As filed with the Securities and Exchange Commission on December 1, 1995
Securities Act File No. 33-60596
Investment Company Act File No. 811-7096
==========================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM N-2
Registration Statement Under the Securities Act of 1933 / X /
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 3 / X /
and
Registration Statement Under the Investment Company Act of 1940 / X /
Amendment No. 9 / X /
(Check appropriate box or boxes)
_____________________
PAINEWEBBER PREMIER TAX-FREE
INCOME FUND INC.
(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.
Vice President and Secretary
PaineWebber Premier Tax-Free Income Fund Inc.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)
_____________________
Copies to:
ROBERT A. WITTIE, ESQ. GREGORY K. TODD, ESQ.
KIRKPATRICK & LOCKHART LLP MITCHELL HUTCHINS ASSET
1800 M Street, N.W. Management Inc.
Washington, D.C. 20036 1285 Avenue of the Americas
New York, New York 10019
___________
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: [ X ]
It is proposed that this filing will become effective (check
appropriate box)
[ x ] when declared effective pursuant to Section 8(c)
This Registration Statement relates to the registration of an
indeterminate number of shares solely for market-making transactions.
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<PAGE>
PaineWebber Premier Tax-Free Income Fund Inc.
Form N-2 Cross Reference Sheet
Part A
Item Number Caption Prospectus Caption
- ----------- ------- ------------------
1 Outside Front Cover . . . . . Outside Front Cover of
Prospectus
2 Inside Front and Outside Back Inside Front and Outside
Cover Page . . . . . . . . . Back Cover Page of
Prospectus
3 Fee Table and Synopsis . . . Fund Expenses; Prospectus
Summary
4 Financial Highlights . . . . Financial Highlights
5 Plan of Distribution . . . . Outside Front Cover; The
Offering
6 Selling Shareholders . . . . Not Applicable
7 Use of Proceeds . . . . . . . Use of Proceeds
8 General Description of Trading History; The
Registrant . . . . . . . . . Fund; Investment
Objective and Policies;
Other Investment
Practices; Special
Leverage Considerations;
Special Considerations
and Risk Factors;
Description of Capital
Stock
9 Management . . . . . . . . . Management of the Fund;
Custodian, Transfer and
Dividend Disbursing Agent
and Registrar;
Description of Capital
Stock
10 Capital Stock, Long-Term Debt
and Other Securities . . . . Special Leverage
Considerations; Dividends
and Other Distributions;
Dividend Reinvestment
Plan; Description of
Capital Stock; Taxes
11 Defaults and Arrears on Senior Not Applicable
Securities . . . . . . . . .
12 Legal Proceedings . . . . . . Not Applicable
13 Table of Contents of the Table of Contents of
Statement of Statement of Additional
Additional Information . . . Information
Part B Statement of
Item Number Caption Additional Information
- ----------- ------- ----------------------
14 Cover Page . . . . . . . . . Cover Page of Statement
of Additional Information
15 Table of Contents . . . . . . Outside Back Cover Page
of Statement of
Additional Information
16 General Information and Cover Page of Statement
History . . . . . . . . . . . of Additional Information
<PAGE>
17 Investment Objectives and Investment Policies and
Policies . . . . . . . . . . Restrictions; Hedging and
Related Income
Strategies; Portfolio
Transactions
18 Management . . . . . . . . . Directors and Officers
19 Control Persons and Principal
Holders of Securities . . . . Control Persons and
Principal Holders of
Securities
20 Investment Advisory and Other Directors and Officers;
Services . . . . . . . . . . Investment Advisory
Arrangements; Independent
Public Accountants;
Management of the Fund
(in Prospectus);
Custodian, Transfer and
Dividend Disbursing Agent
and Registrar (in
Prospectus)
21 Brokerage Allocation and Portfolio Transactions
Practices . . . . . . . . . .
22 Tax Status . . . . . . . . . Taxes
23 Financial Statements . . . . Financial Statements
<PAGE>
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
Common Stock
-------------------
Investment Grade Municipal Income Fund Inc. ("Fund") is a diversified,
closed-end management investment company. The Fund's investment objective is to
achieve a high level of current income that is exempt from federal income tax,
consistent with the preservation of capital. To achieve this objective, the Fund
normally invests substantially all of its assets in a diversified portfolio of
long-term, tax-exempt Municipal Obligations that have been rated investment
grade or are unrated but have been determined to be of comparable quality by the
Fund's investment adviser. Municipal Obligations rated investment grade are
those that, at the time of investment, are rated within the four highest grades
by Moody's Investors Service, Inc. (Baa or higher) or Standard & Poor's (BBB or
higher) or have an equivalent rating from another nationally recognized
statistical rating organization. The Fund may invest up to 20% of its total
assets in Municipal Obligations that are unrated but that, at the time of
investment, have been determined by the Fund's investment adviser to be of
comparable quality to those that are rated investment grade. There is no
assurance that the Fund will achieve its investment objective.
The Fund's common stock ("Common Stock") is listed and traded on the New
York Stock Exchange, Inc. ("NYSE") under the symbol "PPM." Shares of the Common
Stock may be offered pursuant to this Prospectus from time to time in order to
effect over-the-counter ("OTC") secondary market sales by PaineWebber
Incorporated ("PaineWebber") in its capacity as a dealer and secondary
market-maker at negotiated prices related to prevailing market prices on the
NYSE at the time of sale. The closing price of the Common Stock on the NYSE on
was $ per share. See "Trading History." The Fund will not receive
any proceeds from the sale of any Common Stock offered pursuant to this
Prospectus.
The Fund has outstanding auction preferred shares ("APS") having a
liquidation preference of $80,000,000. The APS have resulted in financial
leverage, which involves special risks. Although the Fund has no current
intention of doing so, the Fund may engage in additional leverage through the
issuance of additional preferred stock or through borrowings. SEE "SPECIAL
LEVERAGE CONSIDERATIONS" AND "DESCRIPTION OF CAPITAL STOCK."
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") serves as
investment adviser and administrator of the Fund. This Prospectus concisely sets
forth certain information an investor should know before investing and should be
retained for future reference. A Statement of Additional Information ("SAI")
dated February 1, 1996 has been filed with the Securities and Exchange
Commission and is incorporated by reference in its entirety into this
Prospectus. A table of contents for the SAI is set forth as the last section of
this Prospectus. A copy of the SAI can be obtained without charge by writing to
the Fund, by contacting your PaineWebber investment executive or PaineWebber's
Correspondent Firms or by calling toll-free 1-800-852-4750.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------
PAINEWEBBER INCORPORATED
-------------------
The date of this Prospectus is February 1, 1996
<PAGE>
FUND EXPENSES
The following tables are intended to assist investors in understanding the
various direct or indirect costs and expenses associated with investing in the
Fund.
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SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price)........................ None(1)
Dividend Reinvestment and Cash Purchase Plan Fees..................... None
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS ATTRIBUTABLE TO COMMON
STOCK)(2)
Investment Advisory and Administration Fees (after fee waiver)........ 1.23%
Interest Payments on Borrowed Funds(3)................................ 0.00%
Other Expenses........................................................ 0.46%
Total Annual Expenses (after fee waiver).......................... 1.69%
</TABLE>
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(1) Prices for the Common Stock traded in the OTC market will reflect ordinary
dealer mark-ups.
(2) The percentages shown reflect the presentation of all expenses expected to
be incurred by the Fund as a percentage of only those net assets
attributable to the Common Stock. If expressed as a percentage of all of the
Fund's net assets (regardless of whether such assets are attributable to the
Common Stock or to the APS), such percentages would be lower. Investment
advisory and administration fees are payable to Mitchell Hutchins at an
annual rate of 0.90% of all of the Fund's average weekly net assets.
However, effective June 1, 1995, Mitchell Hutchins began waiving 0.25% of
its 0.90% investment advisory and administrative fees. If the fee waiver
were not in effect, investment advisory and administration fees and total
expenses (each expressed as percentage of net assets attributable to Common
Stock) would have been % and %, respectively. Mitchell Hutchins may
discontinue this fee waiver at any time. See "Management of the Fund" for
additional information. The investment advisory and administration fees
payable to Mitchell Hutchins is higher than that paid by most funds. "Other
Expenses" have been estimated based upon expenses actually incurred for the
fiscal year ended September 30, 1995.
(3) The Fund may borrow money. See "Special Leverage
Considerations--Borrowings." The Fund has no current intention of borrowing
money for investment purposes.
EXAMPLE
An investor would directly or indirectly pay the following expenses on a
$1,000 investment in the Fund, assuming (i) a 5% annual return and (ii)
reinvestment of all dividends and other distributions at net asset value:*
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- -------- ----------- ---------- ---------
$ 17 $53 $ 92 $ 200
- ------------
* After fee waivers. If fee waivers were not in effect, the amounts that would
be paid by an investor during the one-year, three-year, five-year and ten-year
periods reflected in the table would be $ , $ , $ and $ ,
respectively.
This Example assumes that the percentage amounts listed under Annual
Expenses remain the same in the years shown (except that Annual Expenses have
been reduced to reflect the completion of organization expense amortization
after five years from the commencement of investment operations). The above
tables and the assumptions in the Example of a 5% annual return and reinvestment
at net asset value are required by regulations of the Securities and Exchange
Commission ("SEC") applicable to all closed-end investment companies; the
assumed 5% annual return is not a prediction of, and does
2
<PAGE>
not represent, the projected or actual performance of the Common Stock. In
addition, while the Example assumes reinvestment of all dividends and other
distributions at net asset value, participants in the Fund's Dividend
Reinvestment Plan will receive shares of the Fund's Common Stock purchased by
the Plan agent at the market price in effect at that time, which may be at,
above, or below net asset value.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND THE FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus.
<TABLE>
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The Fund....................... Investment Grade Municipal Income Fund Inc. ("Fund") is a
diversified, closed-end management investment company. See
"The Fund."
The Offering................... The shares of the Fund's common stock ("Common Stock") may
be offered pursuant to this prospectus from time to time
in order to effect over-the-counter ("OTC") secondary
market sales by PaineWebber Incorporated ("PaineWebber")
in its capacity as a dealer and secondary market-maker at
negotiated prices related to prevailing market prices on
the New York Stock Exchange, Inc. ("NYSE") at the time of
sale. The Common Stock is listed and traded on the NYSE
under the symbol "PPM." See "The Offering" and "Trading
History."
Investment Objective and
Policies....................... The Fund's investment objective is to achieve a high level
of current income that is exempt from federal income tax,
consistent with the preservation of capital. To achieve
this objective, the Fund normally invests substantially
all of its assets in a diversified portfolio of long-term,
tax-exempt Municipal Obligations that have been rated
investment grade or are unrated but have been determined
to be of comparable quality by the Fund's investment
adviser, Mitchell Hutchins Asset Management Inc.
("Mitchell Hutchins"). Municipal Obligations rated
investment grade are those that, at the time of
investment, are rated within the four highest grades by
Moody's Investors Services, Inc. ("Moody's") (Baa or
higher) or Standard & Poor's ("S&P") (BBB or higher) or
have an equivalent rating from another nationally
recognized statistical rating organization. The Fund may
invest up to 20% of its total assets in Municipal
Obligations that are unrated but that, at the time of
investment, have been determined by Mitchell Hutchins to
be of comparable quality to those that are rated
investment grade. There is no assurance that the Fund will
achieve its investment objective.
</TABLE>
3
<PAGE>
<TABLE>
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At least 80% of the Fund's net assets normally are
invested in Municipal Obligations that are not subject to
the federal alternative minimum tax ("AMT") for individual
taxpayers. The Fund may invest in high quality,
short-term, tax-exempt investments, and with respect to up
to 20% of its net assets, taxable investments, in order to
invest cash reserves, or it may make such investments on a
temporary basis during defensive periods or when, in the
opinion of Mitchell Hutchins, no suitable long-term
Municipal Obligations are available. The Fund may engage
in when-issued and delayed delivery transactions, enter
into stand-by commitments, purchase illiquid securities,
invest in repurchase agreements, lend portfolio securities
and enter into certain hedging and related income
strategies. The Fund may enter into options and futures
that, at a maximum, approximate (but that do not exceed)
the full value of its portfolio assets. Certain of these
investment practices entail additional risks and may give
rise to taxable income. Accordingly, under normal
circumstances, the Fund does not intend to engage in such
practices to a significant extent.
See "Investment Objective and Policies," "Other Investment
Practices," "Special Considerations and Risk Factors,"
"Taxes" and Appendix A.
Auction Preferred Shares....... The Fund has outstanding 800 shares of Auction Preferred
Shares ("APS") Series A and 800 shares of APS Series B,
having an aggregate liquidation value of $80,000,000. The
APS has resulted in the financial leveraging of the Common
Stock. The APS pay dividends at rates that are adjusted
over relatively short periods of time and that reflect
prevailing short-term, tax-exempt interest rates. In
accordance with the Fund's investment objective and
policies, the proceeds of the APS have been invested in
long-term Municipal Obligations, which typically bear
interest at rates that are higher than short-term,
tax-exempt interest rates. Through this leveraging
technique, the Fund seeks to obtain a higher yield for
Common Stockholders than would be available if the APS had
not been issued. The APS have received ratings of aaa from
Moody's and AAA from S&P.
Although the Fund has no current intention of doing so,
the Fund may engage in additional leverage through the
issuance of additional preferred stock or through
borrowings. There are special risks associated with
leveraging, including the possibility that changes in the
relationship of short- and long-term interest rates might
cause the yield on, and the net asset value of, the Common
Stock to be lower than would be the case without
leveraging.
See "Special Leverage Considerations" and "Description of
Capital Stock."
</TABLE>
4
<PAGE>
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Investment Adviser and Adminis-
trator......................... Mitchell Hutchins, a wholly owned subsidiary of
PaineWebber, serves as the Fund's investment adviser and
administrator. Mitchell Hutchins provides investment
advisory and portfolio management services to investment
companies, pension funds and other institutional,
corporate and individual clients. As investment adviser
and administrator, Mitchell Hutchins is entitled to
receive from the Fund a fee, computed weekly and paid
monthly, in an amount equal to an annual rate of 0.90% of
the Fund's average weekly net assets. This fee is greater
than the advisory and administration fees paid by most
funds.
Dividends and Other
Distributions.................. The Fund declares and pays monthly cash dividends to
Common Stockholders at a level rate that, on an annual
basis and after payment of dividends on any preferred
stock, results in the distribution of all of the Fund's
net investment income. The dividend rate on the Common
Stock is adjusted by the Fund's board of directors as
necessary to reflect the performance of the Fund. The Fund
intends to distribute annually to Common Stockholders
substantially all of the net capital gains realized by the
Fund to the extent that such net capital gains are not
necessary to satisfy dividend, redemption or liquidation
preferences of the APS or any other preferred stock.
Dividends paid to Common Stockholders are exempt from
regular federal income tax to the extent such dividends
are properly designated by the Fund as being derived from
interest on tax-exempt securities. A portion of such
dividends may be subject to the AMT. Dividends and other
distributions will be subject to regular federal income
tax to the extent that they are derived from net realized
capital gain, income on non-tax-exempt securities or any
other taxable income of the Fund. The Fund's dividends and
other distributions also may be subject to state and local
income tax. For federal tax purposes, the Fund is required
to allocate tax-exempt income, net realized capital gains
and any other taxable income between shares of Common
Stock and shares of any preferred stock in proportion to
the total dividends and other distributions paid to each
class for the year in which such tax-exempt income, net
realized capital gains or other taxable income is earned
or realized.
See "Dividends and Other Distributions; Dividend
Reinvestment Plan" and "Taxes."
Dividend Reinvestment Plan..... The Fund has established a Dividend Reinvestment Plan
("Plan") under which all Common Stockholders whose shares
are registered in their own names, or in the name of
PaineWebber (or its nominee), have all dividends and other
distributions on
</TABLE>
5
<PAGE>
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their shares of Common Stock automatically reinvested in
additional shares of Common Stock, unless such Common
Stockholders elect to receive cash. Common Stockholders
who elect to hold their shares in the name of a broker or
nominee other than PaineWebber (or its nominee) should
contact such broker or nominee to determine whether, or
how, they may participate in the Plan. Shares of Common
Stock acquired under the Plan are purchased in the open
market, on the NYSE or otherwise, at prices that may be
higher or lower than the net asset value per share of the
Common Stock at the time of the purchase. The Fund will
not issue any new shares of Common Stock in connection
with its Plan. See "Dividends and Other Distributions;
Dividend Reinvestment Plan."
Common Stock Repurchases and
Tender Offers; Conversion to
Open-End Fund.................. In recognition of the possibility that the Common Stock
may trade at a discount from net asset value, the Fund's
board of directors, in consultation with Mitchell
Hutchins, intends to review at least annually the
possibility of open market repurchases of Common Stock and
tender offers for Common Stock at net asset value. There
can be no assurance that the board of directors will
decide to undertake either of these actions or that, if
undertaken, such actions will result in the Common Stock
trading at a price equal or close to its net asset value
per share. The extent to which the Fund may engage in
Common Stock repurchases and tender offers may be limited
so long as preferred stock is outstanding. The Fund may
borrow to finance such repurchases and tender offers. The
board of directors also will consider from time to time
the conversion of the Fund to an open-end investment
company. Any such conversion would require redemption of
the APS or any other outstanding preferred stock, with the
result that the Fund would no longer have the benefit of
the leverage provided by preferred stock. See "Special
Leverage--Considerations," and "Description of Capital
Stock Common Stock Repurchases and Tender Offers" and
"Description of Capital Stock-- Conversion to Open-End
Investment Company."
Custodian, Transfer and
Dividend Disbursing Agent and
Registrar.................... State Street Bank and Trust Company serves as custodian of
the Fund's assets. PNC Bank, National Association, serves
as transfer and dividend disbursing agent and as registrar
with respect to the Common Stock. See "Custodian, Transfer
and Dividend Disbursing Agent and Registrar."
</TABLE>
6
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<TABLE>
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Special Considerations and Risk
Factors........................ Certain Considerations and Risks Associated with Municipal
Obligations. The yield on a Municipal Obligation depends
on a variety of factors, including general municipal and
fixed-income security market conditions, the condition of
the issuer, the size of the particular offering, the
maturity, credit quality and rating of the issue and
expectations regarding changes in income tax rates. The
market value of Municipal Obligations, and accordingly the
Fund's net asset value, normally varies inversely with
changes in interest rates. Municipal Obligations rated Baa
by Moody's are investment grade, but Moody's considers
Municipal Obligations rated Baa to have speculative
characteristics. Certain Municipal Obligations held by the
Fund may permit the issuer to call or redeem the
obligations, in whole or in part, at its option. If an
issuer were to redeem Municipal Obligations held by the
Fund during a time of declining interest rates, the Fund
might realize capital gains or losses at a time that it
would not otherwise do so, and the Fund might not be able
to reinvest the proceeds of the redemption in Municipal
Obligations providing as high a level of income as the
obligations that were redeemed.
The obligations of issuers of Municipal Obligations are
subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of creditors.
Further, federal, state and local laws may be enacted that
adversely affect the tax-exempt status of interest on
Municipal Obligations or of the exempt-interest dividends
received by the Fund's stockholders or that impose other
constraints upon the enforcement of such obligations. It
is also possible 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 Obligations may be materially and
adversely affected.
Alternative Minimum Tax; State and Local Taxation. The
Fund may invest up to 20% of its net assets in Municipal
Obligations the interest on which is subject to the AMT
for individual taxpayers. Accordingly, stockholders who
are individuals may be required to include a portion of
the Fund's dividends in calculating their AMT liability.
Corporations that hold Common Stock must include the
entire amount of any exempt-interest dividends in
calculating their adjusted current earnings for purposes
of the AMT. The Fund may not be an appropriate investment
for investors who are subject to AMT liability or who
would become subject to AMT liability by reason of an
investment in the Fund. All or a portion of the Fund's
dividends also may be subject to state and local taxation.
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7
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Market Price of Common Stock. Shares of the common stock
of closed-end investment companies frequently trade at a
discount to their net asset value, and the Fund's Common
Stock has historically traded at a discount to its net
asset value. See "Trading History." This market risk is
separate and distinct from the risk that the Fund's net
asset value may decrease. Accordingly, the Common Stock is
designed primarily for long-term investors and should not
be viewed as a vehicle for trading purposes.
Anti-Takeover Provisions. The Fund's Articles of
Incorporation contain provisions limiting (1) the ability
of other entities or persons to acquire control of the
Fund, (2) the Fund's freedom to engage in certain
transactions and (3) the ability of the Fund's directors
or stockholders to amend the Articles of Incorporation.
These provisions of the Articles of Incorporation may be
regarded as "anti-takeover" provisions.
See "Investment Objective and Policies," "Special Leverage
Considerations," "Special Considerations and Risk
Factors," "Taxes" and "Description of Capital Stock."
Special Leverage
Considerations................. The APS have resulted in leverage, which poses special
risks for Common Stockholders, including the possibility
of higher volatility of both the net asset value and the
market value of the Common Stock. Fluctuations in the
dividend rates on the APS affect the dividends on the
Common Stock. There can be no assurance that the Fund will
be able to realize a higher return on its investment
portfolio than the then current dividend rate on any
preferred stock. If the then current dividend rate on the
APS were to exceed the return on the Fund's portfolio, the
Fund's leveraged capital structure would result in a lower
yield to Common Stockholders than if the Fund were not
leveraged. Moreover, any decline in the value of the
Fund's assets will be borne entirely by Common
Stockholders. Accordingly, the effect of leverage in a
declining market will be a greater decrease in the net
asset value of the Common Stock than if the Fund were not
leveraged, which may be reflected in a greater decline in
the market price of the Common Stock.
See "Special Leverage Considerations," "Taxes" and
"Description of Capital Stock."
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8
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FINANCIAL HIGHLIGHTS
The table below provides selected per share data and ratios for one share of
Common Stock for the periods shown. This information is supplemented by the
financial statements and accompanying notes appearing in the Fund's Annual
Report to Shareholders for the fiscal year ended September 30, 1995, which are
incorporated by reference into the Fund's SAI and can be obtained by
shareholders upon request. The financial statements and notes, as well as
information in the table below insofar as it relates to the fiscal year ended
September 30, 1995, have been audited by Price Waterhouse LLP, independent
accountants, whose report thereon is included in the Annual Report to
Shareholders.
<TABLE><CAPTION>
FOR THE YEARS ENDED FOR THE PERIOD
SEPTEMBER 30, NOVEMBER 6,
----------------------- 1992+ THROUGH
1995 1994 SEPTEMBER 30, 1993
-------- --------- ------------------
<S> <C> <C> <C>
Net asset value, beginning of period.............. $ 14.72 $ 17.04 $ 15.00
-------- --------- ----------
Net investment income............................. 1.18 1.17 0.94
Net realized and unrealized gains (losses) from
investment transactions........................... 1.03 (2.28) 2.13
-------- --------- ----------
Net increase (decrease) from investment
operations........................................ 2.21 (1.11) 3.07
-------- --------- ----------
Dividends from net investment income to:
Common shareholders............................. (0.90) (0.98) (0.73)
Common share equivalent of dividends paid to
preferred shareholders........................ (0.30) (0.21) (0.14)
Distributions from net realized gains from
investment transactions......................... -- (0.02) --
-------- --------- ----------
Total dividends and distributions to
shareholders...................................... (1.20) (1.21) (0.87)
-------- --------- ----------
Underwriting and offering costs incurred with the
preferred stock offering charged to common stock.. -- -- (0.16)
-------- --------- ----------
Net asset value, end of period.................... $ 15.73 $ 14.72 $ 17.04
-------- --------- ----------
-------- --------- ----------
Per share market value, end of period............. $ 13.00 $ 12.38 $ 15.63
-------- --------- ----------
-------- --------- ----------
Total investment return(1)........................ 12.63% (15.21)% 9.10%
-------- --------- ----------
-------- --------- ----------
Ratios to average net assets attributable to
common shares:
Total expenses net of waivers from adviser...... 1.69%(2) 1.70% 1.55%*
Total expenses before waivers from adviser...... 1.82% 1.70% 1.55%*
Net investment income before preferred stock
dividends..................................... 7.87%(2) 7.32% 6.55%*
Preferred stock dividends....................... 2.02% 1.33% 0.95%*
Net investment income available to common share-
holders........................................... 5.85%(2) 5.99% 5.60%*
Supplemental data:
Net assets, end of period (000's)............... $242,906 $ 232,406 $256,466
Portfolio turnover rate......................... 7% 0% 6%
Asset coverage per share of preferred stock, end
of period..................................... $151,816 $ 145,254 $160,291
</TABLE>
(Footnotes on following page)
9
<PAGE>
(Footnotes for preceding page)
- ------------
+ Commencement of operations
* Annualized
(1) Total investment return is calculated assuming a purchase of common stock at
the current market price on the first day and a sale at the current market
price on the last day of each period reported and assuming reinvestment of
dividends and other distributions to common shareholders at prices obtained
under the Fund's Dividend Reinvestment Plan. Total investment returns for
periods of less than one year have not been annualized. Total investment
return does not reflect brokerage commissions.
