<PAGE>
PAINEWEBBER PREMIER INSURED MUNICIPAL
INCOME FUND INC.
COMMON STOCK
------------------------
PaineWebber Premier Insured 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 Municipal Obligations that are insured as to
timely payment of both principal and interest by an entity with claims-paying
ability rated Aaa by Moody's Investors Service, Inc. ('Moody's'), AAA by
Standard & Poor's ('S&P') or an equivalent rating from another nationally
recognized statistical rating organization ('NRSRO') or (with respect to 20% of
the Fund's total assets) that are (i) backed by an escrow or trust account
containing sufficient U.S. government or U.S. government agency securities to
ensure the timely payment of principal and interest, (ii) guaranteed as to the
timely payment of principal and interest by an entity which has a credit rating
of Aaa by Moody's, AAA by S&P or an equivalent rating by another NRSRO or (iii)
rated Aaa by Moody's, AAA by S&P or an equivalent rating by another NRSRO. No
assurance can be given that the Fund will achieve its investment objective. All
or a portion of the Fund's dividends may be attributable to interest income that
is an item of tax preference for purposes of the federal alternative minimum
tax.
The Fund's common stock ('Common Stock') is listed and traded on the New
York Stock Exchange, Inc. ('NYSE') under the symbol 'PIF'. 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 the prevailing market prices on the
NYSE at the time of sale. The closing price of the Common Stock on the NYSE on
July 31, 1995 was $11.50 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 $150,000,000. The APS have resulted in financial
leverage for the Fund, which involves special risks. The Fund may utilize
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 August 1, 1995 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 August 1, 1995.
<PAGE>
FUND EXPENSES
The following tables are intended to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear, directly or
indirectly.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering
price)...................................... None(1)
Dividend Reinvestment Fees................... None
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO COMMON STOCK)(2)
Investment Advisory and Administration
Fees........................................ 1.42%
Interest Payments on Borrowed Funds(3)....... 0.00%
Other Expenses............................... 0.32%
------
Total Annual Expenses................... 1.74%
</TABLE>
------------------
(1) Prices for the Common Stock traded in the OTC market will reflect ordinary
dealer mark-ups.
(2) The percentages shown reflect the annualization 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 the Fund's average weekly net assets. See
'Management of the Fund' for additional information. The investment advisory
and administration fees payable to Mitchell Hutchins are higher than that
paid by most funds. 'Other Expenses' have been estimated based upon expenses
actually incurred for the fiscal year ended March 31, 1995. Effective June
1, 1995, Mitchell Hutchins began waiving 0.25% of its 0.90% investment
advisory and administration fees. While Mitchell Hutchins may discontinue
this fee waiver at any time, this waiver is expected to reduce the Fund's
investment advisory and administration fees and total annual expenses (each
expressed as a percentage of net assets attributable to Common Stock) for
the current fiscal year to 1.03% and 1.35%, respectively.
(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*:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C>
$18 $55 $94 $205
</TABLE>
------------------
* After giving effect to the 0.25% fee waiver referred to above, 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 $14, $43, $74 and $162,
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 regulation 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 not represent, the
projected or actual performance of the Fund's Common Stock. In addition, while
this Example assumes reinvestment of all dividends and other distributions at
net asset value, participants in the Fund's Dividend Reinvestment Plan ('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.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus, and in the Statement
of Additional Information ('SAI').
<TABLE>
<S> <C>
The Fund.............................. PaineWebber Premier Insured Municipal
Income Fund Inc. (the '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.
PaineWebber is not obligated to
conduct any such market-making
activities and may discontinue such
activities at any time without
notice, at its sole discretion. No
assurance can be given as to the
liquidity of, or the trading market
for, the Common Stock as a result of
any market-making activities
undertaken by PaineWebber. The Common
Stock is listed and traded on the
NYSE under the symbol 'PIF.' 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
Municipal Obligations that are insured
as to the timely payment of both
principal and interest by an entity
that, at the time of investment, has a
claims-paying ability rated Aaa by
Moody's Investors Service, Inc.
