the formula
exceeds the intrinsic value of the option.
LENDING OF PORTFOLIO SECURITIES. The Funds do not intend to lend their
portfolio securities, except under unusual circumstances, because securities
loans generate taxable income. As indicated in the Prospectus, however, each
Fund is authorized to lend up to 331/3% of its total assets to broker-dealers or
institutional investors that Mitchell Hutchins deems qualified, but only when
the borrower maintains acceptable collateral with the Fund's custodian, marked
to market daily, in an amount at least equal to the market value of the
securities loaned, plus accrued interest and dividends. Acceptable collateral is
limited to cash, U.S. government securities and irrevocable letters of credit
that meet certain guidelines established by Mitchell Hutchins. In determining
whether to lend securities to a particular broker-dealer or institutional
investor, Mitchell Hutchins will consider, and during the period of the loan
will monitor, all relevant facts and circumstances, including the
creditworthiness of the borrower. Each Fund will retain authority to terminate
any loan at any time. A Fund may pay reasonable fees in connection with a loan
and may pay a negotiated portion of the interest earned on the cash or money
market instruments held as collateral to the borrower or placing broker. A Fund
will receive reasonable interest on the loan or a flat fee from the borrower and
amounts equivalent to any dividends, interest or other distributions on the
securities loaned. A Fund will retain record ownership of loaned securities to
exercise beneficial rights, such as voting and subscription rights and rights to
dividends, interest or other distributions, when regaining such rights is
considered to be in the Fund's interest.
Pursuant to procedures adopted by the appropriate board governing each
Fund's securities lending program, the board has approved retention of
PaineWebber to serve as lending agent for each Fund. The board also has
authorized the payment of fees (including fees calculated as a percentage of
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invested cash collateral) to PaineWebber for these services. Each board
periodically reviews all portfolio securities loan transactions for which
PaineWebber acted as lending agent.
SEGREGATED ACCOUNTS. When a Fund enters into certain transactions that
involve obligations to make future payments to third parties, including the
purchase of securities on a when-issued or delayed delivery basis, the Fund will
maintain with an approved custodian in a segregated account cash or other liquid
securities, marked to market daily, in an amount at least equal to the Fund's
obligation or commitment under such transactions. As described below under
'Hedging and Other Strategies Using Derivative Contracts,' segregated accounts
may also be required in connection with certain transactions involving options
or futures contracts.
DURATION. Duration is a measure of the expected life of a fixed income
security that was developed as a more precise alternative to the concept 'term
to maturity.' Traditionally, a debt security's 'term to maturity' has been used
as a proxy for the sensitivity of the security's price to changes in interest
rates (which is the 'interest rate risk' or 'volatility' of the security).
However, 'term to maturity' measures only the time until a debt security
provides for a final payment, taking no account of the pattern of the security's
payments prior to maturity.
For any fixed income security with interest payments occurring prior to the
payment of principal, duration is always less than maturity. For example,
depending upon its coupon and the level of market yields, a Treasury note with a
remaining maturity of five years might have a duration of 4.5 years. For
mortgage-backed and other securities that are subject to prepayments, put or
call features or adjustable coupons, the difference between the remaining stated
maturity and the duration is likely to be much greater.
Futures, options and options on futures have durations which, in general,
are closely related to the duration of the securities which underlie them.
Holding long futures or call option positions (backed by a segregated account of
cash and cash equivalents) will lengthen a Fund's duration by approximately the
same amount as would holding an equivalent amount of the underlying securities.
Short futures or put options have durations roughly equal to the negative
duration of the securities that underlie these positions, and have the effect of
reducing portfolio duration by approximately the same amount as would selling an
equivalent amount of the underlying securities.
There are some situations in which the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. In this and other similar situations, Mitchell Hutchins will use
more sophisticated analytical techniques that incorporate the economic life of a
security into the determination of its duration and, therefore, its interest
rate exposure.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES
The financial condition of the State of California, its public authorities
and local governments could affect the market values and marketability of, and
therefore the net asset value per share and the interest income of, a Fund, or
result in the default of existing obligations, including obligations which may
be held by the Fund. The following section provides only a brief summary of the
complex factors affecting the financial condition of California, and is based on
information obtained from the State of California, as publicly available on the
date of this Statement of Additional Information. The information contained in
such publicly available documents has not been independently verified. It should
be noted that the creditworthiness of obligations issued by local issuers may be
unrelated to the creditworthiness of California, and that there is no obligation
on the part of California to make payment on such local obligations in the event
of default in the absence of a specific guarantee or pledge provided by the
State of California.
During the early 1990's, California experienced significant financial
difficulties, which reduced its credit standing, but the State's finances have
improved since 1994. The ratings of certain related debt of other issuers for
which California has an outstanding lease purchase, guarantee or other
contractual obligation (such as for state-insured hospital bonds) are generally
linked directly to California's rating. Should the financial condition of
California deteriorate again, its credit ratings could be further
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reduced, and the market value and marketability of all outstanding notes and
bonds issued by California, its public authorities or local governments could be
adversely affected.
ECONOMIC FACTORS
California's economy is the largest among the 50 states and one of the
largest in the world. The State's population of more than 32 million represents
over 12% of the total United States population and grew by 26% in the 1980s,
more than double the national rate. Population growth slowed to less than 1%
annually in 1994 and 1995, but rose to 1.9% in 1996. During the early 1990's,
net population growth in the State was due to births and foreign immigration.
Total personal income in the State, at an estimated $760 billion in 1995,
accounts for almost 13% of all personal income in the nation. Total employment
is over 14 million, the majority of which is in the service, trade and
manufacturing sectors.
From mid-1990 to late 1993, the State suffered a recession with the worst
economic, fiscal and budget conditions since the 1930s. Construction,
manufacturing (especially aerospace), and financial services, among others, were
all severely affected, particularly in Southern California. Job losses were the
worst of any post-war recession. Employment levels stabilized by late 1993 and
steady job growth has occurred since early 1994. Pre-recession job levels were
reached in 1996. Unemployment, while remaining higher than the national average,
has come down from its 10% recession peak to 6.5% in spring, 1997. Economic
indicators show a steady and strong recovery underway in California since the
start of 1994 particularly in export-related industries, services, electronics,
entertainment and tourism, although the residential housing sector has been
weaker than in prior recoveries. 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.
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Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain 'assessments' for municipal
services and programs. Article XIIID also contains several new provisions
affecting 'fees' and 'charges', defined for purposes of Article XIIID to mean
'any levy other than an ad valorem tax, a special tax, or an assessment, imposed
by a [local government] upon a parcel or upon a person as an incident of
property ownership, including a user fee or charge for a property related
service.' All new and existing property related fees and charges must conform to
requirements prohibiting, among other things, fees and charges which generate
revenues exceeding the funds required to provide the property related service or
are used for unrelated purposes. There are new notice, hearing and protest
procedures for levying or increasing property related fees and charges, and,
except for fees or charges for sewer, water and refuse collection services (or
fees for electrical and gas service, which are not treated as 'property related'
for purposes of Article XIIID), no property related fee or charge may be imposed
or increased without majority approval by the property owners subject to the fee
or charge or, at the option of the local agency, two-thirds voter approval by
the electorate residing in the affected area.
In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes, assessments, fees
and charges. Consequently, local voters could, by future initiative, repeal,
reduce or prohibit the future imposition or increase of any local tax,
assessment, fee or charge. It is unclear how this right of local initiative may
be used in cases where taxes or charges have been or will be specifically
pledged to secure debt issues.
The interpretation and application of Proposition 218 will ultimately be
determined by the courts with respect to a number of matters, and it is not
possible at this time to predict with certainty the outcome of such
determinations. Proposition 218 is generally viewed as restricting the fiscal
flexibility of local governments, and for this reason, some ratings of
California cities and counties have been, and others may be, reduced.
Appropriations Limits. The State and its local governments are subject to
an annual 'appropriations limit' imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB prohibits
the State or any covered local government from spending 'appropriations subject
to limitation' in excess of the appropriations limit imposed. 'Appropriations
subject to limitation' are authorizations to spend 'proceeds of taxes,' which
consist of tax revenues and certain other funds, including proceeds from
regulatory licenses, user charges or other fees, to the extent that such
proceeds exceed the cost of providing the product or service, but 'proceeds of
taxes' exclude most State subventions to local governments. No limit is imposed
on appropriations of funds which are not 'proceeds of taxes,' such as reasonable
user charges or fees, and certain other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations
arising from certain emergencies declared by the Governor, (3) appropriations
for certain capital outlay projects, (4) appropriations by the State of
post-1989 increases in gasoline taxes and vehicle weight fees, and (5)
appropriations made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population, and any transfers of service
responsibilities between government units. The definitions for such adjustments
were liberalized in 1990 to follow more closely growth in the State's economy.
'Excess' revenues are measured over a two year cycle. Local governments
must return any excess to taxpayers by rate reductions. The State must refund
50% of any excess, with the other 50% paid to schools and community colleges.
With more liberal annual adjustment factors since 1988, and depressed revenues
since 1990 because of the recession, few governments are currently operating
near their spending limits, but this condition may change over time. Local
governments may by voter approval exceed their spending limits for up to four
years. During fiscal year 1986-87, State receipts from proceeds of taxes
exceeded its appropriations limit by $1.1 billion, which was returned to
taxpayers. Since that year, appropriations subject to limitation have been under
the State limit. State appropriations were $7.0 billion under the limit for
fiscal year 1996-97.
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Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and XIIID of
the California Constitution, the ambiguities and possible inconsistencies in
their terms, and the impossibility of predicting future appropriations or
changes in population and cost of living, and the probability of continuing
legal challenges, it is not currently possible to determine fully the impact of
these Articles on California Municipal Obligations or on the ability of the
State or local governments to pay debt service on such California Municipal
Obligations. It is not possible, at the present time, to predict the outcome of
any pending litigation with respect to the ultimate scope, impact or
constitutionality of these Articles or the impact of any such determinations
upon State agencies or local governments, or upon their ability to pay debt
service on their obligations. Further initiatives or legislative changes in laws
or the California Constitution may also affect the ability of the State or local
issuers to repay their obligations.
OBLIGATIONS OF THE STATE OF CALIFORNIA
Under the California Constitution, debt service on outstanding general
obligation bonds is the second charge to the General Fund after support of the
public school system and public institutions of higher education. As of March 1,
1997, the State had outstanding approximately $17.7 billion of long-term general
obligation bonds, plus $368 million of general obligation commercial paper which
will be refunded by long-term bonds in the future, and $6.1 billion of
lease-purchase debt supported by the State General Fund. The State also had
about $9.4 billion of authorized and unissued general obligation bonds and
lease-purchase debt. In FY 1995-96, debt service on general obligation bonds and
lease purchase debt was approximately 5.2% of General Fund revenues.
RECENT FINANCIAL RESULTS
The principal sources of General Fund revenues in 1995-1996 were the
California personal income tax (45% of total revenues), the sales tax (34%),
bank and corporation taxes (13%), and the gross premium tax on insurance (2%).
The State maintains a Special Fund for Economic Uncertainties (the 'SFEU'),
derived from General Fund revenues, as a reserve to meet cash needs of the
General Fund, but which is required to be replenished as soon as sufficient
revenues are available. Year-end balances in the SFEU are included for financial
reporting purposes in the General Fund balance. Because of the recession and an
accumulated budget deficit, no reserve was budgeted in the SFEU from 1992-93 to
1995-96.
General. Throughout the 1980's, State spending increased rapidly as the
State population and economy also grew rapidly, including increased spending for
many assistance programs to local governments, which were constrained by
Proposition 13 and other laws. The largest State program is assistance to local
public school districts. In 1988, an initiative (Proposition 98) was enacted
which (subject to suspension by a two-thirds vote of the Legislature and the
Governor) guarantees local school districts and community college districts a
minimum share of State General Fund revenues (currently about 35%).
Starting in mid-1990, the State has faced adverse economic, fiscal, and
budget conditions. The 1990-1994 economic recession seriously affected State tax
revenues. It also caused increased expenditures for health and welfare programs.
The State is also facing a structural imbalance in its budget with the largest
programs supported by the General Fund (education, health, welfare and
corrections) growing at rates significantly higher than the growth rates for the
principal revenue sources of the General Fund. These structural concerns will be
exacerbated in coming years by the expected need to substantially increase
capital and operating funds for corrections as a result of a 'Three Strikes' law
enacted in 1994.
Recent Budgets. As a result of the recession and these factors, among
others, the State experienced substantial revenue shortfalls, and greater than
anticipated social service costs, in the early 1990's. The State accumulated and
sustained a budget deficit in the budget reserve, the SFEU, approaching $2.8
billion at its peak at June 30, 1993. The Legislature and Governor agreed on a
number of different steps to respond to the adverse financial conditions and
produce Budget Acts in the Years 1991-92 to 1995-96 (although not all of these
actions were taken in each year):
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significant cuts in health and welfare program expenditures;
transfers of program responsibilities and some funding sources from
the State to local governments, coupled with some reduction in
mandates on local government;
transfer of about $3.6 billion in annual local property tax revenues
from cities, counties, redevelopment agencies and some other
districts to local school districts, thereby reducing State funding
for schools;
reduction in growth of support for higher education programs, coupled
with increases in student fees;
revenue increases (particularly in the 1992-93 Fiscal Year budget),
most of which were for a short duration;
increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare
services to undocumented aliens (although these efforts have produced
much less federal aid than the State Administration had requested);
and
various one-time adjustment and accounting changes (some of which are
being challenged in court).
The combination of stringent budget actions cutting State expenditures, and
the turnaround of the economy by late 1993, finally led to the restoration of
positive financial results, with revenues equaling or exceeding expenditures
starting in FY 1992-93. As a result, the accumulated budget deficit was reduced
from $2.8 billion to about $70 million as of June 30, 1996.
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts 'borrowed' from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. The State's cash condition became so serious that from
late spring 1992 until 1995, the State had to rely on issuance of short term
notes which matured in a subsequent fiscal year to finance its ongoing deficit,
and pay current obligations. For a two-month period in the summer of 1992,
pending adoption of the annual Budget Act, the State was forced to issue
registered warrants (IOUs) to some of its suppliers, employees and other
creditors. With the repayment of the last of these deficit notes in April, 1996,
the State does not plan to rely further on external borrowing across fiscal
years, but will continue its normal cash flow borrowings during a fiscal year.
Current Budget. The 1996-97 Budget Act was signed by the Governor on July
15, 1996, along with various implementing bills. Revenues for the Fiscal Year
were estimated to total $47.643 billion, a 3.3 percent increase over the final
estimated 1995-96 revenues. The Budget Act contained General Fund appropriations
totaling $47.251 billion, a 4.0 percent increase over the final estimated
1995-96 expenditures.
The following are principal features of the 1996-97 Budget Act:
1. Funding for schools and community college districts increased by
$1.65 billion total above revised 1995-96 levels, much of which was
budgeted to fund class-size reductions in grades K-3. The funding increases
have brought K-12 expenditures to almost $4,800 per pupil, an almost 15%
increase over the level prevailing during the recession years.
2. Cuts in health and welfare totaling about $360 million (about $300
million less than originally anticipated, because of federal actions).
3. A 4.9 percent increase in funding for the University of California
and the California State University system, with no increases in student
fees for the second consecutive year.
4. The Budget Act assumed the federal government would provide
approximately $700 million in new aid for incarceration and health care
costs of illegal immigrants. These funds reduce appropriations in these
categories that would otherwise have to be paid from the General Fund.
With signing of the Budget Act, the State implemented its regular cash flow
borrowing program with the issuance of $3.0 billion of Revenue Anticipation
Notes to mature on June 30, 1997. The Budget Act appropriated a modest budget
reserve in the SFEU of $305 million, as of June 30, 1997. The
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General Fund fund balance on that date, however, will reflect $1.45 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 1996-97 Budget Act
contained a $150 million appropriation from the General Fund toward this
settlement.
The Department of Finance has reported that, based on stronger than
expected revenues, reflecting the continued strength of the State's economic
recovery, General Fund revenues for the full 1996-97 fiscal year will be almost
$1.8 billion above initial projections, at about $49.4 billion. This is expected
to be offset by required increased payments to schools, and lower than expected
savings resulting from federal welfare reform actions and federal aid for
illegal immigrants. As a result, the expected balance of the SFEU at June 30,
1997 has not been materially changed from the Budget Act, at an estimated $312
million. This will be the first positive balance in the decade of the 90's. The
State has not yet given any prediction of how the federal welfare reform law
will impact the State's finances, or those of its local agencies; the State is
in the midst of making many decisions concerning implementation of the new
welfare law.
Proposed 1997-98 Budget. On January 9, 1997, the Governor released his
proposed budget for FY 1997-98. Assuming continuing strength in the economy, the
Governor projected General Fund revenues of $50.7 billion, and proposed
expenditures of $51.3 billion, to leave a budget reserve in the SFEU of $550
million at June 30, 1998. The Governor proposed further programs to reduce class
size in lower primary grades, using excess revenues from FY 1996-97. He also
proposed a further cut in corporate taxes, and sweeping changes in public
assistance programs to respond to the new federal welfare reform law. In a
budget update released on May 14, 1997, the Department of Finance increased its
estimate of revenues for the 1997-98 fiscal year to $52.0 billion, assuming the
continued strong economy. Mandated spending will also increase, and the
Department of Finance still projects a modest year-end balance in the SFEU of
$580 million.
Although the State's strong economy is producing record revenues to the
State government, the State's budget continues to be under stress from mandated
spending on education, a rising prison population, and social needs of a growing
population with many immigrants. These factors which limit State spending growth
also put pressure on local governments. There can be no assurances that, if
economic conditions weaken, or other factors intercede, the State will not
experience budget gaps in the future.
BOND RATING
The ratings on California's long-term general obligation bonds were reduced
in the early 1990's from 'AAA' levels which had existed prior to the recession.
In 1996, Fitch and Standard & Poor's raised their ratings of California's
general obligation bonds, which as of April 1997 were assigned ratings of 'A+'
from Standard & Poor's, 'A1' from Moody's and 'A+' 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 a deferral of
payments by California to the Public Employees Retirement System, 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 or may not have to be
implemented in one year.
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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. 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. At least one rural county (Butte) publicly announced that it might
enter bankruptcy proceedings in August 1990, although such plans were put off
after the Governor approved legislation to provide additional funds for the
county. Other counties have also indicated that their budgetary condition is
extremely grave. 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 FY 1995-96 and FY 1996-97. Los Angeles
County's debt was downgraded by Moody's and S&P in the summer of 1995. Orange
County, which emerged from Federal Bankruptcy Court protection in June 1996, has
significantly reduced county services and personnel, and faces strict financial
conditions following large investment fund losses in 1994 which resulted in
bankruptcy.
Counties and cities may face further budgetary pressures as a result of
changes in welfare and public assistance programs, which will have to be enacted
by June, 1997 in order to comply with the federal welfare reform law. It is not
yet known how the State's legislation will turn out and what its overall impact
will be on local government finances.
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.
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
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certificates may not be paid when due. Litigation is brought from time to time
which challenges the constitutionality of such lease arrangements.
OTHER CONSIDERATIONS
The repayment of industrial development securities secured by real property
may be affected by California laws limiting foreclosure rights of creditors.
Securities backed by health care and hospital revenues may be affected by
changes in State regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program), including risks related
to the policy of awarding exclusive contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly affect 'tax
allocation' bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g., because of a major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity which
increased such tax rate to repay that entity's general obligation indebtedness.
As a result, redevelopment agencies (which, typically, are the issuers of tax
allocation securities) no longer receive an increase in tax increment when taxes
on property in the project area are increased to repay voter-approved bonded
indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and principal
on their obligations remains unclear. Furthermore, other measures affecting the
taxing or spending authority of California or its political subdivisions may be
approved or enacted in the future. Legislation has been or may be introduced
which would modify existing taxes or other revenue-raising measures or which
either would further limit or, alternatively, would increase the abilities of
state and local governments to impose new taxes or increase existing taxes. It
is not possible, at present, to predict the extent to which any such legislation
will be enacted. Nor is it possible, at present, to determine the impact of any
such legislation on California Municipal Obligations in which the Fund may
invest, future allocations of state revenues to local governments or the
abilities of state or local governments to pay the interest on, or repay the
principal of, such California Municipal Obligations.
Substantially all of California is within an active geologic region subject
to major seismic activity. Northern California in 1989 and Southern California
in 1994 experienced major earthquakes causing billions of dollars in damages.
The federal government provided more than $13 billion in aid for both
earthquakes, and neither event is expected to have any long-term negative
economic impact. Any California Municipal Obligation in the Fund could be
affected by an interruption of revenues because of damaged facilities, or,
consequently, income tax deductions for casualty losses or property tax
assessment reductions. Compensatory financial assistance could be constrained by
the inability of (i) an issuer to have obtained earthquake insurance coverage
rates; (ii) an insurer to perform on its contracts of insurance in the event of
widespread losses; or (iii) the federal or State government to appropriate
sufficient funds within their respective budget limitations.
SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL SECURITIES
The financial condition of the State of New York ('New York State' or the
'State'), its public authorities and public benefit corporations (the
'Authorities') and its local governments, particularly The 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 Statement of
Additional Information. The information
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contained in such publicly available documents has not been independently
verified. Such information is subject to change upon the adoption by the State
Legislature of the State's final budget for fiscal year 1997-1998, which has not
been enacted as of the date of this Statement of Additional Information.
Further, the adoption of a final State budget may cause changes to the City
budget for the City's fiscal year 1997-1998. There can be no assurance that such
changes may not have adverse effects on the City's cash flow, expenditures or
revenues. It should be noted that the creditworthiness of obligations issued by
local issuers may be unrelated to the creditworthiness of New York State, and
that there is no obligation on the part of New York State to make payment on
such local obligations in the event of default in the absence of a specific
guarantee or pledge provided by New York State.
ECONOMIC FACTORS. New York is the third most populous state, and has a
relatively high level of personal wealth; however, the State economy has grown
more slowly than that of the nation as a whole, resulting in the gradual erosion
of its relative economic affluence (due to such factors such as relative costs
for taxes, labor and energy). 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. New York has a declining proportion of its
workforce engaged in manufacturing and increasing proportion engaged in service
industries. The State, therefore, is likely to be less affected than the nation
as a whole during an economic recession concentrated in construction and
manufacturing sectors of the economy, but likely to be more affected during a
recession concentrated in the service-producing sector. The State's
manufacturing and maritime base have been seriously eroded, as illustrated by
the decline of the steel industry in the Buffalo area and of the apparel and
textile industries in the City. In addition, the City experienced substantial
socio-economic changes, as a large segment of its population and a significant
share of corporate headquarters and other businesses relocated (many
out-of-state).
Both the State and the City experienced substantial revenue increases in
the mid-1980s attributable directly (corporate income and financial corporations
taxes) and indirectly (personal income and a variety of other taxes) to growth
in new jobs, rising profits and capital appreciation derived from the finance
sector of the City's economy. From 1977 to its 1988 peak, the finance, insurance
and real estate sectors rose 55%, to account in 1988 for 23% of total earnings
in the City and 14% statewide (compared to 7% nationwide). The finance sector's
growth was a catalyst for the New York metropolitan region's related business
and professional services, retail trade and residential and commercial real
estate markets. The then rising real estate market contributed to City revenues,
as higher property values and new construction added to collections from
property taxes, mortgage recording and transfer taxes and sales taxes on
building materials. The boom on Wall Street more than compensated for the
continued erosion of the State's (and the City's) manufacturing and maritime
base, since average wages in the finance, insurance and real estate sector and
related business and professional services were substantially higher (thereby
providing a net increase of higher incomes, taxed at even higher marginal
rates).
During the calendar years 1984 through 1991, the State's rate of economic
expansion was somewhat slower than that of the nation as a whole. In the
1990-1991 national recession, the economy of the Northeast region in general and
the State in particular was more heavily damaged than that of the rest of the
nation and has been slower to recover.
Although the national economy began to expand in 1991, the State economy
remained in recession until 1993, when employment growth resumed. Employment
growth has been hindered during recent years by significant cutbacks in the
computer and instrument manufacturing, utility and defense industries. Personal
income increased substantially in 1992 and 1993. The State's economy entered
into the fourth year of a slow recovery in 1996. Most of the growth occurred in
the trade, construction and service industries, with business, social services
and health sectors accounting for most of the service industry growth. According
to assumptions contained in the State financial plan for FY 1996-97 issued on
July 26, 1996 (the '1996-97 State Financial Plan') continues to predict a
slowing of State employment growth in the public sector during calendar year
1996, but forecasts slow growth in the private sector during the same time
period. The forecast reflects a continuation of the slower growth for the State
of New York than for the nation as a whole. The Second Quarterly Update to the
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1996-97 State Financial Plan issued on January 31, 1997 (the 'Second Quarterly
Update') projects continued moderate growth with employment wages and income
continuing their modest rise.
The Second Quarterly Update indicated that moderate growth was projected to
continue in 1997 for employment, wages, and personal income, followed by a
slight slowing in 1998. Personal income was estimated to have grown by 5.2
percent in 1996, fueled in part by an unusually large increase in financial
sector bonus payments, and was projected to grow 4.5 percent in 1997 and 4.2
percent in 1998. Overall employment growth is expected to continue at a modest
rate, reflecting the moderate growth of the national economy, continued spending
restraint in government, and restructuring in the health care, social service,
and banking sectors.
The Supplement to the Annual Information Statement, dated June 6, 1997 (the
'June Supplement') reported that on March 10, 1997 the Legislature and the
Governor conducted a consensus economic and revenue forecasting process as
required under law. As a part of the consensus revenue forecasting process, the
Division of the Budget updated the economic forecast upon which receipts
estimates are based. The forecast for income growth in 1997 was increased
modestly to the 5.2 to 5.6 percent range, consistent with an economic outlook of
modest growth in the State's economy and moderate inflation.
The State ended its 1996-97 fiscal year on March 31, 1997 in balance on a
cash basis, with a FY 1996-97 General Fund cash surplus as reported by the
Division of the Budget of approximately $1.4 billion. The cash surplus was
derived primarily from higher-than-expected revenues and lower-than-expected
spending for social services programs. The 1997-98 Financial Plan projects
balance on a cash basis in the General Fund. It reflects a continuing strategy
of substantially reduced State spending, including program restructurings,
reductions in social welfare spending, and efficiency and productivity
initiatives. As compared to the 1996-97 State Financial Plan, the Executive
Budget proposes a year-to-year decline in General Fund spending of 0.2 percent.
There can be no assurance that the State economy will not experience
worse-than-predicted results in FY 1997-98 with corresponding material and
adverse effects on the State's projections of receipts and disbursements. As all
State Financial Plans are based upon forecasts of national and State economic
activity it should be noted that many uncertainties exist in such forecasts,
including federal financial and monetary policies, the availability of credit
and the condition of the world economy. In addition, the economic and financial
condition of the State may be affected by various financial, social, economic
and political factors. These factors can be complex, may vary from year to year
and are frequently the results of actions taken not only by the State and its
agencies and instrumentalities, but also by other entities, such as the federal
government, that are not under the control of the State.
The fiscal health of the State may also be impacted by the fiscal health of
the City. Although the City has had a balanced budget since 1981, estimates of
the City's future revenues and expenditures are subject to various
uncertainties. For example, the effects of the October 1987 stock market crash
and the 1990-92 national recession have had a disproportionately adverse impact
on the New York City metropolitan region. According to recent staff reports,
while economic recovery in New York City has been slower than in other regions
of the country, a surge in Wall Street profitability generated a substantial
surplus for the City in City FY 1996-97. Although several sectors of the City's
economy have expanded recently, especially tourism and business and professional
services, City tax revenues remain heavily dependent on the continued
profitability of the securities industries and the course of the national
economy.
While the State's economy is broader-based than that of the City,
particular industries are concentrated in and have a disproportionate impact on
certain areas, such as heavy industry in Buffalo, photographic and optical
equipment in Rochester, machinery and transportation equipment in Syracuse and
Utica-Rome, computers in Binghamton and in the Mid-Hudson Valley and electrical
equipment in the Albany-Troy-Schenectady area. Constraints on economic growth,
taxpayer resistance to proposed substantial increases in local tax rates, and
reductions in State aid in regions apart from the City have contributed to
financial difficulties for several county and other local governments.
THE STATE. As noted above, the financial condition of the State is
affected by several factors, including the strength of the State and its
regional economies, actions of the federal government, and
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State actions affecting the level of receipts and disbursements. Owing to these
and other factors, the State may, in future years, face substantial potential
budget gaps resulting from a significant disparity between tax revenues
projected from a lower recurring receipts base and the future costs of
maintaining State programs at current levels.
The June Supplement reported that on February 13, 1997 the Governor
submitted amendments to his Executive Budget as permitted under the State
Constitution. These amendments are said to have had the effect of increasing
total disbursements by $63 million, fully offset by additional resources
expected to be available in FY 1997-98. The 1997-98 Financial Plan, as amended,
continued to project balance on a cash basis in the General Fund. Total General
Fund receipts and transfers from other funds were projected to be $32.94
billion. Total General Fund disbursements and transfers to other funds were
projected to be $32.90 billion. The Executive subsequently identified
approximately $1.56 billion in unbudgeted resources for use in the 1997-98
Financial Plan. These additional resources are said to have arisen primarily
from revenues produced by stronger-than-expected growth in the State's economy
and higher final personal income tax payments for the 1996 tax year; an
additional $373 million in nonrecurring FY 1996-97 cash resources and
approximately $200 million in nonrecurring federal aid for reimbursement of
previous costs incurred by the State for providing child protective services.
However, the economic and financial condition of the State may be affected
by various financial, social, economic and political factors. Those factors can
be very complex, can vary from fiscal year to fiscal year, and are frequently
the result of actions taken not only by the State but also by entities, such as
the federal government, that are outside the State's control. Because of the
uncertainty and unpredictability of changes in these factors, their impact
cannot be fully included in the assumptions underlying the State's projections.
REVENUE BASE. The State's principal revenue sources are economically
sensitive, and include the
personal income tax, user taxes and fees and business taxes.
The Personal Income Tax is imposed on the income of individuals, estates
and trusts and is based on federal definitions of income and deductions with
certain modifications. In 1995, the State enacted a tax-reduction program
designed to reduce receipts from the personal income tax by 20 percent over
three years. Prior to 1995, the tax had remained substantially unchanged since
1989 as a result of annual deferrals of tax reductions originally enacted in
1987. The tax-reduction program is estimated to reduce receipts by $2.3 billion
in FY 1996-97, compared to what tax receipts would have been under the pre-1995
rate structure. The maximum rate was reduced from the 7.875 percent in effect
between 1989 and 1994 to 7.59375 percent for 1995, to 7.125 percent for 1996,
and is scheduled under current law to be reduced to 6.85 percent for 1997 and
thereafter. In addition to significant reductions in overall tax rates, the
program also includes increases in the standard deduction, widening tax brackets
to increase the income thresholds to which higher tax rates apply, and
modification of certain tax credits. The FY 1996-1997 Annual Information
Statement stated that the projected yield of the tax for FY 1996-97 was $17.1
billion, an increase of $103 million from reported collections in the State's FY
1995-96.
User taxes and fees are comprised of three-quarters of the State four
percent sales and use tax (the balance, one percent, flows to support Local
Government Assistance Corporation ('LGAC') debt service requirements),
cigarette, alcoholic beverage container, and auto rental taxes, and a portion of
the motor fuel excise levies. Also included in this category are receipts from
the motor vehicle registration fees and alcoholic beverage license fees.
Beginning in 1993-94, a portion of the motor fuel tax and motor vehicle
registration fees and all of the highway use tax are earmarked for dedicated
transportation funds. The FY 1996-1998 Annual Information Statement stated that
receipts in this category in the State's FY 1996-97 were expected to total $6.73
billion, an increase of $97 million from reported FY 1995-96 results. Underlying
growth in the continuing sales tax base is forecast to be 5 percent, accounting
for the increase in the category as a whole.
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. Through 1993, these levies had been subject to a 15 percent surcharge
initially imposed in 1990. Beginning in 1994, the surcharge rate has been phased
out and, for more taxpayers, there will be no surcharge liability for taxable
periods ending in 1997 and thereafter. The FY 1996-1997 Annual
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Information Statement stated that total business tax receipts in the State's FY
1996-97 fiscal year were projected at $4.62 billion, a decline of $360 million
from reported FY 1995-96 results. The decline results primarily from the
continuing effects of tax reductions originally enacted in 1994 and 1995, valued
at approximately $300 million more in FY 1996-97 than in FY 1995-96.
STATE DEBT. Disbursements from Debt Service Funds are estimated in the
Second Quarterly Update at $3.02 billion in FY 1997-98, an increase of $464
million from FY 1996-97. Of this increase, $81 million is attributable to
transportation bonding for the State and local highway and bridge programs which
are financed by the Dedicated Highway and Bridge Trust Fund, and $45 million is
for the mental hygiene programs financed through the Mental Health Services
Fund. This increase also reflects $262 million in City University of New York
Senior and community college debt service formerly classified as local
assistance in the General Fund. Debt service for LGAC bonds is projected at $340
million.
BUDGETARY FLEXIBILITY. A significant portion of the State's General Fund
budget is accounted for by contractually required expenses (such as pension and
debt service costs) and by federally mandated programs (such as AFDC and
Medicaid). In addition, State aid for school districts comprises a major share
of the budget, and total appropriations and distribution of such aid is
especially contentious politically. Furthermore, the State's ability to respond
to unanticipated developments in the future may have been impaired since the
State has utilized a substantial range of actions of a non-recurring nature in
recent years to finance its General Fund operations, including tapping excess
monies in special funds, refinancing outstanding debt to reduce reserve fund
requirements and current (but not long-term) debt service costs, recalculating
pension fund contributions, selling State assets, reimbursing past General Fund
expenditures by the issuance of authority debt and deferring payment for
expenditures to future fiscal years.
LABOR COSTS. The State government workforce is mostly unionized, subject
to the Taylor Law which authorizes collective bargaining and prohibits (but has
not, historically, prevented) strikes and work slowdowns. Costs for employee
health benefits have increased substantially, and can be expected to further
increase. The State has a substantial unfunded liability for future pension
benefits, and has utilized changes in its pension fund investment return
assumptions to reduce current contribution requirements. If such investment
earnings assumptions are not sustained by actual results, additional State
contributions will be required in future years to meet the State's contractual
obligations. The State's change in actuarial method from the aggregate cost
method to a modified projected unit credit in FY1990-91 created a substantial
surplus that was amortized and applied to offset the State's contribution
through FY1993-94. This change in actuarial method was ruled unconstitutional by
the State's highest court and the State returned to the aggregate cost method in
FY1994-95 using a four-year phase-in. Employer contributions, including the
State's, are expected to increase over the next five to ten years.
PUBLIC ASSISTANCE. On August 22, 1996, the President signed into law the
Personal Responsibility and Work Opportunity Reconciliation Act of 1996. This
federal legislation fundamentally changed the programmatic and fiscal
responsibilities for administration of welfare programs at the federal, state
and local levels. The new law abolishes the federal Aid to Families with
Dependent Children program (AFDC), and creates a new Temporary Assistance to
Needy Families with Dependent Children program (AFDC), and creates a new
Temporary Assistance to Needy Families program (TANF) funded with a fixed
federal block grant to states. The new law also imposes (with certain
exceptions) a five-era durational limit on TANF recipients, requires that
virtually all recipients be engaged in work or community service activities
within two years of receiving benefits, and limits assistance provided to
certain immigrants and other classes of individuals. States are required to meet
work activity participation targets for their TANF caseload; these requirements
are phased in over time. States that fail to meet these federally mandated job
participation rates, or that fail to conform with certain other federal
standards, face potential sanctions in the form of a reduced federal block
grant.
Proposed legislation that includes both provisions necessary to implement
the State's TANF plan to conform with federal law and implement the Governor's
welfare reform proposal is still pending before the Legislature. There can be no
assurances of timely enactment of certain conforming provisions required under
the federal law. Further delay increases the risk that the State could incur
fiscal penalties for failure to comply with federal law.
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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. The FY 1996-1997 Annual Information Statement stated that General Fund
payments for Medicaid are projected to be $5.29 billion, virtually unchanged
from the level of $5.34 billion in FY 1995-96 and down from $5.79 billion in FY
1994-95. This slow growth is due primarily to continuation of cost containment
measures enacted in FY 1995-96, new reforms included in the FY 1996-97 adopted
budget, and forecasts for lower caseload based upon actual experience through
May 1996. Other social service spending is forecast to increase by only $7
million to $3.17 billion in FY
1996-97, down from $3.34 billion in FY 1995-96.
THE STATE AUTHORITIES. There are numerous public authorities with various
responsibilities, including those which finance, construct and/or operate
revenue producing public facilities. Public authority operating expenses and
debt service costs are generally paid by revenues generated by the projects
financed or operated, such as tolls charged for the use of highways, bridges or
tunnels, rentals charged for housing units, and charges for occupancy at medical
care facilities. In addition, State legislation authorizes several financing
techniques for public authorities. Also there are statutory arrangements
providing for State local assistance payments otherwise payable to localities to
be made under certain circumstances to public authorities. Although the State
has no obligation to provide additional assistance to localities whose local
assistance payments have been paid to public authorities under these
arrangements, if local assistance payments are diverted the affected localities
could seek additional State assistance. Some authorities also receive moneys
from State appropriations to pay for the operating costs of certain of their
programs. As described below, the MTA receives the bulk of this money in order
to provide transit and commuter services.
Since 1980, the State has enacted several taxes -- including a surcharge on
the profits of banks, insurance corporations and general business corporations
doing business in the 12-county Metropolitan Transportation Region served by the
MTA and a special one-quarter of 1 percent regional sales and use tax -- that
provide revenues for mass transit purposes, including assistance to the MTA.
Since 1987 State 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. For the FY 1996-97, total State assistance to the MTA is estimated at
approximately $1.09 billion.
State legislation accompanying the FY 1996-97 adopted State budget
authorized the MTA, Triborough Bridge and Tunnel Authority and Transit Authority
to issue an aggregate of $6.5 billion in bonds to finance a portion of a new
$11.98 billion MTA capital plan for the 1995 through 1999 calendar years (the
'1995-99 Capital Program'), and authorized the MTA to submit the 1995-99 Capital
Program to the Capital Program Review Board for approval. This plan will
supersede the overlapping portion of the MTA's 1992-96 Capital Program. This is
the fourth capital plan since the Legislature authorized procedures for the
adoption, approval and amendment of MTA capital programs and is designed to
upgrade the performance of the MTA's transportation systems by investing in new
rolling stock, maintaining replacement schedules for existing assets and
bringing the MTA system into a state of good repair. The 1995-99 Capital Program
assumes the issuance of an estimated $5.1 billion in bonds under this $6.5
billion aggregate bonding authority. The remainder of the plan is projected to
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.
There can be no assurance that all the necessary governmental actions for
the 1995-99 Capital Program or future capital programs will be taken, that
funding sources currently identified will not be
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decreased or eliminated, or that the 1995-99 Capital Program, or parts thereof,
will not be delayed or reduced. Should funding levels fall below current
projections, the MTA would have to revise its 1995-99 Capital Program
accordingly. If the 1995-99 Capital Program is delayed or reduced, ridership and
fare revenues may decline, which could, among other things, impair the MTA's
ability to meet its operating expenses without additional assistance.
THE CITY. The City has required, and continues to require significant
financial assistance from the State. The City depends on the State to enable the
City to balance its budget and meet its cash requirements. In the early 1970s,
the City incurred substantial operating deficits, and its financial controls,
accounting practices and disclosure policies were widely criticized. In 1975,
the City encountered severe financial difficulties and lost access to the public
credit markets. The State Legislature responded in 1975 by creating the
Municipal Assistance Corporation For The City of New York ('MAC') to provide
financing assistance for the City and the Financial Control Board to exercise
certain oversight and review functions with respect to the City's finances. The
Financial Control Board's powers over the City were suspended in June 1986, but
would be reinstated (under current law) if the City experiences certain adverse
financial circumstances. At the time of the fiscal crisis the State provided
substantial financial assistance to the City, the Federal government provided
the City with direct seasonal loans and guarantees on the City's long-term debt
and the City's labor unions accepted deferrals of wage increases and approved
purchases of City bonds by the pension funds. No assurance can be given that
similar assistance would again be made available if needed, particularly given
the current budgetary constraints faced by both the Federal and State
governments.
The City provides services usually undertaken by counties, school districts
or special districts in other large urban areas, including the provision of
social services such as day care, foster care, health care, family planning,
services for the elderly and special employment services for needy individuals
and families who qualify for such assistance. State law requires the City to
allocate a large portion of its total budget to Board of Education operations,
and mandates that the City assume the local share of public assistance and
Medicaid costs. For each of the 1981 through 1996 fiscal years, the City
achieved balanced operating results as reported in accordance with then
applicable generally accepted accounting principles ('GAAP'). The City was
required to close substantial budget gaps in recent years in order to maintain
balanced operating results. There can be no assurance that the City will
continue to maintain a balanced budget as required by State law without
additional tax or other revenue increases or additional reductions in City
services or entitlement programs, which could adversely affect the City's
economic base.
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 1997-2000 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 1997-2000 Financial Plan will be
realized. Due to the uncertainty existing on the federal and state levels, the
ultimate adoption of the State budget for FY 1997-98 may result in substantial
reductions in projected expenditures for social spending programs.
Cost-containment assumptions contained in the 1997-2000 Financial Plan and the
City FY 1997-98 Budget may therefore be significantly adversely affected upon
the final adoption of the State budget for FY 1997-98. Furthermore, actions
taken in recent fiscal years to avert deficits may have reduced the City's
flexibility in responding to future budgetary imbalances, and have deferred
certain expenditures to later fiscal years.