(2) Effective June 1, 1995, Mitchell Hutchin's began waiving 0.25% of its 0.90%
advisory and administrative fees. If such waivers had not been made, the
ratios of total expenses to average net assets, net investment income before
preferred stock dividends, and net investment income available to Common
Shareholders to net assets attributable to Common Share would have been
%, % and %, respectively.
The following information relates to the APS. See "Special Leverage
Considerations."
<TABLE><CAPTION>
INVOLUNTARY
ASSET LIQUIDATING
TOTAL AMOUNT COVERAGE PREFERENCE PER AVERAGE MARKET
SENIOR SECURITIES YEAR OUTSTANDING* PER UNIT UNIT** VALUE PER UNIT***
- --------------------------------- ---- ------------ -------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
APS Series A..................... 1995 $ 40,000,000 $151,816 $ 50,000 $ 82,319
APS Series B..................... 1995 $ 40,000,000 $151,816 $ 50,000 $ 82,319
APS Series A..................... 1994 $ 40,000,000 $145,254 $ 50,000 $ 93,257
APS Series B..................... 1994 $ 40,000,000 $145,254 $ 50,000 $ 93,257
APS Series A..................... 1993+ $ 40,000,000 $160,291 $ 50,000 $ 150,157
APS Series B..................... 1993+ $ 40,000,000 $160,291 $ 50,000 $ 150,157
</TABLE>
- ------------
+ Data reflects period from January 21, 1993 (date of issuance of APS) to
September 30, 1993.
* Based on liquidation value. Number of APS shares outstanding did not change
after the January 21, 1993 issuance date.
** Plus any accrued but unpaid dividends.
*** Calculated by multiplying $50,000 by the result obtained by dividing (a) the
average monthly market value of the Common Stock during the related fiscal
year (or, in the case of 1993, the period from January 21, 1993 (date of
issuance of APS) through September 30, 1993) by (b) the average of the
amount of APS outstanding at the end of each such month.
10
<PAGE>
THE FUND
The Fund is a diversified, closed-end management investment company and has
registered as such under the Investment Company Act of 1940 ("1940 Act"). The
Fund was incorporated under the laws of the State of Maryland on August 6, 1992.
Prior to , 1996, the name of the Fund was "PaineWebber Premier
Tax-Free Income Fund Inc." The Fund began doing business under the name
"Investment Grade Municipal Income Fund" in August 1995, and the shareholders of
the Fund approved a formal change of the Fund's name to Investment Grade
Municipal Income Fund Inc. on , 1996. The Fund's principal office is
located at 1285 Avenue of the Americas, New York, New York 10019, and its
telephone number is (212) 713-2000.
THE OFFERING
Shares of the Common Stock may be offered pursuant to this Prospectus from
time to time in order to effect OTC secondary market sales by PaineWebber in its
capacity as a dealer and secondary market-maker at negotiated prices related to
prevailing market prices on the NYSE at the time of sale. Costs incurred in
connection with this offering will be paid by PaineWebber. PaineWebber's
principal offices are located at 1285 Avenue of the Americas, New York, New York
10019. Mitchell Hutchins is a wholly owned subsidiary of PaineWebber.
USE OF PROCEEDS
The Fund will not receive any proceeds from the sale of any Common Stock
offered pursuant to this Prospectus. Proceeds received by PaineWebber as a
result of its OTC secondary market sales of the Common Stock will be utilized by
PaineWebber in connection with its secondary market operations and for general
corporate purposes.
11
<PAGE>
TRADING HISTORY
Shares of the Common Stock, par value $.001 per share are listed and traded
on the NYSE under the symbol "PPM." The following table sets forth for the
Common Stock for each quarterly period within the two most recent fiscal years
and each fiscal quarter since the beginning of the current fiscal year: (a) the
per share high and low sales prices as reported by the NYSE; (b) the per Share
net asset values, based on the Fund's computation as of 4:00 p.m. on the last
NYSE business day for the week corresponding to the dates on which the
respective high and low sales prices were recorded; and (c) the discount or
premium to net asset value represented by the high and low sales prices shown.
The range of net asset values and of premiums and discounts for the Common Stock
during the periods shown may be broader than is shown in this table. On January
, 1996, the closing price per share of Common Stock on the NYSE was $ , the
Fund's net asset value per share was $ and the discount to net asset value
per share was %.
<TABLE><CAPTION>
(DISCOUNT) OR
PREMIUM
SALES PRICES NET ASSET VALUES TO NET ASSET VALUE
--------------- ----------------- ------------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
- -------------------------------- ----- ----- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
12/31/93........................ $16 3/8 $ 15 1/4 $ 17.00 $ 16.91 (3.68)% (9.82)%
03/31/94........................ 16 13 7/8 17.19 15.76 (6.92) (11.96)
06/30/94........................ 14 3/8 13 1/4 15.59 15.21 (7.79) (12.89)
09/30/94........................ 14 1/8 12 1/8 15.38 14.75 (8.16) (17.80)
12/31/94........................ 12 5/8 10 3/4 14.72 13.50 (14.23) (20.37)
03/31/95........................ 13 3/8 12 14.92 14.02 (10.36) (14.41)
06/30/95........................ 13 1/2 12 3/8 16.02 15.25 (15.73) (18.85)
09/30/95........................ 13 1/2 12 5/8 15.88 15.36 (14.99) (17.81)
12/31/95........................
</TABLE>
See "Description of Capital Stock -- Common Stock Repurchases and Tender
Offers" as to methods that may be undertaken by the Fund to reduce any discount.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to achieve a high level of current income
that is exempt from federal income tax, consistent with the preservation of
capital. To achieve this objective, the Fund normally invests substantially all
of its assets in a diversified portfolio of long-term, tax-exempt Municipal
Obligations that have been rated investment grade or are unrated but have been
determined to be of comparable quality by Mitchell Hutchins. Municipal
Obligations rated investment grade are those that, at the time of investment,
are rated within the four highest grades by Moody's (Baa or higher) or S&P (BBB
or higher) or have an equivalent rating from another nationally recognized
statistical rating organization. The Fund may invest up to 20% of its total
assets in Municipal Obligations that are unrated but that, at the time of
investment, have been determined by Mitchell Hutchins to be of comparable
quality to those that are rated investment grade. Municipal Obligations rated
Baa by Moody's are investment grade, but Moody's considers Municipal Obligations
rated Baa to have speculative characteristics. Changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity for Municipal
Obligations that are rated BBB or Baa (or that have equivalent ratings) to make
principal and interest payments than is the case for higher grade Municipal
Obligations. At least 80% of the Fund's net assets normally are invested in
Municipal Obligations that are not subject to the AMT for individual taxpayers.
The balance of the Fund's assets may be invested
12
<PAGE>
in Municipal Obligations that are subject to the AMT or in certain other
investments. See "Other Investment Practices." Under normal circumstances, the
Fund invests at least 65% of its total assets in income producing securities.
There is no assurance that the Fund will achieve its investment objective.
Municipal Obligations are obligations issued by or on behalf of states
(including the District of Columbia), territories or possessions of the United
States or their respective political subdivisions, agencies or
instrumentalities, or by multistate agencies or authorities, the interest on
which is, in the opinion of bond counsel, exempt from regular federal income
tax. Municipal Obligations are issued for various public purposes, including
construction of public facilities, such as airports, bridges, hospitals,
housing, mass transportation, schools, streets and water and sewer works. Other
public purposes for which Municipal Obligations may be issued include
refinancing outstanding obligations and obtaining funds for general operating
expenses and for loans to other public institutions and facilities. Municipal
Obligations include "public purpose" obligations, which generate interest that
is exempt from regular federal income tax and, for individual taxpayers, is not
subject to the AMT, and qualified "private activity" obligations, which generate
interest that is exempt from regular federal income tax but that, if the
obligations were issued after August 7, 1986, is subject to the AMT. Under
normal circumstances, no more than 20% of the Fund's net assets will be invested
in Municipal Obligations the interest on which is subject to the AMT. The
principal types of Municipal Obligations in which the Fund may invest are
described in Appendix A to this Prospectus and in the SAI.
Moody's, S&P and the other nationally recognized statistical rating
organizations are private services that provide ratings of the credit quality of
debt obligations, including Municipal Obligations. It should be emphasized that
ratings are general and are not absolute standards of quality. Consequently,
Municipal Obligations 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
financial condition may be better or worse than is indicated by its rating.
Subsequent to its purchase by the Fund, an issue of Municipal Obligations may
cease to be rated or its rating may be reduced below the minimum rating required
for purchase by the Fund. Mitchell Hutchins will consider such an event in
determining whether the Fund should continue to hold the obligation. In making
such a determination, Mitchell Hutchins will consider such factors as its
assessment of the credit quality of the issuer of the security and the price at
which the security could be sold. Mitchell Hutchins will engage in an orderly
disposition of downgraded Municipal Obligations to the extent necessary to
ensure that the Fund's holdings of Municipal Obligations rated below investment
grade will not exceed 5% of the Fund's net assets. The Fund does not purchase
junk bonds. A description of Moody's and S&P's ratings is included as Appendix A
to the SAI.
The Fund may invest 25% or more of its total assets in a particular segment
of the Municipal Obligations market, such as hospital, housing or airport
revenue bonds, or in securities the interest on which is paid from revenues on
similar types of projects, if Mitchell Hutchins determines that the yields
available from obligations in that market segment justify the potential increase
in risk resulting from a large investment in that market segment. Although such
obligations might be supported by the credit of governmental entities or by
non-governmental entities from a number of different industries, an economic,
business, political or other change affecting one such obligation might also
affect other obligations in the same market.
The Fund's investment objective and certain investment limitations described
in the SAI are fundamental policies that may not be changed without shareholder
approval. All other investment policies may be changed by the Fund's board of
directors without shareholder approval.
13
<PAGE>
OTHER INVESTMENT PRACTICES
Certain of the other investment practices in which the Fund may engage and
that are described below may give rise to federal income tax. Under normal
circumstances, the Fund does not intend to engage in those practices to a
significant extent. The Fund's ability to engage in certain of these investment
practices is limited by the rating agency guidelines applicable to the APS. See
"Special Leverage Considerations" and Appendix B to the SAI.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase Municipal Obligations on a when-issued basis, or may
purchase or sell Municipal Obligations for delayed delivery. In when-issued or
delayed delivery transactions, delivery of the securities occurs beyond normal
settlement periods, but no payment on delivery will be made by the Fund prior to
the actual delivery or payment by the other party to the transaction. The Fund
will not accrue income with respect to a when-issued or delayed delivery
security prior to its stated delivery date. When the Fund purchases securities
on a when-issued or delayed delivery basis, however, it immediately assumes the
risks of ownership, including the risk of price fluctuation. Depending on market
conditions, the Fund's when-issued and delayed delivery purchase commitments
could cause its net asset value per share (and thus its market value per share)
to be more volatile, because such securities may increase the amount by which
the Fund's total assets, including the value of when-issued and delayed delivery
securities held by the Fund, exceed its net assets. Failure to deliver a
security purchased on a when-issued or delayed delivery basis may result in a
loss or missed opportunity to make an alternative investment.
SHORT-TERM TAX-EXEMPT AND TAXABLE INVESTMENTS
The Fund normally invests substantially all of its assets in long-term
Municipal Obligations. However, in order to invest cash reserves or when, in the
opinion of Mitchell Hutchins, no suitable long-term Municipal Obligations are
available, the Fund may invest in high quality short-term Municipal Obligations
that are rated, at the time of investment, no lower than MIG-2 by Moody's, SP-2
by S&P or, if unrated, that are determined by Mitchell Hutchins to be of
comparable quality to Municipal Obligations that are rated at least MIG-2 or
SP-2. These Municipal Obligations may include variable or floating rate demand
notes and similar instruments that trade as short-term obligations. The Fund
also may invest in such high quality short-term Municipal Obligations for
temporary defensive purposes.
In addition, if in the opinion of Mitchell Hutchins no suitable short-term
Municipal Obligations are available, the Fund temporarily may hold cash and,
with respect to up to 20% of its net assets, invest in taxable money market
instruments, including: (1) U.S. government securities; (2) high quality
commercial paper that is rated, at the time of purchase, no lower than Prime-2
by Moody's or A-2 by S&P or, if unrated, that is determined by Mitchell Hutchins
to be of comparable quality to commercial paper that is rated at least Prime-2
or A-2; (3) bank obligations (including certificates of deposit, time deposits
and bankers' acceptances of domestic banks); and (4) repurchase agreements with
respect to any of the foregoing. Interest earned from such taxable investments
will be taxable to stockholders as ordinary income when distributed. If the Fund
were to hold cash, the cash would not earn interest, and the Fund's yield would
be lower than if the cash had been invested.
14
<PAGE>
REPURCHASE AGREEMENTS
The Fund is authorized to enter into repurchase agreements 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 the Fund would purchase securities from a bank or recognized securities
dealer and simultaneously commit to resell those securities to the bank or
dealer at an agreed-upon date and price reflecting a market rate of interest
unrelated to the coupon rate or maturity of the purchased securities. The Fund
would maintain custody of the underlying securities prior to their repurchase;
thus, the obligation of the bank or securities dealer to pay the repurchase
price on the date agreed to would, in effect, be secured by such securities. If
the value of such securities were less than the repurchase price, plus any
agreed-upon additional amount, the other party to the agreement would be
required to 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 would be
accrued as interest and included in the Fund's net investment income.
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
the repurchase agreement becomes insolvent. The 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 Fund's board of directors. Mitchell Hutchins will review and
monitor the creditworthiness of such institutions under the board's general
supervision.
LENDING OF PORTFOLIO SECURITIES
To attempt to enhance income (which would be taxable income) the Fund is
authorized to lend portfolio securities with a value of up to 33 1/3% of its
total assets to broker-dealers or institutional investors that Mitchell Hutchins
deems qualified, but only if doing so would not adversely affect the rating of
the APS by S&P and only when the borrower maintains with the Fund's custodian
collateral, either in cash or money market instruments, in an amount at least
equal to the market value of the securities loaned, plus accrued interest and
dividends, determined on a daily basis and adjusted accordingly. 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. The Fund will retain authority to terminate
any loans at any time. The Fund may pay reasonable administrative and custodial
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. The Fund will receive reasonable interest on the
loan or a flat fee from the borrower, and the Fund will receive amounts
equivalent to any dividends, interest or other distributions on the securities
loaned. The Fund will regain record ownership of loaned securities to exercise
beneficial rights, such as voting and subscription rights and rights to
dividends, interest and other distributions, when regaining such rights is
considered by Mitchell Hutchins to be in the Fund's interest.
15
<PAGE>
OTHER PRACTICES
The Fund may invest up to 20% of its total 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, securities subject to contractual restrictions on
resale, repurchase agreements maturing in more than seven days and municipal
lease obligations (including certificates of participation) other than those
that Mitchell Hutchins has determined are liquid pursuant to guidelines
established by the board of directors. To the extent the Fund invests in
illiquid securities, the Fund may not be able to readily liquidate such
investments, and would have to sell other investments if necessary to raise cash
to meet its obligations. The lack of a liquid secondary market for illiquid
securities may make it more difficult for the Fund to assign a value to those
securities for purposes of valuing the Fund's portfolio and calculating its net
asset value. The Fund also may invest in stand-by commitments with respect to
Municipal Obligations it purchases or holds. Although it has no present
intention to do so during the coming year, the Fund may use options (both
exchange-traded and OTC) to attempt to enhance income (which would be taxable
income) and also may attempt to reduce the overall risk of its investments
(hedge) by using options, futures contracts and interest rate protection
transactions.
SPECIAL LEVERAGE CONSIDERATIONS
PREFERRED STOCK
On January 21, 1993, the Fund issued 800 shares of APS Series A and 800
shares of APS Series B having an aggregate liquidation value of $80,000,000. The
net proceeds to the Fund of the sale of the APS, after deduction of underwriting
discounts and offering expenses, was $78,333,671. Although it has no present
intention to do so, the Fund has the right to issue additional APS or other
preferred stock to the maximum extent permitted under the 1940 Act.
The APS has resulted (and any issuance of other preferred stock would
result) in the financial leveraging of the Common Stock. The use of leverage is
a speculative investment technique and involves special risks to the Common
Stockholders. These include the possibility of higher volatility of both the net
asset value and the market value of the Common Stock. Also, fluctuations in the
dividend rate on the APS will affect the dividends on the Common Stock. So long
as the Fund is able to realize a higher net rate of return on its investment
portfolio than the then current dividend rate on the APS (or on any other
preferred stock issued by the Fund) together with other related expenses, the
effect of the leverage will be to cause Common Stockholders to realize higher
current net investment income than if the Fund were not so leveraged. There can
be no assurance, however, that the Fund will be able to realize such a net
return. To the extent that the then current dividend rate on the APS approaches
the net return on the Fund's investment portfolio, the benefit of leverage to
Common Stockholders will be reduced, and if the then current dividend rate on
the APS were to exceed the net return on the Fund's portfolio, the Fund's
leveraged capital structure would result in a lower yield to Common Stockholders
than if the Fund were not so leveraged.
Each Series of APS pays dividends at rates that normally are tax-exempt and
that are adjusted to market based on an auction process. Rates normally are
adjusted every 28 days on APS Series A and every three months on APS Series B.
As of September 30, 1995 the dividend rate payable on APS Series A was 3.664%,
and the dividend rate payable on APS Series B was 3.685%. Based on those
dividend rates, the Fund must experience a net annual return of 1% in order to
cover the annual dividend payments on APS. There can be no assurance that the
Fund will continue to realize a higher
16
<PAGE>
net rate of return on its investment portfolio than the dividend rate that must
be paid on the APS. The following table may assist the investor in understanding
the effects of leverage by illustrating the effect of leverage on return to a
holder of Common Stock. The figures appearing in the table are hypothetical and
actual returns may be greater or less than those appearing in the table.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Return on Portfolio (Net of Expenses).... -10% -5% 0% 5% 10%
Corresponding Return to Common Stockholder....... -16.72% -9.26% -1.80% 5.65% 13.11%
</TABLE>
Any decline in the net asset value of the Fund's investments will be borne
entirely by holders of Common Stock. Accordingly, the effect of leverage in a
declining market would be a greater decrease in the net asset value of the
Common Stock than if the Fund were not leveraged and could adversely affect the
Fund's ability to make dividend payments on its Common Stock. Any such decrease
may be reflected in a greater decline in the market price of the Common Stock.
If the Fund's current investment income were not sufficient to meet dividend
requirements on the APS, it could become necessary for the Fund to liquidate
certain of its investments, thereby reducing net assets and, therefore, the net
asset value of the Common Stock. Such liquidations would cause the Fund to incur
transaction costs and might also cause the Fund to realize gains on securities
held for less than three months. Because under current tax laws less than 30% of
the Fund's gross income may be derived from the sale or other disposition of
stocks or other securities held for less than three months to maintain the
Fund's status as a regulated investment company ("RIC"), such gains would limit
the ability of the Fund to sell other securities held for less than three months
that the Fund might wish to sell in the ordinary course of its portfolio
management and thus might adversely affect the Fund's yield. Moreover, while
dividends on the APS, which are cumulative, are unpaid, no dividends or other
distributions would be permitted to be paid on Common Stock until the Fund
resumed its payments of dividends on the preferred stock as required.
Under the 1940 Act, the value of the Fund's total assets, less all
liabilities and indebtedness not deemed to be senior securities under the 1940
Act, must be at least equal to 200% of the aggregate liquidation value of the
preferred stock (plus any outstanding indebtedness deemed to be senior
securities) at any time that the Fund pays a dividend or makes any other
distribution on Common Stock (other than a distribution payable in Common Stock)
or any time the Fund repurchases Common Stock, in each case after giving effect
to such dividend, distribution or repurchase. This requirement could impair the
ability of the Fund to maintain its qualification as a RIC for federal tax
purposes. To the extent necessary, the Fund intends to purchase or redeem
preferred stock in order to maintain asset coverage at the required 200% level.
In such circumstances, the Fund may have to liquidate portfolio securities in
order to meet redemption requirements. This could have the effect of reducing
the Fund's future net income. Such liquidations would cause the Fund to incur
related transaction costs. In addition, such liquidations might require the Fund
to realize capital gains or losses at a time that it would not otherwise do so
and might limit the ability of the Fund to dispose of other securities that it
might wish to sell in the ordinary course of portfolio management, thereby
adversely affecting the Fund's yield. Such redemptions could also require the
Fund to pay redemption premiums, which would adversely affect the Common
Stockholders.
The APS have received ratings of aaa from Moody's and AAA from S&P. The
rating agencies have established guidelines and other requirements with which
the Fund has agreed to comply for so long as the APS are outstanding and are
rated by Moody's and S&P. The rating agencies' portfolio guidelines establish a
set of tests for portfolio composition and asset coverage that supplement (and
in some cases are more restrictive than) the applicable requirements under the
1940 Act and the Fund's
17
<PAGE>
investment policies. Such guidelines include asset coverage requirements which
are more restrictive than those under the 1940 Act, restrictions on certain
portfolio investments and investment practices, requirements that the Fund
maintain a portion of its assets in short-term high quality fixed-income
securities and certain mandatory redemption requirements. The rating agency
requirements also impose certain minimum issue size, geographic diversification
and other requirements for determining portfolio assets that are eligible for
computing compliance with their asset coverage requirements. The ability of the
Fund to comply with such asset coverage maintenance ratios may be subject to
circumstances which are beyond the control of the Fund, such as market
conditions for its portfolio securities. The terms of the APS prohibit the
payment of dividends or distributions on the Common Stock in the event the Fund
fails to meet such asset coverage maintenance ratios and, in such circumstances,
also provide for mandatory redemption of the APS, with the potential adverse
effects discussed above. For additional information concerning rating agency
guidelines and restrictions, see Appendix B to the SAI.
In accordance with the 1940 Act, the holders of the APS have special voting
rights, including the right to elect at least two directors at all times. See
"Description of Capital Stock -- Auction Preferred Shares -- Voting Rights."
The issuance of the APS has entailed certain costs and expenses, such as
underwriting discounts, fees associated with the registration of the preferred
stock with the SEC, filings under state securities laws, rating agency fees,
legal and accounting fees, printing costs, and will entail certain other ongoing
expenses, such as administrative and accounting fees. These costs and expenses
have been or will be borne by the Fund. The initial costs and expenses of the
APS have been reflected as a reduction in the net asset value of the Common
Stock. Ongoing expenses associated with the APS will be reflected as a reduction
in the investment income that otherwise would be available for distribution to
Common Stockholders.