('Moody's'), AAA by Standard & Poor's
('S&P') or has an equivalent rating
from another nationally recognized
statistical rating organization
('NRSRO') or (with respect to 20% of
the Fund's total assets) that are, at
the time of investment, (1) backed by
an escrow or trust account containing
sufficient U.S. government or U.S.
government agency securities to ensure
the timely payment of principal and
interest; (2) guaranteed as to the
timely payment of principal and
interest by an entity which has a
credit rating of Aaa by Moody's, AAA
by S&P or an equivalent rating by
another NRSRO; or (3) not insured,
guaranteed or backed by escrows but
rated Aaa by Moody's, AAA by S&P or
have an equivalent rating by another
NRSRO. All or a portion of the Fund's
assets may be invested in Municipal
Obligations the interest on which is
an item of tax preference ('Tax
Preference Item') for purposes of the
federal alternative minimum tax
('AMT'). No assurance can be given
that the Fund will achieve its
investment objective.
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
See 'Investment Objective and Policies,'
'Insurance,' 'Other Investment
Practices,' 'Taxes' and Appendix A.
Municipal Obligations................. Municipal Obligations are debt
obligations or similar securities
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 federal income
tax. Municipal Obligations are issued
for various public purposes, including
construction of public facilities,
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 federal income tax and is not a
Tax Preference Item and qualified
'private activity' obligations, which
generate interest that is exempt from
federal income tax but that may be a
Tax Preference Item. The Municipal
Obligations in which the Fund may
invest include municipal bonds,
industrial development and private
activity bonds, municipal lease
obligations, zero coupon obligations,
floating and variable rate
obligations, participation interests
and custodial receipts for any of the
foregoing, inverse floaters, put
bonds, tender option bonds and certain
municipal derivatives, such as
detachable call options and Municipal
Obligations with embedded caps. The
market prices of inverse floaters and
zero coupon obligations will be more
volatile than those of other types of
municipal obligations and certain
Municipal Obligations, such as many
forms of municipal lease obligations,
may be illiquid.
See 'Investment Objective and Policies,'
'Other Investment Practices' and
'Appendix A.'
Insurance............................. Insurance for Municipal Obligations in
which the Fund invests will be
obtained from insurance companies
having claims-paying ability ratings
of Aaa from Moody's or AAA from S&P or
having an equivalent rating from
another NRSRO. Such insurance may be
purchased by the issuer of the
Municipal Obligation or by a third
party at the time of issuance of the
Municipal Obligation ('Original Issue
Insurance') or by the Fund or a third
party subsequent to the original
issuance of the Municipal Obligation
('Secondary Market Insurance'). The
Fund also may purchase insurance
covering certain Municipal Obligations
which it intends to purchase for its
portfolio or which it already owns
('Portfolio Insurance'). See
'Insurance.'
Auction Preferred Shares.............. The Fund has outstanding 800 shares of
Auction Preferred Shares ('APS')
Series A, 800 shares of APS Series B,
800 shares of APS Series C and 600
shares of APS Series D, having an
aggregate liquidation value of
$150,000,000. The
APS have 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
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
reflect prevailing 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.
The Fund may utilize 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.'
Investment Adviser and
Administrator....................... Mitchell Hutchins Asset Management Inc.
('Mitchell Hutchins'), a wholly owned
asset management 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. The
Fund pays Mitchell Hutchins, as
investment adviser and administrator,
a fee, computed weekly and payable
monthly, in an amount equal to an
annual rate of 0.90% of the Fund's
average weekly net assets. This fee is
higher than the advisory and
administration fees paid by most
funds. See 'Management of the Fund.'
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.