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The 1997-2000 Financial Plan published on November 14, 1996 reflects actual
receipts and expenditures and changes in forecast revenues and expenditures
since the June, 1996 Financial Plan. The 1997-2000 Financial Plan projects
revenues and expenditures for FY 1996-97 balanced in accordance with GAAP, and
projects gaps of $1.2 billion, $2.1 billion and $3.0 billion for the 1998, 1999
and 2000 fiscal years, respectively.
In connection with the Financial Plan, the City has outlined a gap-closing
program for the 1998 through 2000 fiscal years to eliminate the remaining $1.2
billion, $2.1 billion and $3.0 billion projected budget gaps for such fiscal
years. This program, which is not specified in detail, assumes additional agency
programs to reduce expenditures or increase revenues by $400 million, $950
million and $1.4 billion in the 1998 through 2000 fiscal years, respectively;
additional revenue initiatives and asset sales of $76 million, $229 million and
$281 million in the 1998 through 2000 fiscal years, respectively; additional
Federal and State aid of $250 million, $250 million and $325 million in the 1998
through 2000 fiscal years, respectively; additional reductions in entitlement
costs of $400 million, $600 million and $975 million in the 1998 through 2000
fiscal years, respectively; and availability in each of the 1998 through 2000
fiscal years of $100 million of the General Reserve.
The City's projected budget gaps for the 1999 and 2000 fiscal years do not
reflect the savings expected to result from prior years' programs to close the
gaps set forth in the Financial Plan. Thus, for example, recurring savings
anticipated from the actions which the City proposes to take to balance the
fiscal year 1998 budget are not taken into account in projecting the budget gaps
for the 1999 and 2000 fiscal years.
Although the City has maintained balanced budgets in each of its last
sixteen fiscal years and is projected to achieve balanced operating results for
the 1997 fiscal year, there can be no assurance that the gap-closing actions
proposed in the Financial Plan can be successfully implemented or that the City
will maintain a balanced budget in future years without additional State aid,
revenue increases or expenditure reductions. Additional tax increases and
reductions in essential City services could adversely affect the City's economic
base.
The City derives its revenues from a variety of local taxes, user charges,
miscellaneous revenues and federal and State unrestricted and categorical
grants. The City projected that local revenues would provide approximately 67.8%
of total revenues in FY 1996-97 while federal aid, including categorical grants,
will provide 11.9% in FY 1996-97 and State aid, including unrestricted aid and
categorical grants, will provide 20.3% in FY 1996-97. The largest source of the
City's revenues is the real estate tax (approximately 21% of total revenues
projected for FY 1996-97, at rates levied by the City council (subject to
certain State constitutional limits). The City derives the remainder of its tax
revenues from a variety of other economically sensitive local taxes (subject to
authorization by the legislature), including: a local sales and compensating use
tax (primarily dedicated to MAC debt service) imposed in addition to the State's
retail sales tax; the personal income tax on City residents and the earnings tax
on non-residents; a general corporation tax; and a financial corporation tax.
High tax burdens in the City impose political and economic constraints on the
ability of the City to increase local tax rates. The City's four-year financial
plans have been the subject of extensive public comment and criticism,
principally questioning the reasonableness of assumptions that the City will
have the capacity to generate sufficient revenues in the future to provide the
level of services contained in such City financial plans. On July 10, 1995, S&P
lowered the City's credit rating from A- to BBB+, among the lowest ratings of
any major city in the country. The rating agency cited specifically the City
budget's reliance on 'one-shot' measures to balance the budget for FY 1995-96
without rectifying the underlying structural problems, its continued optimistic
projections of State and federal aid, and continued high debt levels.
The City is the largest municipal debt issuer in the nation, and has more
than doubled its debt load since the end of FY 1987-88, in large measure to
rehabilitate its extensive, aging physical plant. The City's seasonal borrowing
needs increased significantly during FY 1989-90 and FY 1990-91, largely due to
delayed State aid payments, and totalled $2.25 billion in FY 1991-92, $1.40
billion in FY 1992-93, $1.75 billion in FY 1993-94, $2.2 billion in FY 1994-95,
$2.4 billion in FY 1995-96 and $2.4 billion in FY 1996-1997.
The City makes substantial capital expenditures to reconstruct and
rehabilitate the City's infrastructure and physical assets, including City mass
transit facilities, sewers, streets, bridges and
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tunnels, and to make capital investments that will improve productivity in City
operations. However, when operating revenues come under increasing pressure,
funding levels of the City's capital program are reduced from those previously
forecast in order to reduce debt service costs. In addition, the City's
projection of total debt subject to the general debt limit that would be
required to fund the Updated Ten-Year Capital Strategy published in April 1995
indicated that, if no action were taken, projected contracts for capital
projects and debt issuance may exceed the general debt limit by the end of
FY 1996-97 and would exceed the general debt limit by a substantial amount
thereafter.
OTHER LOCALITIES. Certain localities in addition to the City could have
financial problems which, if significant, could lead to requests for additional
State assistance during the State's FY 1997-98 and thereafter. Fiscal
difficulties experienced by the City of Yonkers, for example, could result in
State actions to allocate State resources in amounts that cannot yet be
determined. Beginning in 1990, the City of Troy experienced a series of
budgetary deficits that resulted in the establishment of a Supervisory Board for
the City of Troy in 1994. The Supervisory Board's powers were increased in 1995,
when Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the City of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding.
Seventeen municipalities received extraordinary assistance during the 1996
legislative session through $50 million in special appropriations targeted for
distressed cities.
Municipalities and school districts have engaged in substantial short-term
and long-term borrowings. In 1994, the total indebtedness of all localities in
the State other than New York City was approximately $17.7 billion. A small
portion (approximately $82.9 million) of that indebtedness represented borrowing
to finance budgetary deficits and was issued pursuant to State enabling
legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than New York City authorized by State law to issue debt to finance deficits
during the period that such deficit financing is outstanding. Seventeen
localities had outstanding indebtedness for deficit financing at the close of
their fiscal year ending in 1994.
FUNDAMENTAL INVESTMENT LIMITATIONS. The following fundamental investment
limitations cannot be changed for a Fund without the affirmative vote of the
lesser of (1) more than 50% of the outstanding shares of the Fund or (2) 67% or
more of the shares of the Fund present at a shareholders' meeting if more than
50% of the outstanding shares are represented at the meeting in person or by
proxy. If a percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting from a change in values of
portfolio securities or the amount of total assets will not be considered a
violation of any of the following limitations.
Each Fund will not:
(1) purchase any security if, as a result of that purchase, 25% or
more of the Fund's total assets would be invested in securities of
issuers having their principal business activities in the same
industry, except that this limitation does not apply to securities
issued or guaranteed by the U.S. government, its agencies or
instrumentalities or to municipal securities.
(2) issue senior securities or borrow money, except as permitted under
the Investment Company Act of 1940 ('1940 Act') and then not in
excess of 331/3% of the Fund's total assets (including the amount
of the senior securities issued but reduced by any liabilities not
constituting senior securities) at the time of the issuance or
borrowing, except that the Fund may borrow up to an additional 5%
of its total assets (not including the amount borrowed) for
temporary or emergency purposes.
(3) make loans, except through loans of portfolio securities or
through repurchase agreements, provided that for purposes of this
restriction, the acquisition of bonds, debentures, other debt
securities or instruments, or participations or other interests
therein and investments in government obligations, commercial
paper, certificates of deposit, bankers' acceptances or similar
instruments will not be considered the making of a loan.
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(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 California Tax-Free Income Fund, in debt
obligations issued by the State of California, its
municipalities and public authorities or by other issuers if
such obligations pay interest that is exempt from federal
income tax and California personal income tax and is not an
item of tax preference for purposes of the AMT ('AMT exempt
interest');
(b) in the case of National Tax-Free Income Fund, in debt
obligations issued by states, municipalities and public
authorities and other issuers that pay interest that is exempt
from federal income tax ('municipal obligations') and that
also is AMT exempt interest;
(c) in the case of Municipal High Income Fund, in municipal
obligations; and
(d) in the case of New York Tax-Free Income Fund, in debt
obligations issued by the State of New York, its
municipalities and public authorities or by other issuers if
such obligations pay interest that is exempt from federal
income tax as well as New York State and New York City
personal income taxes and is AMT exempt interest.
In addition, California Tax-Free Income Fund and National Tax-Free Income
Fund each will not:
(8) purchase securities of any one issuer if, as a result, more than
5% of the Fund's total assets would be invested in securities of
that issuer or the Fund would own or hold more than 10% of the
outstanding voting securities of that issuer, except that up to
25% of the Fund's total assets may be invested without regard to
this limitation, and except that this limitation does not apply to
securities issued or guaranteed by the U.S. government, its
agencies and instrumentalities or to securities issued by other
investment companies.
The following interpretation applies to, but is not a part of,
fundamental limitation (8): Each state, territory and possession
of the United States (including the District of Columbia and
Puerto Rico), each political subdivision, agency, instrumentality
and authority thereof, and each multi-state agency of which a
state is a member is a separate 'issuer.' When the assets and
revenues of an agency, authority, instrumentality or other
political subdivision are separate from the government creating
the subdivision and the security is backed only by the assets and
revenues of the subdivision, such subdivision would be deemed to
be the sole issuer. Similarly, in the case of an IDB or PAB, if
that bond is backed only by the assets and revenues of the
non-governmental user, then that non-governmental user would be
deemed to be the sole issuer. However, if the creating government
or another entity guarantees a security, then to the extent that
the value of all securities issued or guaranteed by that
government or entity and owned by the Fund exceeds 10% of the
Fund's total assets, the guarantee would be considered a separate
security and would be treated as issued by that government or
entity.
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NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions may be
changed by each board without shareholder approval.
Each Fund will not:
(1) invest more than 10% of its net assets in illiquid securities, a
term which means securities that cannot be disposed of within
seven days in the ordinary course of business at approximately the
amount at which the Fund has valued the securities and includes,
among other things, repurchase agreements maturing in more than
seven days.
(2) purchase securities on margin, except for short-term credit
necessary for clearance of portfolio transactions and except that
the Fund may make margin deposits in connection with its use of
financial options and futures, forward and spot currency
contracts, swap transactions and other financial contracts or
derivative instruments.
(3) engage in short sales of securities or maintain a short position,
except that the Fund may (a) sell short 'against the box' and (b)
maintain short positions in connection with its use of financial
options and futures, forward and spot currency contracts, swap
transactions and other financial contracts or derivative
instruments.
(4) purchase securities of other investment companies, except to the
extent permitted by the 1940 Act and except that this limitation
does not apply to securities received or acquired as dividends,
through offers of exchange, or as a result of reorganization,
consolidation, or merger.
(5) purchase portfolio securities while borrowings in excess of 5% of
its total assets are outstanding.
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HEDGING AND OTHER STRATEGIES USING DERIVATIVE CONTRACTS
As discussed in the Prospectus, Mitchell Hutchins may use a variety of
financial instruments ('Derivative Instruments'), including certain options,
futures contracts (sometimes referred to as 'futures') and options on futures
contracts, to attempt to hedge the Funds' portfolios or to attempt to enhance
the Funds' income. A Fund may enter into transactions using one or more types of
Derivative Instruments, under which the full value of its portfolio is at risk.
Under normal circumstances, however, a Fund's use of those instruments will
place at risk a much smaller portion of its assets. In particular, each Fund may
use the Derivative Instruments described below:
OPTIONS ON DEBT SECURITIES -- A call option is a short-term contract
pursuant to which the purchaser of the option, in return for a premium, has the
right to buy the security underlying the option at a specified price at any time
during the term of the option. The writer of the call option, who receives the
premium, has the obligation, upon exercise of the option during the option term,
to deliver the underlying security against payment of the exercise price. A put
option is a similar contract which gives its purchaser, in return for a premium,
the right to sell the underlying security at a specified price during the option
term. The writer of the put option, who receives the premium, has the
obligation, upon exercise during the option term, to buy the underlying security
at the exercise price.
OPTIONS ON INDEXES OF DEBT SECURITIES -- An index assigns relative values
to the securities included in the index and fluctuates with changes in the
market values of such securities. Index options operate in the same way as more
traditional options except that exercises of index options are effected with
cash payments and do not involve delivery of securities. Thus, upon exercise of
an index option, the purchaser will realize and the writer will pay an amount
based on the difference between the exercise price and the closing price of the
index. Currently, options on indexes of debt securities do not exist.
MUNICIPAL BOND INDEX FUTURES CONTRACTS -- A municipal bond index futures
contract is a bilateral agreement pursuant to which one party agrees to accept
and the other party agrees to make delivery of an amount of cash equal to a
specified dollar amount times the difference between the index value at the
close of trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the bonds comprising the index is
made; generally contracts are closed out prior to the expiration date of the
contract.
MUNICIPAL DEBT AND INTEREST RATE FUTURES CONTRACTS -- A municipal debt or
interest rate futures contract is a bilateral agreement pursuant to which one
party agrees to accept and the other party agrees to make delivery of the
specific type of debt security called for in the contract at a specified future
time and at a specified price. Although such futures contracts by their terms
call for actual delivery or acceptance of debt securities, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery. Currently there is no public market for municipal debt futures
contracts.
OPTIONS ON FUTURES CONTRACTS -- Options on futures contracts are similar to
options on securities except that an option on a futures contract gives the
purchaser the right, in return for the premium, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell a security, at a
specified price at any time during the option term. Upon exercise of the option,
the delivery of the futures position to the holder of the option will be
accompanied by delivery of the accumulated balance, which represents the amount
by which the market price of the futures contract exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option on
the future. The writer of an option, upon exercise, will assume a short position
in the case of a call, and a long position in the case of a put.
GENERAL DESCRIPTION OF HEDGING STRATEGIES. Hedging strategies can be
broadly categorized as 'short hedges' and 'long hedges.' A short hedge is a
purchase or sale of a Derivative Instrument intended to partially or fully
offset potential declines in the value of one or more investments held in a
Fund's portfolio. Thus, in a short hedge a Fund takes a position in a Derivative
Instrument whose price is expected to move in the opposite direction of the
price of the investment being hedged. For example, a Fund might purchase a put
option on a security to hedge against a potential decline in the value of that
security. If the price of the security declined below the exercise price of the
put, the Fund could exercise the put and thus limit its loss below the exercise
price to the premium paid plus
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transaction costs. In the alternative, because the value of the put option can
be expected to increase as the value of the underlying security declines, the
Fund might be able to close out the put option and realize a gain to offset the
decline in the value of the security.
Conversely, a long hedge is a purchase or sale of a Derivative Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that a Fund intends to acquire. Thus, in a long
hedge a Fund takes a position in a Derivative Instrument whose price is expected
to move in the same direction as the price of the prospective investment being
hedged. For example, a Fund might purchase a call option on a security it
intends to purchase in order to hedge against an increase in the cost of the
security. If the price of the security increased above the exercise price of the
call, the Fund could exercise the call and thus limit its acquisition cost to
the exercise price plus the premium paid and transaction costs. Alternatively,
the Fund might be able to offset the price increase by closing out an
appreciated call option and realizing a gain.
Derivative Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that a Fund owns
or intends to acquire. Derivative Instruments on debt securities may be used to
hedge either individual securities or broad fixed income market sectors.
The use of Derivative Instruments is subject to applicable regulations of
the Securities and Exchange Commission ('SEC'), the several options and futures
exchanges upon which they are traded and the Commodity Futures Trading
Commission ('CFTC'). In addition, a Fund's ability to use Derivative Instruments
will be limited by tax considerations. See 'Taxes.'
In addition to the products and strategies described below, Mitchell
Hutchins expects to discover additional opportunities in connection with
options, futures contracts and other derivative contracts and hedging
techniques. These new opportunities may become available as Mitchell Hutchins
develops new techniques, as regulatory authorities broaden the range of
permitted transactions and as new options, futures contracts or other techniques
are developed. Mitchell Hutchins may utilize these opportunities to the extent
that they are consistent with the Funds' investment objectives and permitted by
the Funds' investment limitations and applicable regulatory authorities. The
Funds' Prospectus or SAI will be supplemented to the extent that new products or
techniques involve materially different risks than those described below or in
the Prospectus.
SPECIAL RISKS OF STRATEGIES USING DERIVATIVE CONTRACTS. The use of
Derivative Instruments involves special considerations and risks, as described
below. Risks pertaining to particular Derivative Instruments are described in
the sections that follow.
(1) Successful use of most Derivative Instruments depends upon Mitchell
Hutchins' ability to predict movements of the overall securities and interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. While Mitchell Hutchins is experienced in the
use of Derivative Instruments, there can be no assurance that any particular
hedging strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Derivative Instrument and price movements of the
investments being hedged. For example, if the value of a Derivative Instrument
used in a short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which
Derivative Instruments are traded. The effectiveness of hedges using Derivative
Instruments on indices will depend on the degree of correlation between price
movements in the index and price movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a Fund entered into a short
hedge because Mitchell Hutchins projected a decline in the price of a security
in the Fund's portfolio, and the price of that security increased instead, the
gain from that increase might be wholly or partially offset by a decline in the
price of the Derivative Instrument. Moreover, if the price of the Derivative
Instrument
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declined by more than the increase in the price of the security, the Fund could
suffer a loss. In either such case, the Fund would have been in a better
position had it not hedged at all.
(4) As described below, a Fund might be required to maintain assets as
'cover,' maintain segregated accounts or make margin payments when it takes
positions in Derivative Instruments involving obligations to third parties
(i.e., Derivative Instruments other than purchased options). If a Fund were
unable to close out its positions in such Derivative Instruments, it might be
required to continue to maintain such assets or accounts or make such payments
until the position expired or matured. These requirements might impair a Fund's
ability to sell a portfolio security or make an investment at a time when it
would otherwise be favorable to do so, or require that a Fund sell a portfolio
security at a disadvantageous time. A Fund's ability to close out a position in
a Derivative Instrument prior to expiration or maturity depends on the existence
of a liquid secondary market or, in the absence of such a market, the ability
and willingness of a contra party 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 the Fund.
COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS. Transactions using
Derivative Instruments, other than purchased options, expose a Fund to an
obligation to another party. A Fund will not enter into any such transactions
unless it owns either (1) an offsetting ('covered') position in securities or
other options or futures contracts or (2) cash or liquid securities, with a
value sufficient at all times to cover its potential obligations to the extent
not covered as provided in (1) above. Each Fund will comply with SEC guidelines
regarding cover for hedging 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, the commitment of a large portion of
a Fund's assets to cover or segregated accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
OPTIONS. The Funds may purchase put and call options, and write (sell)
covered put and call options, on debt securities. The purchase of call options
serves as a long hedge, and the purchase of put options serves as a short hedge.
Writing covered put or call options can enable a Fund to enhance income by
reason of the premiums paid by the purchasers of such options. However, if the
market price of the security underlying a covered put option declines to less
than the exercise price of the option, minus the premium received, the Fund
would expect to suffer a loss. Writing covered call options 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 Fund will
be obligated to sell the security at less than its market value. If the covered
call option is an OTC option, the securities or other assets used as cover would
be considered illiquid to the extent described under 'Investment Policies and
Restrictions -- Illiquid Securities.'
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Generally, OTC options on debt securities are European
style options. This means that the option is only exercisable immediately prior
to its expiration. This is in contrast to American-style options, which are
exercisable at any time prior to the expiration date of the option. Options that
expire unexercised have no value.
A Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, a Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
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.
27
<PAGE>
<PAGE>
The Funds may purchase or write both exchange-traded and OTC options.
However, exchange-traded or liquid OTC options on municipal debt securities are
not currently available. Exchange markets for options on debt securities exist
but are relatively new, and these instruments are primarily traded on the OTC
market. Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed which,
in effect, guarantees completion of every exchange-traded option transaction. In
contrast, OTC options are contracts between the Fund and its contra party
(usually a securities dealer or a bank) with no clearing organization guarantee.
Thus, when the Fund purchases or writes an OTC option, it relies on the contra
party to make or take delivery of the underlying investment upon exercise of the
option. Failure by the contra party 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 will enter into OTC option transactions only with contra
parties that have a net worth of at least $20 million.
A Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. Each Fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although a Fund
will enter into OTC options only with contra parties that are expected to be
capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option position
at a favorable price prior to expiration. In the event of insolvency of the
contra party, the Fund might be unable to close out an OTC option position at
any time prior to its expiration.
If a Fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by a Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
In the event that options on indices of municipal and non-municipal debt
securities become available, a Fund may purchase and write put and call options
on such indices in much the same manner as the more traditional options
discussed above, except that index options may serve as a hedge against overall
fluctuations in the debt securities markets (or market sectors) rather than
anticipated increases or decreases in the value of a particular security.
GUIDELINES FOR OPTIONS. A Fund's use of options is governed by the
following guidelines, which can be changed by its board without shareholder
vote:
1. A Fund may purchase a put or call option, including any straddles
or spreads, 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 the
Fund's total assets.
2. The aggregate value of securities underlying put options written by
any Fund determined as of the date the put options are written will not
exceed 50% of the Fund's net assets.