The Fund does not expect to realize significant taxable income. For federal
tax purposes, however, net realized capital gains and other taxable income, if
any, will be allocated (along with tax-exempt income) between Common
Stockholders and the holders of the APS in proportion to total distributions
paid to each class of stockholders for the year in which such capital gains or
other taxable income is realized or earned. The holders of the APS are entitled
to receive dividends on a cumulative basis before any dividend or other
distribution may be paid to Common Stockholders. Moreover, the terms of the APS
require that, if any portion of a dividend or distribution to the holders of the
APS is taxable, the Fund must pay an additional dividend on the APS in an amount
such that the net after-tax return on the APS will be the same as the net
after-tax return that would have been derived if the initial dividends paid to
the holders of the APS had qualified in their entirety as tax-exempt income. Any
such additional dividends paid to holders of the APS will reduce the net
investment income of the Fund available for distribution to Common Stockholders.
BORROWINGS
The Fund is permitted to borrow money to finance Common Stock repurchases
and tender offers or for investment purposes from banks and other entities or
through reverse repurchase agreements in an amount not in excess of 33 1/3% of
total assets (including the amount of the borrowing and any other senior
securities representing indebtedness issued, but reduced by any liabilities and
indebtedness not constituting senior securities). Borrowing by the Fund would
create leverage and would entail speculative factors similar to those applicable
to the issuance of preferred stock. If borrowings are made on a
18
<PAGE>
secured basis, the custodian will segregate the pledged assets for the benefit
of the lender or arrangements will be made with a suitable subcustodian, which
may include the lender. The Fund has no current intention of borrowing money for
investment purposes during the coming year. See "Description of Capital
Stock -- Common Stock Repurchases and Tender Offers."
SPECIAL CONSIDERATIONS AND RISK FACTORS
The yield on a Municipal Obligation 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 income tax rates. Generally, the longer the maturity of a Municipal
Obligation, the higher the yield and the greater the volatility. The market
value of Municipal Obligations, and accordingly the net asset value of the
Common Stock, normally will vary inversely with changes in interest rates. Such
changes in the values of Municipal Obligations held by the Fund will not affect
the interest income derived from them but will affect the net asset value of
shares of the Common Stock.
Certain Municipal Obligations held by the Fund may permit the issuer to call
or redeem the obligations, in whole or in part, at its option. If an issuer were
to redeem Municipal Obligations held by the Fund during a time of declining
interest rates, the Fund might realize capital gains or losses at a time that it
would not otherwise do so, and the Fund might not be able to reinvest the
proceeds of the redemption in Municipal Obligations providing as high a level of
income as the obligations that were redeemed. The Fund may be able to purchase
detachable call options on Municipal Obligations it holds to protect its
investments from the risk of issuer redemptions. See Appendix A to this
Prospectus.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from regular federal income tax (and also, when
applicable, from the AMT) are rendered by bond counsel to the issuer at the time
of issuance. Neither the Fund nor Mitchell Hutchins will review the proceedings
relating to the issuance of Municipal Obligations or the basis for such
opinions. Federal, state and local laws may be enacted that adversely affect the
tax-exempt status of interest on Municipal Obligations or of the exempt-interest
dividends received by the Fund's stockholders or that impose other constraints
upon enforcement of such obligations. It is also possible 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
Obligations may be materially and adversely affected. The obligations of issuers
of Municipal Obligations are subject to the provisions of bankruptcy, insolvency
and other laws affecting the rights and remedies of creditors. In the event of a
bankruptcy of such an issuer, the Fund could experience delays and limitations
with respect to the collection of principal and interest on such Municipal
Obligations, and in some circumstances, the Fund might not be able to collect
all principal and interest to which it is entitled. To enforce its rights in the
event of a default in the payment of interest or repayment of principal, or
both, the Fund might take possession of and manage the assets or have a receiver
appointed to collect and disburse pledged revenues securing the issuer's
obligations on such securities; any such action might increase the Fund's
operating expenses and might adversely affect the net asset value of the Fund.
The Fund may invest up to 20% of its net assets in Municipal Obligations the
interest on which is subject to the AMT for individual taxpayers. Accordingly,
stockholders who are individuals may be required to include a portion of the
Fund's dividends in calculating their AMT liability. Corporations that hold
Common Stock must include the entire amount of any exempt-interest dividends in
calculating their adjusted current earnings for purposes of the AMT. The Fund
may not be an appropriate
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<PAGE>
investment for investors who are subject to AMT liability or who would become
subject to AMT liability by reason of an investment in the Fund. All or a
portion of the Fund's dividends also may be subject to state and local taxation.
See "Taxes."
Shares of the common stock of closed-end investment companies frequently
trade at a discount to their net asset value, and the Fund's Common Stock has
historically traded at a discount to its net asset value. Accordingly, there is
a risk that, for example, a Common Stockholder who sells shares at a time when
the Common Stock is trading at a discount could incur a loss of capital even if
the Fund's net asset value has not declined since the stockholder purchased his
shares. This market risk is separate and distinct from the risk that the Fund's
net asset value may decrease. Accordingly, the Common Stock is designed
primarily for long-term investors and should not be viewed as a vehicle for
trading purposes.
MANAGEMENT OF THE FUND
Subject to the supervision of the Fund's board of directors, investment
advisory and administration services are provided to the Fund by Mitchell
Hutchins pursuant to an Investment Advisory and Administration Contract dated
October 15, 1992 ("Advisory Contract"). Mitchell Hutchins' principal business
address is 1285 Avenue of the Americas, New York, New York 10019. Mitchell
Hutchins is a wholly owned subsidiary of PaineWebber, which is a wholly owned
subsidiary of Paine Webber Group Inc., a publicly held financial services
holding company. Mitchell Hutchins provides investment advisory and portfolio
management services to investment companies, pension funds and other
institutional, corporate and individual clients. As of December 31, 1995, total
assets under Mitchell Hutchins' management were approximately $ billion. As of
that date, Mitchell Hutchins served as investment adviser or sub-adviser to
registered investment companies with separate portfolios having aggregate
assets of approximately $ billion.
Pursuant to the Advisory Contract, Mitchell Hutchins provides a continuous
investment program for the Fund and makes investment decisions and places orders
to buy, sell or hold particular securities; Mitchell Hutchins also supervises
all matters relating to the operation of the Fund and obtains for it corporate
officers, clerical staff, office space, equipment and services. As compensation
for its services, Mitchell Hutchins is entitled to receive a fee, computed
weekly and paid monthly, in an amount equal to the annual rate of 0.90% of the
Fund's average weekly net assets. This fee is greater than the advisory and
administration fees paid by most funds. Effective June 1, 1995, Mitchell
Hutchins began waiving 0.25% of its investment advisory and administration fees.
Mitchell Hutchins may discontinue this fee waiver at any time.
Gregory W. Serbe, a vice president of the Fund and a managing director of
Mitchell Hutchins has been responsible for the day-to-day management of the
Fund's portfolio since the Fund's inception. Mr. Serbe is the chief investment
officer of Mitchell Hutchins responsible for tax-exempt bonds and tax-exempt
money market investments. Mr. Serbe is the primary portfolio manager for four
municipal bond funds with aggregate assets of over $ million, and he manages
or oversees taxable money market funds and tax-exempt fixed income funds having
aggregate assets of more than $ billion. Mr. Serbe has been with Mitchell
Hutchins since 1983. Other members of Mitchell Hutchins' tax-exempt investments
group provide input on market outlook, interest rate forecasts and other
considerations pertaining to tax-exempt investments.
Mitchell Hutchins investment personnel may engage in securities transactions
for their own accounts pursuant to a code of ethics that establishes procedures
for personal investing and restricts certain transactions.
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<PAGE>
DIVIDENDS AND OTHER DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund declares and pays monthly cash dividends to Common Stockholders at
a rate that, on an annual basis, results in the distribution of all of the
Fund's net investment income remaining after the payment of dividends on any
outstanding preferred stock. The dividend rate is adjusted by the Fund's board
of directors as necessary to reflect the performance of the Fund. Dividend
levels are determined by the Fund's board of directors after giving
consideration to a number of factors, including the Fund's undistributed net
investment income, historical and projected net investment income, expenses and
projected payments to preferred stockholders. The Fund's policy to pay dividends
on the Common Stock on this basis may be changed by its board of directors
without notice to stockholders.
The Fund intends to distribute annually to Common Stockholders substantially
all of its realized net capital gain (the excess of long-term capital gain over
net short-term capital loss) and its realized net short-term capital gain to the
extent that such capital gains are not necessary to satisfy the dividend,
redemption or liquidation preference of any shares of the APS or any other
preferred stock. Substantially all of the Fund's net investment income not
previously distributed for any fiscal year will be distributed to stockholders
after the end of that year.
To enable the Fund to maintain level monthly dividends, the Fund anticipates
that its monthly dividends may from time to time represent less or more than the
entire amount of net investment income earned by the Fund in the period to which
the dividend relates. Undistributed net investment income would be available to
supplement future distributions which might otherwise have been reduced by
reason of a decrease in the Fund's monthly net income due to fluctuations or
expenses or due to an increase in the dividend rate on the Fund's outstanding
preferred stock. As a result, dividends paid by the Fund for any particular
monthly period may be more or less than the amount of net investment income
earned by the Fund during the related period. Undistributed net investment
income will be reflected in the Fund's net asset value, and correspondingly,
distributions from undistributed net investment income will reduce the Fund's
net asset value.
For federal tax purposes, the Fund is required to allocate tax-exempt
income, net realized capital gains and any other taxable income between shares
of Common Stock and shares of any preferred stock in proportion to the total
dividends and other distributions paid to each class for the year in which such
tax-exempt income, net realized capital gains or other taxable income is earned
or realized.
While any shares of the APS are outstanding, the Fund may not declare any
cash dividend or other distribution on the Common Stock unless at the time of
such declaration: (1) all accrued dividends on the APS have been paid; (2) any
required redemptions of the APS have been made; (3) after giving effect to the
dividend or other distribution, the asset coverage requirements imposed by the
rating agencies then rating the APS would be satisfied; and (4) the Fund's total
assets, less all liabilities and indebtedness not deemed to be senior securities
under the 1940 Act (determined after deducting the amount of such dividend or
other distribution), are at least 200% of the liquidation value of the
outstanding preferred stock (plus any outstanding indebtedness deemed to be
senior securities). Under certain circumstances, these limitations could impair
the ability of the Fund to maintain its qualification for treatment as a
regulated investment company. See "Taxes." For further information regarding the
impact of the issuance of the APS on the payment of dividends and other
distributions on the Common Stock, see "Special Leverage Considerations."
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<PAGE>
DIVIDEND REINVESTMENT PLAN
The Fund has established a Plan under which all Common Stockholders whose
shares are registered in their own names, or in the name of PaineWebber (or its
nominee) have all dividends and other distributions on their shares of Common
Stock automatically reinvested in additional shares, unless such Common
Stockholders elect to receive cash. Common Stockholders may affirmatively elect
to receive all dividends and other distributions in cash paid by check mailed
directly to the stockholders by PNC Bank, National Association ("Transfer
Agent"), as dividend disbursing agent. Common Stockholders who elect to hold
their shares in the name of a broker or nominee other than PaineWebber (or its
nominee) should contact such broker or nominee to determine whether, or how,
they may participate in the Plan. The ability of such Common Stockholders to
participate in the Plan may change if their shares of the Common Stock are
transferred into the name of another broker or nominee.
The Transfer Agent serves as agent for the Common Stockholders in
administering the Plan. After the Fund declares a dividend or determines to make
a capital gain distribution, the Transfer Agent, as agent for the participants,
receives the cash payment and uses it to buy shares of Common Stock in the open
market, on the NYSE or otherwise, for the participants' accounts. Such shares
may be purchased at prices that are higher or lower than the net asset value per
share of the Common Stock at the time of purchase. The number of shares of
Common Stock purchased with each dividend will be equal to the result obtained
by dividing the amount of the dividend payable to a particular shareholder by
the average price per share (including applicable brokerage commissions) that
the Transfer Agent was able to obtain in the open market. The Fund will not
issue any new shares of Common Stock in connection with the Plan. The Transfer
Agent will maintain all stockholder accounts in the Plan and furnish written
confirmations of all transactions in the accounts, including information needed
by stockholders for personal and tax records. Shares in the account of each Plan
participant will be held by the Transfer Agent in non-certificated form in the
name of the participant, and each stockholder's proxy will include those shares
of Common Stock purchased pursuant to the Plan.
There is no charge to participants for reinvesting dividends or other
distributions. The Transfer Agent's fees for the handling of reinvestment of
distributions will be paid by the Fund. However, each participant will pay a pro
rata share of brokerage commissions incurred with respect to the Transfer
Agent's open market purchases of Fund shares in connection with the reinvestment
of distributions.
The automatic reinvestment of dividends and other distributions in shares of
Common Stock will not relieve participants of any income tax that may be payable
on such distributions. See "Taxes."
A holder who has elected to participate in the Plan may terminate
participation in the Plan at any time without penalty, and Common Stockholders
who have previously terminated participation in the Plan may rejoin it at any
time. Changes in elections must be made in writing to the Transfer Agent and
should include the stockholder's name and address as they appear on the share
certificate. An election to terminate participation in the Plan, until such
election is changed, will be deemed to be an election by a Common Stockholder to
take all subsequent distributions in cash. An election will be effective only
for distributions declared and having a record date at least ten days after the
date on which the election is received.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan with
respect to any dividend or other distribution if notice of the change is sent to
Plan participants at least 30 days before the record date for such distribution.
The
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<PAGE>
Plan also may be amended or terminated by the Transfer Agent by at least 30
days' written notice to all Plan participants. All correspondence concerning the
Plan should be directed to the Transfer Agent at PNC Bank, National Association,
c/o PFPC Inc., P.O. Box 8950, Wilmington, Delaware 19899.
TAXES
The Fund intends to continue to qualify for treatment as a RIC under the
Internal Revenue Code of 1986. For each taxable year that the Fund so qualifies,
it will be relieved of federal income tax on that part of its investment company
taxable income (consisting generally of taxable net investment income, net
short-term capital gain and net realized gains from certain hedging
transactions) and net capital gain that is distributed to its stockholders.
Distributions by the Fund of the excess of tax-exempt interest income over
certain amounts disallowed as deductions, which the Fund designates as
"exempt-interest dividends," generally may be excluded from gross income by its
Common Stockholders for federal income tax purposes; those distributions may,
however, be taxable for state and local tax purposes. In order to pay
exempt-interest dividends, the Fund must (and 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 obligations the interest on
which is tax-exempt.
If the Fund invests in any instruments that generate taxable income, under
the circumstances described in "Other Investment Practices -- Short-Term
Tax-Exempt and Taxable Investments," distributions of the interest earned
thereon will be taxable to the Fund's stockholders as ordinary income to the
extent of its earnings and profits. Moreover, if the Fund realizes capital gains
as a result of market transactions, distributions of those gains also will be
taxable to stockholders.
Interest on indebtedness incurred or continued by a stockholder to purchase
or carry shares of Common Stock is not deductible to the extent that interest
relates to exempt-interest dividends received from the Fund. If the Fund invests
in certain private activity bonds ("PABs"), the portion of the Fund's
exempt-interest dividends that is attributable to the interest it earns thereon
and that is specified in an annual notice from the Fund must be included by its
stockholders in calculating their liability for the AMT. Corporate stockholders,
however, must include all of their exempt-interest dividends in calculating
their adjusted current earnings for purposes of the AMT.
The Fund notifies its stockholders following the end of each calendar year
of the amounts of exempt-interest dividends, taxable dividends and capital gain
distributions paid (or deemed paid) that year and of any portion thereof that is
subject to the AMT for individuals. Dividends and other distributions declared
by the Fund in October, November or December of any year and payable to
stockholders of record on a date in any of those months will be deemed to have
been paid by the Fund and received by the stockholders on December 31 of that
year if the distributions are paid by the Fund during the following January.
Accordingly, those distributions will be reported by stockholders for the year
in which that December 31 falls.
Upon a sale or exchange of shares of Common Stock, including a sale pursuant
to a share repurchase or tender offer by the Fund, a Common Stockholder
generally will recognize a taxable gain or loss (equal to the difference between
his adjusted basis for the shares and the amount realized), which will be
treated as a capital gain or loss if the shares are capital assets in the
stockholder's hands and will
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<PAGE>
be a long-term capital gain or loss if the shares have been held for more than
one year. Notwithstanding this general rule, however, any loss realized on a
sale or exchange of shares of Common Stock (1) will be disallowed to the extent
of any exempt-interest dividends received on those shares; (2) will be treated
as a long-term, rather than as a short-term, capital loss to the extent of any
capital gain distributions received thereon, if the shares were held for six
months or less; and (3) will be disallowed to the extent those shares are
replaced by other shares of Common Stock within a period of 61 days beginning 30
days before and ending 30 days after the date of disposition of the shares
(which could occur, for example, as the result of participation in the Dividend
Reinvestment Plan), in which event the replacement shares' basis will be
adjusted to reflect the disallowed loss.
Investors should also be aware that if shares of the Common Stock are
purchased shortly before the record date for any distribution, the investor will
pay full price for the shares and could receive some portion of the price back
as an exempt-interest dividend, a taxable dividend or capital gain distribution.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting the Fund and its Common Stockholders; see the
SAI for a further discussion. There may be other federal, state or local tax
considerations applicable to a particular investor. Prospective stockholders are
therefore urged to consult their tax advisers.
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 200 million shares of capital stock, $.001
par value. Currently, 800 shares of capital stock are classified as APS Series A
and 800 shares of capital stock are classified as APS Series B. All remaining
shares of capital stock are classified as Common Stock. The following
description is subject to the provisions contained in the Fund's Articles of
Incorporation and Bylaws.
COMMON STOCK
Shares of the Common Stock have no preemptive, conversion, exchange or
redemption rights. Each share has equal voting, dividend, distribution and
liquidation rights. The outstanding shares of Common Stock are fully paid and
nonassessable. Except as otherwise indicated in this Prospectus and except as
otherwise required by applicable law, holders of shares of the APS have equal
voting rights with holders of shares of Common Stock (one vote per share) and
will vote together with holders of Common Stock as a single class. All voting
rights for the election of directors are noncumulative, which means that the
holders of more than 50% of the shares can elect 100% of the directors then
nominated for election if they choose to do so and, in such event, the holders
of the remaining shares will not be able to elect any directors. However, the
holders of the APS, voting as a class, can elect two directors. The rights of
the holders of the Common Stock to elect directors and to vote on other matters
are subject to the voting rights of the APS, as discussed below under
"Description of Capital Stock -- Auction Preferred Shares."
Under the rules of the NYSE applicable to listed companies, the Fund is
required to hold an annual meeting of stockholders in each year. If the Fund is
converted to an open-end investment company or if for any other reason the
Fund's shares are no longer listed on the NYSE (or any other national securities
exchange the rules of which require annual meetings of stockholders), the Fund
may decide not to hold annual meetings of stockholders. See "Description of
Capital Stock -- Common Stock
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<PAGE>
Repurchases and Tender Offers; Description of Capital Stock -- Conversion to
Open-End Investment Company."
Any additional offerings of the Common Stock, if made, will require approval
of the Fund's board of directors and will be subject to the requirement of the
1940 Act that shares may not be sold at a price below the then current net asset
value, exclusive of underwriting discounts and commissions, except, among other
things, in connection with an offering to existing stockholders or with the
consent of a majority of the holders of the Fund's outstanding voting
securities.
The following chart indicates the Fund's preferred and common shares
outstanding as of November 17, 1995.
<TABLE><CAPTION>
AMOUNT OUTSTANDING
AMOUNT HELD BY EXCLUSIVE OF AMOUNT HELD
REGISTRANT OR FOR ITS BY REGISTRANT OR FOR ITS
TITLE OF CLASS AMOUNT AUTHORIZED ACCOUNT ACCOUNT
- ------------------------------------ ----------------- --------------------- ------------------------
<S> <C> <C> <C>
Common Stock........................ 199,998,400 -- --
APS Series A........................ 800 -- 800
APS Series B........................ 800 -- 800
</TABLE>
AUCTION PREFERRED SHARES
General. Holders of the APS are entitled to receive cumulative cash
dividends at an adjustable rate determined through an auction process. See
"Special Leverage Considerations -- Preferred Stock." All outstanding shares of
APS are fully paid and non-assessable, have no pre-emptive or conversion rights
and are not subject to any sinking fund provisions. As long as the APS are
outstanding, the composition of the Fund's investment portfolio will reflect
guidelines established by the rating agencies rating the APS. See "Investment
Policies and Restrictions -- APS Rating Agency Guidelines" in the SAI and
"Appendix B" to the SAI.
Liquidation Preference. Upon a liquidation of the Fund, whether voluntary or
involuntary, the holders of the APS then outstanding will be entitled to receive
and to be paid out of the assets of the Fund available for distribution to its
stockholders, before any payment or distribution shall be made on the Common
Stock or on any other class of stock of the Fund ranking junior to the APS upon
liquidation, an amount equal to the liquidation preference with respect to the
APS. The liquidation preference for the APS is $50,000 per share, plus an amount
equal to all dividends thereon (whether or not earned or declared) accumulated
but unpaid to the date of final distribution. After the payment to the holders
of the APS of the full preferential amounts, the holders of APS as such shall
have no right or claim to any of the remaining assets of the Fund. Neither the
sale of all or substantially all the property or business of the Fund, nor the
merger or consolidation of the Fund into or with any other corporation nor the
merger or consolidation of any other corporation into or with the Fund shall be
a liquidation, whether voluntary or involuntary, for the purposes of this
paragraph.
Voting Rights. Holders of the APS generally will have equal voting rights
with holders of Common Stock (one vote per share) and generally will vote
together with holders of Common Stock as a single class. However, in connection
with the election of the Fund's directors, holders of outstanding shares of
preferred stock, including any APS, voting as a separate class, are entitled to
elect two of the Fund's directors; the remaining directors are elected by Common
Stockholders and preferred stockholders,
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<PAGE>
including any APS, voting as a single class. In addition, if at any time
dividends (whether or not earned or declared) on any outstanding preferred
stock, including the APS, shall be due and unpaid in an amount equal to two full
years' dividends thereon, then the holders of the preferred stock, including any
outstanding APS, voting as a separate class, will be entitled to elect a
majority of the total number of directors of the Fund so long as such dividends
remain unpaid.
So long as any of the APS are outstanding, the Fund will not, without the
affirmative vote of a majority of the outstanding APS, determined with reference
to a "majority of outstanding voting securities" as that term is defined in
Section 2(a)(42) of the 1940 Act (voting separately as one class): (a)
authorize, create or issue any class or series of stock ranking prior to or on a
parity with the APS with respect to the payment of dividends or the distribution
of assets upon liquidation or increase the authorized amount of APS (except that
the Fund may, without the vote of the holders of APS, authorize, create or issue
classes or series of preferred stock ranking on a parity with the APS with
respect to the payment of dividends and the distribution of assets upon
liquidation subject to continuing compliance by the Fund with the asset coverage
requirement of the 1940 Act and APS basic maintenance amount requirements
established by Moody's or S&P; provided that the Fund obtains written
confirmation from Moody's (if Moody's is then rating the APS) and S&P (if S&P is
then rating the APS) that the issuance of any such additional class or series of
preferred stock would not impair the rating then assigned by such rating agency
to the APS), (b) amend, alter or repeal the Fund's Articles of Incorporation
insofar as they relate to the APS ("APS Provisions"), whether by merger,
consolidation or otherwise, so as to affect any preference, right or power of
such APS or the holders thereof; provided that (i) none of the actions permitted
by the exception to (a) above will be deemed to affect such preferences, rights
or powers and (ii) the authorization, creation and issuance of classes or series
of stock ranking junior to the APS with respect to payment of dividends and the
distribution of assets upon liquidation will be deemed to affect such
preferences, rights or powers only if Moody's or S&P is then rating the Fund and
such issuance would, at the time thereof, cause the Fund not to satisfy the
assets coverage or APS basic maintenance amounts referred to above, or (c) file
a voluntary application for relief under federal bankruptcy law or any similar
application under state law for so long as the Fund is solvent and does not
foresee becoming insolvent.