For federal tax purposes, the Fund is
required to allocate net realized
capital gains and any taxable income
(along with tax-exempt income) between
Common Stockholders and any preferred
stockholders in proportion to total
distributions paid to each class of
stockholders for the relevant year. If
a portion of the dividends paid on the
preferred stock is taxable because of
such allocations, the Fund may be
required to make an additional
dividend payment to the preferred
stockholders so that the net after-tax
return on the preferred stock is the
same after the additional dividend as
the net after-tax return that would
have been derived if the initial
dividends had qualified in their
entirety as tax-
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
exempt income. Common Stockholders are
not entitled to comparable additional
dividends and any such payments to the
preferred stockholders would reduce
the net investment income, capital
gains or other income available for
distribution to the Common
Stockholders.
Dividends paid to Common Stockholders
are exempt from federal income tax to
the extent such dividends are properly
designated by the Fund as being
derived from interest on tax-exempt
securities. All or a portion of such
dividends may be attributable to
interest income that is a Tax
Preference Item.
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 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 another broker or nominee
should contact such broker or nominee
to determine whether, or how, they may
participate in the Plan. Additional
shares of Common Stock acquired under
the Plan will be 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 the Plan. See
'Dividends and Other Distributions;
Dividend Reinvestment Plan.'
Special Risk Considerations........... Insurance. There can be no assurance
that the insurers whose policies
insure Municipal Obligations held by
the Fund will be able to maintain
their Aaa, AAA or equivalent
claims-paying ability ratings or to
honor their obligations under all
circumstances. The loss of such
ratings or an inability to honor such
obligations would be likely to have an
adverse effect on the market value of
the Municipal Obligations covered by
policies issued by such insurers to
the extent the Fund is not able to or
does not obtain alternative insurance.
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 Baa by Moody's, BBB by S&P
or an equivalent rating by another
NRSRO do not exceed 5% of the Fund's
net assets.
Alternative Minimum Tax; State and Local
Taxation. The Fund may invest all or a
portion of its assets in Municipal
Obligations the interest on which is a
Tax Preference Item. Accordingly, 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
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
an investment in the Fund. All or a
portion of the Fund's dividends also
may be subject to state and local
taxation.
Market Risk of Insured Municipal
Obligations. Although insurance or
guarantees on, or escrows of U.S.
government securities with respect to,
Municipal Obligations reduce financial
or credit risk, such Municipal
Obligations remain subject to market
risk (i.e., the risk of fluctuations
in market value as a result of changes
in prevailing interest rates).
Illiquid Securities. The Fund may invest
up to 20% of its net assets in
illiquid securities. The Fund may not
be able readily to dispose of such
securities at an amount that
approximates that at which the Fund
has valued them and would have to sell
other investments if necessary to
raise cash to meet its obligations.
Illiquid securities include, among
other things, municipal lease
obligations (including certificates of
participation) other than those that
Mitchell Hutchins has determined to be
liquid pursuant to guidelines
established by the Fund's board of
directors.
Rights of Preferred Stockholders. In the
event that dividends payable on any
preferred stock remain unpaid for a
period of two years, the preferred
stockholders will, for so long as the
dividends remain unpaid, be entitled
to elect a majority of the Fund's
board of directors. In the event of
any voluntary or involuntary
liquidation, dissolution or winding up
of the Fund, the preferred
stockholders will be entitled to
receive a preferential liquidating
distribution equal to the purchase
price of the preferred stock plus any
accrued and unpaid dividends before
any distribution of assets is made to
the Common Stockholders.
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. These provisions 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. The overall effect of
these provisions is to render more
difficult the accomplishment of a
merger or the assumption of control by
a stockholder who owns beneficially
more than 5% of the Fund's shares.
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.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
See 'Investment Objective and Policies,'
'Insurance,' 'Other Investment
Practices,' 'Taxes' and 'Description
of Capital Stock.'
Market Price and Net Asset Value of
Shares.............................. Shares of the Fund and of other
closed-end investment companies have
in the past frequently traded at a
discount to their net asset values.
The market value of Municipal
Obligations (and, accordingly, the
Fund's net asset value) generally
increases when interest rates decline
and decreases when interest rates
rise, and these changes are likely to
be greater in the case of a fund
having a leveraged capital structure.