3. The aggregate premiums paid on all options (including options on
securities and indices of debt securities and options on futures contracts)
purchased by the Fund that are held at any time will not exceed 20% of the
Fund's net assets.
FUTURES. The Funds may purchase and sell municipal bond index futures
contracts, municipal debt futures contracts and interest rate futures contracts.
The Funds also may purchase put and call options, and write covered put and call
options, on such futures contracts. The purchase of futures or call options
thereon 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 call options on securities or indices.
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, the Fund may sell a futures contract or a call option thereon, or
purchase a put option on that futures contract. If Mitchell
28
<PAGE>
<PAGE>
Hutchins wishes to lengthen the average duration of a Fund's portfolio, the Fund
may buy a futures contract or a call option thereon, or sell a put option
thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, 'initial margin' consisting of cash, obligations of
the United States or obligations fully guaranteed as to principal and interest
by the United States, in an amount generally equal to 10% or less of the
contract value. Margin must also be deposited when writing a call option on a
futures contract, in accordance with applicable exchange rules. Unlike margin in
securities transactions, initial margin on futures contracts does not represent
a borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.
Subsequent 'variation margin' payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
'marking to market.' Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a Fund purchases or
sells a futures contract or writes a call or put option thereon, it is subject
to daily variation margin calls that could be substantial in the event of
adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
Each Fund intends to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If a Fund were unable to liquidate a futures or related options position
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. The Fund would continue to be subject
to market risk with respect to the position. In addition, except in the case of
purchased options, the Fund would continue to be required to make daily
variation margin payments and might be required to maintain the position being
hedged by the future or option or to maintain cash or securities in a segregated
account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, 'program trading' and
other investment strategies might result in temporary price distortions.
29
<PAGE>
<PAGE>
GUIDELINES FOR FUTURES AND RELATED OPTIONS. A Fund's use of futures and
related options is governed by the following guidelines, which can be changed by
its board without shareholder vote:
1. To the extent a Fund enters into futures contracts and options on
futures positions that are not for bona fide hedging purposes (as defined
by the CFTC), the aggregate initial margin and premiums on those positions
(excluding the amount by which options are 'in-the-money') may not exceed
5% of the Fund's net assets.
2. The aggregate premiums paid on all options (including options on
securities and indices of debt securities and options on futures contracts)
purchased by any Fund that are held at any time will not exceed 20% of the
Fund's net assets.
3. The aggregate margin deposits on all futures contracts and options
thereon held at any time by the Fund will not exceed 5% of the Fund's total
assets.
TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES
The trustees and executive officers of each Trust, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ ---------------- ----------------------------------------------------
<S> <C> <C>
Margo N. Alexander**; 50 Trustee and Mrs. Alexander is president, chief executive officer
President and a director of Mitchell Hutchins (since January
1995) and an executive vice president and director
of PaineWebber. Mrs. Alexander is president and a
director or trustee of 29 investment companies for
which Mitchell Hutchins or PaineWebber serves as
investment adviser.
Richard Q. Armstrong; 61 Trustee Mr. Armstrong is chairman and principal of RQA
78 West Brother Drive Enterprises (management consulting firm) (since
Greenwich, CT 06830 April 1991 and principal occupation since March
1995). Mr. Armstrong is also a director of Hi Lo
Automotive, Inc. He 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, Luis
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 28
investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.
</TABLE>
30
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ ---------------- ----------------------------------------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.**; 70 Trustee and Mr. Bewkes is a director of Paine Webber Group Inc.
Chairman of the ('PW Group') (holding company of PaineWebber and
Board of Mitchell Hutchins). Prior to December 1995, he was
Trustees a consultant to PW Group. Prior to 1988, he was
chairman of the board, president and chief
executive officer of American Bakeries Company.
Mr. Bewkes is also a director of Interstate
Bakeries Corporation and NaPro BioTherapeutics,
Inc. Mr. Bewkes is a director or trustee of 29
investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.
Richard R. Burt; 50 Trustee Mr. Burt is chairman of International Equity
1101 Connecticut Avenue, N.W. Partners (international investments and consulting
Washington, D.C. 20036 firm) (since March 1994) and a partner of McKinsey
& Company (management consulting firm) (since
1991). He is also a director of American
Publishing Company and Archer-Daniels-Midland Co.
(agricultural commodities). 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
28 investment companies for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.
Mary C. Farrell**; 47 Trustee Ms. Farrell is a managing director, senior
investment strategist and member of the Investment
Policy Committee of PaineWebber. Ms. Farrell
joined PaineWebber in 1982. She is a member of the
Financial Women's Association and Women's Economic
Roundtable, and is employed 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 28 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
</TABLE>
31
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ ---------------- ----------------------------------------------------
<S> <C> <C>
Meyer Feldberg; 55 Trustee Mr. Feldberg is Dean and Professor of Management of
Columbia University the Graduate School of Business, Columbia
101 Uris Hall University. Prior to 1989, he was president of the
New York, New York 10027 Illinois Institute of Technology. Dean Feldberg is
also a director of K-III Communications
Corporation, Federated Department Stores, Inc. and
Revlon, Inc. Dean Feldberg is a director or
trustee of 28 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
George W. Gowen; 67 Trustee Mr. Gowen is a partner in the law firm of
666 Third Avenue Dunnington, Bartholow & Miller. Prior to May 1994,
New York, New York 10017 he was a partner in the law firm of Fryer, Ross &
Gowen. Mr. Gowen is a director of Columbia Real
Estate Investments, Inc. Mr. Gowen is a director
or trustee of 28 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Frederic V. Malek; 60 Trustee Mr. Malek is chairman of Thayer Capital Partners
1455 Pennsylvania Avenue N.W. (merchant bank). From January 1992 to November
Suite 350 1992, he was campaign manager of Bush-Quayle '92.
Washington, D.C. 20004 From 1990 to 1992, he was vice chairman and, from
1989 to 1990, he was president of Northwest
Airlines Inc., NWA Inc. (holding company of
Northwest Airlines Inc.) and Wings Holdings Inc.
(holding company of NWA Inc.). Prior to 1989, he
was employed by the Marriott Corporation (hotels,
restaurants, airline catering and contract
feeding), where he most recently was an executive
vice president and president of Marriott Hotels
and Resorts. Mr. Malek is also a director of
American Management Systems, Inc. (management
consulting and computer related services),
Automatic Data Processing, Inc., CB Commercial
Group, Inc. (real estate services), Choice Hotels
International (hotel and hotel franchising), FPL
Group, Inc. (electric services), Integra, Inc.
(bio-medical), Manor Care, Inc. (health care),
National Education Corporation and Northwest
Airlines Inc. Mr. Malek is a director or trustee
of 28 investment companies for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.
</TABLE>
32
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ ---------------- ----------------------------------------------------
<S> <C> <C>
Carl W. Schafer; 61 Trustee Mr. Schafer is president of the Atlantic Foundation
P.O. Box 1164 (charitable foundation supporting mainly
Princeton, New Jersey 08542 oceanographic exploration and research). He is a
director of Roadway Express, Inc. (trucking), The
Guardian Group of Mutual Funds, Evans Systems,
Inc. (motor fuels, convenience store and
diversified company), Electronic Clearing House,
Inc. (financial transactions processing), Wainoco
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 28 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Cynthia N. Bow; 38 Vice President Ms. Bow is a vice president and a portfolio manager
(PW Mutual Fund of Mitchell Hutchins. Ms. Bow has been with
Trust only) Mitchell Hutchins since 1982. Ms. Bow is a vice
president of four investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Elbridge T. Gerry III; 40 Vice President Mr. Gerry is a senior vice president and a portfolio
manager of Mitchell Hutchins. Prior to January
1996, he was with J.P. Morgan Private Banking
where he was responsible for managing municipal
assets, including several municipal bond funds.
Mr. Gerry is a vice president of five investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Dennis McCauley; 50 Vice President Mr. McCauley is a managing director and chief
investment officer -- fixed income of Mitchell
Hutchins. Prior to December 1994, he was director
of fixed income investments of IBM Corporation.
Mr. McCauley is a vice president of 19 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Ann E. Moran; 39 Vice President Ms. Moran is a vice president of the mutual fund
and Assistant finance division of Mitchell Hutchins. Ms. Moran
Treasurer is a vice president and assistant treasurer of 29
investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.
</TABLE>
33
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ ---------------- ----------------------------------------------------
<S> <C> <C>
Richard S. Murphy; 42 Vice President Mr. Murphy is a senior vice president and a
(PW Mutual Fund portfolio manager of Mitchell Hutchins. Prior to
Trust only) March 1994 Mr. Murphy was a vice president at
American International Group. Mr. Murphy is a vice
president of two investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Dianne E. O'Donnell; 44 Vice President Ms. O'Donnell is a senior vice president and deputy
and Secretary general counsel of Mitchell Hutchins. Ms.
O'Donnell is a vice president and secretary of 28
investment companies and vice president and
assistant secretary of one investment company for
which Mitchell Hutchins or PaineWebber serves as
investment adviser.
Emil Polito; 36 Vice President Mr. Polito is a senior vice president and director
of operations and control for Mitchell Hutchins.
From March 1991 to September 1993 he was director
of the Mutual Funds Sales Support and Service
Center for Mitchell Hutchins and PaineWebber. Mr.
Polito is also a vice president of 29 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Victoria E. Schonfeld; 46 Vice President Ms. Schonfeld is a managing director and general
counsel of Mitchell Hutchins. Prior to May 1994,
she was a partner in the law firm of Arnold &
Porter. Ms. Schonfeld is a vice president of 29
investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.
Paul H. Schubert; 34 Vice President Mr. Schubert is a first vice president and the
and Treasurer director of the mutual fund finance division of
Mitchell Hutchins. From August 1992 to August
1994, he was a vice president at BlackRock
Financial Management L.P. Prior to August 1992, he
was an audit manager with Ernst & Young LLP. Mr.
Schubert is a vice president and treasurer of 29
investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.
</TABLE>
34
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------ ---------------- ----------------------------------------------------
<S> <C> <C>
Barney A. Taglialatela; 36 Vice President Mr. Taglialatela is a vice president and a manager
and Assistant of the mutual fund finance division of Mitchell
Treasurer Hutchins. Prior to February 1995, he was a manager
of the mutual fund finance division of Kidder
Peabody Asset Management, Inc. Mr. Taglialatela is
a vice president of 28 investment companies for
which Mitchell Hutchins or PaineWebber serves as
investment adviser.
William W. Veronda; 51 Vice President Mr. Veronda is a senior vice president of Mitchell
(PW Municipal Hutchins. Prior to September 1995, he was a senior
Series only) vice president and general manager at Invesco
Funds Group. Mr. Veronda is vice president of one
investment company for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Keith A. Weller; 35 Vice President Mr. Weller is a first vice president and associate
and Assistant general counsel of Mitchell Hutchins. Prior to May
Secretary 1995, he was an attorney in private practice. Mr.
Weller is a vice president and assistant secretary
of 28 investment companies for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.
Ian W. Williams; 39 Vice President Mr. Williams is a vice president and a manager of
and Assistant the mutual fund finance division of Mitchell
Treasurer Hutchins. Prior to June 1992, he was an audit
senior accountant with Price Waterhouse LLP. Mr.
Williams is a vice president of 28 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
</TABLE>
- ------------------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are 'interested persons' of the
Trusts as defined in the 1940 Act by virtue of their positions with Mitchell
Hutchins, PaineWebber and/or PW Group.
Each Trust pays trustees who are not 'interested persons' of the Trust
('disinterested trustees') $1,000 annually for each series and $150 for each
board meeting and each meeting of a board committee (other than committee
meetings held on the same day as a board meeting). Each Trust presently has two
series and thus pays each such trustee $2,000 annually, plus any additional
annual amounts due for board or committee meetings. Each chairman of the audit
and contract review committees of individual funds within the PaineWebber fund
complex receives additional compensation aggregating $15,000 annually from the
relevant funds. All Trustees are reimbursed for any expenses incurred in
attending meetings. Trustees and officers of the Trusts own in the aggregate
less than 1% of the shares of each Fund. Because Mitchell Hutchins and
PaineWebber perform substantially all of the services necessary for the
operation of the Trusts and the Funds, neither Trust requires any employees. No
officer, director or employee of Mitchell Hutchins or PaineWebber presently
receives any compensation from the Trusts for acting as a trustee or officer.
35
<PAGE>
<PAGE>
The table below includes certain information relating to the compensation
of each Trust's current trustees who held office with that Trust or with other
PaineWebber funds during the fiscal year ended February 28, 1997.
COMPENSATION TABLE`D'
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION AGGREGATE COMPENSATION TOTAL COMPENSATION FROM
FROM PAINEWEBBER FROM PAINEWEBBER MUTUAL THE TRUSTS AND THE FUND
NAME OF PERSON, POSITION MUNICIPAL SERIES* FUND TRUST* COMPLEX**
- ----------------------------------- ---------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Richard Q. Armstrong,
Trustee.......................... $2,483 $ 2,483 $59,873
Richard R. Burt,
Trustee.......................... 2,183 2,183 51,173
Meyer Feldberg,
Trustee.......................... 4,309 3,950 96,181
George W. Gowen,
Trustee.......................... 4,309 3,950 92,431
Frederic V. Malek,
Trustee.......................... 4,309 3,950 92,431
Carl W. Schafer,
Trustee.......................... 2,483 2,483 62,307
</TABLE>
- ------------------
`D'Only independent members of the board are compensated by the Trusts and
identified above; trustees who are 'interested persons,' as defined by the
1940 Act, do not receive compensation.
* Represents fees paid to each trustee during the fiscal year ended February
28, 1997.
** Represents total compensation paid to each trustee during the calendar year
ended December 31, 1996; no fund within the fund complex has a bonus,
pension, profit sharing or retirement plan.
PRINCIPAL HOLDERS OF SECURITIES
As of May 31, 1997, the Trusts' records indicate that no shareholder owned
more than 5% of a Trust's shares.
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator of California Tax-Free Income Fund and National
Tax-Free Income Fund pursuant to a contract dated April 21, 1988 with
PaineWebber Mutual Fund Trust, as supplemented by a Fee Agreement dated June 30,
1992 with respect to National Tax-Free Income Fund, and of Municipal High Income
Fund and New York Tax-Free Income Fund pursuant to a contract with PaineWebber
Municipal Series dated July 1, 1989 (each an 'Advisory Contract' and,
collectively, the 'Advisory Contracts'). Under the Advisory Contracts, each Fund
pays Mitchell Hutchins a fee, computed daily and paid monthly, at the annual
rate of 0.50% of average daily net assets in the case of California Tax-Free
Income Fund and National Tax-Free Income Fund and 0.60% of average daily net
assets in the case of Municipal High Income Fund and New York Tax-Free Income
Fund.
Pursuant to the Advisory Contracts, during each of the periods indicated,
Mitchell Hutchins earned (or accrued) advisory fees in the amounts set forth
below:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28/29
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
California Tax-Free Income Fund............................. $ 902,327 $1,116,442 $1,340,491
National Tax-Free Income Fund............................... $2,022,871 $2,388,482 $2,891,059
Municipal High Income Fund.................................. $ 555,499 $ 647,537 $ 768,555
New York Tax-Free Income Fund............................... $ 312,553 $ 380,993 $ 481,509
(of which (of which
$123,590 $10,398
was waived) was waived)
</TABLE>
36
<PAGE>
<PAGE>
Under a Service Agreement with each Trust pursuant to which PaineWebber
provides certain services to the Funds not otherwise provided by the Fund's
transfer agent, which agreement is reviewed by each board annually, PaineWebber
earned (or accrued) the amounts set forth below during each of the periods
indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28/29
---------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
California Tax-Free Income Fund.............................. $16,293 $19,943 $24,838
National Tax-Free Income Fund................................ $43,965 $52,513 $64,620
Municipal High Income Fund................................... $13,436 $15,997 $19,534
New York Tax-Free Income Fund................................ $ 7,682 $ 9,267 $10,747
(of (of
which which
$7,682 $3,734
was was
waived) waived)
</TABLE>
Under the terms of the applicable Advisory Contract, each Fund bears all
expenses incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of a Trust not readily identifiable as belonging to a
particular Fund are allocated between the appropriate Funds by or under the
direction of the board in such manner as the board deems fair and equitable.
Expenses borne by each Fund include the following: (1) the cost (including
brokerage commissions, if any) of securities purchased or sold by the Fund and
any losses incurred in connection therewith; (2) fees payable to and expenses
incurred on behalf of the Fund by Mitchell Hutchins; (3) organizational
expenses; (4) filing fees and expenses relating to the registration and
qualification of the Fund's shares under federal and state securities laws and
maintenance of such registrations and qualifications; (5) fees and salaries
payable to trustees who are not interested persons of the Fund or Mitchell
Hutchins; (6) all expenses incurred in connection with the trustees' services,
including travel expenses; (7) taxes (including any income or franchise taxes)
and governmental fees; (8) costs of any liability, uncollectible items of
deposit and other insurance or fidelity bonds; (9) any costs, expenses or losses
arising out of a liability of or claim for damages or other relief asserted
against the Fund for violation of any law; (10) legal, accounting and auditing
expenses, including legal fees of special counsel for the independent trustees;
(11) charges of custodians, transfer agents and other agents; (12) costs of
preparing share certificates; (13) expenses of setting in type and printing
prospectuses and supplements thereto, statements of additional information and
supplements thereto, reports and proxy materials for existing shareholders and
costs of mailing such materials to existing shareholders; (14) any extraordinary
expenses (including fees and disbursements of counsel) incurred by the Fund;
(15) fees, voluntary assessments and other expenses incurred in connection with
membership in investment company organizations; (16) costs of mailing and
tabulating proxies and costs of meetings of shareholders, the board and any
committees thereof; (17) the cost of investment company literature and other
publications provided to trustees and officers; and (18) costs of mailing,
stationery and communications equipment.
Under each Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by a Fund in
connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Mitchell Hutchins in the performance of its duties or from reckless disregard of
its duties and obligations thereunder. Each Advisory Contract terminates
automatically upon its assignment and is terminable at any time without penalty
by the board or by vote of the holders of a majority of a Fund's outstanding
voting securities, on 60 days' written notice to Mitchell Hutchins or by
Mitchell Hutchins on 60 days' written notice to a Fund.
37
<PAGE>
<PAGE>
The following table shows the approximate net assets as of May 31, 1997,
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)................................................ $ 5,757.7
Global........................................................................... 3,109.4
Equity/Balanced.................................................................. 3,943.5
Fixed Income (excluding Money Market)............................................ 4,923.6
Taxable Fixed Income............................................................. 3,379.7
Tax-Free Fixed Income............................................................ 1,543.9
Money Market Funds............................................................... 23,869.9
</TABLE>
Mitchell Hutchins personnel may invest in securities for their own accounts
pursuant to a code of ethics that describes the fiduciary duty owed to
shareholders of the PaineWebber funds and other Mitchell Hutchins' advisory
accounts by all Mitchell Hutchins' directors, officers and employees,
establishes procedures for personal investing and restricts certain
transactions. For example, employee accounts generally must be maintained at
PaineWebber, personal trades in most securities require pre-clearance and
short-term trading and participation in initial public offerings generally are
prohibited. In addition, the code of ethics puts restrictions on the timing of
personal investing in relation to trades by PaineWebber funds and other Mitchell
Hutchins advisory clients.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
the Class A, Class B, Class C and Class Y shares of the Funds under separate
distribution contracts with each Trust (collectively, 'Distribution Contracts').
Each Distribution Contract requires Mitchell Hutchins to use its best efforts,
consistent with its other businesses, to sell shares of the applicable Funds.
Shares of the Funds are offered continuously. Under separate exclusive dealer
agreements between Mitchell Hutchins and PaineWebber, relating to the Class A,
Class B, Class C and Class Y shares of each Fund (collectively, 'Exclusive
Dealer Agreements'), PaineWebber and its correspondent firms sell each Fund's
shares.
Under separate plans of distribution pertaining to the Class A, Class B and
Class C shares of the Funds adopted by the Trusts in the manner prescribed under
Rule 12b-1 under the 1940 Act ('Class A Plan,' 'Class B Plan' and 'Class C
Plan,' collectively, 'Plans'), each Fund pays Mitchell Hutchins a service fee,
accrued daily and payable monthly, at the annual rate of 0.25% of the average
daily net assets of each Class of shares. Under the Class B Plan, each Fund also
pays Mitchell Hutchins a distribution fee, accrued daily and payable monthly, at
the annual rate of 0.75% of the average daily net assets of the Class B shares.
Under the Class C Plan, each Fund pays Mitchell Hutchins a distribution fee,
accrued daily and payable monthly, at the annual rate of 0.50% of the average
daily net assets of the Class C shares. There is no distribution plan with
respect to the Funds' Class Y shares.
Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the board at least quarterly, and the board 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 board, including those trustees who are not 'interested persons' of the
Trust and who have no direct or indirect financial interest in the operation of
the Plan or any agreement related to the Plan, acting in person at a meeting
called for that purpose, (3) payments by a Fund under the Plan shall not be
materially increased without the affirmative vote of the holders of a majority
of the outstanding shares of the relevant Class of that Fund and (4) while the
Plan remains in effect, the selection and nomination of trustees who are not
'interested persons' of the Trust shall be committed to the discretion of the
trustees who are not interested persons of the Trust.
In reporting amounts expended under the Plans to the trustees, Mitchell
Hutchins will allocate expenses attributable to the sale of each Class of Fund
shares to such Class based on the ratio of sales of the shares of such Class to
the sales of all three Classes of shares. The fees paid by one Class of Fund
shares will not be used to subsidize the sale of any other Class of Fund shares.
38
<PAGE>
<PAGE>
Under prior plans of distribution substantially similar to the Class A
Plan, each Fund paid Mitchell Hutchins a monthly distribution fee computed at
the same rate and in the same manner as the service fees under the Class A Plan.
The Funds paid (or accrued) the following fees to Mitchell Hutchins under
the Class A, Class B and Class C Plans during the fiscal year ended February 28,
1997:
<TABLE>
<CAPTION>
CALIFORNIA NATIONAL NEW YORK
TAX-FREE TAX-FREE MUNICIPAL HIGH TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND*
----------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
Class A............................................. $ 344,429 $ 730,134 $132,992 $ 1,008
Class B............................................. 234,043 462,284 211,056 77,064
Class C............................................. 144,672 495,098 137,105 79,618
</TABLE>
- ------------------
* During the fiscal year shown above, Mitchell Hutchins waived all or a portion
of its distribution fees. If such waivers had not been made, for the Class A,
Class B and Class C shares, the actual fees that would have been paid by the
Fund would have been $65,229, $102,212 and $118,348, respectively.
Mitchell Hutchins estimates that it and its parent corporation,
PaineWebber, incurred the following shareholder service-related and
distribution-related expenses with respect to the Funds during the fiscal year
ended February 28, 1997:
CLASS A
<TABLE>
<CAPTION>
CALIFORNIA NATIONAL NEW YORK
TAX-FREE TAX-FREE MUNICIPAL HIGH TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
----------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
Marketing and advertising........................... $61,137 $ 120,995 $ 36,895 $ 28,628
Amortization of commissions......................... N/A N/A N/A N/A
Printing of prospectuses and statements of
additional information............................ 2,225 2,535 454 425
Branch network costs allocated and interest
expense........................................... 204,591 421,881 74,123 38,068
Service fees paid to PaineWebber investment
executives........................................ 128,246 271,859 49,460 24,287
</TABLE>
CLASS B
<TABLE>
<CAPTION>
CALIFORNIA NATIONAL NEW YORK
TAX-FREE TAX-FREE MUNICIPAL HIGH TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Marketing and advertising............................ $10,385 $ 19,144 $ 14,637 $11,213
Amortization of commissions.......................... 87,161 171,578 79,361 37,711
Printing of prospectuses and statements of additional
information........................................ 381 401 183 166
Branch network costs allocated and interest
expense............................................ 42,934 83,251 37,049 18,474
Service fees paid to PaineWebber investment
executives......................................... 21,781 43,025 19,618 9,515
</TABLE>
CLASS C
<TABLE>
<CAPTION>
CALIFORNIA NATIONAL NEW YORK
TAX-FREE TAX-FREE MUNICIPAL HIGH TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Marketing and advertising............................ $ 8,551 $ 27,351 $ 12,672 $17,312
Amortization of commissions.......................... 35,954 122,622 33,988 29,366
Printing of prospectuses and statements of additional
information........................................ 322 573 159 257
Branch network costs allocated and interest
expense............................................ 28,901 96,208 25,709 23,238
Service fees paid to PaineWebber investment
executives......................................... 17,953 61,440 16,992 14,683
</TABLE>
39
<PAGE>
<PAGE>
'Marketing and advertising' includes various internal costs allocated by
Mitchell Hutchins to its efforts at distributing Fund shares. These internal
costs encompass office rent, salaries and other overhead expenses of various
departments and areas of operations of Mitchell Hutchins. 'Branch network costs
allocated and interest expense' consist of an allocated portion of the expenses
of various PaineWebber departments involved in the distribution of each Fund's
shares, including the PaineWebber retail branch system.
In approving the Funds' overall Flexible PricingSM system of distribution,
each board considered several factors, including that implementation of Flexible
Pricing would (1) enable investors to choose the purchasing option best suited
to their individual situation, thereby encouraging current shareholders to make
additional investments in the Funds and attracting new investors and assets to
the Funds to the benefit of each Fund and its shareholders; (2) facilitate
distribution of the Funds' shares; and (3) maintain the competitive position of
the Funds in relation to other funds that have implemented or are seeking to
implement similar distribution arrangements.
In approving the Class A Plan, each board considered all the features of
the distribution system, including (1) the conditions under which initial sales
charges would be imposed and the amount of such charges, (2) Mitchell Hutchins'
belief that the initial sales charge combined with a service fee would be
attractive to PaineWebber investment executives and correspondent firms,
resulting in greater growth of the Funds than might otherwise be the case, (3)
the advantages to the shareholders of economies of scale resulting from growth
in each Fund's assets and potential continued growth, (4) the services provided
to each Fund and its shareholders by Mitchell Hutchins, (5) the services
provided by PaineWebber pursuant to its Exclusive Dealer Agreement with Mitchell
Hutchins and (6) Mitchell Hutchins' shareholder service-related expenses and
costs.
In approving the Class B Plan, each board considered all the features of
the distribution system, including (1) the conditions under which contingent
deferred sales charges would be imposed and the amount of such charges, (2) the
advantage to investors in having no initial sales charges deducted from Fund
purchase payments and instead having the entire amount of their purchase
payments immediately invested in Fund shares, (3) Mitchell Hutchins' belief that
the ability of PaineWebber investment executives and correspondent firms to
receive sales commissions when Class B shares are sold and continuing service
fees thereafter while their customers invest their entire purchase payments
immediately in Class B shares would prove attractive to the investment
executives and correspondent firms, resulting in greater growth of each Fund
than might otherwise be the case, (4) the advantages to the shareholders of
economies of scale resulting from growth in each Fund's assets and potential
continued growth, (5) the services provided to each Fund and its shareholders by
Mitchell Hutchins, (6) the services provided by PaineWebber pursuant to its
Exclusive Dealer Agreement with Mitchell Hutchins and (7) Mitchell Hutchins'
shareholder service- and distribution-related expenses and costs. The trustees
also recognized that Mitchell Hutchins' willingness to compensate PaineWebber
and its investment executives, without the concomitant receipt by Mitchell
Hutchins of initial sales charges, was conditioned upon its expectation of being
compensated under the Class B Plan.
In approving the Class C Plan, each board considered all the features of
the distribution system, including (1) the advantage to investors in having no
initial sales charges deducted from Fund purchase payments and instead having
the entire amount of their purchase payments immediately invested in Fund
shares, (2) the advantage to investors in being free from contingent deferred
sales charges upon redemption for shares held more than one year and paying for
distribution on an ongoing basis, (3) Mitchell Hutchins' belief that the ability
of PaineWebber investment executives and correspondent firms to receive sales
compensation for their sales of Class C shares on an ongoing basis, along with
continuing service fees, while their customers invest their entire purchase
payments immediately in Class C shares and do not face contingent deferred sales
charges, would prove attractive to the investment executives and correspondent
firms, resulting in greater growth to each Fund than might otherwise be the
case, (4) the advantages to the shareholders of economies of scale resulting
from growth in each Fund's assets and potential continued growth, (5) the
services provided to each Fund and its shareholders by Mitchell Hutchins, (6)
the services provided by PaineWebber pursuant to its Exclusive Dealer Agreement
with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder service-and
distribution-related expenses and costs. The trustees also recognized that
Mitchell Hutchins' willingness to compensate PaineWebber and its investment
executives, without the concomitant receipt
40
<PAGE>
<PAGE>
by Mitchell Hutchins of initial sales charges or contingent deferred sales
charges upon redemption, was conditioned upon its expectation of being
compensated under the Class C Plan.
With respect to each Plan, the boards considered all compensation that
Mitchell Hutchins would receive under the Plan and the Distribution Contract,
including service fees and, as applicable, initial sales charges, distribution
fees and contingent deferred sales charges. The boards also considered the
benefits that would accrue to Mitchell Hutchins under each Plan in that Mitchell
Hutchins would receive service, distribution and advisory fees that are
calculated based upon a percentage of the average net assets of a Fund, which
fees would increase if the Plan were successful and the Funds attained and
maintained significant asset levels.
Under the Distribution Contract between each Trust and Mitchell Hutchins
for the Class A shares and similar prior distribution contracts, for the periods
set forth below, Mitchell Hutchins earned the following approximate amounts of
sales charges and retained the following approximate amounts, net of concessions
to PaineWebber as exclusive dealer:
CALIFORNIA TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
FISCAL YEARS ENDED FEBRUARY 28/29
---------------------------------
1997 1996 1995
-------- ------- --------
<S> <C> <C> <C>
Earned................................................................... $ 56,842 $57,198 $ 88,183
Retained................................................................. 4,798 1,224 6,470
</TABLE>
NATIONAL TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
FISCAL YEARS ENDED FEBRUARY 28/29
---------------------------------
1997 1996 1995
-------- ------- --------
<S> <C> <C> <C>
Earned................................................................... $148,485 $66,206 $195,108
Retained................................................................. 1,253 1,026 14,852
</TABLE>
MUNICIPAL HIGH INCOME FUND
<TABLE>
<CAPTION>
FISCAL YEARS ENDED FEBRUARY 28/29
---------------------------------
1997 1996 1995
-------- ------- --------
<S> <C> <C> <C>
Earned................................................................... $ 23,894 $52,683 $ 59,937
Retained................................................................. 1,867 964 4,449
</TABLE>
NEW YORK TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
FISCAL YEARS ENDED FEBRUARY 28/29
---------------------------------
1997 1996 1995
-------- ------- --------
<S> <C> <C> <C>
Earned................................................................... $ 11,290 $14,417 $ 38,348
Retained................................................................. 838 1,034 2,923
</TABLE>
Mitchell Hutchins earned and retained the following contingent deferred
sales charges paid upon certain redemptions of shares for the fiscal year ended
February 28, 1997:
<TABLE>
<CAPTION>
CALIFORNIA NATIONAL MUNICIPAL NEW YORK
TAX-FREE TAX-FREE HIGH TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Class A............................ $ 0 $ 0 $ 0 $ 0
Class B............................ 109,202 198,658 106,470 56,407
Class C............................ 4,065 8,449 0 1,393
</TABLE>
PORTFOLIO TRANSACTIONS
Subject to policies established by each board, Mitchell Hutchins is
responsible for the execution of each Fund's portfolio transactions and the
allocation of brokerage transactions. In executing portfolio transactions,
Mitchell Hutchins seeks to obtain the best net results for a Fund, taking into
account such factors as the price (including the applicable dealer spread or
brokerage commission), size of order, difficulty of execution and operational
facilities of the firm involved. Each Fund effects its portfolio transactions
with municipal bond dealers. Municipal securities are traded on the OTC market
on a 'net' basis without a stated commission through dealers acting for their
own account and not as
41
<PAGE>
<PAGE>
brokers. Prices paid to dealers in principal transactions
generally include a 'spread,' which is the difference between the prices at
which the dealer is willing to purchase and sell a specific security at that
time. Since inception, the Funds have not paid any brokerage commissions.
For purchases or sales with broker-dealer firms which act as principal,
Mitchell Hutchins seeks best execution. Although Mitchell Hutchins may receive
certain research or execution services in connection with those transactions,
Mitchell Hutchins will not purchase securities at a higher price or sell
securities at a lower price than would otherwise be paid if no weight was
attributed to the services provided by the executing dealer. Moreover, Mitchell
Hutchins will not enter into any explicit soft dollar arrangements relating to
principal transactions and will not receive in principal transactions the types
of services which could be purchased for hard dollars. Mitchell Hutchins may
engage in agency transactions in OTC debt securities in return for research and
execution services. These transactions are entered into only in compliance with
procedures ensuring that the transaction (including commissions) is at least as
favorable as it would have been if effected directly with a market-maker that
did not provide research or execution services. These procedures include
Mitchell Hutchins' receiving multiple quotes from dealers before executing the
transactions on an agency basis.
Information and research services furnished by dealers or brokers with or
through which the Funds effect securities transactions may be used by Mitchell
Hutchins in advising other funds or accounts and, conversely, research services
furnished to Mitchell Hutchins by dealers or brokers in connection with other
funds or accounts Mitchell Hutchins advises may be used by Mitchell Hutchins in
advising the Funds. Information and research received from such brokers or
dealers will be in addition to, and not in lieu of, the services required to be
performed by Mitchell Hutchins under the Advisory Contracts.
Investment decisions for the Funds and for other investment accounts
managed by Mitchell Hutchins are made independently of each other in light of
differing considerations for the various accounts. However, the same investment
decision may occasionally be made for a Fund and one or more such accounts. In
such cases, simultaneous transactions are inevitable. Purchases or sales are
then averaged as to price and allocated between the Fund involved and such other
account(s) as to amount according to a formula deemed equitable to the Fund and
such account(s). While in some cases this practice could have a detrimental
effect upon the price or value of the security as far as a Fund is concerned, or
upon its ability to complete its entire order, in other cases it is believed
that coordination and the ability to participate in volume transactions will be
beneficial to the Fund.
No Fund will purchase securities that are offered in underwritings in which
Mitchell Hutchins or any of its affiliates is a member of the underwriting or
selling group, except pursuant to procedures adopted by each Trust's board of
trustees pursuant to Rule 10f-3 under the 1940 Act. Among other things, these
procedures require that the commission or spread paid in connection with such a
purchase be reasonable and fair, that the purchase be at not more than the
public offering price prior to the end of the first business day after the date
of the public offering and that Mitchell Hutchins or any affiliate thereof not
participate in or benefit from the sale to a Fund.
PORTFOLIO TURNOVER. Each Fund's annual portfolio turnover rate may vary
greatly from year to year, but it will not be a limiting factor when management
deems portfolio changes appropriate. The portfolio turnover rate is calculated
by dividing the lesser of a Fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
the securities in the portfolio during the year.
During the periods indicated, the portfolio turnover rates for each Fund
were as set forth below:
<TABLE>
<CAPTION>
PORTFOLIO TURNOVER RATES FOR THE
YEARS ENDED FEBRUARY 28/29
------------------------------------
1997 1996
---------------- ----------------
<S> <C> <C>
California Tax-Free Income Fund........................... 73% 32%
National Tax-Free Income Fund............................. 81% 74%
Municipal High Income Fund................................ 64% 48%
New York Tax-Free Income Fund............................. 40% 13%
</TABLE>
42
<PAGE>
<PAGE>
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES
COMBINED PURCHASE PRIVILEGE-CLASS A SHARES. Investors and eligible groups
of related Fund investors may combine purchases of Class A shares of the Funds
with concurrent purchases of Class A shares of any other PaineWebber mutual fund
and thus take advantage of the reduced sales charges for Class A shares
indicated in the table of sales charges in the Prospectus. The sales charge
payable on the purchase of shares of Class A shares of the Funds and Class A
shares of such other funds will be at the rates applicable to the total amount
of the combined concurrent purchases.
An 'eligible group of related Fund investors' can consist of any
combination of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her Individual Retirement Account
('IRA');
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25%
or more of the outstanding voting securities of a corporation will be
deemed to control the corporation, and a partnership will be deemed to be
controlled by each of its general partners);
(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by the individual(s);
(e) an individual (or eligible group of individuals) and a trust
created by the individual(s), the beneficiaries of which are the individual
and/or the individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers
to Minors Act account created by the individual or the individual's spouse;
or
(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).
(h) individual accounts related together under one registered
investment adviser having full discretion and control over the accounts.
The registered investment adviser must communicate at least quarterly
through a newsletter or investment update establishing a relationship with
all of the accounts.
RIGHTS OF ACCUMULATION-CLASS A SHARES. Reduced sales charges are available
through a right of accumulation, under which investors and eligible groups of
related Fund investors (as defined above) are permitted to purchase Class A
shares of the Funds among related accounts at the offering price applicable to
the total of (1) the dollar amount then being purchased plus (2) an amount equal
to the then-current net asset value of the purchaser's combined holdings of
Class A Fund shares and Class A shares of any other PaineWebber mutual fund. The
purchaser must provide sufficient information to permit confirmation of his or
her holdings, and the acceptance of the purchase order is subject to such
confirmation. The right of accumulation may be amended or terminated at any
time.
WAIVERS OF SALES CHARGES-CLASS B SHARES. Among other circumstances, the
contingent deferred sales charge on Class B shares is waived where a total or
partial redemption is made within one year following the death of the
shareholder. The contingent deferred sales charge waiver is available where the
decedent is either the sole shareholder or owns the shares with his or her
spouse as a joint tenant with right of survivorship. This waiver applies only to
redemption of shares held at the time of death.
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of each Fund may be exchanged for shares of the
corresponding Class of most other PaineWebber mutual funds. Shareholders will
receive at least 60 days' notice of any termination or material modification of
the exchange offer, except no notice need be given of an amendment whose only
material effect is to reduce the exchange fee, and no notice need be given if,
under extraordinary circumstances, either redemptions are suspended under the
circumstances described below or a Fund temporarily delays or ceases the sales
of its shares because it is unable to invest amounts effectively in accordance
with the Fund's investment objectives, policies and restrictions.
43
<PAGE>
<PAGE>
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 Trust has
elected, however, to be governed by Rule 18f-1 under the 1940 Act, under which a
Fund is obligated to redeem shares solely in cash up to the lesser of $250,000
or 1% of the net asset value of the Fund during any 90-day period for one
shareholder. This election is irrevocable unless the SEC permits its withdrawal.
A Fund may suspend redemption privileges or postpone the date of payment during
any period (1) when the NYSE is closed or trading on the NYSE is restricted as
determined by the SEC, (2) when an emergency exists, as defined by the SEC, that
makes it not reasonably practicable for the Fund to dispose of securities owned
by it or fairly to determine the value of its assets or (3) as the SEC may
otherwise permit. The redemption price may be more or less than the
shareholder's cost, depending on the market value of a Fund's portfolio at the
time.
AUTOMATIC INVESTMENT PLAN. Participation in the Automatic Investment Plan
enables an investor to use the technique of 'dollar cost averaging.' When the
investor invests the same dollar amount each month under the Plan, the investor
will purchase more shares when a Fund's net asset value per share is low and
fewer shares when the net asset value per share is high. Using this technique,
an investor's average purchase price per share over any given period will be
lower than if the investor purchased a fixed number of shares on a monthly basis
during the period. Of course, investing through the automatic investment plan
does not assure a profit or protect against loss in declining markets.
Additionally, because the automatic investment plan involves continuous
investing regardless of price levels, an investor should consider his or her
financial ability to continue purchases through periods of low price levels.
SYSTEMATIC WITHDRAWAL PLAN. An investor's participation in the systematic
withdrawal plan will terminate automatically if the 'Initial Account Balance' (a
term that means the value of the Fund account at the time the investor elects to
participate in the systematic withdrawal plan) less aggregate redemptions made
other than pursuant to the systematic withdrawal plan is less than $5,000 for
Class A and Class C shareholders or $20,000 for Class B shareholders. Purchases
of additional Fund shares concurrent with withdrawals are ordinarily
disadvantageous to shareholders because of tax liabilities and, for Class A
shares, initial sales charges. On or about the 20th of each month for monthly,
quarterly, semi-annual or annual plans, PaineWebber will arrange for redemption
by a Fund of sufficient Fund shares to provide the withdrawal payment specified
by participants in the Funds' systematic withdrawal plan. The payment generally
is mailed approximately five business days (defined under 'Valuation of Shares')
after the redemption date. Withdrawal payments should not be considered
dividends but redemption proceeds, with the tax consequences described under
'Dividends and Taxes' in the Prospectus. If periodic withdrawals continually
exceed reinvested dividends, 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. ('Transfer Agent'). Instructions to participate in the
plan, change the withdrawal amount or terminate participation in the plan will
not be effective until five days after written instructions with signatures
guaranteed are received by the Transfer Agent. Shareholders may request the
forms needed to establish a systematic withdrawal plan from their PaineWebber
investment executives, correspondent firms or the Transfer Agent at
1-800-647-1568.