The Fund's board of directors may, however, without approval of the holders
of APS, amend, alter or repeal any or all of the definitions required to be
contained in the APS Provisions by the rating agencies in the event the Fund
receives written confirmation from the appropriate rating agency that any such
amendment, alteration or repeal would not impair the ratings then assigned to
the APS by such rating agency. Unless a higher percentage is provided for under
"Description of Capital Stock -- Certain Anti-Takeover Provisions of the
Articles of Incorporation," the affirmative vote of the holders of a majority of
the outstanding APS, voting as a separate class, will be required to approve any
plan of reorganization (as such term is defined under the 1940 Act) adversely
affecting such shares or any action requiring a vote of security holders under
Section 13(a) of the 1940 Act including, among other things, changes in the
Fund's investment objective or changes in the investment restrictions described
as fundamental policies under "Investment Limitations" in the SAI. The class
vote of holders of APS described above will in each case be in addition to a
separate vote of the requisite percentage of shares of Common Stock necessary to
authorize the action in question. To the extent permitted by the 1940 Act, each
series of APS may vote as a separate series in certain circumstances.
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<PAGE>
The foregoing voting provisions will not apply with respect to APS if, at or
prior to the time when a vote is required, such APS shall have been (i) redeemed
or (ii) called for redemption and sufficient funds shall have been deposited in
trust to effect such redemption.
Redemption, Purchase and Sale of Preferred Stock by the Fund. The APS are
redeemable by the Fund in whole or in part at the original purchase price per
share plus accrued dividends per share and any applicable redemption premium.
Any redemption or purchase of shares of preferred stock by the Fund will reduce
the leverage applicable to shares of Common Stock, while any resale of shares by
the Fund will increase such leverage. See "Special Leverage Considerations."
The board of directors, without the approval of the holders of Common Stock,
may authorize an additional offering of preferred stock and may fix the terms of
the preferred stock to be offered.
COMMON STOCK REPURCHASES AND TENDER OFFERS
In recognition of the possibility that the Common Stock might trade at a
discount to net asset value and that any such discount may not be in the best
interest of Common Stockholders, the Fund's board of directors has determined
that it will from time to time consider taking action to attempt to reduce or
eliminate any discount. To that end, the board may, in consultation with
Mitchell Hutchins, from time to time consider action either to repurchase shares
of the Common Stock in the open market or to make a tender offer for shares of
the Common Stock at their net asset value. The board currently intends at least
annually to consider making such open market repurchases or tender offers and at
such time may consider such factors as the market price of the Common Stock, the
net asset value of the Common Stock, the liquidity of the assets of the Fund,
whether such transactions would impair the Fund's status as a RIC or result in a
failure to comply with applicable asset coverage requirements, general economic
conditions and such other events or conditions that may have material effect on
the Fund's ability to consummate such transactions. The board may at any time,
however, decide that the Fund should not repurchase shares or make a tender
offer. Common Stock will not be repurchased unless after such repurchase the
Fund would continue to satisfy the asset coverage requirements imposed under the
1940 Act with respect to the APS and asset coverage requirements imposed by any
rating agency as a condition of its rating of the APS. The Fund may borrow to
finance repurchases and tender offers. Interest on any such borrowings will
reduce the Fund's net income. See "Special Leverage
Considerations -- Borrowings."
There is no assurance that repurchases or tender offers will result in the
Common Stock trading at a price that is equal or close to its net asset value
per share. Although the board of directors believes that share repurchases and
tender offers generally would have a favorable effect on the market price of the
Common Stock, it should be recognized that the Fund's acquisition of shares of
the Common Stock would decrease the Fund's total assets and therefore have the
effect of increasing the Fund's expense ratio and decreasing the asset coverage
with respect to any outstanding APS. Because of the nature of the Fund's
investment objective, policies and portfolio, under current market conditions
Mitchell Hutchins anticipates that repurchases and tender offers generally
should not have a material, adverse effect on the Fund's investment performance
and that Mitchell Hutchins generally should not have any material difficulty in
disposing of portfolio securities in order to consummate share repurchases and
tender offers; however, this may not always be the case.
27
<PAGE>
Any tender offer made by the Fund for shares of the Common Stock generally
would be at a price equal to the net asset value of the shares on a date
subsequent to the Fund's receipt of all tenders. Each offer would be made, and
the Common Stockholders would be notified, in accordance with the requirements
of the Securities Exchange Act of 1934 and the 1940 Act, either by publication
or mailing or both. Each person tendering shares would pay to the Fund's
transfer agent a service charge to help defray certain costs, including the
processing of tender forms, effecting payment, postage and handling. The Fund
expects that the costs of effecting a tender offer would exceed the aggregate of
all service charges received from those who tender their shares. Costs
associated with the tender would be charged against capital.
Tendered shares of Common Stock that have been accepted and purchased by the
Fund will be held in the Fund's treasury until retired by the board. If tendered
shares are not retired, the Fund may hold, sell or otherwise dispose of the
shares for any lawful corporate purpose as determined by the board of directors.
CONVERSION TO OPEN-END INVESTMENT COMPANY
The Fund's board of directors will consider from time to time whether it
would be in the best interests of the Fund and its Common Stockholders to
convert the Fund to an open-end investment company. If the board of directors
determines that such a conversion would be in the best interests of the Fund and
its Common Stockholders and is consistent with the 1940 Act, the board will
submit to the Fund's stockholders, at the next succeeding annual or special
meeting, a proposal to amend the Fund's Articles of Incorporation to so convert
the Fund. Such amendment would provide that, upon its adoption by the holders of
at least a majority of the Fund's outstanding shares entitled to vote thereon,
the Fund will convert from a closed-end to an open-end investment company. If
the Fund converted to an open-end investment company, it would be able to
continuously issue and offer for sale shares of the Common Stock, and each such
share would be redeemable at the option of the holder thereof at a price based
on the then current net asset value per share. In such event, the Fund could be
required to liquidate portfolio securities to meet requests for redemption, the
Common Stock would no longer be listed on the NYSE and certain investment
policies of the Fund would require amendment. In addition, conversion to an
open-end investment company would require that the Fund redeem any outstanding
shares of APS. See "Special Leverage Considerations."
In considering whether to propose that the Fund convert to an open-end
investment company, the board of directors will consider various factors,
including, without limitation, the potential benefits and detriments to the Fund
and its stockholders of conversion, the potential alternatives and the benefits
and detriments associated therewith, and the feasibility of conversion given,
among other things, the Fund's investment objective and policies. In the event
of a conversion to an open-end investment company, the Fund may charge fees in
connection with the sale or redemption of its shares. As an open-end investment
company, the Fund may reserve 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. If payment is made in securities, a shareholder may incur brokerage
expenses in converting these securities into cash.
28
<PAGE>
CERTAIN ANTI-TAKEOVER PROVISIONS OF THE ARTICLES OF INCORPORATION
The Fund presently has provisions in its Articles of Incorporation that have
the effect of limiting: (1) the ability of other entities or persons to acquire
control of the Fund; (2) the Fund's freedom to engage in certain transactions;
or (3) the ability of the Fund's directors or stockholders to amend the Articles
of Incorporation. These provisions of the Articles of Incorporation may be
regarded as "anti-takeover" provisions. Under Maryland law and the Fund's
Articles of Incorporation, the affirmative vote of the holders of at least a
majority of the votes entitled to be cast is required for the consolidation of
the Fund with another corporation, a merger of the Fund with or into another
corporation (except for certain mergers in which the Fund is the successor), a
statutory share exchange in which the Fund is not the successor, a sale or
transfer of all or substantially all of the Fund's assets, the dissolution of
the Fund and any amendment to the Fund's Articles of Incorporation. In addition,
the affirmative vote of the holders of at least 66 2/3% (which is higher than
that required under Maryland law or the 1940 Act) of the outstanding shares of
the Fund's capital stock is required generally to authorize any of the following
transactions or to amend the provisions of the Articles of Incorporation
relating to such transactions:
(1) merger, consolidation or statutory share exchange of the Fund with or
into any other corporation;
(2) issuance of any securities of the Fund to any person or entity for cash;
(3) sale, lease or exchange of all or any substantial part of the assets of
the Fund to any entity or person (except assets having an aggregate
market value of less than $1,000,000); or
(4) sale, lease or exchange to the Fund, in exchange for securities of the
Fund, of any assets of any entity or person (except assets having an
aggregate fair market value of less than $1,000,000)
if such corporation, person or entity is directly, or indirectly through
affiliates, the beneficial owner of more than 5% of the outstanding shares of
the Fund (a "Principal Shareholder"). A similar vote also would be required for
any amendment of the Articles of Incorporation to convert the Fund to an open-
end investment company by making any class of the Fund's capital stock a
"redeemable security," as that term is defined in the 1940 Act. Such vote would
not be required with respect to any of the foregoing transactions, however,
when, under certain conditions, the board of directors approves the transaction,
although in certain cases involving merger, consolidation or statutory share
exchange or sale of all or substantially all of the Fund's assets or the
conversion of the Fund to an open-end investment company, the affirmative vote
of the holders of a majority of the outstanding shares of the Fund's capital
stock would nevertheless be required. Reference is made to the Articles of
Incorporation of the Fund, on file with the SEC, for the full text of these
provisions. These voting rights are in addition to the rights of the holders of
any outstanding APS to vote as a single class on certain matters. See
"Description of Capital Stock -- Auction Preferred Shares."
The provisions of the Articles of Incorporation described above and the
Fund's right to repurchase or make a tender offer for its shares could have the
effect of depriving the Common Stockholders of opportunities to sell their
shares at a premium over prevailing market prices by discouraging a third party
from seeking to obtain control of the Fund in a tender offer or similar
transaction. See "Description of Capital Stock -- Common Stock Repurchases and
Tender Offers" and "Description of Capital Stock -- Conversion to Open-End
Investment Company." The overall effect of these provisions is to render more
difficult the accomplishment of a merger or the assumption of control by a
Principal
29
<PAGE>
Shareholder. They provide, however, the advantage of potentially requiring
persons seeking control of the Fund to negotiate with its management regarding
the price to be paid and facilitating the continuity of the Fund's management,
investment objective and policies. The board of directors of the Fund has
considered the foregoing anti-takeover provisions and concluded that they are in
the best interests of the Fund and its stockholders.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT AND REGISTRAR
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as custodian of the Fund's assets. PNC Bank,
National Association, whose principal business address is Broad and Chestnut
Streets, Philadelphia, Pennsylvania 19110, serves as transfer and dividend
disbursing agent and as registrar with respect to the Common Stock. Bankers
Trust Company, Four Albany Street, New York, New York 10006, serves as the
Auction Agent with respect to the APS and acts as transfer agent, registrar,
dividend disbursing agent and agent for certain notifications for the Fund in
connection with the APS.
FURTHER INFORMATION
Further information concerning these securities and the Fund may be found in
the Registration Statement, of which this Prospectus and the Fund's SAI
constitute a part, on file with the SEC.
30
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TABLE OF CONTENTS OF
STATEMENT OF ADDITIONAL INFORMATION
The Table of Contents for the SAI is as follows:
PAGE
----
Investment Policies and Restrictions................................ 1
Hedging and Related Income Strategies............................... 7
Directors and Officers.............................................. 15
Control Persons and Principal Holders of Securities................. 20
Investment Advisory Arrangements.................................... 21
Portfolio Transactions.............................................. 22
Valuation of Common Stock........................................... 23
Taxes............................................................... 24
Additional Information.............................................. 26
Financial Statements................................................ 27
Appendix A.......................................................... A-1
Appendix B.......................................................... B-1
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APPENDIX A
TYPES OF MUNICIPAL OBLIGATIONS
The Fund may invest in the following types of Municipal Obligations and in
such other types of Municipal Obligations as are described in the SAI or as
become available on the market from time to time.
MUNICIPAL BONDS
Municipal bonds are debt obligations issued to obtain funds for various
public purposes. 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 from another specific
source, such as the user of the facility being financed. Certain municipal bonds
are "moral obligation" issues, which normally are issued by special purpose
public 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.
INDUSTRIAL DEVELOPMENT BONDS AND PRIVATE ACTIVITY BONDS
Industrial development bonds ("IDBs") and private activity bonds ("PABs")
are municipal bonds issued by or on behalf of public authorities to finance
various privately operated facilities, such as airports or pollution control
facilities. IDBs and PABs are generally revenue bonds and thus are not payable
from the unrestricted revenue 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. The Fund may invest more than 25% of its assets in IDBs and
PABs.
IDBs issued after August 15, 1986 generally are considered PABs, and to the
extent the Fund invests in such PABs, stockholders generally will be required to
include a portion of their exempt-interest dividends in calculating their
liability for the AMT. See "Taxes."
MUNICIPAL LEASE OBLIGATIONS
Municipal lease obligations are Municipal Obligations that may take the form
of leases, installment purchase contracts or conditional sales contracts, or
certificates of participation with respect to such contracts or leases.
Municipal lease obligations are issued by state and local governments and
authorities to purchase land or various types of equipment and facilities.
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 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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The liquidity of municipal lease obligations varies. See "Other Investment
Practices." 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. In the case of a "non-appropriation" lease, the
Fund's ability to recover under the lease in the event of non-appropriation or
default will be limited solely to the repossession of the leased property,
without recourse to the general credit of the lessee, and disposition of the
property in the event of foreclosure might prove difficult. The Fund does not
intend to invest a significant portion of its assets in such "non-appropriation"
municipal lease obligations. There is no limitation on the Fund's ability to
invest in other municipal lease obligations.
ZERO COUPON OBLIGATIONS
The Fund may invest up to 10% of its total assets in zero coupon Municipal
Obligations. Such obligations include "pure zero" obligations, which pay no
interest for their entire life (either because they bear no stated rate of
interest or because their stated rate of interest is not payable until
maturity), and "zero/fixed" obligations, which pay no interest for an initial
period and thereafter pay interest currently. Zero coupon obligations also
include securities representing the principal-only components of Municipal
Obligations from which the interest components have been stripped and sold
separately by the holders of the underlying Municipal Obligations. Zero coupon
securities usually trade at a deep discount from their face or par value and
will be subject to greater fluctuations in market value in response to changing
interest rates than obligations of comparable maturities that make current
distributions of interest. While zero coupon Municipal Obligations will not
contribute to the cash available to the Fund for purposes of paying dividends to
stockholders, Mitchell Hutchins believes that limited investments in such
securities may facilitate the Fund's ability to preserve capital while
generating income through the accrual of original issue discount. Zero coupon
Municipal Obligations will not be counted as income-producing securities for
purposes of the Fund's policy of normally investing at least 65% of its total
assets in income-producing securities. Zero coupon Municipal Obligations
generally are liquid, although such liquidity may be reduced from time to time
due to interest rate volatility and other factors.
Federal tax law requires the Fund to distribute at least 90% of its
tax-exempt income, plus its investment company taxable income, including
non-cash income, each year in order to qualify for pass-through federal income
tax treatment as a regulated investment company. Accordingly, although the Fund
will receive no payments on its zero coupon Municipal Obligations prior to their
maturity or disposition, it will have income attributable to such securities,
and it might be required, in order to maintain its desired tax treatment, to
include in its dividends the income attributable to its zero coupon securities.
The Fund might be required to liquidate portfolio securities at a time that it
otherwise would not have done so in order to make such dividends. The Fund will
not be able to purchase additional income-producing securities with cash used to
make such distributions, and as a result, its current income ultimately may be
reduced. See "Taxes" and "Other Investment Practices" in this Prospectus and
"Taxes" in the SAI.
FLOATING AND VARIABLE RATE OBLIGATIONS
The Fund also may purchase floating and variable rate municipal notes and
bonds, which frequently permit the holder to demand payment of principal at any
time, or at specified intervals, and
A-2
<PAGE>
permit the issuer to prepay principal, plus accrued interest, at its discretion
after a specified notice period. The issuer's obligations under the demand
feature of such notes and bonds generally are secured by bank letters of credit
or other credit support arrangements. There may be no secondary market for
variable and floating rate obligations held by the Fund, although the Fund may
be able to obtain payment of principal at face value by exercising the demand
feature of the obligation.
MUNICIPAL DERIVATIVES
The Fund may invest in derivative securities that are Municipal Obligations,
or components thereof, that have been specially structured to reflect investment
characteristics ordinarily associated with other securities or to have other
special rights desired by investors. Generally, such securities are designed to
allow investors to take advantage of expected interest rate trends or to hedge
interest rate or other risks. The Fund does not expect to invest more than 5% of
its net assets in any particular form of municipal derivative during the coming
year other than detachable call options and Municipal Obligations with embedded
caps. Detachable call options are sold by issuers of Municipal Obligations
separately from the Municipal Obligations to which the call options relate and
permit the purchasers of the call options to acquire the Municipal Obligations
at the call price(s) and call date(s). In the event that interest rates drop,
the purchaser could exercise the call option to acquire Municipal Obligations
that yield above- market rates. The Fund expects during the coming year only to
acquire detachable call options relating to Municipal Obligations that the Fund
already owns or will acquire in the immediate future and thereby, in effect,
make such Municipal Obligations non-callable so long as the Fund continues to
hold the detachable call option. Municipal Obligations with embedded caps
provide for additional tax-free payments for a stated period (generally a period
that is shorter than the bond's maturity) above the fixed rate of interest
payable on the Municipal Obligations to the extent that the average level of a
particular index exceeds a specified base level. As long as the APS are
outstanding, the Fund would use Municipal Obligations with embedded caps in
order to attempt to offset the risk of increases in short-term interest rates
while continuing to earn tax-exempt income. Investments in municipal derivatives
may be subject to the same risks as floating rate Municipal Obligations, risks
of adverse tax determinations or, in the case of municipal derivatives used for
hedging purposes, risks similar to those for other hedging strategies. See
"Hedging and Related Income Strategies" in the SAI. The Fund will only invest in
those municipal derivatives that Mitchell Hutchins believes will facilitate the
Fund's ability to achieve its investment objective.
OTHER MUNICIPAL OBLIGATIONS
The Fund also may invest in participations that are issued by banks or other
financial institutions and that represent ownership interests in municipal
bonds, IDBs or PABs, custodial receipts representing ownership interests in
future interest or principal payments on such obligations, inverse floaters, put
bonds and tender option bonds. The Fund currently does not intend to invest more
than 5% of its net assets in any one of these types of Municipal Obligations
during the coming year. The following categories of instruments will not be
treated as satisfying the 80% test (in the Fund's policy of normally investing
at least 80% of its net assets in Municipal Obligations that pay interest that
is exempt from the AMT): participation interests, custodial receipts, inverse
floaters and municipal derivatives that are issued by a third party or anyone
other than a municipality.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS
NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE BY THIS INVESTMENT GRADE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH MUNICIPAL INCOME FUND INC.
INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
FUND OR PAINEWEBBER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE FUND OR BY
PAINEWEBBER IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
-------------- COMMON STOCK
TABLE OF CONTENTS
PAGE
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---------------------
Fund Expenses......................... 2
Prospectus Summary.................... 3 P R O S P E C T U S
Financial Highlights.................. 9
The Fund.............................. 11 ---------------------
The Offering.......................... 11
Use Of Proceeds....................... 11
Trading History....................... 12
Investment Objective And Policies..... 12
Other Investment Practices............ 14
Special Leverage Considerations....... 16
Special Considerations and PAINEWEBBER INCORPORATED
Risk Factors........................ 19
Management of the Fund................ 20
Dividends and Other Distributions;
Dividend Reinvestment Plan............ 21
Taxes................................. 23
Description of Capital Stock.......... 24 --------------------
Custodian, Transfer And Dividend
Disbursing Agent and Registrar........ 30
Further Information................... 30
Table of Contents of Statement of February 1, 1996
Additional Information.............. 31
Appendix A--Types Of Municipal
Obligations........................... A-1
(C)1996 PaineWebber Incorporated
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<PAGE>
INVESTMENT GRADE MUNICIPAL
INCOME FUND INC.
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
Investment Grade Municipal Income Fund Inc. ("Fund") is a diversified
closed-end management investment company. The Fund's investment objective is to
achieve a high level of current income that is exempt from federal income tax,
consistent with the preservation of capital. There is no assurance that the Fund
will achieve its investment objective.
Prior to , 1996, the name of the Fund was "Paine Webber Premier
Tax-Free Income Fund Inc." The Fund began doing business under the name
"Investment Grade Municipal Income Fund" in August 1995 and the shareholders of
the Fund approved a formal change of the Fund's name to Investment Grade
Municipal Fund Inc. on , 1996.
Shares of the Fund's common stock ("Common Stock") may be offered from time
to time in order to effect secondary market sales over-the-counter ("OTC") by
PaineWebber Incorporated ("PaineWebber") in its capacity as a dealer and
secondary market-maker. PaineWebber may (but is not obligated to) make such a
secondary market.
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly
owned subsidiary of PaineWebber, serves as investment adviser and administrator
of the Fund. This Statement of Additional Information ("SAI") is not a
prospectus and should be read only in conjunction with the Fund's current
Prospectus, dated February 1, 1996. Capitalized terms not otherwise defined
herein have the same meanings as in the Prospectus. Certain terms relating to
the Fund's auction preferred shares ("APS") are defined in the Fund's Articles
Supplementary, which are on file with the U.S. Securities and Exchange
Commission ("SEC"), Washington, D.C., as an exhibit to the registration
statement of which this SAI forms a part and may be obtained from the SEC upon
payment of the fee prescribed or inspected at the SEC's office at no charge. A
copy of the Prospectus may be obtained by contacting PaineWebber at 1285 Avenue
of the Americas, New York, New York 10019, or calling toll free 1-800-852-4750.
This SAI is dated February 1, 1996.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Fund's investment policies and limitations.
APS RATING AGENCY GUIDELINES
The Fund intends that, so long as the APS are outstanding, the composition
of its portfolio will reflect guidelines established by Moody's Investors
Service, Inc. ("Moody's") and Standard & Poor's ("S&P") in connection with their
respective ratings of the APS. See Appendix B.
<PAGE>
MUNICIPAL OBLIGATIONS
Under normal circumstances, the Fund does not invest 25% or more of its
total assets in any one industry. Governmental issuers of Municipal Obligations
are not considered part of any industry and, therefore, are not subject to this
limitation. Municipal Obligations backed only by the assets and revenues of
non-governmental entities, however, are considered to be issued by such
non-governmental entities and would be subject to this limitation. The Fund
reserves the right to invest more than 25% of its assets in industrial
development bonds or in issuers located in the same state, although it has no
present intention to invest more than 25% of its assets in issuers located in
the same state. If the Fund were to invest more than 25% of its total assets in
issuers located in the same state, it would be more susceptible to adverse
economic, business or regulatory conditions in that state.
The Fund is authorized to invest in the following types of Municipal
Obligations but does not currently intend to invest more than 5% of its net
assets in any one such type of Municipal Obligation during the coming year:
Participation Interests. The Fund may invest in participation interests in
municipal bonds, including industrial development bonds ("IDBs"), private
activity bonds ("PABs") and floating and variable rate securities. A
participation interest gives the 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 is generally 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, the Fund intends to
exercise the demand under the letters of credit or other guarantees only upon a
default under the terms of the underlying bond, or to maintain the Fund's
portfolio in accordance with its investment objective and policies. 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 the Fund, and the credit standing of banks
issuing letters of credit or guarantees supporting such participation interests
held by the Fund on the basis of published financial information reports of
rating services and bank analytical services.
Custodial Receipts. The Fund may acquire custodial receipts or certificates
underwritten by securities dealers or banks that evidence ownership of future
interest payments, principal payments or both on certain Municipal Obligations.
The underwriter of these certificates or receipts typically purchases Municipal
Obligations and deposits the obligations in an irrevocable trust or custodial
account with a custodial bank, which then issues receipts or certificates that
evidence ownership of the periodic unmatured coupon payments and the final
principal payment on the obligations. Custodial receipts evidencing specific
coupon or principal payments have the same economic attributes as zero coupon
Municipal Obligations described herein. Although under the terms of a custodial
receipt the Fund would be typically authorized to assert its rights directly
against the issuer of the underlying obligation, the Fund could be required to
assert through the custodian bank those rights that may exist against the
underlying issuer. Thus, in the event the underlying issuer fails to pay
principal or interest when due, the Fund may be subject to delays, expenses and
risks that are greater than those that would have been involved if the Fund had
purchased a direct obligation of the issuer. In addition, in the event that the
trust or custodial account in which the underlying security has been deposited
is determined to
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<PAGE>
be an association taxable as a corporation, instead of a non-taxable entity, the
yield on the underlying security would be reduced in recognition of any taxes
paid.