Whether investors will realize gains
or losses upon the sale of Common
Stock will not depend upon the Fund's
net asset value, but will depend
entirely upon whether the market price
of the Common Stock at the time of
sale is above or below the original
purchase price for the shares.
Accordingly, the Common Stock is
designed primarily for long-term
investors, and investors in the Common
Stock should not view the Fund as a
vehicle for trading purposes.
See 'Trading History,' 'Investment
Objective and Policies,' 'Special
Leverage Considerations' 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 preferred stock will 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 any preferred stock were to
exceed the rate of 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 would 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.'
</TABLE>
8
<PAGE>
FINANCIAL HIGHLIGHTS
The table below provides selected per share data and ratios for one share
of Common Stock for each of the periods shown. This information is supplemented
by the financial statements and the accompanying notes appearing in the Fund's
Annual Report to Shareholders for the fiscal year ended March 31, 1995, which
are incorporated by reference into the Fund's SAI, which can be obtained by
shareholders upon request. The financial statements and notes and the financial
information in the table below have been audited by Ernst & Young LLP,
independent auditors, whose report thereon is included in the Annual Report to
Shareholders, which may be obtained without charge.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FISCAL JUNE 8, 1993+
YEAR ENDED TO
MARCH 31, 1995 MARCH 31, 1994
-------------- --------------
<S> <C> <C>
Net asset value, beginning of period.... $ 13.42 $ 15.00
-------------- --------------
Net investment income................... 1.02** 0.73
Net realized and unrealized gains
(losses) from investment
transactions.......................... 0.04 (1.44)
-------------- --------------
Net increase (decrease) in net asset
value from operations................. 1.06 (0.71)
-------------- --------------
Dividends and distributions:
From net investment income--common
stockholders....................... (0.79) (0.60)
From net investment income--preferred
stockholders....................... (0.25) (0.13)
In excess of net investment income to
common stockholders................ (0.02) --
-------------- --------------
Total dividends and distributions to
shareholders.......................... (1.06) (0.73)
-------------- --------------
Underwriting and offering costs incurred
with the preferred stock offering
charged to common stock............... -- (0.14)
-------------- --------------
Net asset value, end of period.......... $ 13.42 $ 13.42
-------------- --------------
-------------- --------------
Per share market value, end of period... $ 11.13 $ 13.00
-------------- --------------
-------------- --------------
Total investment return (1)............. (8.17)% (9.74)%
-------------- --------------
-------------- --------------
Ratios to average net assets
attributable to common shares:
Total expenses....................... 1.74% 1.57%*
Net investment income--before
preferred stock dividends.......... 7.94% 5.92%*
Preferred stock dividends............ 2.02% 0.98%*
Net investment income--available to
common stockholders................ 5.92% 4.94%*
Supplemental Data:
Net assets, end of period (000's).... $ 426,795 $ 333,825
-------------- --------------
-------------- --------------
Portfolio turnover rate.............. 4% 8%
Asset coverage per share of preferred
stock, end of period............... $ 142,265 $ 139,094
</TABLE>
------------------
+ Commencement of operations
* Annualized
** Calculated using the average share method.
(Footnotes continued on next page)
9
<PAGE>
(Footnotes continued from previous page)
(1) Total investment return is calculated assuming a purchase of one share
of common stock at the current market price on the first day of the
period reported and the sale at the current market price on the last
day of the 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 return for
periods less than a year have not been annualized. Total investment
return does not reflect brokerage commissions.
The following information relates to the APS outstanding as of the end of
the periods indicated. See 'Special Leverage Considerations.'