REINSTATEMENT PRIVILEGE-CLASS A SHARES. As described in the Prospectus,
shareholders who have redeemed their Class A shares may reinstate their account
without a sales charge. Shareholders may exercise the reinstatement privilege by
notifying the Transfer Agent of such desire and forwarding a check for the
amount to be purchased within 365 days after the date of redemption. The
reinstatement will be made at the net asset value per share next computed after
the notice of reinstatement and check are received. The amount of a purchase
under this reinstatement privilege cannot exceed the amount of the redemption
proceeds. Gain on a redemption is taxable regardless of whether the
reinstatement privilege is exercised; however, a loss arising out of a
redemption will not be deductible to the extent the redemption proceeds are
reinvested, if the reinstatement privilege is exercised within 30 days after
44
<PAGE>
<PAGE>
redemption, and an adjustment will be made to the shareholder's tax basis for
the shares acquired pursuant to the reinstatement privilege. Gain or loss on a
redemption also will be adjusted for federal income tax purposes by the amount
of any sales charge paid on Class A shares, under the circumstances and to the
extent described below under 'Taxes'.
PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN'sm';
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT'r' (RMA'r')
Shares of the PaineWebber mutual funds (each a 'PW Fund' and, collectively,
the 'PW Funds') are available for purchase by customers of PaineWebber and its
correspondent firms who maintain Resource Management Accounts ('RMA
Accountholders') through the RMA Resource Accumulation Plan ('Plan'). 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 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 anytime, 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 low share
prices. However, over time, dollar cost averaging generally results in a lower
average original investment cost than if an investor invested a larger dollar
amount in a mutual fund at one time.
PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT. In order to enroll in the Plan,
an investor must have opened an RMA account with PaineWebber or one of its
correspondent firms. The RMA account is PaineWebber's comprehensive asset
management account and offers investors a number of features, including the
following:
monthly Premier account statements that itemize all account activity,
including investment transactions, checking activity and Gold
MasterCard'r' transactions during the period, and provide unrealized and
realized gain and loss estimates for most securities held in the account;
comprehensive preliminary 9-month and year-end summary statements that
provide information on account activity for use in tax planning and tax
return preparation;
automatic 'sweep' of uninvested cash into the RMA accountholder's choice
of the six RMA money market funds -- RMA Money Market Portfolio, RMA U.S.
Government Portfolio, RMA
45
<PAGE>
<PAGE>
Tax-Free Fund, RMA California Municipal Money Fund, RMA New Jersey
Municipal Money Fund and RMA New York Municipal Money Fund. Each money
market fund attempts to maintain a stable price per share of $1.00,
although there can be no assurance that it will be able to do so.
Investments in the money market funds are not insured or guaranteed by the
U.S. government;
check writing, with no per-check usage charge, no minimum amount on checks
and no maximum number of checks that can be written. RMA accountholders
can code their checks to classify expenditures. All canceled checks are
returned each month;
Gold MasterCard, with or without a line of credit, which provides RMA
accountholders with direct access to their accounts and can be used with
automatic teller machines worldwide. Purchases on the Gold MasterCard are
debited to the RMA account once monthly, permitting accountholders to
remain invested for a longer period of time;
24-hour access to account information through toll-free numbers, and more
detailed personal assistance during business hours from the RMA Service
Center;
expanded account protection to $25 million in the event of the liquidation
of PaineWebber. This protection does not apply to shares of the RMA money
market funds or the PW Funds because those shares are held at the transfer
agent and not through PaineWebber; and
automatic direct deposit of checks into your RMA account and automatic
withdrawals from the account.
The annual account fee for an RMA account is $85, which includes the Gold
MasterCard, with an additional fee of $40 if the investor selects an optional
line of credit with the Gold MasterCard.
CONVERSION OF CLASS B SHARES
Class B shares of each Fund will automatically convert to Class A shares of
that Fund, based on the relative net asset value per share of each 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. If a
shareholder acquired Class B shares of a Fund through an exchange of Class B
shares of a CDSC Fund that were acquired prior to July 1, 1991, the
shareholder's holding period for purposes of conversion is determined based on
the date the CDSC Fund shares were initially issued. For purposes of conversion
to Class A shares, Class B shares purchased through the reinvestment of
dividends and other distributions paid in respect of Class B shares will be held
in a separate sub-account. Each time any Class B shares in the shareholder's
regular account (other than those in the sub-account) convert to Class A shares,
a pro rata portion of the Class B shares in the sub-account also converts to
Class A shares. The portion will be determined by the ratio that the
shareholder's Class B shares converting to Class A shares bears to the
shareholder's total Class B shares not acquired through dividends and other
distributions.
Under normal circumstances, the net asset values per share of the two
Classes of each Fund will be the same. However, if a Fund's accrued expenses on
any Business Day were to exceed the Fund's accrued income for that Business Day,
the net asset value per share of the Class B shares could be lower than that of
the Class A shares because of the higher ongoing expenses borne by the Class B
shares. If such a divergence existed on a conversion date, a shareholder would
receive fewer Class A shares than the number of Class B shares converted,
although the dollar value would be the same. Mitchell Hutchins considers the
possibility of such an occurrence to be remote.
The availability of the conversion feature is subject to the continuing
availability of an opinion of counsel to the effect that the dividends and other
distributions paid on Class A and Class B shares will not result in
'preferential dividends' under the Internal Revenue Code and the conversion of
shares does not constitute a taxable event. If the conversion feature ceased to
be available, the Class B shares would not be converted and would continue to be
subject to the higher ongoing expenses of the Class B
46
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<PAGE>
shares beyond six years from the date of purchase. Mitchell Hutchins has no
reason to believe that this condition for the availability of the conversion
feature will not be met.
VALUATION OF SHARES
Each Fund determines the net asset value per share separately for each
Class of shares as of the close of regular trading (currently 4:00 p.m., Eastern
time) on the NYSE on each Business Day, which is defined as each Monday through
Friday when the NYSE is open. Currently, the NYSE is closed on the observance of
the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
Securities that are listed on exchanges are valued at the last sale price
on the day the securities are being valued or, lacking any sales on such day, at
the last available bid price. In cases where securities are traded on more than
one exchange, the securities are generally valued on the exchange considered by
Mitchell Hutchins as the primary market. Securities traded in the OTC market and
listed on The Nasdaq Stock Market are valued at the last available sale price on
The Nasdaq Stock Market at 4:00 p.m., Eastern time; other OTC 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 such quotations adequately
reflect, in the judgment of Mitchell Hutchins, the fair value of the security.
Where such market quotations are not readily available, securities are valued
based upon appraisals received from a pricing service using a computerized
matrix system or based upon appraisals derived from information concerning the
security or similar securities received from recognized dealers in those
securities. The amortized cost method of valuation generally is used with
respect to debt obligations with 60 days or less remaining to maturity unless
the applicable board determines that this does not represent fair value. All
other assets are valued at fair value as determined in good faith by or under
the direction of each board.
PERFORMANCE INFORMATION
Each Fund's 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 a Fund's Performance Advertisements are
calculated according to the following formula:
P(1 + T)n = ERV
<TABLE>
<S> <C> <C>
where: P = a hypothetical initial payment of $1,000 to purchase shares of a specified Class
T = average annual total return of shares of that Class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of that
period.
</TABLE>
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or 'T' in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. In calculating the ending redeemable value for Class A shares, the
maximum 4% initial sales charge is deducted from the initial $1,000 payment and,
for Class B and Class C shares, the applicable contingent deferred sales charge
imposed on a redemption of Class B or Class C shares held for the period is
deducted. All dividends and other distributions are assumed to have been
reinvested at net asset value.
Each Fund also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ('Non-Standardized Return'). A Fund calculates Non-Standardized Return for
specified periods of time by assuming an investment of $1,000 in Fund shares and
assuming the reinvestment of all dividends and other distributions. The rate of
47
<PAGE>
<PAGE>
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 will reflect conversion of the Class B shares to Class
A shares at the end of the sixth year.
The following table shows performance information for the Class A, Class B,
Class C (formerly Class D) and Class Y shares of the Funds for the periods
indicated. All returns for periods of more than one year are expressed as an
average annual return.
<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE NATIONAL TAX-FREE
INCOME FUND INCOME FUND
------------------------------------------- -------------------------------------------
CLASS A CLASS B CLASS C CLASS Y CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One year ended
February 28, 1997:
Standardized
Return*.......... (0.24)% (1.86)% 2.55% N/A (0.07)% (1.65)% 2.86% 4.32%
Non-Standardized
Return........... 3.92% 3.14% 3.30% N/A 4.14% 3.35% 3.61% 4.32%
Five years ended
February 28, 1997:
Standardized
Return*.......... 5.02% 4.78% N/A N/A 5.33% 5.07% N/A N/A
Non-Standardized
Return........... 5.89% 5.11% N/A N/A 6.20% 5.40% N/A N/A
Ten years or since
inception** to
February 28, 1997:
Standardized
Return*.......... 5.83% 5.43% 4.79% N/A 8.21% 5.71% 4.98% 4.56%
Non-Standardized
Return........... 6.27% 5.57% 4.79% N/A 8.58% 5.85% 4.98% 4.56%
<CAPTION>
MUNICIPAL HIGH NEW YORK TAX-FREE
INCOME FUND INCOME FUND
------------------------------------------ -------------------------------------------
CLASS A CLASS B CLASS C CLASS Y CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One year ended
February 28, 1997:
Standardized
Return*.......... 2.34% 0.82% 5.33% N/A 0.31% (1.38)% 3.23% N/A
Non-Standardized
Return........... 6.61% 5.82% 6.08% N/A 4.49% 3.62% 3.98% N/A
Five years ended
February 28, 1997:
Standardized
Return*.......... 6.09% 5.85% N/A N/A 5.96% 5.69% N/A N/A
Non-Standardized
Return........... 6.96% 6.16% N/A N/A 6.82% 6.01% N/A N/A
Ten years or since
inception** to
February 28, 1997:
Standardized
Return*.......... 7.65% 6.53% 5.53% N/A 7.03% 6.38% 5.45% N/A
Non-Standardized
Return........... 8.10% 6.66% 5.53% N/A 7.54% 6.51% 5.45% N/A
</TABLE>
- ------------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4%. All Standardized Return figures for Class
B and Class C shares reflect deduction of the applicable contingent deferred
sales charges imposed on a redemption of shares held for the period. Class Y
shares do not impose an initial or contingent deferred sales charge;
therefore, Non-Standardized Return is identical to Standardized Return.
** The inception dates for the classes of shares are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------------------- -------------- -------------- ------------------
<S> <C> <C> <C> <C>
California Tax-Free
Income Fund............ September 16, 1985 July 1, 1991 July 2, 1992 N/A
National Tax-Free Income
Fund................... December 3, 1984 July 1, 1991 July 2, 1992 November 3, 1995
Municipal High Income
Fund................... June 23, 1987 July 1, 1991 July 2, 1992 N/A
New York Tax-Free Income
Fund................... September 23, 1988 July 1, 1991 July 2, 1992 N/A
</TABLE>
YIELD. Yields used in each Fund's Performance Advertisements are
calculated by dividing the Fund's interest income attributable to a Class of
shares for a 30-day period ('Period'), net of expenses attributable to such
Class, by the average number of shares of such Class entitled to receive
dividends during the Period and expressing the result as an annualized
percentage (assuming semi-annual compounding) of the maximum offering price per
share (in the case of Class A shares) or the net asset value per share (in the
case of Class B, Class C shares (formerly Class D shares), and Class Y shares)
at the end of the Period. Yield quotations are calculated according to the
following formula:
a-b
----
YIELD = 2 [(cd)'pp'6 -1]
Where: a = interest earned during the Period attributable to a Class of shares
48
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
b = expenses accrued for the Period attributable to a Class of shares (net of reimbursements)
c = the average daily number of shares of the Class outstanding during the Period that were entitled
to receive dividends
d = the maximum offering price per share (in the case of Class A shares) or the net asset value per
share (in the case of Class B and Class C shares) on the last day of the Period.
</TABLE>
Except as noted below, in determining net investment income earned during
the Period (variable 'a' in the above formula), a Fund calculates interest
earned on each debt obligation held by it during the Period by (1) computing the
obligation's yield to maturity, based on the market value of the obligation
(including actual accrued interest) on the last business day of the Period or,
if the obligation was purchased during the Period, the purchase price plus
accrued interest and (2) dividing the yield to maturity by 360 and multiplying
the resulting quotient by the market value of the obligation (including actual
accrued interest) to determine the interest income on the obligation for each
day of the period that the obligation is in the portfolio. Once interest earned
is calculated in this fashion for each debt obligation held by a Fund, interest
earned during the Period is then determined by totalling the interest earned on
all debt obligations. For purposes of these calculations, the maturity of an
obligation with one or more call provisions is assumed to be the next date on
which the obligation reasonably can be expected to be called or, if none, the
maturity date. With respect to Class A shares, in calculating the maximum
offering price per share at the end of the Period (variable 'd' in the above
formula), a Fund's current maximum 4% initial sales charge on Class A shares is
included. The Funds had the following yields for the 30-day period ended
February 28, 1997:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
California Tax-Free Income Fund................................. 4.44% 3.85% 4.10% N/A
National Tax-Free Income Fund................................... 4.52 3.94 4.18 4.96%
Municipal High Income Fund...................................... 5.30 4.75 5.01 N/A
New York Tax-Free Income Fund................................... 4.53 3.98 4.21 N/A
</TABLE>
Tax-exempt yield is calculated according to the same formula except that
variable 'a' equals interest exempt from federal income tax earned during the
Period. This tax-exempt yield is then translated into tax-equivalent yield
according to the following formula:
E
( ______)+t
TAX EQUIVALENT YIELD= l - p
E = tax-exempt yield of a Class of shares
p = stated income tax rate
t = taxable yield of a Class of shares
The tax-equivalent yield of California Tax-Free Income Fund assumes a
46.24% combined effective California and federal tax rate. The tax-equivalent
yield of New York Tax-Free Income Fund assumes a 46.88% effective New York
State, New York City and federal tax rate. The tax-equivalent yield of each of
National Tax-Free Income Fund and Municipal High Income Fund assumes a 39.6%
effective federal tax rate.
The Funds had the following tax-equivalent yields for the 30-day period
ended February 28, 1997:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
California Tax-Free Income Fund................................... 8.26% 7.16% 7.63% N/A
National Tax-Free Income Fund..................................... 7.48 6.52 6.92 8.21%
Municipal High Income Fund........................................ 8.77 7.87 8.29 N/A
New York Tax-Free Income Fund..................................... 8.53 7.49 7.93 N/A
</TABLE>
OTHER INFORMATION. In Performance Advertisements, each Fund may compare
its Standardized Return and/or its Non-Standardized Return with data published
by Lipper Analytical Services, Inc. ('Lipper'), CDA Investment Technologies,
Inc. ('CDA'), Wiesenberger Investment Companies Service ('Wiesenberger'),
Investment Company Data Inc. ('ICD') or Morningstar Mutual Funds
('Morningstar'), or with the performance of recognized stock, bond and other
indexes, including (but not limited to) the Municipal Bond Buyers Indices,
Lehman Bond Index, the Standard & Poor's 500
49
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<PAGE>
Composite Stock Price Index, the Dow Jones Industrial Average, Merrill Lynch
Municipal Bond Indices, the Morgan Stanley Capital International World Index,
the Lehman Brothers Treasury Bond Index, Lehman Brothers Government/Corporate
Bond Index, the Salomon Brothers World Government Bond Index and changes in the
Consumer Price Index as published by the U.S. Department of Commerce. Each Fund
also may refer in such materials to mutual fund performance rankings and other
data, such as comparative asset, expense and fee levels, published by Lipper,
CDA, Wiesenberger, ICD or Morningstar. Performance Advertisements also may refer
to discussions of a Fund and comparative mutual fund data and ratings reported
in independent periodicals, including THE WALL STREET JOURNAL, MONEY Magazine,
FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW YORK TIMES,
THE CHICAGO TRIBUNE, THE WASHINGTON POST and THE KIPLINGER LETTERS. Comparisons
in performance advertisements may be in graphic form.
Each Fund may include discussions or illustrations of the effects of
compounding in Performance Advertisements. 'Compounding' refers to the fact
that, if dividends or other distributions on an investment in a Fund are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of the Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
Each Fund may also compare its performance with the performance of bank
certificates of deposit (CDs) as measured by the CDA Investment Technologies,
Inc. Certificate of Deposit Index and the Bank Rate Monitor National Index and
the averages of yields of CDs of major banks published by Banxquote'r' Money
Markets. In comparing a Fund's performance to CD performance, investors should
keep in mind that bank CDs are insured in whole or in part by an agency of the
U.S. government and offer fixed principal and fixed or variable rates of
interest, and that bank CD yields may vary depending on the financial
institution offering the CD and prevailing interest rates. Fund shares are not
insured or guaranteed by the U.S. government and returns and net asset value
will fluctuate. The securities held by a Fund generally have longer maturities
than most CDs and may reflect interest rate fluctuations for longer term
securities. An investment in a Fund involves greater risks than an investment in
either a money market fund or a CD.
TAXES
FEDERAL TAXES. In order to continue to qualify for treatment as a
regulated investment company ('RIC') under the Internal Revenue Code, each Fund
must distribute to its shareholders for each taxable year at least 90% of the
sum of its net interest income excludable from gross income under section 103(a)
of the Internal Revenue Code plus its investment company taxable income
(consisting generally of taxable net investment income plus 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) the Fund
must derive less than 30% of its gross income each taxable year from the sale or
other disposition of securities, options or futures held for less than three
months ('Short-Short Limitation'); (3) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. government securities, securities of
other RICs and other securities that are limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the Fund's total assets;
and (4) 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.
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.
50
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<PAGE>
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income (including
income from tax-exempt sources such as a Fund) plus 50% of their benefits
exceeds certain base amounts. Exempt-interest dividends from a Fund still would
be tax-exempt to the extent described in the Prospectus; they would only be
included in the calculation of whether a recipient's income exceeded the
established amounts.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be disallowed to the extent of any exempt-interest dividends
received on those shares and any loss not disallowed will be treated as
long-term, instead of short-term, capital loss to the extent of any capital gain
distributions received thereon. Investors also should be aware that if shares
are purchased shortly before the record date for a capital gain distribution,
the shareholder will pay full price for the shares and receive some portion of
the price back as a taxable distribution.
If a Fund invests in instruments that generate taxable interest income,
under the circumstances described in the Prospectus and in the discussion of
municipal market discount bonds below, the portion of any Fund dividend
attributable to the interest earned thereon will be taxable to the Fund's
shareholders as ordinary income to the extent of its earnings and profits, and
only the remaining portion will qualify as an 'exempt-interest dividend' (as
described in the Prospectus). The respective portions will be determined by the
'actual earned' method, under which the portion of any dividend that qualifies
as exempt-interest may vary, depending on the relative proportions of tax-exempt
and taxable interest earned during the dividend period. Moreover, if a Fund
realizes capital gain as a result of market transactions, any distributions of
the gain will be taxable to its shareholders. Each Fund is required to withhold
31% of all taxable dividends, capital gain distributions and redemption proceeds
payable to any individuals and certain other noncorporate shareholders who do
not provide the Fund with a correct taxpayer identification number. Each Fund
also is required to withhold 31% of all taxable dividends and capital gain
distributions payable to those shareholders who otherwise are subject to backup
withholding.
Dividends and other distributions declared by a Fund in October, November
or December of any year and payable to shareholders of record on a date in any
of those months will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Each Fund invests almost exclusively in debt
securities and Derivative Instruments and receives no dividend income;
accordingly, no portion of the dividends or other distributions paid by any Fund
is eligible for the dividends-received deduction allowed to corporations.
Each Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year substantially all of its
ordinary (taxable) income for the calendar year and capital gain net income for
the one-year period ending on October 31 of that year, plus certain other
amounts.
The use of hedging and option income strategies, such as writing (selling)
and purchasing options and futures, involves complex rules that will determine
for income tax purposes the character and timing of recognition of the gains and
losses a Fund realizes in connection therewith. Income from transactions in
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.
However, income from the disposition of options and futures will be subject to
the Short-Short Limitation if they are held for less than three months.
If a Fund satisfies certain requirements, any increase in value of a
position that is part of a 'designated hedge' will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. Each
Fund will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent a Fund does not qualify for this treatment,
it may be forced to defer the closing out of certain options and futures beyond
the time when it otherwise would be advantageous to do so, in order for the Fund
to continue to qualify as a RIC.
51
<PAGE>
<PAGE>
Each Fund may invest in municipal bonds that are purchased, generally not
on their original issue, with market discount (that is, at a price less than the
principal amount of the bond or, in the case of a bond that was issued with
original issue discount, a price less than the amount of the issue price plus
accrued original issue discount) ('municipal market discount bonds'). If a
bond's market discount is less than the product of (1) 0.25% of the redemption
price at maturity times (2) the number of complete years to maturity after the
taxpayer acquired the bond, then no market discount is considered to exist. Gain
on the disposition of a municipal market discount bond purchased by a Fund after
April 30, 1993 (other than a bond with a fixed maturity date within one year
from its issuance) generally is treated as ordinary (taxable) income, rather
than capital gain, to the extent of the bond's accrued market discount at the
time of disposition. Market discount on such a bond generally is accrued
ratably, on a daily basis, over the period from the acquisition date to the date
of maturity. In lieu of treating the disposition gain as above, a Fund may elect
to include market discount in its gross income currently, for each taxable year
to which it is attributable.