Inverse Floaters. The 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 rate that is set periodically through an auction process or other
method, and a residual component, 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 the interest rate paid to holders of residual components is
generally determined by subtracting the interest rate paid to the holders of
auction components from a fixed amount, the interest rate paid or residual
component holders will decrease as the auction component's rate increases and
increase as the auction component's rate decreases. Moreover, the extent of the
increases and decreases in market value of residual components 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.
Put Bonds. Put bonds are municipal bonds which give the holder an
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. If the put is a "one time only" put, the Fund
ordinarily will sell the bond or put the bond, depending on 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 Mitchell Hutchins' opinion, it is in the best interests of
the Fund to do so. The obligation to purchase the bond on the exercise date of
the put may be supported by a letter of credit or other credit support agreement
from a bank, insurance company or other financial institution, the credit
standing of which affects the credit standing of the obligation. There is no
assurance that an issuer or remarketing agent for a put bond will be able to
repurchase the bond on the put exercise date if the Fund chooses to exercise its
right to put the bond back to the issuer or remarketing agent.
Tender Option Bonds. Tender option bonds are long-term municipal securities
sold by a bank subject to a "tender option" that gives the purchaser the right
to tender them to the bank at par plus accrued interest at designated times (the
"tender option"). The tender option may be exercisable at intervals ranging from
bi-weekly to semi-annually, and the interest rate on the bonds is typically
reset at the end of the applicable interval in order 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.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
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
3
<PAGE>
affect the Fund's net asset value. When the Fund commits to purchase securities
on a when-issued or delayed delivery basis, its custodian will set aside in a
segregated account cash, U.S. government securities or other liquid, high-grade
debt securities with a market value equal to the amount of the commitment. If
necessary, additional assets will be placed in the account daily so that the
value of the account will equal or exceed the amount of the Fund's purchase
commitment. Placing securities rather than cash in the segregated account may
have a leveraging effect on the Fund's net asset value per share; that is, to
the extent that the Fund remains substantially fully invested in securities at
the same time that it has committed to purchase securities on a when-issued or
delayed delivery basis, greater fluctuations in its net asset value per share
may occur than if it had set aside cash to satisfy its purchase commitments.
STAND-BY COMMITMENTS
The Fund may acquire "stand-by commitments" with respect to Municipal
Obligations it purchases or holds. Under a stand-by commitment, which resembles
a put option, a broker, dealer or bank is obligated to repurchase at the Fund's
option specified securities at a specified price. The Fund's ability to exercise
a stand-by commitment is subject to the ability of the seller to make payment on
demand. The Fund will acquire stand-by commitments solely to facilitate
liquidity and does not intend to exercise the rights afforded by the commitments
for trading purposes. The Fund anticipates that stand-by commitments will be
available from brokers, dealers, and banks without the payment of any direct or
indirect consideration. The Fund may pay for stand-by commitments if payment is
deemed necessary, thus increasing to a degree the cost of the underlying
Municipal Obligation and similarly decreasing the obligation's yield.
The Fund would enter into stand-by commitments only with those brokers,
banks or dealers that, in the opinion of Mitchell Hutchins, present minimal
credit risks. The Fund's right to exercise stand-by commitments would be
unconditional and unqualified. A stand-by commitment would not be transferable
by the Fund, although the Fund could sell the underlying securities to a third
party at any time. The acquisition of a stand-by commitment would not ordinarily
affect the valuation or maturity of the underlying Municipal Obligations.
REVERSE REPURCHASE AGREEMENTS
Although it has no present intention to do so during the coming year, the
Fund may enter into reverse repurchase agreements with the same parties with
whom it may enter into repurchase agreements. Under a reverse repurchase
agreement, the Fund would sell securities and agree to repurchase (and the buyer
would be required to resell) them at a mutually agreed date and price. At the
time the Fund enters into a reverse repurchase agreement, it will establish and
maintain a segregated account with an approved custodian containing cash or
liquid high-grade debt securities having a value not less than the repurchase
price (including accrued interest). The market value of securities sold under
reverse repurchase agreements typically is greater than the proceeds of the
sale, and accordingly, the market value of the securities sold is likely to be
greater than the value of the securities in which the Fund invests those
proceeds. Thus, reverse repurchase agreements involve the risk that the Fund
might be unable to reacquire the securities that it has sold. In the event the
buyer of securities under a reverse repurchase agreement files for bankruptcy or
becomes insolvent, such buyer or its trustee or receiver may receive an
extension of time to determine whether to enforce the Fund's obligation to
repurchase
4
<PAGE>
the securities, and the Fund's use of the proceeds of the reverse repurchase
agreement may effectively be restricted pending such decision.
Reverse repurchase agreements will be treated as borrowings for purposes of
calculating the Fund's borrowing limitation. In addition to the foregoing
borrowings, the Fund may borrow money for temporary or emergency purposes (e.g.,
clearance of transactions, share repurchases, tender offers or payments of
dividends to stockholders) in an amount not exceeding 5% of the value of the
Fund's total assets (not including the amount borrowed). See "Investment
Limitations."
ILLIQUID SECURITIES
As noted in the Prospectus, the Fund may invest up to 20% of its total
assets in illiquid securities. The board of directors 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 the Fund's portfolio and
reports periodically on liquidity decisions to the board of directors.
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 OTC
options written by the 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.
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INVESTMENT LIMITATIONS
The following fundamental investment limitations cannot be changed without
the affirmative vote of the lesser of (a) more than 50% of the outstanding
shares of the Fund or (b) 67% or more of such shares present at a stockholders'
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, a later increase or decrease 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 or
of any of the Fund's investment policies. The Fund may not:
(1) issue senior securities (including borrowing money from banks and
other entities and through reverse repurchase agreements), except (a) the
Fund may borrow in an amount not in excess of 33 1/3% of total assets
(including the amount of senior securities issued, but reduced by any
liabilities and indebtedness not constituting senior securities), (b) the
Fund may issue preferred stock having a liquidation preference in an amount
which, combined with the amount of any liabilities or indebtedness
constituting senior securities, is not in excess of 50% of its total assets
(computed as provided in clause (a) above) and (c) the Fund may borrow up to
an additional 5% of its total assets (not including the amount borrowed) for
temporary or emergency purposes;
(2) purchase the securities of any one issuer if as a result more than
5% of its total assets would be invested in the securities of that issuer,
provided that securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities are not subject to this limitation and further
provided that up to 25% of the value of the Fund's total assets may be
invested without regard to this 5% limitation;
(3) make an investment in any one industry if the investment would cause
the aggregate value of all the Fund's investments in such industry to equal
25% or more of the Fund's total assets; provided that this limitation shall
not apply to investments in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, and provided further that
this limitation does not apply to Municipal Obligations other than those
backed only by the assets and revenues of a non-governmental entity;
(4) purchase securities on margin, except for short-term credits
necessary for clearance of portfolio transactions, and except that the Fund
may make margin deposits in connection with its use of options, futures
contracts and options on futures contracts;
(5) engage in the business of underwriting securities of other issuers,
except to the extent that, in connection with the disposition of portfolio
securities, the Fund may be deemed an underwriter under federal securities
laws and except that the Fund may write options;
(6) make short sales of securities or maintain a short position, except
that the Fund may maintain short positions in connection with its use of
options, futures contracts and options on futures contracts and sell short
"against the box;"
(7) purchase or sell real estate (including real estate limited
partnership interests), provided that the Fund may invest in securities
secured by real estate or interests therein or issued by entities that
invest in real estate or interests therein, and provided further that the
Fund may exercise rights under agreements relating to such securities,
including the right to enforce security interests and liquidate real estate
acquired as a result of such enforcement;
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(8) purchase or sell commodities or commodity contracts, except that the
Fund may purchase or sell financial futures contracts and options thereon;
(9) invest in oil, gas or mineral-related programs or leases; or
(10) make loans, except through loans of portfolio instruments and
repurchase agreements, provided that for purposes of this restriction the
acquisition of bonds, debentures or other debt instruments or interests
therein and investment in government obligations, short-term commercial
paper, certificates of deposit and bankers' acceptances shall not be deemed
to be the making of a loan.
For purposes of limitation (2), each state (including the District of
Columbia), territory and possession of the United States, each public
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 such 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 such
government or entity and owned by the Fund exceeds 10% of the Fund's total
assets, such a guarantee would be considered a separate security and would be
treated as issued by such government or entity. The foregoing restrictions do
not limit the percentage of the Fund's assets that may be invested in Municipal
Obligations insured by any given insurer.
HEDGING AND RELATED INCOME STRATEGIES
As discussed in the Prospectus, Mitchell Hutchins may use a variety of
financial instruments ("Hedging Instruments"), including certain options,
futures contracts (sometimes referred to as "futures"), options on futures
contracts and interest rate protection transactions, to attempt to hedge the
Fund's portfolio and may use options to attempt to enhance the Fund's income.
Since any income realized from the use of options and futures would be taxable
to stockholders, the Fund currently does not intend to engage in hedging or
related income strategies and would do so only under unusual market conditions.
In addition, rating agency guidelines impose restrictions on the Fund's ability
to invest in Hedging Instruments. For as long as shares of any series of APS are
rated by Moody's, the Fund may engage in transactions in options on securities,
futures contracts based on the Municipal Index or Treasury Bonds and options on
such futures contracts (collectively "Moody's Hedging Transactions") only when
consistent with the provisions set forth under "Appendix B -- Rating Agency
Guidelines," unless it receives written confirmation from Moody's that engaging
in such transactions will not impair the ratings then assigned to the APS by
Moody's. For as long as shares of any series of APS are rated by S&P, the Fund
will not buy or sell futures contracts or options thereon or write put options
or call options on portfolio securities or enter into interest rate caps,
collars or floors unless it receives written confirmation from S&P that engaging
in such transactions will not impair the ratings then assigned to the APS by
S&P, except that the Fund may buy or sell futures contracts based on the
Municipal Index or Treasury Bonds, may purchase put and call options on such
contracts and may write covered call
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options and secured put options on portfolio securities (collectively "S&P
Hedging Transactions") subject to the limitations described under "Appendix
B -- Rating Agency Guidelines."
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Hedging Instrument intended to
partially or fully offset potential declines in the value of one or more
investments held in the Fund's portfolio. Thus, in a short hedge the Fund takes
a position in a Hedging Instrument the price of which is expected to move in the
opposite direction of the price of the investment being hedged. For example, the
Fund might purchase a put option on a security to hedge against a potential
decline in the value of that security. If the price of the security declined
below the exercise price of the put, the Fund could exercise the put and thus
limit its loss below the exercise price to the premium paid plus transaction
costs. In the alternative, because the value of the put option can be expected
to increase as the value of the underlying security declines, the Fund might be
able to close out the put option and realize a gain to offset the decline in the
value of the security.
Conversely, a long hedge is a purchase or sale of a Hedging Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that the Fund intends to acquire. Thus, in a
long hedge the Fund takes a position in a Hedging Instrument the price of which
is expected to move in the same direction as the price of the prospective
investment being hedged. For example, the 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.
Hedging Instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that the Fund owns or
intends to acquire. Hedging Instruments on debt securities may be used to hedge
either individual securities or broad fixed income market sectors.
The use of Hedging Instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon which they are traded and
the Commodity Futures Trading Commission ("CFTC") and may become subject to
regulation by various state regulatory authorities. In addition, the Fund's
ability to use Hedging Instruments will be limited by tax considerations. See
"Taxes."
In addition to the products, strategies and risks described below, Mitchell
Hutchins expects additional opportunities to develop in connection with options,
futures contracts and other 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
Fund's investment objective and permitted by the Fund's investment limitations
and applicable regulatory authorities.
SPECIAL RISKS OF HEDGING STRATEGIES
The use of Hedging Instruments involves special considerations and risks, as
described below. Risks pertaining to particular Hedging Instruments are
described in the sections that follow.
(1) Successful use of most Hedging Instruments depends upon Mitchell
Hutchins' ability to predict movements of the overall securities and
interest rate markets, which requires different skills
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than predicting changes in the prices of individual securities. While
Mitchell Hutchins is experienced in the use of Hedging 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 Hedging Instrument and price movements of the
investments being hedged. For example, if the value of a Hedging 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 Hedging Instruments are traded. The effectiveness of hedges
using Hedging Instruments on indexes 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 the 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 Hedging Instrument. Moreover, if the price of
the Hedging Instrument declined by more than the increase in the price of
the security, the Fund could suffer a loss. In either such case, the Fund
would have been in a better position had it not hedged at all.
(4) As described below, the Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Hedging Instruments involving obligations to third parties
(i.e., Hedging Instruments other than purchased options). If the Fund were
unable to close out its positions in such Hedging 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 the Fund's ability to sell a portfolio security or make an investment
at a time when it would otherwise be favorable to do so, or require that the
Fund sell a portfolio security at a disadvantageous time. The Fund's ability
to close out a position in a Hedging 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 HEDGING STRATEGIES
Transactions using Hedging Instruments, other than purchased options, expose
the Fund to an obligation to another party. The 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, receivables and
short-term debt securities, with a value sufficient at all times to cover its
potential obligations to the extent not covered as provided in (1) above. The
Fund will comply with SEC guidelines regarding cover for hedging transactions
and will, if the guidelines so require, set aside cash, U.S. government
securities or other liquid, high-grade debt securities in a segregated account
with its custodian in the prescribed amount.
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Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Hedging Instrument is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion of
the 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 Fund may purchase put and call options, and write (sell) covered call
options and covered put 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 the 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 on 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. Options that expire unexercised have no value.
The Fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, the Fund may terminate its
obligation under a call option that it had written by purchasing an identical
call option; this is known as a closing purchase transaction. Conversely, the
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 the Fund to realize profits or limit
losses on an option position prior to its exercise or expiration.
The Fund may purchase or write both exchange-traded and OTC options.
However, exchange-traded or liquid OTC options on Municipal Obligations are not
currently available. 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.
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.
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The Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The 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 the 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 the 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 the Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
In the event that options on indexes of municipal and non-municipal debt
securities become available, the Fund may purchase and write put and call
options on such indexes 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 market (or market sectors) rather than
anticipated increases or decreases in the value of a particular security.
FUTURES
The Fund may purchase and sell municipal bond index futures, other interest
rate futures and options thereon. 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, using a strategy similar
to that used for writing covered call options on securities or indexes.
Similarly, writing covered put options on futures contracts can serve as a
limited long hedge.
Futures strategies also can be used to manage the average duration of the
Fund's portfolio. If Mitchell Hutchins wishes to shorten the average duration of
the Fund, the Fund may sell a futures contract or a call option thereon, or
purchase a put option on that futures contract. If Mitchell Hutchins wishes to
lengthen the average duration of the Fund, 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 the 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, U.S. government
securities or other liquid, high-grade debt securities, 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
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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 with respect to an open
futures position. When the Fund purchases an option on a future, the premium
paid plus transaction costs is all that is at risk. In contrast, when the Fund
purchases or sells a futures contract or writes a call option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If 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.
The 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. Secondary markets for options on futures are currently in the
development stage, and the Fund will not trade options on futures on any
exchange or board of trade unless, in Mitchell Hutchins' opinion, the markets
for such options have developed sufficiently that the liquidity risks for such
options are not greater than the corresponding risks for futures.
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 the Fund were unable to liquidate a futures or related options position
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. The Fund would continue to be subject
to market risk with respect to the position. In addition, except in the case of
purchased options, the Fund would continue to be required to make daily
variation margin payments and might be required to maintain the position being
hedged by the future or option or to maintain cash or securities in a segregated
account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities
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markets involving arbitrage, "program trading" and other investment strategies
might result in temporary price distortions.
GUIDELINE FOR FUTURES AND RELATED OPTIONS
To the extent that the 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 these positions (excluding
the amount by which options are "in-the-money") may not exceed 5% of the Fund's
net assets.
The Fund may use the following Hedging Instruments:
OPTIONS ON DEBT SECURITIES -- A call option is a 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,
or upon the expiration, of the option. The writer of the call option, who
receives the premium, has the obligation, upon exercise of the option, 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 or upon expiration. The writer of the put option, who receives the premium,
has the obligation, upon exercise, to buy the underlying security at the
exercise price. Options on debt securities are traded primarily in the OTC
market rather than on any of the several options exchanges. At present, only
options on U.S. Treasury securities are listed for trading on any recognized
exchange.
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 FUTURES CONTRACTS -- A municipal debt 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 municipal debt security
called for in the contract at a specified future time and at a specified price.
Currently, municipal debt futures contracts do not exist.
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
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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 put.
INTEREST RATE PROTECTION TRANSACTIONS -- The Fund may enter into interest
rate protection transactions, including interest rate swaps and interest rate
caps, collars and floors. Interest rate swap transactions involve an agreement
between two parties to exchange payments that are based, for example, on
variable and fixed rates of interest and that are calculated on the basis of a
specified amount of principal (the "notional principal amount") for a specified
period of time. Interest rate cap and floor transactions involve an agreement
between two parties in which the first party agrees to make payments to the
counterparty when a designated market interest rate goes above (in the case of a
cap) or below (in the case of a floor) a designated level on predetermined dates
or during a specified time period. Interest rate collar transactions involve an
agreement between two parties in which payments are made when a designated
market interest rate either goes above a designated level or goes below a
designated floor level on predetermined dates or during a specified time period.
The Fund would enter into interest rate protection transactions to preserve
a return or spread on a particular investment or portion of its portfolio, to
protect against any increase in the price of securities the Fund anticipates
purchasing at a later date or to effectively fix the rate of interest that it
pays on one or more borrowings or series of borrowings. The Fund would use these
transactions as a hedge and not as a speculative investment. Interest rate
protection transactions are subject to risks comparable to those described above
with respect to other hedging strategies.
The Fund may enter into interest rate swaps, caps, collars and floors on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities, and will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these interest rate protection transactions are entered
into for good faith hedging purposes, and inasmuch as segregated accounts will
be established with respect to such transactions, Mitchell Hutchins and the Fund
believe such obligations do not constitute senior securities and, accordingly,
will not treat them as being subject to its borrowing restrictions. The net
amount of the excess, if any, of the Fund's obligations over its entitlements
with respect to each interest rate swap will be accrued on a daily basis and an
amount of cash, U.S. government securities or other liquid high grade debt
obligations having an aggregate net asset value at least equal to the accrued
excess will be maintained in a segregated account by a custodian that satisfies
the requirements of the Investment Company Act of 1940 ("1940 Act"). The Fund
also will establish and maintain such segregated accounts with respect to its
total obligations under any interest rate swaps that are not entered into on a
net basis and with respect to any interest rate caps, collars and floors that
are written by the Fund.
The Fund will enter into interest rate protection transactions only with
banks and recognized securities dealers or their affiliates believed by Mitchell
Hutchins to present minimal credit risks in accordance with guidelines
established by the Fund's board of directors. If there is a default by the other
party to such a transaction, the Fund will have to rely on its contractual
remedies (which may be limited by bankruptcy, insolvency or similar laws)
pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. Caps, collars and floors are more
recent innovations for which documentation is less standardized, and
accordingly, they are less liquid than swaps.
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DIRECTORS AND OFFICERS
The overall management of the business and affairs of the Fund is vested
with its board of directors. The board of directors approves all significant
agreements between the Fund and persons or companies furnishing services to it,
including the Fund's agreements with its investment adviser and administrator,
custodian and transfer and dividend disbursing agent and registrar. The
day-to-day operations of the Fund are delegated to its officers and to Mitchell
Hutchins, subject always to the investment objective and policies of the Fund
and to general supervision by the Fund's board of directors.
The business addresses and principal occupations during the past five years
of the directors and executive officers of the Fund are:
<TABLE><CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME, AGE AND ADDRESS* WITH THE FUND OTHER DIRECTORSHIPS
- ----------------------------- -------------------- ---------------------------------------------
<S> <C> <C>
Margo N. Alexander; 48** [Director and Mrs. Alexander is president, chief executive
President] officer and a director of Mitchell
Hutchins. Prior to January 1995, Mrs.
Alexander was an executive vice president
of PaineWebber. Mrs. Alexander is also a
director, trustee of two other investment
companies and president of 38 other
investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Richard Q. Armstrong; 60 Director Mr. Armstrong is chairman and principal of
78 West Brother Drive RQA Enterprises (management consulting
Greenwich, CT 06830 firm) (since 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 also a
director or trustee of 5 other investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
</TABLE>
15
<PAGE>
<TABLE><CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME, AGE AND ADDRESS* WITH THE FUND OTHER DIRECTORSHIPS
- ----------------------------- -------------------- ---------------------------------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.; 69** Director and Mr. Bewkes is a director of Paine Webber
Chairman of the Group Inc. ("PW Group") (holding company of
Board of Directors Mitchell Hutchins and PaineWebber) and 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 a director or trustee of 26 other
investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Richard R. Burt; 48 Director Mr. Burt is chairman of International Equity
1101 Connecticut Avenue N.W. Partners (international investments and
Washington, D.C. 20036 consulting firm) (since March 1994) and a
partner of McKinsey & Company (management
consulting firm) (since 1991). He is also a
director of American Publishing Company. 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 also a director or
trustee of 6 other investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Meyer Feldberg; 53 Director Mr. Feldberg is Dean and Professor of
Columbia University Management of the Graduate School of
101 Uris Hall Business, Columbia University. Prior to
New York, NY 10027 1989, he was president of the Illinois
Institute of Technology. Dean Feldberg is
also a director of AMSCO International
Inc., Federated Department Stores Inc.,
Inco Homes Corporation, New World
Communications Group Incorporated and a
director or trustee of 19 other investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
</TABLE>
16
<PAGE>
<TABLE><CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME, AGE AND ADDRESS* WITH THE FUND OTHER DIRECTORSHIPS
- ----------------------------- -------------------- ---------------------------------------------
<S> <C> <C>
John R. Torell III; 56 Director Mr. Torell is chairman of Torell Management,
767 Fifth Avenue Inc. (financial advisory firm) (since
Suite 4605 1989), chairman of Telesphere Corporation
New York, NY 10153 (financial information) and a partner of
Zilkha and Company (merchant bank and
investment company). Mr. Torell is also a
director of American Home Products Corp.,
COLTS Manufacturing Company and Volt
Information Sciences Inc. He is the former
chairman and chief executive officer of
Fortune Bancorp (1990-1991 and 1990-1994,
respectively). He is the former chairman,
president and chief executive officer of
CalFed, Inc. (savings association) (1988 to
1989) and former president of Manufacturers
Hanover Corp. (bank) (prior to 1988). Mr.
Torell is a director or trustee of 9 other
investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
William D. White; 62 Director Mr. White is retired. From February 1989
P.O. Box 199 through March 1994, he was president of the
Upper Black Eddy, PA 18972 National League of Professional Baseball
Clubs. Prior to 1989, he was a television
sportscaster for WPIX-TV, New York. Mr.
White is also a director or trustee of 9
other investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Teresa M. Boyle; 37 Vice President Ms. Boyle is a first vice president and
manager -- advisory administration of
Mitchell Hutchins. Prior to November 1993,
she was compliance manager of Hyperion
Capital Management, Inc., an investment
advisory firm. Prior to April 1993, Ms.
Boyle was a vice president and manager --
legal administration of Mitchell Hutchins.