CALIFORNIA TAXES. Individual shareholders of California Tax-Free Income
Fund who reside in California will not be subject to California personal income
tax on distributions received from the Fund to the extent such distributions are
attributable to interest on tax-exempt obligations issued by the State of
California or a California local government (or interest earned on obligations
of U.S. possessions or territories) ('exempt-interest dividends'), provided that
the Fund qualifies as a RIC under the 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 portions of the provisions of the
Internal Revenue Code applicable to RICs, amounts treated as capital gain
distributions for federal income tax purposes generally will be treated as
long-term capital gains for California personal income tax purposes. In
addition, distributions to shareholders other than exempt-interest dividends are
includable in income subject to the California alternative minimum tax.
Distributions of investment income and long-term and short-term capital
gains will not be excluded from taxable income in determining the California
corporate franchise tax for corporate shareholders. In addition, such
distributions may be includable in income subject to the California alternative
minimum tax.
Interest on indebtedness incurred by shareholders to purchase or carry
shares of California Tax-Free Income Fund will not be deductible for California
personal income tax purposes.
Shares of California Tax-Free Income Fund will not be subject to the
California property tax.
NEW YORK TAXES. Individual shareholders of New York Tax-Free Income Fund
will not be required to include in their gross income for New York State and
City purposes any portion of distributions received from the Fund to the extent
such distributions are directly attributable to interest earned on tax-exempt
obligations issued by New York State or any political subdivisions thereof
(including the City) or interest earned on obligations of U.S. possessions or
territories to the extent interest on such obligations is exempt from state
taxation pursuant to federal law, provided that the Fund qualifies as a RIC
under the Internal Revenue Code and satisfies the requirements 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 represent 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
52
<PAGE>
<PAGE>
(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 foregoing is a general summary of certain provisions of federal,
California and New York State and City tax laws currently in effect as they
directly govern the taxation of shareholders of the Funds. These provisions are
subject to change by legislative or administrative action, and any such change
may be retroactive with respect to Fund transactions. Shareholders are advised
to consult with their own tax advisers for more detailed information concerning
tax matters.
TAX-FREE INCOME VS. TAXABLE INCOME-NATIONAL TAX-FREE INCOME FUND AND
MUNICIPAL HIGH INCOME FUND. Table I below illustrates approximate equivalent
taxable and tax-free yields at the 1996 federal individual income tax rates. For
example, a couple with taxable income of $90,000 in 1996, or single individuals
with taxable income of $55,000 in 1996, whose investments earn a 6% tax-free
yield, would have had to earn approximately an 8.33% taxable yield to receive
the same benefit.
TABLE I. 1996 FEDERAL TAXABLE VS. TAX-FREE YIELDS*
<TABLE>
<CAPTION>
TAXABLE INCOME (000'S) A TAX-FREE YIELD OF
- ------------------------------------- ---------------------------------------------
SINGLE JOINT FEDERAL TAX
RETURN RETURN BRACKET 4.00% 5.00% 6.00% 7.00% 8.00%
----- ----- ----- ----- -----
IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
- ---------------- ---------------- ----------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 24.0 $ 0 - 40.1 15.00% 4.71 % 5.88 % 7.06 % 8.24% 9.41%
24.0 - 58.2 40.1 - 96.9 28.00 5.56 6.94 8.33 9.72 11.11
58.2 - 121.3 96.9 - 147.7 31.00 5.80 7.25 8.70 10.14 11.59
121.3 - 263.8 147.7 - 263.8 36.00 6.25 7.81 9.38 10.94 12.50
Over $263.8 Over $263.8 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
1996 individual federal and 1997 California personal income tax rates. For
example, a California couple with taxable income of $90,000, or a single
California individual with taxable income of $55,000, whose investments earn a
6% tax-free yield, would have had to earn a 9.19% taxable yield to receive the
same benefit.
53
<PAGE>
<PAGE>
TABLE II. 1996 FEDERAL AND CALIFORNIA TAXABLE VS. TAX-FREE YIELDS*
(See notes 1-4 below)
<TABLE>
<CAPTION>
EFFECTIVE
TAXABLE INCOME (000'S) CALIFORNIA
- ------------------------------------- AND A TAX-FREE YIELD OF
SINGLE JOINT FEDERAL TAX ---------------------------------------------
RETURN RETURN BRACKET 4.00% 5.00% 6.00% 7.00% 8.00%
----- ----- ----- ----- -----
IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
- ---------------- ---------------- ----------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 18.4 - 24.0 $ 36.7 - 40.1 20.10% 5.01 % 6.26 % 7.51% 8.76% 10.01%
24.0 - 25.5 40.1 - 51.0 32.32 5.91 7.39 8.87 10.34 11.82
25.5 - 32.2 51.0 - 64.4 33.76 6.04 7.55 9.06 10.57 12.08
32.2 - 58.2 64.4 - 96.9 34.70 6.13 7.66 9.19 10.72 12.25
58.2 - 121.3 96.9 - 147.7 37.42 6.39 7.99 9.59 11.19 12.78
121.3 - 263.8 147.7 - 263.8 41.95 6.89 8.61 10.34 12.06 13.78
Over $263.8 Over $263.8 45.22 7.30 9.13 10.95 12.78 14.60
</TABLE>
1. Net amount subject to federal income tax after deductions and exemptions.
Assumes that all income is ordinary income.
2. The income ranges shown reflect federal and California income brackets for
1996. Inflation adjusted income brackets for 1997 are not yet available.
3. Excludes the impact of the phase out of personal exemptions, limitations on
itemized deductions and other credits, exclusions and adjustments that may
increase a taxpayer's marginal tax rate as well as the effect of certain
levels of income (including tax exempt income) on the taxability of social
security payments.
- ------------
* See note following Table III.
TAX-FREE INCOME VS. TAXABLE INCOME-NEW YORK TAX-FREE INCOME FUND. Table
III below illustrates approximate equivalent taxable and tax-free yields at the
1996 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
1996, whose investments earn a 4% tax-free yield, would have had to earn a 6.24%
taxable yield to receive the same benefit. A couple who lives in New York State
outside of New York City with taxable income of $90,000 in 1996 would have had
to earn a 5.98% 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 1996, who lives
in New York City and whose investments earn a 4% tax-free yield, would have had
to earn a 6.24% taxable yield to receive the same benefit. A single individual
with taxable income of $55,000 in 1996, who lives in New York State outside of
New York City, would have had to earn a 5.98% taxable yield to realize a 4%
tax-free yield.
TABLE III. 1996 FEDERAL AND NEW YORK TAXABLE VS. TAX-FREE YIELDS*
<TABLE>
<CAPTION>
COMBINED
TAXABLE INCOME (000'S) FEDERAL/
- ------------------------------------------ NYS/NYC A TAX-FREE YIELD OF
SINGLE JOINT TAX ---------------------------------------------
RETURN RETURN BRACKET 4.00% 5.00% 6.00% 7.00% 8.00%
----- ----- ----- ----- -----
IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
- --------------------- ---------------- ------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 24.0 $ 0 - 40.1 24.33% 5.29 % 6.61 % 7.93% 9.25% 10.57%
24.0 - 58.2 40.1 - 96.9 35.91 6.24 7.80 9.36 10.92 12.48
58.2 - 121.3 96.9 - 147.7 38.61 6.52 8.15 9.77 11.40 13.03
121.3 - 263.8 147.7 - 263.8 43.06 7.03 8.78 10.54 12.29 14.05
Over $263.8 Over $263.8 46.27 7.44 9.30 11.17 13.03 14.89
</TABLE>
54
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
TAXABLE INCOME (000'S)
- ------------------------------------- COMBINED A TAX-FREE YIELD OF
SINGLE JOINT FEDERAL/NYS ---------------------------------------------
RETURN RETURN TAX BRACKET 4.00% 5.00% 6.00% 7.00% 8.00%
----- ----- ----- ----- -----
IS EQUAL TO A TAXABLE YIELD OF APPROXIMATELY:
- ---------------- ---------------- ----------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 24.0 $ 0 - 40.1 21.06% 5.07 % 6.33 % 7.60% 8.87% 10.13%
24.0 - 58.2 40.1 - 96.9 33.13 5.98 7.48 8.97 10.47 11.96
58.2 - 121.3 96.9 - 147.7 35.92 6.24 7.80 9.36 10.92 12.48
121.3 - 263.8 147.7 - 263.8 40.56 6.73 8.41 10.09 11.78 13.46
Over $263.8 Over $263.8 43.90 7.13 8.91 10.70 12.48 14.26
</TABLE>
- ------------
The yields listed are for illustration only and are not necessarily
representative of a Fund's yield. Each Fund invests primarily in obligations the
interest on which is exempt from federal income tax and, in the case of
California Tax-Free Income Fund, from California personal income tax and, in the
case of New York Tax-Free Income Fund, from New York State and New York City
personal income taxes; however, some of a Fund's investments may generate
taxable income. Effective tax rates shown are those in effect on the date of
this Statement of Additional Information; such rates might change after that
date.
* Certain simplifying assumptions have been made. Any particular taxpayer's
effective tax rate may differ. The effective rates reflect the highest tax
bracket within each range of income listed. However, a California or New York
taxpayer within the lowest income ranges shown may fall within a lower
effective tax bracket. The figures set forth above do not reflect the AMT,
limitations on federal or state itemized deductions and personal exemptions
or any state or local taxes payable on Fund distributions (other than
California, New York State and New York City personal income taxes in the
case of Tables II and III).
OTHER INFORMATION
The names of the Trusts are PaineWebber Mutual Fund Trust and PaineWebber
Municipal Series. Prior to April 6, 1992, the name of PaineWebber Mutual Fund
Trust was PaineWebber California Tax-Free Income Fund and its sole operating
series was designated as 'Initial Series.' Prior to June 30, 1992, National
Tax-Free Income Fund was a series of a different Massachusetts business trust,
PaineWebber Managed Municipal Trust. Prior to November 10, 1995, the Funds'
Class C shares were known as 'Class D' shares.
Each Trust is an entity of the type commonly known as a 'Massachusetts
business trust.' Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust or a
Fund. However, each Trust's Declaration of Trust disclaims shareholder liability
for the obligations of the Trust or a Fund and requires that notice of such
disclaimer be given in each note, bond, contract, instrument, certificate or
undertaking made or issued by the Trust's trustees or by any officers or officer
by or on behalf of a Fund, the trustees or any of them in connection with the
Fund. Each Declaration of Trust provides for indemnification from a Fund's
property for all losses and expenses of any Fund shareholder held personally
liable for the obligations of the Fund. Thus, the risk of a shareholder's
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself would be unable to meet its obligations,
a possibility that Mitchell Hutchins believes is remote and not material. Upon
payment of any liability incurred by a shareholder solely by reason of being or
having been a shareholder, the shareholder paying such liability will be
entitled to reimbursement from the general assets of a Fund. The trustees intend
to conduct the operations of each Fund in such a way as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the Fund.
CLASS-SPECIFIC EXPENSES. Each Fund may determine to allocate certain of
its expenses (in addition to distribution fees) to the specific classes of the
Fund's shares to which those expenses are attributable. For example, Class B
shares bear higher transfer agency fees per shareholder account than those borne
by other classes. 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.
55
<PAGE>
<PAGE>
Moreover, the tracking and calculations required by the automatic conversion
feature of the Class B shares will cause the transfer agent to incur additional
costs. Although the transfer agency fee will differ on a per account basis as
stated above, the specific extent to which the transfer agency fees will differ
between the classes as a percentage of net assets is not certain, because the
fee as a percentage of net assets will be affected by the number of shareholder
accounts in each class and the relative amounts of net assets in each class.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C., 20036-1800 serves as counsel to the Funds.
Kirkpatrick & Lockhart LLP also acts as counsel to Mitchell Hutchins and
PaineWebber in connection with other matters. The law firm of Orrick, Herrington
& Sutcliffe, 400 Sansome Street, San Francisco, CA 94111, serves as counsel to
California Tax-Free Income Fund with respect to California law. The law firm of
Orrick, Herrington & Sutcliffe, 666 Fifth Avenue, New York, New York 10103,
serves as counsel to New York Tax-Free Income Fund with respect to New York law.
AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
serves as independent auditors for the Funds.
FINANCIAL STATEMENTS
The Funds' Annual Report to Shareholders for the fiscal year ended February
28, 1997 is a separate document supplied with this Statement of Additional
Information and the financial statements, accompanying notes and report of
independent auditors appearing therein are incorporated by reference in this
Statement of Additional Information.
56
<PAGE>
<PAGE>
[This page intentionally left blank]
57
<PAGE>
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY A FUND OR ITS DISTRIBUTOR. THE PROSPECTUS AND
THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY ANY
FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions......... 1
Hedging and Other Strategies Using Derivative
Instruments................................ 25
Trustees and Officers; Principal Holders of
Securities................................. 30
Investment Advisory and Distribution
Arrangements............................... 36
Portfolio Transactions....................... 41
Reduced Sales Charges, Additional Exchange
and Redemption Information and Other
Services................................... 43
Conversion of Class B Shares................. 46
Valuation of Shares.......................... 47
Performance Information...................... 47
Taxes........................................ 50
Other Information............................ 55
Financial Statements......................... 56
</TABLE>
'c'1997 PaineWebber Incorporated
PaineWebber California
Tax-Free Income Fund
PaineWebber National
Tax-Free Income Fund
PaineWebber Municipal
High Income Fund
PaineWebber New York
Tax-Free Income Fund
-----------------------------
Statement of Additional Information
July 1, 1997
-----------------------------
PAINEWEBBER
<PAGE>
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements: (filed herewith)
PaineWebber Municipal High Income Fund
Included in Part A of this Registration Statement:
Financial highlights for one Class A share of the Fund for each
of the nine years in the period ended February 28,1997 and for
the period June 23,1987 (commencement of operations) to February
29, 1988.
Financial highlights for one Class B share of the Fund for each
of the five years in the period ended February 28, 1997 and for
the period July 1,1991 (commencement of offering) to February 29,
1992.
Financial highlights for one Class C share of the Fund for each
of the four years in the period ended February 28, 1997 and
for the period July 2, 1992 (commencement of offering) to
February 28, 1993.
Included in Part B of this Registration Statement through incorporation
by reference from the Annual Report to Shareholders (previously filed
with the Securities and Exchange Commission through EDGAR on April 29
1997 Accession No.: 0000809991-97-00001).
Portfolio of Investments at February 28, 1997.
Statement of Assets and Liabilities at February 28, 1997.
Statement of Operations for the year ended February 28, 1997.
Statement of Changes in Net Assets for each of the two years in
the period ended February 28, 1997.
Notes to Financial Statements
Financial highlights for one Class A share for each of the five
years in the period ended February 28, 1997.
Financial highlights for one Class B share for each of the five
years in the period ended February 28, 1997.
Financial highlights for one Class C share for each of the four
years in the period ended February 28, 1997 and for the period
July 2, 1992 (commencement of offering) to February 29, 1993.
Report of Ernst & Young LLP, Independent Auditors, dated April 7,
1997 relating to PaineWebber Municipal Series (comprised of
PaineWebber Municipal High Income Fund and PaineWebber New York
Tax-Free Income Fund).
C-1
<PAGE>
<PAGE>
PaineWebber New York Tax-Free Income Fund
Included in Part A of this Registration Statement:
Financial highlights for one Class A share of the Fund for each
of the eight years in the period ended February 28, 1997 and for
the period September 30, 1988 (commencement of operations) to
February 28, 1989.
Financial highlights for one Class B share of the Fund for each
of the five years in the period ended February 28, 1997 and for
the period July 1, 1991 (commencement of offering) to February
29, 1992.
Financial highlights for one Class C share of the Fund for each
of the four years in the period ended February 28, 1997 and for
the period July 2, 1992 (commencement of offering) to February
28, 1993.
Included in Part B of this Registration Statement through incorporation
by reference from the Annual Report to Shareholders (previously filed
with the Securities and Exchange Commission through EDGAR on April 29,
1997 Accession No.: 0000809991-97-00001).
Portfolio of Investments at February 28, 1997.
Statement of Assets and Liabilities at February 28, 1997.
Statement of Operations for the year ended February 28, 1997.
Statement of Changes in Net Assets for each of the two years in
the period ended February 28, 1997.
Notes to Financial Statements
Financial highlights for one Class A share for each of the five
years in the period ended February 28, 1997.
Financial highlights for one Class B share for each of the five
years in the period ended February 28, 1997.
Financial highlights for one Class C share for each of the four
years in the period ended February 28, 1997 and for the period
July 2, 1992 (commencement of offering) to February 28, 1993.
Report of Ernst & Young LLP, Independent Auditors, dated April 7,
1997 relating to PaineWebber Municipal Series (comprised of
PaineWebber Municipal High Income Fund and PaineWebber New York
Tax-Free Income Fund)
(b) Exhibits:
(1) (a) Declaration of Trust 1/
(b) Amendment effective April 10, 1987 to Declaration of
Trust 10/
(c) Amendment effective May 1, 1987 to Declaration of
Trust 2/
(d) Amendment effective January 28, 1988 to Declaration of
Trust 5/
(e) Amendment effective June 30, 1988 to Declaration of
Trust 6/
C-2
<PAGE>
<PAGE>
(f) Amendment effective August 23, 1988 to Declaration of
Trust 6/
(g) Amendment effective July 1, 1989 to Declaration of
Trust 10/
(h) Amendment effective December 21, 1990 to Declaration of
Trust 8/
(i) Amendment effective July 1, 1991 to Declaration of
Trust 10/
(j) Amendment effective June 30, 1992 to Declaration of
Trust 11/
(k) Amendment effective July 20, 1995 to Declaration of
Trust 15/
(l) Amendment effective November 10, 1995 to Declaration of
Trust 17/
(2) (a) By-Laws 2/
(b) Amendment dated March 19, 1991 to By-Laws 8/
(c) Amendment dated September 28, 1994 to By-Laws 14/
(3) Voting trust agreement - none
(4) Instruments defining the rights of holders of the Registrant's
shares of beneficial interest 13/
(5) Investment Advisory and Administration Contract 7/
(6) (a) Distribution Contract (Class A Shares) 12/
(b) Distribution Contract (Class B Shares) 12/
(c) Distribution Contract (Class C Shares) 17/
(d) Distribution Contract (Class Y Shares) 17/
(e) Exclusive Dealer Agreement (Class A Shares) 12/
(f) Exclusive Dealer Agreement (Class B Shares) 12/
(g) Exclusive Dealer Agreement (Class C Shares) 17/
(h) Exclusive Dealer Agreement (Class Y Shares) 17/
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement 4/
(9) (a) Transfer Agency Agreement 8/
(b) Service Contract 7/
(10) (a) Opinion and consent of Kirkpatrick & Lockhart LLP,
counsel to the Registrant, with respect to Class A and
Class B Shares 9/
(b) Opinion and consent of Kirkpatrick & Lockhart LLP,
counsel to the Registrant, with respect to Class C
Shares 10/
(c) Opinion and consent of Kirkpatrick & Lockhart LLP,
counsel to the Registrant, with respect to Class Y
Shares 17/
(11) Other opinions, appraisals, rulings and consents:
(a) Independent Auditor's Consent (filed herewith)
(b) Consent of special counsel to the Registrant with respect
to New York law with respect to PaineWebber New York
Tax-Free Income Fund (filed herewith)
(12) Financial Statements omitted from prospectus-none
(13) Letter of investment intent 3/
(14) Prototype Retirement Plan - none
(15) (a) Plan of Distribution pursuant to Rule 12b-1 (Class A
Shares) 10/
(b) Plan of Distribution pursuant to Rule 12b-1 (Class B
Shares) 10/
(c) Plan of Distribution pursuant to Rule 12b-1 (Class C
Shares) 11/
(16) (a) Schedule for Computation of Performance Quotations for
Class A Shares of Municipal High Income Fund and New
York Tax-Free Income Fund 9/
(b) Schedule for Computation of Performance Quotations for
Class B Shares of Municipal High Income Fund and New
York Tax-Free Income Fund 10/
C-3
<PAGE>
<PAGE>
(c) Schedule for Computation of Performance Quotations for
Class C Shares of Municipal High Income Fund and New York
Tax-Free Income Fund 11/
(17) and (27) Financial Data Schedule (filed herewith)
(18) Plan pursuant to Rule 18f-3 18/
- -----------------------------
1/ Incorporated by reference from initial registration statement, SEC File
No. 33-11611, filed January 29, 1987.
2/ Incorporated by reference from Pre-Effective Amendment No. 2 to the
registration statement, SEC File No. 33-11611, filed May 13, 1987.
3/ Incorporated by reference from Pre-Effective Amendment No. 3 to the
registration statement, SEC File No. 33-11611, filed June 16, 1987.
4/ Incorporated by reference from Post-Effective Amendment No. 1 to the
registration statement, SEC File No. 33-11611, filed December 15, 1987.
5/ Incorporated by reference from Post-Effective Amendment No. 2 to the
registration statement, SEC File No. 33-11611, filed July 14, 1988.