Ms. Boyle is also a vice president of 38
other investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Joan L. Cohen; 31 Vice President and Ms. Cohen is a vice president and attorney of
Assistant Secretary Mitchell Hutchins. Prior to December 1993,
she was an associate at the law firm of
Seward & Kissel. Ms. Cohen is also a vice
president and assistant secretary of 25
other investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
17
<PAGE>
<TABLE><CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME, AGE AND ADDRESS* WITH THE FUND OTHER DIRECTORSHIPS
- ----------------------------- -------------------- ---------------------------------------------
<S> <C> <C>
C. William Maher; 34 Vice President and Mr. Maher is a first vice president and a
Assistant Treasurer senior manager of the mutual fund finance
division of Mitchell Hutchins. Mr. Maher is
also a vice president and assistant
treasurer of 38 other investment companies
for which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Dennis McCauley; 49 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 also a
vice president of 20 other investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Ann E. Moran; 38 Vice President and Ms. Moran is a vice president of Mitchell
Assistant Treasurer Hutchins. Ms. Moran is also a vice
president and assistant treasurer of 38
other investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Dianne E. O'Donnell; 43 Vice President and Ms. O'Donnell is a senior vice president and
Secretary senior associate general counsel of
Mitchell Hutchins. Ms. O'Donnell is also a
vice president and secretary of 38 other
investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Victoria E. Schonfeld; 45 Vice President Ms. Schonfeld is a managing director and
general counsel of Mitchell Hutchins. From
April 1990 to May 1994, she was a partner
in the law firm of Arnold & Porter. Prior
to April 1990, she was a partner in the law
firm of Shereff, Friedman, Hoffman &
Goodman. Mr. Schonfeld is also a vice
president of 38 other investment companies
for which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Paul H. Schubert; 32 Vice President and Mr. Schubert is a vice president of Mitchell
Assistant Treasurer Hutchins. From August 1992 to August 1994,
he was a vice president of BlackRock
Financial Management, L.P. Prior to August
1992, he was an audit manager with Ernst &
Young LLP. Mr. Schubert is also a vice
president and assistant treasurer of 38
other investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Gregory W. Serbe; 50 Vice President Mr. Serbe is a managing director of Mitchell
Hutchins responsible for tax-exempt bonds
and tax-exempt money market investments.
Mr. Serbe is also a vice president of 12
other investment companies for which
Mitchell Hutchins serves as investment
adviser.
</TABLE>
18
<PAGE>
<TABLE><CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME, AGE AND ADDRESS* WITH THE FUND OTHER DIRECTORSHIPS
- ----------------------------- -------------------- ---------------------------------------------
<S> <C> <C>
Julian F. Sluyters; 35 Vice President and Mr. Sluyters is a senior vice president and
Treasurer the director of the mutual fund finance
division of Mitchell Hutchins. Prior to
1991, he was an audit senior manager with
Ernst & Young LLP. Mr. Sluyters is also a
vice president and treasurer of 38 other
investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Gregory K. Todd; 39 Vice President and Mr. Todd is a first vice president and
Assistant Secretary associate general counsel of Mitchell
Hutchins. Prior to 1993, he was a partner
in the firm of Shereff, Friedman, Hoffman &
Goodman. Mr. Todd is also a vice president
and assistant secretary of 38 other
investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Keith A. Weller; 34 Vice President and Mr. Weller is a first vice president and
Assistant Secretary associate general counsel of Mitchell
Hutchins. From September 1987 to March
1995, he was an attorney in private
practice. Mr. Weller is also a vice
president and assistant secretary of 23
other 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.
** Messrs. Alexander and Bewkes are "interested persons" of the Fund, as defined
in the 1940 Act, by reason of their positions with Mitchell Hutchins,
PaineWebber and/or PW Group .
The Fund pays directors who are not "interested persons" of the Fund $1,500
annually and $250 per meeting of the board of directors or any committee
thereof. Directors also will be reimbursed for any expenses incurred in
attending meetings. Because Mitchell Hutchins performs substantially all of the
services necessary for the operation of the Fund, the Fund requires no
employees. No officer, director or employee of PaineWebber or Mitchell Hutchins
presently receives any compensation from the Fund for acting as a director or
officer. The following table includes certain information relating to the
compensation of the Fund's directors. [Mrs. Alexander is not included in the
table since she was not elected director until after the end of the fiscal
year].
19
<PAGE>
COMPENSATION TABLE
<TABLE><CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION
BENEFITS ESTIMATED FROM THE
AGGREGATE ACCRUED AS ANNUAL FUND AND THE
COMPENSATION PART OF THE BENEFITS FUND COMPLEX
NAME OF FROM THE FUND'S UPON PAID TO
PERSON, POSITION FUND* EXPENSES RETIREMENT DIRECTORS**
- --------------------------------------------- ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C>
Richard Q. Armstrong
Director................................... $1,250 -- -- --
E. Garrett Bewkes, Jr.,
Director and chairman of the board of
directors.................................... -- -- -- --
Richard R. Burt
Director................................... $1,250 -- -- --
Meyer Feldberg,
Director................................... $3,250 -- -- --
John R. Torell III,
Director................................... $3,250 -- -- --
William D. White,
Director................................... $2,750 -- -- --
</TABLE>
- ------------
* Represents fees paid to each director during the fiscal year ended September
30, 1995.
** Represents total compensation paid to each director during the calendar year
ended December 31, 1994.
Because Mitchell Hutchins performs substantially all of the services
necessary for the operation of the Fund, the Fund requires no employees. No
officer, director or employee of PaineWebber or Mitchell Hutchins presently
receives any compensation from the Fund for acting as a director or officer. The
1940 Act requires that the holders of the outstanding shares of Preferred Stock,
including the APS, voting as a separate class, have the right to select at least
two of the Fund's directors at all times. For purposes of this condition, Mr.
Feldberg [and Mrs. Alexander] (who were elected by a majority of the holders of
the APS at the annual meeting of shareholders of the Fund held on [January 18,
1995]) will stand for re-election as directors by the holders of the APS at the
Fund's next annual meeting of shareholders.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of January , 1996, Cede & Co. (the nominee of The Depository Trust
Company, a securities depository) owned of record shares of the Fund's
Common Stock or % of the outstanding shares of Common Stock. To the
knowledge of the Fund, no person is the beneficial owner of 5% or more of its
shares of Common Stock.
As of January , 1996, the directors and officers of the Fund as a group
beneficially owned less than 1% of the Fund's outstanding shares of Common
Stock.
20
<PAGE>
INVESTMENT ADVISORY ARRANGEMENTS
Mitchell Hutchins is the Fund's investment adviser and administrator
pursuant to a contract dated October 15, 1992 with the Fund ("Advisory
Contract"). Pursuant to the Advisory Contract, Mitchell Hutchins provides a
continuous investment program for the Fund and makes investment decisions and
places orders to buy, sell or hold particular securities. As administrator,
Mitchell Hutchins supervises all matters relating to the operation of the Fund
and provides for it corporate, administrative and clerical personnel, office
space, equipment and services. For the period November 6, 1992 (commencement of
operations) to September 30, 1993, for the fiscal year ended September 30, 1994
and for the fiscal year ended September 30, 1995, the Fund paid or accrued to
Mitchell Hutchins $1,820,488, $2,207,447 and $1,914,328 respectively, in
investment advisory and administration fees.
In addition to the payments to Mitchell Hutchins under the Advisory Contract
described in the Prospectus, the Fund pays certain other costs including: (1)
the costs (including brokerage commissions) of securities purchased or sold by
the Fund and any losses incurred in connection therewith; (2) expenses incurred
on behalf of the Fund by Mitchell Hutchins; (3) organizational expenses of the
Fund, whether or not advanced by Mitchell Hutchins; (4) filing fees and expenses
relating to the registration and qualification of the Common Stock under federal
and state securities laws; (5) fees and salaries payable to directors who are
not interested persons of the Fund or Mitchell Hutchins; (6) all expenses
incurred in connection with the directors' 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 any other insurance
or fidelity bonds; (9) any costs, expenses or losses arising out of a liability
of or claims 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 directors; (11) charges of custodians,
transfer agents and other agents; (12) costs of preparing share certificates;
(13) expenses of printing and distributing reports to stockholders; (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 stockholders, the board
and any committees thereof; (17) the costs of investment company literature and
other publications provided to directors and officers; (18) costs of mailing,
stationery and communications equipment; (19) interest charges on borrowings;
(20) fees and expenses of listing and maintaining any listing of the Fund's
shares on the New York Stock Exchange, Inc. ("NYSE") or any other national
securities exchange; and (21) costs and expenses (including rating agency fees)
associated with the issuance of preferred stock.
The Advisory Contract was approved by the Fund's board of directors and by a
majority of the directors who neither are interested persons of the Fund nor
have any direct or indirect financial interest in the Advisory Contract
("Independent Directors"), on September 16, 1992 and by its initial stockholder
on October 15, 1992. Unless sooner terminated, the Advisory Contract will
continue in effect automatically for successive annual periods, provided that
such continuance is specifically approved at least annually: (1) by a majority
vote of the Independent Directors cast in person at a meeting called for the
purpose of voting on such approval; and (2) by the board of directors or by vote
of a majority of the outstanding voting securities (i.e., the Common
Stockholders and holders of the APS, voting as a single class) of the Fund.
21
<PAGE>
Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with 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 under the Advisory Contract. The Advisory Contract is terminable by
vote of the board of directors or by the holders of a majority of the
outstanding voting securities of the Fund, at any time without penalty, on 60
days' written notice to Mitchell Hutchins. The Advisory Contract may also be
terminated by Mitchell Hutchins on 60 days' written notice to the Fund. The
Advisory Contract terminates automatically upon its assignment.
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, PaineWebber/Kidder, Peabody and Mitchell
Hutchins/Kidder, Peabody mutual funds (collectively, "PW 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 PW
Funds and other Mitchell Hutchins advisory clients.
PORTFOLIO TRANSACTIONS
Subject to policies established by the board of directors, Mitchell Hutchins
is responsible for the execution of the Fund's portfolio transactions and the
allocation of brokerage transactions. In executing portfolio transactions,
Mitchell Hutchins seeks to obtain the best net results for the 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. Municipal Obligations in which the Fund invests
generally are traded on the OTC market on a "net" basis without a stated
commission through dealers acting for their own account and not as brokers.
Prices paid to dealers in principal transactions generally include a "spread,"
which is the difference between the prices at which the dealer is willing to
purchase and sell a specific security at that time. For the period November 6,
1992 (commencement of operations) to September 30, 1993, for the fiscal year
ended September 30, 1994 and for the fiscal year ended September 30, 1995, the
Fund paid no brokerage commissions.
In placing orders with dealers, Mitchell Hutchins attempts to obtain the
best net price and the most favorable execution of its orders. Mitchell Hutchins
may purchase and sell portfolio securities from and to dealers who provide the
Fund with research, analysis, statistical or pricing advice or similar services.
Portfolio transactions will not be directed by the Fund to dealers solely on the
basis of research and advice provided. Research services furnished by the
dealers through which or with which the Fund effects securities transactions may
be used by Mitchell Hutchins in advising other funds or accounts they advise
and, conversely, research services furnished to Mitchell Hutchins in connection
with other funds or accounts that Mitchell Hutchins advises may be used in
advising the Fund.
Investment decisions for the Fund and for other investment accounts managed
by Mitchell Hutchins are made independently of each other in light of differing
considerations for the various accounts. However, the same investment decision
may occasionally be made for the Fund and one or
22
<PAGE>
more such accounts. In such cases, simultaneous transactions are inevitable.
Purchases or sales then are then averaged as to price and allocated between the
Fund and such other account(s) as to amount according to a formula deemed
equitable to the Fund and such account(s). While in some cases this practice
could have a detrimental effect upon the price or value of the security as far
as the 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.
The Fund will not purchase securities that are offered in underwritings in
which PaineWebber, Mitchell Hutchins or any of their affiliates is a member of
the underwriting or selling group, except pursuant to procedures adopted by the
board of directors 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 PaineWebber, Mitchell
Hutchins and their affiliates not participate in or benefit from the sale to the
Fund.
PORTFOLIO TURNOVER
For the fiscal year ended September 30, 1994 and for the fiscal year ended
September 30, 1995, the Fund's portfolio turnover rates were 0% and 7%,
respectively. Portfolio turnover may vary from year to year and will not be a
limiting factor when Mitchell Hutchins deems portfolio changes appropriate. The
portfolio turnover rate is calculated by dividing the lesser of the 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 long-term securities in the portfolio
during the year.
VALUATION OF COMMON STOCK
The net asset value of the Common Stock is determined weekly as of the close
of regular trading on the NYSE (currently 4:00 p.m., Eastern time) on the last
day of the week on which the NYSE is open for trading. The net asset of the
Common Stock also is determined monthly as of the close of regular trading on
the NYSE on the last day of the month on which the NYSE is open for trading. The
net asset value per share of Common Stock is computed by dividing the value of
the securities held by the Fund plus any cash or other assets (including
interest and dividends accrued but not yet received and earned discount) minus
all liabilities (including accrued expenses) and the liquidation preference of
any outstanding preferred stock by the total number of shares of Common Stock
outstanding at such time.
When market quotations are readily available, the Fund's debt securities are
valued based upon those quotations. When market quotations for options and
futures positions held by the Fund are readily available, those positions are
valued based upon such quotations. Market quotations generally are not available
for options traded in the OTC market. When market quotations for options and
futures positions or any other securities and assets of the Fund are not readily
available, they are valued at fair value as determined in good faith by or under
the direction of the board of directors. When market quotations are not readily
available for any of the Fund's debt securities, such 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. Notwithstanding the above, debt securities with maturities of 60
23
<PAGE>
days or less generally are valued at amortized cost if their original term to
maturity was 60 days or less, or by amortizing the difference between their fair
value as of the 61st day prior to maturity and their maturity value if their
original term to maturity exceeded 60 days, unless in either case the board of
directors or its delegate determines that this does not represent fair value.
TAXES
TAXATION OF THE FUND
General. In order to continue to qualify for treatment as a regulated
investment company ("RIC") under the Internal Revenue Code, the Fund must
distribute to its stockholders 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 ("tax-exempt income") plus its investment company taxable
income (consisting generally of taxable net investment income, net short-term
capital gain and net realized gains from certain hedging transactions)
("Distribution Requirement") and must meet several additional requirements.
Among these requirements are 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 contracts)
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 contracts 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, with those
other securities 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. If the Fund
failed to qualify for treatment as a RIC for any taxable year, it would be taxed
as an ordinary corporation on its taxable income for that year (even if that
income was distributed to its stockholders) and all distributions out of its
earnings and profits would be taxable to its stockholders as dividends (that is,
ordinary income).
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year at least 98%
of the sum of its ordinary income (not including tax-exempt income) for that
year and its capital gain net income for the one-year period ending on October
31 of that year, plus certain other amounts. For these purposes, any such
taxable income retained by the Fund, and on which it pays federal income tax,
will be treated as having been distributed.
While any shares of the APS are outstanding, the Fund may not declare any
cash dividend or other distribution on the Common Stock unless, at the time of
the declaration, the Fund satisfies certain dividend payment and asset coverage
requirements. See "Special Leverage Considerations" in the Prospectus. Any such
suspension of distributions on the Common Stock could prevent the Fund from
satisfying the Distribution Requirement and avoiding imposition of the Excise
Tax. For so long as the Fund has outstanding preferred stock, it will be
required to allocate each particular type of its income for each taxable year
(such as tax-exempt income, net realized capital gains and other taxable income)
between the two classes of shares, Common Stock and preferred stock, in
proportion to the total
24
<PAGE>
distributions paid to each such class for that year. It is not expected that any
portion of the Fund's distributions will be eligible for the dividends-received
deduction available for corporations.
The Fund may acquire zero coupon Municipal Obligations issued with original
issue discount. As the holder of such a security, the Fund would have to include
in its gross income for purposes of the Distribution and Income Requirements the
original issue discount that accrues on the security for the taxable year, even
if it receives no payment on the security during the year. Because the Fund
annually must distribute at least 90% of its tax-exempt income, including any
accrued original issue discount, to satisfy the Distribution Requirement, it may
be required in a particular year to distribute as a dividend an amount that is
greater than the total amount of cash it actually receives. Those distributions
will be made from the Fund's cash assets, or from the proceeds of sales of
portfolio securities or from borrowings, if necessary. The Fund may realize
taxable capital gains or losses from those sales, which would increase or
decrease its investment company taxable income or net capital gain (the excess
of net long-term capital gain over net short-term capital loss). In addition,
any such gains may be realized on the disposition of securities held for less
than three months. Because of the Short-Short Limitation, any such gains would
reduce the Fund's ability to sell other securities, or certain options or
futures, held for less than three months that it might wish to sell in the
ordinary course of its portfolio management.
Hedging Strategies. The use of hedging 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 the Fund realizes in connection therewith. These rules also may require
the Fund to "mark to market" (that is, treat as sold for their fair market
value) at the end of each taxable year certain positions in its portfolio, which
may cause the Fund to recognize taxable income without receiving cash with which
to make distributions necessary to satisfy the Distribution Requirement and to
avoid imposition of the Excise Tax. In that event, the Fund might have to
liquidate securities to enable it to make the required distributions, which
would cause the Fund to recognize gains or losses and might affect its ability
to satisfy the Short-Short Limitation.
Income from transactions in options and futures derived by the 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 the 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. The Fund
will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent the 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 for treatment as a RIC.
TAXATION OF THE STOCKHOLDERS
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose modified adjusted gross income
(including income from tax-exempt sources such as the
25
<PAGE>
Fund) plus 50% of their net benefits exceeds certain base amounts.
Exempt-interest dividends are still tax-exempt to the extent described in the
Prospectus; they are only included in the calculation of whether a recipient's
income exceeds the established amounts.
Distributions of the Fund's net capital gain, if any, will be taxable to its
stockholders as long-term capital gains, regardless of the length of time they
held their Fund shares.
Entities or other 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 of Common Stock because, for certain
of these facilities, the interest on such bonds is not exempt from federal
income tax. For these purposes, the term "substantial user" is defined generally
to include a "non-exempt person" who regularly uses in trade or business a part
of a facility financed from the proceeds of IDBs or PABs.
A participant in the Fund's Dividend Reinvestment Plan is treated as having
received a distribution in the amount of the cash used to purchase shares of
Common Stock on his behalf, including a pro rata portion of the brokerage fees
incurred by the Transfer Agent. See "Dividends and Other Distributions; Dividend
Reinvestment Plan" in the Prospectus.
The Fund is required to withhold 31% of all taxable dividends, capital gain
distributions and repurchase proceeds payable to any individuals and certain
other noncorporate stockholders who do not provide the Fund with a correct
taxpayer identification number. Withholding at that rate from taxable dividends
and capital gain distributions also is required for stockholders who otherwise
are subject to backup withholding.
ADDITIONAL INFORMATION
COMMON STOCK REPURCHASES AND TENDERS
As discussed in the Prospectus, the Fund's board of directors may tender for
its shares to reduce or eliminate the discount to net asset value at which the
Fund's shares might trade. Even if a tender offer has been made, it will be the
board's announced policy, which may be changed by the board, not to accept
tenders or effect repurchases (or, if a tender offer has not been made, not to
initiate a tender offer) if: (1) such transactions, if consummated, would (a)
result in the delisting of the Common Stock from the NYSE (the NYSE having
advised the Fund that it would consider delisting if the aggregate market value
of the outstanding shares is less than $5,000,000, the number of publicly held
shares falls below 600,000 or the number of round-lot holders falls below
1,200), (b) impair the Fund's status as a RIC (which would eliminate the Fund's
eligibility to deduct dividends paid to its stockholders, thus causing the
Fund's income to be fully taxed at the corporate level in addition to the
taxation of stockholders upon dividends received from the Fund) or (c) cause the
Fund to violate applicable asset coverage or similar requirements on outstanding
preferred stock or borrowings; (2) the Fund would not be able to liquidate
portfolio securities in an orderly manner and consistent with the Fund's
investment objective and policies in order to repurchase its shares; or (3)
there is, in the board's judgment, any (a) material legal action or proceeding
instituted or threatened challenging such transactions or otherwise materially
adversely affecting the Fund, (b) suspension of trading or limitation on prices
of securities generally on the NYSE or any other exchange on which portfolio
securities of the Fund are traded, (c) declaration of a banking moratorium by
federal or state authorities or any suspension of payment by banks in the United
States, New York State or any state in which the Fund invests, (d) limitation
26
<PAGE>
affecting the Fund or the issuers of its portfolio securities imposed by federal
or state authorities on the extension of credit by lending institutions, (e)
commencement of war, armed hostilities or other international or national
calamity directly or indirectly involving the United States or (f) other event
or condition that would have a material adverse effect on the Fund or its
stockholders if shares were repurchased. The board of directors may modify these
conditions in light of experience.
COUNSEL
The law firm of Kirkpatrick & Lockhart LLP, 1800 M Street N.W., Washington,
D.C. 20036-5891 counsel to the Fund, has passed upon the legality of the shares
offered by the Fund's Prospectus. Kirkpatrick & Lockhart LLP also acts as
counsel to Mitchell Hutchins and PaineWebber in connection with other matters.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036,
serves as the Fund's independent accountants.
FINANCIAL STATEMENTS
The Fund's Annual Report to Shareholders for the fiscal year ended September
30, 1995 is a separate document supplied with this SAI, and the financial
statements, accompanying notes and report of independent auditors therein are
incorporated by reference in this SAI.
27
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
APPENDIX A
RATINGS
Municipal bonds are rated by Moody's and S&P. Moody's also publishes
separate ratings for municipal notes. Descriptions of these ratings, together
with the ratings assigned by Moody's and S&P to commercial paper, are set forth
below.
DESCRIPTION OF MOODY'S FOUR HIGHEST MUNICIPAL BOND RATINGS
AAA. Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. Interest payments are protected by
a large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
AA. Bonds which are rated Aa are judged to be of high quality by all
standards. They are rated lower than the Aaa 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 which are rated A possess many favorable investment attributes and
are considered to be upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA. Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest 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.
Note: Those bonds in the Aa, A and Baa groups which Moody's believes possess
the strongest investment attributes are designated by the symbols Aa1, A1 and
Baa1.
DESCRIPTION OF S&P'S FOUR HIGHEST MUNICIPAL BOND RATINGS
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
A-1
<PAGE>
Note: Plus (+) or Minus (-): The ratings from "AA" to "BBB" may be modified
by the addition of a plus or minus sign to show relative standing within the
major categories.
DESCRIPTION OF MOODY'S HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES AND OTHER
SHORT-TERM LOANS
Moody's ratings for state and municipal notes and other short-term loans are
designated "Moody's Investment Grade" ("MIG" or, for variable or floating rate
obligations, "VMIG"). 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. Symbols
used will be as follows:
MIG-1VMIG-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 or both.
MIG-2VMIG-2. This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
DESCRIPTION OF S&P'S RATINGS OF STATE AND MUNICIPAL NOTES AND OTHER SHORT-TERM
LOANS
S&P's tax exempt note ratings are generally given to such notes that mature
in three years or less. The two higher rating categories are as follows:
SP-1. Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Issuers assigned Prime-1 by Moody's have a superior capacity for repayment
of short-term promissory obligations. Prime-1 repayment capacity will often be
evidenced by the following characteristics: leading market positions in
well-established industries; high rates of return on funds employed;
conservative capitalization structures with moderate reliance on debt and ample
asset protection; broad margins in 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 assigned
Prime-2 have a strong capacity for repayment of senior short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issues assigned A by S&P, the highest rating category, are regarded as
having the greatest capacity for timely repayment. Issues in this category are
delineated with the numbers 1, 2 and 3 to indicate the relative degree of
safety. The A-1 designation 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. The A-2
designation indicates that the capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for issues designated
A-1.