6/ Incorporated by reference from Post-Effective Amendment No. 5 to the
registration statement, SEC File No. 33-11611, filed May 2, 1989.
7/ Incorporated by reference from Post-Effective Amendment No. 7 to the
registration statement, SEC File No. 33-11611, filed June 29, 1990.
8/ Incorporated by reference from Post-Effective Amendment No. 8 to the
registration statement, SEC File No. 33-11611, filed April 29, 1991.
9/ Incorporated by reference from Post-Effective Amendment No. 9 to the
registration statement, SEC File No. 33-11611, filed June 24, 1991.
10/ Incorporated by reference from Post-Effective Amendment No. 11 to the
registration statement, SEC File No. 33-11611, filed June 24, 1992.
11/ Incorporated by reference from Post-Effective Amendment No. 12 to the
registration statement, SEC File No. 33-11611, filed June 30, 1993.
12/ Incorporated by reference from Post-Effective Amendment No. 13 to the
registration statement, SEC File No. 33-11611, filed July 1, 1994.
13/ Incorporated by reference from Articles III, VIII, IX, I and XI of
Registrant's Declaration of Trust, as amended effective April 10, 1987,
May 1, 1987, January 28, 1988, June 30, 1988, June 30, 1988, July 1,
1989, December 21, 1990, July 1, 1991, June 30, 1992, July 20, 1995, and
November 10, 1995, and from Articles II, VII and X of the Registrant's
By-Laws, as amended September 28, 1994.
14/ Incorporated by reference from Post-Effective Amendment No. 14 to the
registration statement, SEC File No. 33-11611, filed June 30, 1995.
15/ Incorporated by reference from Post-Effective Amendment No. 15 to the
registration statement, SEC File No. 33-11611, filed August 31, 1995.
16/ Incorporated by reference from Post-Effective Amendment No. 17 to the
registration statement, SEC File No. 33-11611, filed April 25, 1996.
C-4
<PAGE>
<PAGE>
17/ Incorporated by reference from Post-Effective Amendment No. 18 to the
registration statement, SEC File No. 33-11611, filed July 1, 1996.
18/ Incorporated by reference from Post-Effective Amendment No. 19 to the
registration statement, SEC File No. 33-11611, filed September 24, 1996.
Item 25. Persons Controlled by or under Common Control with Registrant
None.
Item 26. Number of Holders of Securities
Number of Record
Shareholders as of
Title of Class May 30, 1997
-------------------
Shares of beneficial interest ($.001 par value)
PaineWebber Municipal High Income Fund
Class A Shares 1,781
Class B Shares 731
Class C Shares 605
Class Y Shares 0
PaineWebber New York Tax-Free Income Fund
Class A Shares 884
Class B Shares 340
Class C Shares 440
Class Y Shares 0
Item 27. Indemnification
Section 2 of "Indemnification" in Article X of the Declaration of Trust
provides that the appropriate series of 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 or a particular series thereof; 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.
C-5
<PAGE>
<PAGE>
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, or 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 Registrant, or is or was serving at the request of the
Registrant 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 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 between
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") and the Registrant
provides that Mitchell Hutchins shall not be liable for any error of judgment or
mistake of law or for any loss suffered by any series ("Fund") or the Registrant
in connection with the matters to which the Contract relates, except for a loss
resulting from willful misfeasance, bad faith, or gross negligence of Mitchell
Hutchins in the performance of its duties or from its reckless disregard of its
obligations and duties under the Contract. Section 10 of the Contract provides
that the trustees shall not be liable for any obligations of the Registrant
under the Contract and that Mitchell Hutchins shall look only to the assets and
property of the Registrant in settlement of such right or claim and not to the
assets and property of the trustees.
Section 9 of each Distribution Contract provides that the Registrant
will indemnify Mitchell Hutchins and its officers, directors or controlling
persons against all liabilities arising from any alleged untrue statement of
material fact in the Registration Statement or from alleged omission to state in
the Registration Statement a material fact required to be stated in it or
necessary to make the statements in it, in light of the circumstances under
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 of each Distribution
Contract 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 Contract.
C-6
<PAGE>
<PAGE>
Section 9 of each Exclusive Dealer Agreement contains provisions similar
to section 9 of the Distribution Contracts, with respect to PaineWebber
Incorporated ("PaineWebber").
Section 6 of the Service Contract provides that PaineWebber shall be
indemnified and held harmless by the Registrant against all liabilities, except
those arising out of bad faith, gross negligence, willful misfeasance or
reckless disregard of its duties under the Contract.
Section 10 of each Distribution Contract and Section 7 of the Service
Contract contain provisions similar to that of Section 10 of the Investment
Advisory and Administration Contract, with respect to Mitchell Hutchins and
PaineWebber, as appropriate.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be provided to trustees, officers and controlling
persons of the Registrant, pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding or payment pursuant to any insurance policy) is
asserted against the Registrant by such trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Item 28. 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 29. Principal Underwriters
a) Mitchell Hutchins serves as principal underwriter and/or investment
adviser for the following investment companies:
ALL-AMERICAN TERM TRUST INC.
GLOBAL HIGH INCOME DOLLAR FUND INC.
GLOBAL SMALL CAP FUND INC.
INSURED MUNICIPAL INCOME FUND INC.
INVESTMENT GRADE INCOME FUND INC.
MANAGED HIGH YIELD FUND INC.
PAINEWEBBER AMERICA FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PAINEWEBBER INVESTMENT SERIES
C-7
<PAGE>
<PAGE>
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
PAINEWEBBER SERIES TRUST
STRATEGIC GLOBAL INCOME FUND, INC.
TRIPLE A AND GOVERNMENT SERIES - 1997, INC.
2002 TARGET TERM TRUST INC.
b) Mitchell Hutchins is the principal underwriter for the Registrant.
PaineWebber acts as exclusive dealer for the shares of the Registrant. The
directors and officers of Mitchell Hutchins, their principal business addresses,
and their positions and offices with Mitchell Hutchins are identified in its
Form ADV, as filed with the Securities and Exchange Commission (registration
number 801-13219). The directors and officers of PaineWebber, their principal
business addresses, and their positions and offices with PaineWebber are
identified in its Form ADV, as filed with the Securities and Exchange Commission
(registration number 801-7163). The foregoing information is hereby incorporated
herein by reference. The information set forth below is furnished for those
directors and officers of Mitchell Hutchins or PaineWebber who also serve as
trustees or officers of the Registrant. Unless otherwise indicated, the
principal business address of each person named is 1285 Avenue of the Americas,
New York, New York 10019.
<TABLE>
<CAPTION>
Position With Position and Offices With
Name Registrant Underwriter or Exclusive Dealer
- ---- -------------- --------------------------------
<S> <C> <C>
Margo N. Alexander Trustee and President Director, President, and Chief
(Chief Executive Officer) Executive Officer 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.
Elbridge T.Gerry III Vice President Senior Vice President and a
Portfolio Manager of Mitchell
Hutchins
Dennis McCauley Vice President Managing Director and Chief
Investment Officer - Fixed Income
of Mitchell Hutchins
Ann E. Moran Vice President and Vice President of Mitchell Hutchins
Assistant Treasurer
C-8
<PAGE>
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
Position With Position and Offices With
Name Registrant Underwriter or Exclusive Dealer
- ---- -------------- --------------------------------
<S> <C> <C>
Dianne E. O'Donnell Vice President and Senior Vice President and Deputy
Secretary General Counsel of Mitchell
Hutchins
Emil Polito Vice President Senior Vice President, Director of
Operations and Control for
Mitchell Hutchins
Victoria E. Schonfeld Vice President Managing Director and General
Counsel of Mitchell Hutchins
Paul H. Schubert Vice President and First Vice President and Director
Treasurer of the Mutual Fund Finance
Division of Mitchell Hutchins
Barney A. Taglialatela Vice President and Vice President and a Manager of
Assistant Treasurer the Mutual Fund Finance Division
of Mitchell Hutchins
William W. Veronda Vice President Senior Vice President of Mitchell
Hutchins
Keith A. Weller Vice President and First Vice President and Associate
Assistant Secretary General Counsel of Mitchell
Hutchins
Ian W. Williams Vice President and Vice President and a Manager of
Assistant Treasurer the Mutual Fund Finance Division
of Mitchell Hutchins
c) None
Item 30.
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, 1285 Avenue of the Americas, New York,
New York 10019. All other accounts, books and documents required by Rule 31a-1
are maintained in the physical possession of Registrant's transfer agent and
custodian.
C-9
<PAGE>
<PAGE>
Item 31. Management Services
Not applicable.
Item 32. Undertakings
Registrant hereby undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
C-10
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York and State of
New York, on the 26th day of June, 1997.
PAINEWEBBER MUNICIPAL SERIES
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:
</TABLE>
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Margo N. Alexander President and Trustee June 26, 1997
- --------------------------- (Chief Executive Officer)
Margo N. Alexander *
/s/ E. Garrett Bewkes, Jr. Trustee and Chairman June 26, 1997
- --------------------------- of the Board of Trustees
E. Garrett Bewkes, Jr. *
/s/ Richard Q. Armstrong Trustee June 26, 1997
- ---------------------------
Richard Q. Armstrong *
/s/ Richard R. Burt Trustee June 26, 1997
- ---------------------------
Richard R. Burt *
/s/ Mary C. Farrell Trustee June 26, 1997
- ---------------------------
Mary C. Farrell *
/s/ Meyer Feldberg Trustee June 26, 1997
- ---------------------------
Meyer Feldberg *
/s/ George W. Gowen Trustee June 26, 1997
- ---------------------------
George W. Gowen *
/s/ Frederic V. Malek Trustee June 26, 1997
- ---------------------------
Frederic V. Malek *
/s/ Carl W. Schafer Trustee June 26, 1997
- ---------------------------
Carl W. Schafer *
/s/ Paul H. Schubert Vice President and Treasurer June 26, 1997
- --------------------------- (Chief Financial and Accounting
Paul H. Schubert Officer)
</TABLE>
<PAGE>
<PAGE>
SIGNATURES (CONTINUED)
* Signature affixed by Elinor W. Gammon pursuant to powers of attorney
dated May 21, 1996 and incorporated by reference from Post-Effective
Amendment No. 30 to the registration statement of PaineWebber Managed
Municipal Trust, SEC File 2-89016, filed June 27, 1996.
<PAGE>
<PAGE>
PAINEWEBBER MUNICIPAL SERIES
EXHIBIT INDEX
Exhibit
Number
(1) (a) Declaration of Trust 1/
(b) Amendment effective April 10, 1987 to Declaration of
Trust 10/
(c) Amendment effective May 1, 1987 to Declaration of Trust 2/
(d) Amendment effective January 28, 1988 to Declaration of
Trust 5/
(e) Amendment effective June 30, 1988 to Declaration of
Trust 6/
(f) Amendment effective August 23, 1988 to Declaration of
Trust 6/
(g) Amendment effective July 1, 1989 to Declaration of
Trust 10/
(h) Amendment effective December 21, 1990 to Declaration of
Trust 8/
(i) Amendment effective July 1, 1991 to Declaration of
Trust 10/
(j) Amendment effective June 30, 1992 to Declaration of
Trust 11/
(k) Amendment effective July 20, 1995 to Declaration of
Trust 15/
(l) Amendment effective November 10, 1995 to Declaration of
Trust 17/
(2) (a) By-Laws 2/
(b) Amendment dated March 19, 1991 to By-Laws 8/
(c) Amendment dated September 28, 1994 to By-Laws 14/
(3) Voting trust agreement - none
(4) Instruments defining the rights of holders of the Registrant's
shares of beneficial interest 13/
(5) Investment Advisory and Administration Contract 7/
(6) (a) Distribution Contract (Class A Shares) 12/
(b) Distribution Contract (Class B Shares) 12/
(c) Distribution
Contract (Class C Shares) 17/
(d) Distribution Contract (Class Y Shares) 17/
(e) Exclusive Dealer Agreement (Class A Shares) 12/
(f) Exclusive Dealer Agreement (Class B Shares) 12/
(g) Exclusive Dealer Agreement (Class C Shares) 17/
(h) Exclusive Dealer Agreement (Class Y Shares) 17/
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement 4/
(9) (a) Transfer Agency Agreement 8/
(b) Service Contract 7/
(10) (a) Opinion and consent of Kirkpatrick & Lockhart LLP,
counsel to the Registrant, with respect to Class A and
Class B Shares 9/
(b) Opinion and consent of Kirkpatrick & Lockhart LLP,
counsel to the Registrant, with respect to Class C
Shares 10/
(c) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel
to the Registrant, with respect to Class Y Shares 17/
(11) Other opinions, appraisals, rulings and consents:
(a) Independent Auditor's Consent (filed herewith)
(b) Consent of special counsel to the Registrant with respect
to New York law with respect to PaineWebber New York
Tax-Free Income Fund (filed herewith)
(12) Financial Statements omitted from prospectus-none
(13) Letter of investment intent 3/
(14) Prototype Retirement Plan - none
<PAGE>
<PAGE>
(15) (a) Plan of Distribution pursuant to Rule 12b-1 (Class A
Shares) 10/
(b) Plan of Distribution pursuant to Rule 12b-1 (Class B
Shares) 10/
(c) Plan of Distribution pursuant to Rule 12b-1 (Class C
Shares) 11/
(16) (a) Schedule for Computation of Performance Quotations for
Class A Shares of Municipal High Income Fund and New York
Tax-Free Income Fund 9/
(b) Schedule for Computation of Performance Quotations for
Class B Shares of Municipal High Income Fund and New York
Tax-Free Income Fund 10/
(c) Schedule for Computation of Performance Quotations for
Class C Shares of Municipal High Income Fund and New York
Tax-Free Income Fund 11/
(17) and (27) Financial Data Schedule (filed herewith)
(18) Plan pursuant to Rule 18f-3 18/
- -----------------------------
1/ Incorporated by reference from initial registration statement, SEC File
No. 33-11611, filed January 29, 1987.
2/ Incorporated by reference from Pre-Effective Amendment No. 2 to the
registration statement, SEC File No. 33-11611, filed May 13, 1987.
3/ Incorporated by reference from Pre-Effective Amendment No. 3 to the
registration statement, SEC File No. 33-11611, filed June 16, 1987.
4/ Incorporated by reference from Post-Effective Amendment No. 1 to the
registration statement, SEC File No. 33-11611, filed December 15, 1987.
5/ Incorporated by reference from Post-Effective Amendment No. 2 to the
registration statement, SEC File No. 33-11611, filed July 14, 1988.
6/ Incorporated by reference from Post-Effective Amendment No. 5 to the
registration statement, SEC File No. 33-11611, filed May 2, 1989.
7/ Incorporated by reference from Post-Effective Amendment No. 7 to the
registration statement, SEC File No. 33-11611, filed June 29, 1990.
8/ Incorporated by reference from Post-Effective Amendment No. 8 to the
registration statement, SEC File No. 33-11611, filed April 29, 1991.
9/ Incorporated by reference from Post-Effective Amendment No. 9 to the
registration statement, SEC File No. 33-11611, filed June 24, 1991.
10/ Incorporated by reference from Post-Effective Amendment No. 11 to the
registration statement, SEC File No. 33-11611, filed June 24, 1992.
11/ Incorporated by reference from Post-Effective Amendment No. 12 to the
registration statement, SEC File No. 33-11611, filed June 30, 1993.
12/ Incorporated by reference from Post-Effective Amendment No. 13 to the
registration statement, SEC File No. 33-11611, filed July 1, 1994.
13/ Incorporated by reference from Articles III, VIII, IX, I and XI of
Registrant's Declaration of Trust, as amended effective April 10, 1987,
May 1, 1987, January 28, 1988, June 30, 1988, June 30, 1988, July 1,
1989, December 21, 1990, July 1, 1991, June 30, 1992, July 20, 1995, and
<PAGE>
<PAGE>
November 10, 1995, and from Articles II, VII and X of the Registrant's
By-Laws, as amended September 28, 1994.
14/ Incorporated by reference from Post-Effective Amendment No. 14 to the
registration statement, SEC File No. 33-11611, filed June 30, 1995.
15/ Incorporated by reference from Post-Effective Amendment No. 15 to the
registration statement, SEC File No. 33-11611, filed August 31, 1995.
16/ Incorporated by reference from Post-Effective Amendment No. 17 to the
registration statement, SEC File No. 33-11611, filed April 25, 1996.
17/ Incorporated by reference from Post-Effective Amendment No. 18 to the
registration statement, SEC File No. 33-11611, filed July 1, 1996.
18/ Incorporated by reference from Post-Effective Amendment No. 19 to the
registration statement, SEC File No. 33-11611, filed September 24, 1996.
<PAGE>
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions 'Financial
Highlights' in the Prospectus and 'Auditors' in the Statement of Additional
Information and to the incorporation by reference of our report dated April 7,
1997, in this Registration Statement (Form N-1A No. 33-11611) of PaineWbber
Municipal Series (comprising, respectively, the PaineWebber Municipal High
Income fund and PaineWebber New York Tax-Free Income Fund).
ERNST & YOUNG LLP
New York, New York
June 30, 1997
<PAGE>
<PAGE>
[LETTERHEAD OF ORRICK, HERRINGTON & SUTCLIFFE LLP]
July 1, 1997
Mitchell Hutchins
1285 Avenue of the Americas
New York, New York 10019
Re: PaineWebber New York Tax-Free Income Fund, a series of the PaineWebber
Municipal Series (the 'New York Fund')
We hereby consent to the the filing of this consent as an exhibit to the
registration statement on Form N-1A for the New York Fund dated as of the date
hereof (the 'Registration Statement') and to the use of our name as counsel to
the New York fund with respect to the New York law in the Registration Statement
and the Prospectus for the New York Fund.
Very truly yours,
/s/ Orrick, Herrington & Sutcliffe LLP
Orrick, Herrington & Sutcliffe LLP
<PAGE>
<TABLE> <S> <C>
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<SERIES>
<NUMBER> 101
<NAME> MUNICIPAL HIGH INCOME FUND CLASS A
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 50438
<INVESTMENTS-AT-VALUE> 51960
<RECEIVABLES> 938
<ASSETS-OTHER> 46
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 52944
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 351
<TOTAL-LIABILITIES> 351
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 52076
<SHARES-COMMON-STOCK> 5061
<SHARES-COMMON-PRIOR> 5566
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (1006)
<ACCUM-APPREC-OR-DEPREC> 1522
<NET-ASSETS> 52593
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3631
<OTHER-INCOME> 0
<EXPENSES-NET> (562)
<NET-INVESTMENT-INCOME> 3070
<REALIZED-GAINS-CURRENT> 670
<APPREC-INCREASE-CURRENT> (682)
<NET-CHANGE-FROM-OPS> 397
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6691)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5172
<NUMBER-OF-SHARES-REDEEMED> (26971)
<SHARES-REINVESTED> 2468
<NET-CHANGE-IN-ASSETS> (24547)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (1606)
<GROSS-ADVISORY-FEES> 328
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 562
<AVERAGE-NET-ASSETS> 53197
<PER-SHARE-NAV-BEGIN> 10.29
<PER-SHARE-NII> .56
<PER-SHARE-GAIN-APPREC> .10
<PER-SHARE-DIVIDEND> (.56)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
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<EXPENSE-RATIO> 1.15
<AVG-DEBT-OUTSTANDING> 0
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<PAGE>
<TABLE> <S> <C>
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<SERIES>
<NUMBER> 102
<NAME> MUNICIPAL HIGH INCOME CLASS B
<MULTIPLIER> 1000
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<PERIOD-TYPE> 12-MOS
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<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 18631
<INVESTMENTS-AT-VALUE> 19193
<RECEIVABLES> 366
<ASSETS-OTHER> 17
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 19556
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 130
<TOTAL-LIABILITIES> 130
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 19236
<SHARES-COMMON-STOCK> 1870
<SHARES-COMMON-PRIOR> 2320
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (371)
<ACCUM-APPREC-OR-DEPREC> 562
<NET-ASSETS> 19427
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1341
<OTHER-INCOME> 0
<EXPENSES-NET> 293
<NET-INVESTMENT-INCOME> 1048
<REALIZED-GAINS-CURRENT> 252
<APPREC-INCREASE-CURRENT> (104)
<NET-CHANGE-FROM-OPS> 1197
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (958)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2057
<NUMBER-OF-SHARES-REDEEMED> (10726)
<SHARES-REINVESTED> 981
<NET-CHANGE-IN-ASSETS> (7639)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (669)
<GROSS-ADVISORY-FEES> 129
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 293
<AVERAGE-NET-ASSETS> 21106
<PER-SHARE-NAV-BEGIN> 10.29
<PER-SHARE-NII> .48
<PER-SHARE-GAIN-APPREC> .10
<PER-SHARE-DIVIDEND> (.48)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.39
<EXPENSE-RATIO> 1.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000809991
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<SERIES>
<NUMBER> 103
<NAME> MUNICIPAL HIGH INCOME CLASS C
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 16272
<INVESTMENTS-AT-VALUE> 16763
<RECEIVABLES> 302
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