A-2
<PAGE>
APPENDIX B
RATING AGENCY GUIDELINES
GENERAL
The guidelines described below have been developed by Moody's and S&P in
connection with other issuances of asset-backed and similar securities,
including debt obligations and adjustable rate preferred stock, generally on a
case-by-case basis through discussions with the issuers of these securities. The
guidelines are designed to ensure that assets underlying outstanding debt or
preferred stock will be sufficiently varied and will be of sufficient quality
and amount to justify investment grade ratings. The guidelines do not have the
force of law, but they have been adopted by the Fund in order to satisfy current
requirements necessary for Moody's and S&P to issue the above-described ratings
for shares of each series of APS, which ratings are generally relied upon by
institutional investors in purchasing such securities. In the context of a
closed-end investment company such as the Fund, therefore, the guidelines
provide a set of tests for portfolio composition and asset coverage that
supplement (and in some cases are more restrictive than) the applicable
requirements under the 1940 Act. A rating agency's guidelines will apply to
shares of any series of APS only so long as such rating agency is rating such
shares.
The Fund intends to maintain a Discounted Value for its portfolio at least
equal to the APS Basic Maintenance Amount and, in addition, so long as S&P is
rating the shares of any series of APS, the Fund intends to maintain a Minimum
Liquidity Level. Moody's and S&P have each established separate guidelines for
determining Discounted Value. To the extent any particular portfolio holding
does not satisfy the applicable rating agency's guidelines, all or a portion of
such holding's value will not be included in the calculation of Discounted Value
(as defined by such rating agency). The Moody's and S&P guidelines do not impose
any limitations on the percentage of Fund assets that may be invested in
holdings not eligible for inclusion in the calculation of the Discounted Value
of the Fund's portfolio. The amount of such assets included in the portfolio at
any time may vary depending upon the rating, diversification and other
characteristics of the Eligible Assets included in the portfolio, although it is
not anticipated that in the normal course of business the value of such assets
would exceed 20% of the Fund's total assets.
In managing the Fund's portfolio, Mitchell Hutchins will not alter the
composition of the Fund's portfolio if, in the reasonable belief of Mitchell
Hutchins, the effect of any such alteration would be to cause the Fund to have
Eligible Assets with an aggregate Discounted Value, as of the immediately
preceding Valuation Date, less than the APS Basic Maintenance Amount of such
Valuation Date; provided, however, that in the event that, as of the immediately
preceding Valuation Date, the aggregate Discounted Value of the Fund's Eligible
Assets exceeded the APS Basic Maintenance Amount by five percent or less,
Mitchell Hutchins will not alter the composition of the Fund's portfolio in a
manner reasonably expected to reduce the aggregate Discounted Value of the
Fund's Eligible Assets unless the Fund shall have confirmed that, after giving
effect to such alteration, the aggregate Discounted Value of the Fund's Eligible
Assets would exceed the APS Basic Maintenance Amount.
Upon any failure to maintain the required Discounted Value, the Fund will
seek to alter the composition of its portfolio to reattain the APS Basic
Maintenance Amount on or prior to the APS Basic Maintenance Cure Date, thereby
incurring additional transaction costs and possible losses and/or gains on
dispositions of portfolio securities. To the extent any such failure is not
cured in a timely
B-1
<PAGE>
manner, shares of each series of APS will be subject to redemption if either
Moody's or S&P is rating such shares. The APS Basic Maintenance Amount includes
the sum of (i) the aggregate liquidation value of each series of APS then
Outstanding and (ii) certain accrued and projected payment obligations of the
Fund. See "Asset Maintenance."
The Fund may, but is not required to, adopt any modifications to these
guidelines that may hereafter be established by Moody's and S&P. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any rating
agency providing a rating for the shares of any series of APS may, at any time,
change or withdraw any such rating. As set forth in the APS Provisions, the
Board of Directors may, without Stockholder approval, modify certain definitions
or policies which have been adopted by the Fund pursuant to the rating agency
guidelines, provided the Board of Directors has obtained written confirmation
from Moody's and S&P, as appropriate, that any such change would not impair the
ratings then assigned by Moody's and S&P to any series of APS.
As described by Moody's and S&P, a preferred stock rating is an assessment
of the capacity and willingness of an issuer to pay preferred stock obligations.
The ratings on any series of the APS are not recommendations to purchase, hold
or sell shares of such series of APS, inasmuch as the ratings do not comment as
to market price or suitability for a particular investor nor do the rating
agency guidelines described above address the likelihood that a holder of shares
of any series of APS will be able to sell such shares in an Auction. The ratings
are based on current information furnished to Moody's and S&P by the Fund and
Mitchell Hutchins, and information obtained from other sources. The ratings may
be changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information. The Fund's Common Stock has not been rated
by a nationally recognized statistical rating organization.
S&P AAA Rating Guidelines. For purposes of calculating the Discounted Value
of the Fund's portfolio under current S&P guidelines, the fair market value of
Municipal Obligations eligible for consideration under such guidelines ("S&P
Eligible Assets") must be discounted by certain discount factors set forth in
the table below ("S&P Discount Factors"). The Discounted Value of a Municipal
Obligation under S&P guidelines is the fair market value thereof divided by the
S&P Discount Factor. The S&P Discount Factor used to discount a particular
Municipal Obligation will be determined by reference to the "S&P Exposure
Period" as determined by S&P (currently, 3 Business Days) and the S&P rating on
such Municipal Obligation. S&P Discount Factors for a range of exposure periods
are set forth below:
S&P DISCOUNT FACTORS
RATING CATEGORY
-------------------------------
S&P EXPOSURE PERIOD AAA AA A BBB
- ------------------------------------------ ---- ---- ---- ----
40 Business Days.......................... 190% 195% 210% 250%
22 Business Days.......................... 170 175 190 230
10 Business Days.......................... 155 160 175 215
7 Business Days.......................... 150 155 170 210
3 Business Days.......................... 130 135 150 190
Since the S&P Exposure Period currently applicable to the Fund is three
Business Days, the S&P Discount Factors currently applicable to S&P Eligible
Assets will be determined by reference to the factors set forth opposite the
line entitled "3 Business Days." Notwithstanding the foregoing, (i) the
B-2
<PAGE>
S&P Discount Factor for short-term Municipal Obligations will be 115%, so long
as such Municipal Obligations are rated A-1+ or SP-1+ by S&P and mature or have
a demand feature exercisable within 30 days or less, or 125% if such Municipal
Obligations are not rated by S&P but are rated VMIG-1, P-1 or MIG-1 by Moody's;
provided, however, that any such Moody's-rated short-term Municipal Obligations
which have demand features exercisable within 30 days or less must be backed by
a letter of credit, liquidity facility or guarantee from a bank or other
financial institution with a short-term rating of at least A-1+ from S&P; and
further provided that such Moody's-rated short-term Municipal Obligations may
comprise no more than 50% of short-term Municipal Obligations that qualify as
S&P Eligible Assets and (ii) no S&P Discount Factor will be applied to cash or
to Receivables for Municipal Obligations Sold. For purposes of the foregoing,
Anticipation Notes rated SP-1+ or, if not rated by S&P, rated MIG-1 or VMIG-1 by
Moody's, which do not mature or have a demand feature at par exercisable in 30
days and which do not have a long-term rating, will be considered to be
short-term Municipal Obligations. "Receivables for Municipal Obligations Sold,"
for purposes of calculating S&P Eligible Assets as of any Valuation Date, means
the book value of receivables for Municipal Obligations sold as of or prior to
such Valuation Date if such receivables are due within five business days of
such Valuation Date.
The S&P guidelines impose certain minimum issue size, issuer, geographical
diversification and other requirements for purposes of determining S&P Eligible
Assets:
(1) In order to be considered S&P Eligible Assets, Municipal Obligations
owned by the Fund must:
(a) Be interest bearing and pay interest at least semi-annually;
(b) Be payable with respect to principal and interest in U.S.
dollars;
(c) Be publicly rated BBB or higher by S&P or, if not rated by S&P
but rated by Moody's, be rated at least A by Moody's; provided that such
Moody's-rated Municipal Obligations will be included in S&P Eligible
Assets only to the extent the fair market value of such Municipal
Obligations does not exceed 50% of the aggregate fair market value of S&P
Eligible Assets. For purposes of determining the S&P Discount Factors
applicable to such Moody's-rated Municipal Obligations, any such
Municipal Obligation will be deemed to have an S&P rating which is one
full rating category lower than its Moody's rating;
(d) Not be private placements; and
(e) Be part of an issue with an original issue size of at least $20
million or, if of an issue with an original issue size below $20 million
(but in no event lower than $10 million), be issued by an issuer with a
total of at least $50 million of securities outstanding.
(2) Municipal Obligations of any one issuer or guarantor (excluding bond
insurers) will be considered S&P Eligible Assets only to the extent the fair
market value of such Municipal Obligations does not exceed 10% of the
aggregate fair market value of S&P Eligible Assets, provided that 2% is
added to the applicable S&P Discount Factor for every 1% by which the fair
market value of such Municipal Obligations exceeds 5% of the aggregate fair
market value of S&P Eligible Assets,
B-3
<PAGE>
(3) Municipal Obligations guaranteed or insured by any one bond insurer
will be considered S&P Eligible Assets only to the extent the fair market
value of such Municipal Obligations does not exceed 25% of the aggregate
fair market value of S&P Eligible Assets.
(4) Municipal Obligations issued by issuers in any one state (including
the District of Columbia), territory or possession of the United States will
be considered S&P Eligible Assets only to the extent the fair market value
of such Municipal Obligations does not exceed 20% of the aggregate fair
market value of S&P Eligible Assets.
For so long as shares of any series of APS are Outstanding and S&P is rating
such APS, the Fund will not, unless the Fund has received written confirmation
from S&P that any such action would not impair the rating then assigned by S&P
to the APS, engage in any one or more of the following transactions: engage in
reverse repurchase agreement transactions; borrow money, except that the Fund
may, without obtaining the written confirmation described above, borrow money
for the purposes of clearing securities transactions if the APS Basic
Maintenance Amount would continue to be satisfied after giving effect to such
borrowing; issue any class or series of shares ranking prior to or on a parity
with the APS with respect to the payment of dividends or the distribution of
assets upon dissolution, liquidation or winding up of the Fund, or reissue any
APS previously purchased or redeemed by the Fund; lend portfolio securities;
merge or consolidate with any corporation; engage in repurchase agreement
transactions in which the term of such repurchase obligation is longer than 90
days, in which the underlying security is a security other than United States
Treasury securities (not inclusive of zero coupon securities), demand deposits,
certificates of deposit, or bankers acceptances in which the counter-party or
its affiliates have securities rated A-1+ by S&P with respect to such underlying
security; or engage in short sale transactions. In addition, as long as shares
of APS are so rated or unless such confirmation has been received, the Fund will
not enter into interest rate caps, collars or floors, purchase or sell futures
contracts or options thereon or write uncovered put or uncovered call options on
portfolio securities except that (i) the Fund may engage in any S&P Hedging
Transactions based on the Municipal Index, provided that the Fund shall not
engage in any S&P Hedging Transaction based on the Municipal Index (other than
Closing Transactions) which would cause the Fund at the time of such transaction
to own or have sold the least of (1) more than 1,000 outstanding futures
contracts based on the Municipal Index, (2) outstanding futures contracts based
on the Municipal Index and on the Treasury Bonds exceeding in number 25% of the
quotient of the fair market value of the Fund's total assets divided by 100,000
or (3) outstanding futures contracts based on the Municipal Index exceeding in
number 10% of the average number of daily traded futures contracts based on the
Municipal Index in the month prior to the time of effecting such transaction as
reported by The Wall Street Journal and (ii) the Fund may engage in S&P Hedging
Transactions based on Treasury Bonds, provided that the Fund shall not engage in
any S&P Hedging Transaction based on Treasury Bonds (other than Closing
Transactions) which would cause the Fund at the time of such transaction to own
or have sold the lesser of (1) outstanding futures contracts based on Treasury
Bonds and on the Municipal Index exceeding in number 25% of the quotient of the
fair market value of the Fund's total assets divided by 100,000 or (2)
outstanding futures contracts based on Treasury Bonds exceeding in number 10% of
the average number of daily traded futures contracts based on Treasury Bonds in
the month prior to the time of effecting such transaction as reported by The
Wall Street Journal.
For so long as shares of any series of APS are rated by S&P, the Fund will
engage in Closing Transactions to close out any outstanding futures contract
which the Fund owns or has sold or any outstanding option thereon owned by the
Fund in the event (i) the Fund does not have S&P Eligible
B-4
<PAGE>
Assets with an aggregate Discounted Value equal to or greater than the APS Basic
Maintenance Amount on two consecutive Valuation Dates and (ii) the Fund is
required to pay Variation Margin on the second such Valuation Date. For so long
as shares of any series of APS are rated by S&P, the Fund will engage in a
Closing Transaction to close out any outstanding futures contract or option
thereon in the month prior to the delivery month under the terms of such futures
contract or option thereon unless the Fund holds securities deliverable under
such terms. For purposes of determining S&P Eligible Assets to determine
compliance with the APS Basic Maintenance Amount, no amounts on deposit with the
Fund's custodian or broker representing Initial Margin or Variation Margin shall
constitute S&P Eligible Assets. For so long as shares of any series of APS are
rated by S&P, when the Fund writes a futures contract or option thereon, it will
maintain an amount of cash, cash equivalents or short-term, money market
securities in a segregated account with the Fund's custodian, so that the amount
so segregated plus the amount of Initial Margin and Variation Margin held in the
account of the Fund's broker equals the fair market value of the futures
contract, except that in the event the Fund writes a futures contract or option
thereon which requires delivery of an underlying security, the Fund shall hold
such underlying security.
Moody's "aaa" Rating Guidelines. For purposes of calculating the Discounted
Value of the Fund's portfolio under current Moody's guidelines, the fair market
value of Municipal Obligations eligible for consideration under such guidelines
("Moody's Eligible Assets") must be discounted by certain discount factors set
forth in the table below ("Moody's Discount Factors"). The Discounted Value of a
Municipal Obligation under Moody's guidelines is the fair market value thereof
divided by the Moody's Discount Factor. The Moody's Discount Factor used to
discount a particular Municipal Obligation will be determined by reference to
the "Moody's Exposure Period" as determined by Moody's (currently, the period
commencing on a given Valuation Date and ending 47 days thereafter) and the
Moody's rating on such Municipal Obligation. Moody's Discount Factors for a
range of exposure periods are set forth below:
<TABLE><CAPTION>
MOODY'S DISCOUNT FACTORS RATING CATEGORY
----------------------------------------------------------
VMIG-1 SP-1+
MOODY'S EXPOSURE PERIOD AAA(1) AA(1) A(1) BAA(1) OTHER(2) (1)(3)(4) (3)(4)
- -------------------------------- ------ ----- ---- ------ -------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
7 weeks......................... 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but greater than
7 weeks....................... 154 164 173 205 235 137 149
9 weeks or less but greater than
8 weeks....................... 158 169 179 209 242 138 150
</TABLE>
- ------------
(1) Moody's rating.
(2) Municipal Obligations not rated by Moody's but rated BBB-, BBB or BBB+ by
S&P.
(3) Municipal Obligations rated MIG-1, VMIG-1 or Prime-1 or, if not rated by
Moody's, rated SP-1+ by S&P which do not mature or have a demand feature at
par exercisable within the Moody's Exposure Period and which do not have a
long-term rating.
(4) For the purposes of the definition of Moody's Eligible Assets, these
securities will have an assumed rating of "A" by Moody's.
Since the Moody's Exposure Period currently applicable to the Fund is 47
days, the Moody's Discount Factors currently applicable to Moody's Eligible
Assets will be determined by reference to the
B-5
<PAGE>
factors set forth opposite the line entitled "7 weeks." Notwithstanding the
foregoing, (i) no Moody's Discount Factor will be applied to short-term
Municipal Obligations so long as such Municipal Obligations are rated at least
MIG-1, VMIG-1 or P-1 by Moody's and mature or have a demand feature at par
exercisable within the Moody's Exposure Period, and the Moody's Discount Factor
for such Municipal Obligations will be 125% as long as such Municipal
Obligations are rated A-1- /M or SP-1+ /M by S&P and mature or have a demand
feature at par exercisable within the Moody's Exposure Period and (ii) no
Moody's Discount Factor will be applied to cash or to Receivables for Municipal
Obligations Sold. "Receivables for Municipal Obligations Sold," for purposes of
calculating Moody's Eligible Assets as of any Valuation Date, means no more than
the aggregate of the following: (i) the book value of receivables for Municipal
Obligations sold as of or prior to such Valuation Date if such receivables are
due within five business days of such Valuation Date, and if the trades which
generated such receivables are (x) settled through clearinghouse firms with
respect to which the Fund has received prior written authorization from Moody's
or (y) with counterparties having a Moody's long-term debt rating of at least
Baa3; and (ii) the Moody's Discounted Value of Municipal Obligations sold as of
or prior to such Valuation Date which generated receivables, if such receivables
are due within the Moody's Exposure Period but do not comply with either of
conditions (x) or (y).
The Moody's guidelines impose certain minimum issue size, issuer,
geographical diversification and other requirements for purposes of determining
Moody's Eligible Assets, as set forth in the table below:
<TABLE><CAPTION>
MINIMUM MAXIMUM MAXIMUM STATE OR
ISSUE SIZE UNDERLYING TERRITORY
RATING (MILLIONS) OBLIGOR** CONCENTRATION**
- --------------------------------------- ---------- ---------- ----------------
<S> <C> <C> <C>
Aaa.................................... $ 10 100% 100%
Aa..................................... 10 20 60
A...................................... 10 10 40
Baa.................................... 10 6 20
Other*................................. 10 4 12
</TABLE>
- ------------
* Municipal Obligations not rated by Moody's but rated at least BBB- by S&P.
** The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category.
Current Moody's guidelines also require that Municipal Obligations
constituting Moody's Eligible Assets pay interest in cash, be publicly rated Baa
or higher by Moody's or, if not rated by Moody's but rated by S&P that they be
rated at least BBB by S&P, and that they not have suspended ratings. For
purposes of determining the Moody's Discount Factors applicable to such
S&P-rated Municipal Obligations, any such Municipal Obligations (excluding
short-term Municipal Obligations) will be deemed to have a Moody's rating which
is one full rating category lower than its S&P rating. For purposes of
calculation of Minimum Issue Size, Maximum Underlying Obligor and Maximum State
or Territory Concentration, Moody's Eligible Assets shall be calculated without
including cash and Municipal Obligations rated MIG-1, VMIG-1 or Prime-1 or, if
not rated by Moody's, rated SP-1+ by S&P, which either mature or have a demand
feature at par exercisable within the Moody's Exposure Period. Where the Fund
sells an asset and agrees to repurchase such asset in the future, the Discounted
Value of such asset will constitute a Moody's Eligible Asset and the amount the
Fund is required to pay upon repurchase of such asset will count as a liability
for the purposes of the APS Basic Maintenance Amount. Where the Fund purchases
an asset and agrees to sell it to a third party in the future, cash
B-6
<PAGE>
receivable by the Fund thereby will constitute a Moody's Eligible Asset if the
long-term debt of such other party is rated at least A2 by Moody's and such
agreement has a term of 30 days or less; otherwise the Discounted Value of such
asset will constitute a Moody's Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset to the extent that it has been irrevocably deposited for the
payment of (A)(i) through (A)(vii) under the definition of APS Basic Maintenance
Amount or it is subject to any material lien, mortgage, pledge, security
interest or security agreement of any kind (collectively, "Liens"), except for
(a) Liens which are being contested in good faith by appropriate proceedings and
which Moody's has indicated to the Fund will not affect the status of such asset
as a Moody's Eligible Asset, (b) Liens for taxes that are not then due and
payable or that can be paid thereafter without penalty, (c) Liens to secure
payment for services rendered or cash advanced to the Fund by Mitchell Hutchins,
State Street Bank and Trust Company or the Auction Agent and (d) Liens by virtue
of any repurchase agreement.
For so long as the shares of any series of APS are Outstanding and the APS
are rated by Moody's, the Fund will not, unless it has received written
confirmation from Moody's that any such action would not impair the ratings then
assigned by Moody's to the APS engage in any one or more of the following
transactions: (1) incur any indebtedness, except that the Fund may, without
obtaining the prior written approval described above, incur indebtedness for the
purpose of clearing securities transactions if the Discounted Value of Moody's
Eligible Assets would equal or exceed the APS Basic Maintenance Amount after
giving effect to such indebtedness; (2) issue any class or series of shares
ranking prior to or on a parity with the APS with respect to the payment of
dividends or the distribution of assets upon dissolution, liquidation or winding
up of the Fund, or reissue any APS previously purchased or redeemed by the Fund;
(3) engage in short sale transactions; or (4) except as necessary to effect
Closing Transactions, engage in transactions in options on securities, futures
contracts or options on futures contracts, except that in connection with
Moody's Hedging Transactions: (A) the Fund may buy call or put options on
securities; (B) the Fund may write covered call options on securities; (C) the
Fund may write put options on securities; (D) the Fund may enter into positions
in futures contracts based on the Municipal Index provided that the Fund shall
not engage in any such transaction which would cause the Fund at the time of
such transaction to own or have sold (1) outstanding futures contracts based on
the Municipal Index exceeding in number 10% of the rolling average number of
daily traded futures contracts based on the Municipal Index in the 30 calendar
days prior to the time of effecting such transaction as reported by The Wall
Street Journal or (2) outstanding futures contracts based on the Municipal Index
and options on such futures contracts having an aggregate fair market value
(taking into account the fair market value of futures contracts based on
Treasury Bonds) exceeding the fair market value of Moody's Eligible Assets owned
by the Fund; (E) the Fund may enter into futures contracts on Treasury Bonds
provided that the Fund shall not engage in any such transaction which would
cause the Fund at the time of such transaction to own or have sold (1)
outstanding futures contracts based on Treasury Bonds and options on such
futures contracts having an aggregate fair market value (taking into account the
fair market value of futures contracts based on the Municipal Index) exceeding
40% of the aggregate fair market value of Moody's Eligible Assets owned by the
Fund and rated Aa by Moody's (or, if not rated by Moody's but rated by S&P,
rated AAA by S&P) or (2) outstanding futures contracts based on Treasury Bonds
and options on such futures contracts having an aggregate fair market value
(taking into account the fair market value of futures contracts based on the
Municipal Index) exceeding 80% of the aggregate fair market value of Moody's
Eligible Assets owned by the Fund and rated Baa or A by Moody's (or, if not
rated by Moody's but rated by S&P, rated A or
B-7
<PAGE>
AA by S&P); for purposes of the foregoing clauses (D) and (E), the Fund shall be
deemed to own the number of futures contracts that underlie any outstanding
option written by the Fund; and (F) the Fund may buy call or put options on
futures contracts on the Municipal Index or Treasury Bonds, may write put
options on such futures contracts (provided, that if the contract would require
delivery of a security, that security must be held by the Fund) and may write
call options on such futures if it owns the futures contract subject to the
option.
For so long as shares of any series of APS are rated by Moody's, the Fund
will engage in Closing Transactions to close out any outstanding futures
contract based on the Municipal Index if the open interest with respect to such
futures contracts based on the Municipal Index as reported by The Wall Street
Journal is less than 5,000. For so long as shares of APS are rated by Moody's,
the Fund will engage in a Closing Transaction to close out any outstanding
futures contract by no later than the fifth Business Day of the month in which
such contract expires and will engage in a Closing Transaction to close out any
outstanding option on a futures contract by no later than the first Business Day
of the month in which such option expires. For so long as shares of APS are
rated by Moody's, the Fund will engage in transactions with respect to futures
contracts or options thereon having only the next settlement date or the
settlement date immediately thereafter.
For purposes of valuation of Moody's Eligible Assets (i) if the Fund writes
a call option, the underlying asset will be valued as follows: (A) if the option
is exchange-traded and may be offset readily or if the option expires before the
earliest possible redemption of the APS, at the lower of the Discounted Value of
the underlying security of the option and the exercise price of the option or
(B) otherwise, it has no value; (ii) if the Fund writes a put option, the
underlying asset will be valued as follows: the lesser of (A) exercise price and
(B) the Discounted Value of the underlying security; (iii) if the Fund is a
seller under a futures contract, the underlying security will be valued at the
lower of (A) settlement price and (B) Discounted Value of the underlying
security; provided that, if a contract matures within the Moody's Exposure
Period, the security may be valued at the settlement price; (iv) if the Fund is
the buyer under a futures contract, the underlying security will be valued at
the lower of (A) the settlement price and (B) Discounted Value of the underlying
security; provided that, if the contract matures within the Moody's Exposure
Period, the security may be valued at Discounted Value of the underlying
security; and (v) call or put option contracts which the Fund buys have no
value. For so long as shares of any series of APS are rated by Moody's: (1) the
Fund will not engage in options and futures transactions for leveraging or
speculative purposes; (2) the Fund will not write any anticipatory call options
or sell any anticipatory contracts pursuant to which the Fund hedges the
anticipated purchase of an asset prior to completion of such purchase; (3) the
Fund will not enter into an option or futures transaction unless, after giving
effect thereto, the Fund would continue to have Moody's Eligible Assets with an
aggregate Discounted Value equal to or greater than the APS Basic Maintenance
Amount; (4) for purposes of the APS Basic Maintenance Amount (i) assets in
margin accounts are not Moody's Eligible Assets, (ii) 10% of the settlement
price of assets sold under a futures contract, the settlement price of assets
purchased under a futures contract and the settlement price of an underlying
futures contract if the Fund writes put options on futures contracts will
constitute liabilities of the Fund and (iii) if the Fund writes call options on
futures contracts and does not own the underlying futures contract, 105% of the
fair market value of the underlying futures contract will constitute a liability
of the Fund; (5) the Fund shall enter into only exchange-traded futures and
shall write only exchange-traded options on exchanges approved by Moody's; (6)
where delivery may be made to the Fund with any of a class of securities, the
Fund shall assume for purposes of the APS Basic Maintenance Amount
B-8
<PAGE>
that it takes delivery of that security which yields it the least value; (7) the
Fund will not engage in forward contracts; (8) the Fund will enter into futures
contracts as seller only if it owns the underlying security; and (9) there shall
be a quarterly audit made of the Fund's futures and options transactions by the
Fund's independent accountants to confirm that the Fund is in compliance with
these standards.
ASSET MAINTENANCE
1940 ACT APS ASSET COVERAGE
The Fund is required under the APS Provisions to maintain, with respect to
the APS, as of the last Business Day of each month in which any APS are
outstanding, asset coverage of at least 200% with respect to senior securities
which are stock, including APS (or such other asset coverage as may in the
future be specified in or under the 1940 Act as the minimum asset coverage for
senior securities which are stock of a closed-end investment company as a
condition of declaring dividends on its common stock). If the Fund fails to
maintain such asset coverage in accordance with the requirements of the rating
agency or agencies then rating the APS ("1940 Act APS Asset Coverage") and such
failure is not cured as of the last Business Day of the following month ("1940
Act Cure Date"), the Fund will be required in certain circumstances to redeem
certain of the APS.
APS BASIC MAINTENANCE AMOUNT
So long as any APS are Outstanding, the Fund is required under the APS
Provisions to maintain as of each Business Day (a "Valuation Date") assets
having in the aggregate a Discounted Value at least equal to the APS Basic
Maintenance Amount established by the rating agency or agencies then rating the
APS. If the Fund fails to meet such requirement on any Valuation Date and such
failure is not cured on or before the third Business Day after such Valuation
Date ("APS Basic Maintenance Cure Date"), the Fund will be required in certain
circumstances to redeem certain of the shares of APS.
The "APS Basic Maintenance Amount" as of any Valuation Date is defined as
the dollar amount equal to the sum of:
(A)(i) the product of the number of APS outstanding on such date
multiplied by $50,000;
(ii) the aggregate amount of dividends that will have accumulated at
the Applicable Rate (whether or not earned or declared) to (but not
including) the respective first Dividend Payment Dates for each of the APS
outstanding that follow such Valuation Date (or to the 47th day after such
Valuation Date, if such 47th day is earlier than the first following
Dividend Payment Date);
(iii) the amount equal to the Projected Dividend Amount (based on the
number of APS outstanding on such date);
(iv) the amount of anticipated Fund expenses for the 90 days
subsequent to such Valuation Date;
(v) the amount of the Fund's Maximum Potential Additional Dividends
Liability as of such Valuation Date;
(vi) the amount of any premium payable pursuant to a Premium Call
Period; and
B-9
<PAGE>
(vii) any current liabilities as of such Valuation Date to the extent
not reflected in any of (A)(i) through (A)(vi) (including, without
limitation, any amounts described below as required to be treated as
liabilities in connection with the Fund's transactions in futures and
options and including any payables for Municipal Obligations purchased as of
such Valuation Date) less
(B) either (i) the face value of any Fund assets irrevocably deposited
by the Fund for the payment of any of (A)(i) through (A)(vii) if such assets
mature prior to or on the date of payment of the liability for which such
assets are deposited and are either securities issued or guaranteed by the
United States Government or have a rating assigned by Moody's of P-1,
VMIG-1, or MIG-1, (or, with respect to S&P, SP-1+ or A-1+) or (ii) the
Discounted Value of such assets.
For purposes of the foregoing, "Maximum Potential Additional Dividends
Liability," as of any Valuation Date, means the aggregate amount of Additional
Dividends that would be due if the Fund were to make Retroactive Taxable
Allocations, with respect to any taxable year, estimated based upon dividends
paid and the amount of undistributed realized net capital gains and other
taxable income earned by the Fund, as of the end of the calendar month
immediately preceding such Validation Date, and assuming such Additional
Dividends are fully taxable.
For purposes of the APS Basic Maintenance Amount in connection with S&P's
ratings of the APS, with respect to any transactions by the Fund in futures
contracts, the Fund shall include as liabilities (i) 30% of the aggregate
settlement value, as marked to market, of any outstanding futures contracts
based on the Municipal Index which are owned by the Fund plus (ii) 25% of the
aggregate settlement value, as marked to market, of any outstanding futures
contracts based on Treasury Bonds which contracts are owned by the Fund. For
purposes of the APS Basic Maintenance Amount in connection with Moody's rating
of the APS, with respect to any transactions by the Fund in securities
operations, the Fund shall include as liabilities (i) 10% of the exercise price
of a call option written by the Fund and (ii) the exercise price of any written
put option.
The Discount Factors and guidelines for determining the market value of the
Fund's portfolio holdings, described above under the heading "Rating Agency
Guidelines -- General," have been based on criteria established in connection
with rating each series of APS. These factors include, but are not limited to,
the sensitivity of the market value of the relevant asset to changes in interest
rates, the liquidity and depth of the market for the relevant asset, the credit
quality of the relevant asset (for example, the lower the rating of a debt
obligation, the higher the related discount factor) and the frequency with which
the relevant asset is marked to market. In no event shall the Discounted Value
of any asset of the Fund exceed its unpaid principal balance or face amount as
of the date of calculation. The Discount Factors relating to any asset of the
Fund and the APS Basic Maintenance Amount, the assets eligible for inclusion in
the calculation of the Discounted Value of the Fund's portfolio and certain
definitions and methods of calculation relating thereto may be changed from time
to time by the Fund without approval of the holders of the APS, but only in the
event the Fund receives written confirmation from the appropriate rating agency
that any such change would not impair the rating then assigned to the APS by
such rating agency. A rating agency's Discount Factors and guidelines will apply
to the APS so long as such rating agency is rating the APS.
On or before 5:00 P.M., New York City time, on the third Business Day after
a Valuation Date on which the Fund fails to maintain a Discounted Value of
Moody's Eligible Assets or S&P Eligible Assets in an amount greater than or
equal to the APS Basic Maintenance Amount, and the third Business Day
B-10
<PAGE>
after the APS Basic Maintenance Cure Date with respect to such Valuation Date,
the Fund is required to deliver to the Auction Agent (so long as either Moody's
or S&P is rating the APS) a report with respect to the calculation of the APS
Basic Maintenance Amount and the value of its portfolio holdings as of the date
of such failure or such cure date, as the case may be ("APS Basic Maintenance
Report"). The Fund will also deliver an APS Basic Maintenance Report to S&P (if
S&P is then rating the APS) and Moody's (if Moody's is then rating the APS) on a
bi-weekly or quarterly basis and: (i) on any Valuation Date on which the
Discounted Value of Moody's Eligible Assets or S&P Eligible Assets, as the case
may be, is greater than the APS Basic Maintenance Amount by 5% or less or (ii)
on any date on which the Fund redeems Common Stock. Within ten Business Days
after delivery of such report relating to the last Business Day of each fiscal
quarter of the Fund, commencing March 31, 1993, the Fund will deliver a letter
prepared by the Fund's independent accountants regarding the accuracy of the
calculations made by the Fund in its most recent APS Basic Maintenance Report.
If any such letter prepared by the Fund's independent accountants shows that an
error was made in the most recent APS Basic Maintenance Report, the calculation
or determination made by the Fund's independent accountants will be conclusive
and binding on the Fund.
MINIMUM LIQUIDITY LEVEL
Pursuant to S&P guidelines, so long as S&P is rating the APS, the Fund is
required under the APS Provisions to have, as of each Valuation Date and with
respect to shares of each series of APS, Deposit Securities with maturity or
tender dates not later than the day preceding the first Dividend Payment Date
for such series that follows such Valuation Date (collectively "Dividend
Coverage Assets") for each share of each series of APS Outstanding that follow
such Valuation Date and having a value not less than the Dividend Coverage
Amount (the "Minimum Liquidity Level"). So long as S&P is rating the APS, if, as
of each Valuation Date, the Fund does not have the required Dividend Coverage
Assets, the Fund will, as soon as practicable, adjust its portfolio in order to
meet the Minimum Liquidity Level. The "Dividend Coverage Amount," as of any
Valuation Date, means with respect to each series of APS, (A) the aggregate
amount of dividends that will accumulate on each share of APS to (but not
including) the first Dividend Payment Date for each share of APS Outstanding
that follows such Valuation Date plus any liabilities that will become payable
prior to or on such payment date; less (B) the combined value of Deposit
Securities irrevocably deposited for the payment of dividends on the APS and
Receivables for Municipal Obligations Sold which become due prior to the
Dividend Payment Date and interest with respect to Municipal Obligations which
is payable to the Fund prior to the Dividend Payment Date. "Deposit Securities"
generally means cash and Municipal Obligations rated at least A-1+ or SP-1+ by
S&P. The definitions of "Deposit Securities," "Dividend Coverage Assets" and
"Dividend Coverage Amount" may be changed from time to time by the Fund without
approval of the holders of the APS, but only in the event the Fund receives
written confirmation from S&P that any such change would not impair the rating
then assigned by S&P to the APS.
B-11
<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 INVESTMENT GRADE
CONNECTION WITH THE OFFERING MADE BY THE MUNICIPAL INCOME FUND INC.
PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
FUND OR PAINEWEBBER. THE PROSPECTUS AND THIS
STATEMENT OF ADDITIONAL INFORMATION DO NOT
CONSTITUTE AN OFFERING BY THE FUND OR BY
PAINEWEBBER IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
--------------
COMMON STOCK
TABLE OF CONTENTS
PAGE ----------------
---- STATEMENT OF ADDITIONAL
Investment Policies and INFORMATION
Restrictions.......................... 1 ----------------
Hedging and Related Income
Strategies............................ 7
Directors and Officers................ 15 PAINEWEBBER INCORPORATED
Control Persons and Principal Holders
of Securities....................... 20 ----------------
Investment Advisory Arrangements...... 21
Portfolio Transactions................ 22
Valuation of Common Stock............. 23
Taxes................................. 24
Additional Information................ 26
Financial Statements.................. 27
Appendix A............................ A-1
Appendix B............................ B-1
February 1, 1996
(C)1996 PaineWebber Incorporated
[LOGO]
Recycled
Paper
- --------------------------------------------------------------------------------
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<PAGE>
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
1. Financial Statements:
Included in Part A of the Registration Statement:
a. Financial Highlights
Included through incorporation by reference in Part B of the
Registration Statement and filed with the Annual Report to
Shareholders with the Securities and Exchange Commission on
December 1, 1995 [File No. 33-60596] [Accession No.
0000950112-95-003100]:
a. Report of Price Waterhouse LLP, Independent
Accountants
b. Portfolio of Investments at September 30, 1995
c. Statement of Assets and Liabilities at September 30,
1995
d. Statement of Operations for the year ended September
30, 1995
e. Statement of Cash Flows for the year ended September
30, 1995
f. Statement of Changes in Net Assets
g. Notes to Financial Statements
h. Quarterly Results of Operations (unaudited)
i. Financial Highlights
2. Exhibits:
a. (i) Articles of Incorporation1/
(ii) Articles Supplementary2/
1/ Incorporated herein by reference to exhibit 1 to the Registration
Statement on Form N-2 filed August 7, 1992 (File No. 33-50670).
2/ Incorporated herein by reference to exhibit a.(ii) to the Pre-
Effective Amendment No. 1 to the Registration Statement on Form N-2 filed
June 11, 1993 (File No. 33-60596).
II-1
<PAGE>
b. Bylaws3/
c. None
d. Inapplicable
e. Dividend Reinvestment Plan4/
f. None
g. Investment Advisory and Administration Contract5/
h. None6/
i. None
j. Custodian Agreement7/
k. Transfer Agency Agreement8/
l. Opinion and Consent of Counsel9/
m. None
n. Consent of Independent Accountants (filed herewith)
o. None
3/ Incorporated herein by reference to exhibit 2 to the Registration
Statement on Form N-2 filed August 7, 1992 (File No. 33-50670).
4/ Incorporated herein by reference to exhibit 9(c) to Pre-Effective
Amendment No. 2 to the Registration Statement on Form N-2 filed October
29, 1992 (File No. 33-50670).
5/ Incorporated herein by reference to exhibit 6 to Pre-Effective
Amendment No. 2 to the Registration Statement on Form N-2 filed October
29, 1992 (File No. 33-50670).
6/ The shares of the common stock offered by the Prospectus will be
offered in order to effect over-the-counter secondary market transactions
by PaineWebber in its capacity as a dealer and secondary market maker and
not pursuant to any agreement with the Fund. Shares of the common stock
were originally issued in a public offering pursuant to an Underwriting
Agreement and a related document, included as exhibits 7(a) and (b) to
Pre-Effective Amendment No. 2 to the Registration Statement on Form N-2
filed October 29, 1992 (File No. 33-50670).
7/ Incorporated herein by reference to exhibit 9(a) to Pre-Effective
Amendment No. 2 to the Registration Statement on Form N-2 filed October
29, 1992 (File No. 33-50670).
8/ Incorporated herein by reference to exhibit 9(b) to Pre-Effective
Amendment No. 2 to the Registration Statement on Form N-2 filed October
29, 1992 (File No. 33-50670).
9/ Incorporated herein by reference to exhibit l. to Pre-Effective
Amendment No. 1 to the Registration Statement on Form N-2 filed June 11,
1993 (File No. 33-60596).
II-2
<PAGE>
p. Letter of Investment Intent10/
q. None
Item 25. Marketing Arrangements
Inapplicable.
Item 26. Other Expenses of Issuance and Distribution
Not applicable to current Post-Effective Amendment; for expenses
incurred in connection with this Registration Statement; see Pre-Effective
Amendment No. 1 to the Series' Registration Statement on Form N-2, SEC
File No. 33-60596, filed June 11, 1993.
Item 27. Persons Controlled by or Under Common Control
None.
Item 28. Number of Holders of Securities
Number of Record
Title of Class Stockholders as of
-------------- 11/29/95
Shares of Common Stock, par value
$0.001 per share . . . . . . . . . . . . . . . . 647
Auction Preferred Shares, Series A . . . . . . . 3
Auction Preferred Shares, Series B . . . . . . . 3
Item 29. Indemnification
Incorporated by reference to Item 3 of Part II to Pre-Effective
Amendment No. 2 to the Registration Statement on Form N-2 filed October
29, 1992 (File No. 33-50670).
Item 30. Business and Other Connections of Investment Adviser
See "Management of the Fund" in the Prospectus.
Mitchell Hutchins, a Delaware corporation, is a registered investment
adviser and is wholly owned by PaineWebber, which in turn is wholly owned
by Paine Webber Group Inc. Mitchell Hutchins is primarily engaged in the
investment advisory business. Information as to executive officers and
directors of Mitchell Hutchins is included in its Form ADV filed on August
17, 1995 with the SEC (Registration number 801-13219) and is incorporated
herein by reference.
Item 31. Location of Accounts and Records
The accounts and records of the Fund are maintained at the offices of
Mitchell Hutchins at 1285 Avenue of the Americas, New York, New York 10019
and at the office of the Fund's custodian State Street Bank and Trust
Company, at One Heritage Drive, North Quincy, Massachusetts 02171
and at the office of the Trust's transfer agent, PNC Bank, National
Association, c/o PFPC Inc., 103 Bellevue Parkway, Wilmington, Delaware
19809.
10/ Incorporated herein by reference to exhibit 14 to Pre-Effective
Amendment No. 2 to the Registration Statement on Form N-2 filed October
29, 1992 (File No. 33-50670).
II-3
<PAGE>
Item 32. Management Services
None.
Item 33. Undertakings
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of
the registration statement (or the most
recent post-effective amendment thereof)
which, individually or in the aggregate,
represent a fundamental change in the
information set forth in the registration
statement; and
(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement.
(2) That for the purpose of determining any liability
under the Securities Act of 1933, the information omitted from the
form of prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus filed by
the registrant pursuant to Rule 424(b)(1) or (4) or 497 under the
Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(3) That for the purpose of determining any liability
under the Securities Act of 1933, each post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(4) To remove from registration by means of a post-
effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
(5) To send by first class mail or other means designed to
ensure equally prompt delivery, within two business days of receipt of
a written or oral request, any Statement of Additional Information.
II-4
<PAGE>
PAINEWEBBER PREMIER TAX-FREE INCOME FUND INC.
EXHIBIT INDEX
Sequential
Page
Exhibit Document Description Number
- ------- -------------------- ----------
a. (i) Articles of Incorporation [previously
filed as exhibit 1 to the Registration
Statement to Form N-2 filed August 7,
1992 (File No. 33-50670)]
(ii) Articles Supplementary [previously filed
as exhibit a.(ii) to the Pre-Effective
Amendment No. 1 to the Registration
Statement Form N-2 filed June 11, 1993
(File No. 33-60596)]
b. Bylaws [previously filed as exhibit 2 to
the Registration Statement on Form N-2
filed August 7, 1992 (File No. 33-
50670)]
c. None
d. Inapplicable
e. Dividend Reinvestment Plan [previously
filed as exhibit 9(c) to Pre-Effective
Amendment No. 2 to the Registration
Statement on Form N-2 filed October 29,
1992 (file No. 33-50670)]
f. None
g. Investment Advisory and Administration
Contract [previously filed as exhibit 6
to Pre-Effective Amendment No. 2 to the
Registration Statement on Form N-2 filed
October 29, 1992 (file No. 33-50670)]
h. None
i. None
j. Custodian Agreement [previously filed as
exhibit 9(a) to Pre-Effective Amendment
No. 2 to the Registration Statement on
Form N-2 filed October 29, 1992 (file
No. 33-50670)]
k. Transfer Agency Agreement [previously
filed as exhibit 9(b) to Pre-Effective
Amendment No. 2 to the Registration
Statement on Form N-2 filed October 29,
1992 (file No. 33-50670)]
II-5
<PAGE>
l. Opinion and consent of counsel
[previously filed as exhibit l. to the
Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-2 filed
June 11, 1993 (File No. 33-60596)]
m. None
n. Consent of Independent Accountants
(filed herewith)
o. None
p. Letter of Investment Intent [previously
filed as exhibit 14 to Pre-Effective
Amendment No. 2 to the Registration
Statement on Form N-2 filed October 29,
1992 (file No. 33-50670)]
q. None
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New
York, and the State of New York, on the 29th day of November, 1995.
PAINEWEBBER PREMIER TAX-FREE INCOME FUND INC.
(doing business as Investment Grade Municipal Income Fund)
By:/s/ Gregory K. Todd
-----------------------
Gregory K. Todd
Vice President and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed
below by the following persons in the capacities and on the dates
indicated:
Signature Title Date
--------- ----- ----
/s/ E. Garrett Bewkes, Jr.
-------------------------------------- Director and Nov. 29, 1995
E. Garrett Bewkes, Jr.* Chairman
of the Board
of Directors
/s/ Richard Q. Armstrong
-------------------------------------- Director Nov. 29, 1995
Richard Q. Armstrong****
-------------------------------------- Director
Richard R. Burt
/s/ Meyer Feldberg Director Nov. 29, 1995
--------------------------------------
Meyer Feldberg**
/s/ John R. Torell III
-------------------------------------- Director Nov. 29, 1995
John R. Torell III**
/s/ William D. White
-------------------------------------- Director Nov. 29, 1995
William D. White**
<PAGE>
/s/ Margo N. Alexander
-------------------------------------- President Nov. 29, 1995
(Chief
Margo N. Alexander*** Executive
Officer)
/s/ Julian F. Sluyters
-------------------------------------- Vice Nov. 29, 1995
Julian F. Sluyters President and
Treasurer
(Principal
Financial and
Accounting
Officer)
________________
*Signature affixed by Robert A. Wittie, pursuant to power of attorney
dated January 3, 1994, and incorporated by reference from Post-Effective
Amendment No. 20 to the Registration Statement of PaineWebber Master
Series, Inc., SEC No. 33-2524, filed February 28, 1994.
**Signature affixed by Robert A. Wittie, pursuant to powers of attorney
dated March 31, 1993, and incorporated by reference from Pre-Effective
Amendment No. 2 to the Fund's Registration Statement on Form N-2, SEC No.
33-60596, filed April 2, 1993.
***Signature affixed by Robert A. Wittie, pursuant to power of attorney
dated May 8, 1995, and incorporated by reference from Post-Effective
Amendment No. 34 to the Registration Statement of PaineWebber America
Fund, SEC No. 2-78626, filed May 10, 1995.
****Signature affixed by Robert A. Wittie, pursuant to power of attorney
dated June 1, 1995, filed herewith.
<PAGE>
POWER OF ATTORNEY
I, Richard Q. Armstrong, Director of Triple A and Government
Series - 1995, Inc., Tripple A and Government Series - 1997, Inc., All-
American Term Trust Inc., 2002 Target Term Trust Inc., Global Small Cap
Fund Inc., Global High Income Dollar Fund Inc., PainWebber Premier High
Income Trust Inc., PaineWebber Premier Tax-Free Income Fund Inc. and
PaineWebber Premier Insured Municipal Income fund Inc. (collectively, the
"Funds"), hereby constitute and appoint Victoria E. Schonfeld, Dianne E.
O'Donnell, Gregory K. Todd, Joan L. Cohen, Elinor W. Gammon and Robert A.
Wittie, and each of them singly, my true and lawful attorneys, with full
power to them to sign for me, and in my capacity as Director for each of
the Funds, any and all amendments to each of the particular registration
statements of the Funds, and all instruments necessary or desirable in
connection therewith, filed with the Securities and Exchange Commission,
hereby ratifying and confirming my signature as it may be signed by said
attorneys to any and all amendments to said registration statements.
Pursuant to the requirements of the Securities Act of 1933, this
instrument has been signed below by the following in the capacity and on
the date indicated.
Signature Title Date
/s/ Richard Q. Armstrong Director June 1, 1995
- ------------------------ -------
<PAGE>
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 3 to the Registration Statement on Form N-2 (the "Registration
Statement") of our report dated November 15, 1995 relating to the financial
statements and financial highlights appearing in the September 30, 1995 Annual
Report to Shareholders of Investment Grade Municipal Income Fund (formerly
PaineWebber Premier Tax-Free Income Fund Inc.) which is also incorporated by
reference into the Registration Statement. We also consent to the references to
us under the headings "Financial Highlights" in the Prospectus and "Independent
Accountants" in the Statement of Additional Information.
/s/ Price Waterhouse LLP
- ------------------------------------
PRICE WATERHOUSE LLP
New York, New York
November 30, 1995