<TABLE>
<CAPTION>
ASSET INVOLUNTARY
COVERAGE LIQUIDATING AVERAGE
FISCAL TOTAL AMOUNT PER PERFORMANCE MARKET VALUE
YEAR SENIOR SECURITIES OUTSTANDING* UNIT** PER UNIT*** PER UNIT****
------------------- --------------------------------------------- ------------ -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
1994+ APS Series A, B and C........................ $120,000,000 $139,094 $50,000 $ 96,654
1995++ APS Series A, B, C and D..................... $150,000,000 $142,265 $50,000 $ 76,554
</TABLE>
---------------
* Based on liquidation value of $50,000 per share. The number of
outstanding shares of each Series of APS has not changed since the
Series was issued and is as follows: Series A, B and C (each issued
August 12, 1993)--800 shares of each Series; APS Series D (issued
November 28, 1994)--600 shares.
** Asset Coverage Per Unit is the same for each APS Series.
*** Plus any accrued but unpaid dividends.
**** Average Market Value Per Unit is the same for each APS Series and is
calculated by multiplying $50,000 by the result obtained by dividing:
(a) the average monthly market value of the Common Stock during the
fiscal year; by (b) the average of the amount of APS outstanding at
the end of such month.
+ Reflects the period from August 12, 1993 (date of issuance of APS
Series A, B and C) to March 31, 1994.
++ Reflects the full fiscal year for APS Series A, B and C and the period
from November 28, 1994 (date of issuance) to March 31, 1995 for APS
Series D.
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 February 18,
1993. 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 Fund's
board of directors has approved, and intends to submit to a vote of the
shareholders, a proposal to change the name of the Fund to 'Insured Municipal
Income Fund.' Subject to regulatory and NYSE approval, the Fund intends to do
business under that new name until a shareholder vote takes place.
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.
TRADING HISTORY
Shares of the Common Stock, par value $.001 per share are listed and traded
on the NYSE under the symbol 'PIF.' The following table sets forth for the
Common Stock for each quarterly period since the Fund commenced operations: (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/OR PREMIUMS AND DISCOUNTS FOR THE COMMON STOCK
DURING THE PERIODS SHOWN MAY BE BROADER THAN IS SHOWN ON THIS TABLE. On July 31,
1995, the closing price per share of Common Stock on the NYSE was $11.50, the
Fund's net asset value per share was $13.62 and the discount to net asset value
per share was (15.60)%.
<TABLE>
<CAPTION>
(DISCOUNT) OR
PREMIUM TO NET
SALES PRICES NET ASSET VALUES ASSET VALUE
-------------- ---------------- ----------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
------------- ----- ----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
6/30/93*..... $15 1/4 $14 1/2 $15.00 $15.13 1.67% (4.16)%
9/30/93...... 15 3/8 14 3/8 15.75 15.70 (2.38) (8.44)
12/31/93..... 15 3/8 14 16.00 15.04 (3.91) (6.91)
3/31/94...... 15 1/8 12 3/4 15.78 14.27 (4.15) (10.65)
6/30/94...... 13 3/8 12 13.37 13.37 0.04 (10.25)
9/30/94...... 12 1/8 10 5/8 13.66 12.81 (11.24) (17.06)
12/31/94..... 10 7/8 9 3/8 12.75 11.13 (14.71) (15.77)
3/31/95...... 11 5/8 10 1/8 12.92 11.99 (10.02) (15.55)
6/30/95...... 12 10 7/8 14.32 13.25 (16.20) (17.92)
</TABLE>
* For the period June 8, 1993 (commencement of operations) to June 30,
1993.
See 'Description of Capital Stock--Common Stock Repurchases and Tender
Offers' and '--Conversion to Open-End Investment Company' as to methods that may
be undertaken by the Fund to reduce any discount.
11
<PAGE>
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 Municipal Obligations
that are insured as to the timely payment of both principal and interest by an
entity that, at the time of investment, has a claims-paying ability rated Aaa by
Moody's, AAA by S&P or an equivalent rating by another NRSRO or (with respect to
20% of the Fund's total assets) that are, at the time of investment, (1) backed
by an escrow or trust account containing sufficient U.S. government or U.S.
government agency securities to ensure the timely payment of principal and
interest; (2) guaranteed as to timely payment of principal and interest by an
entity which has a credit rating of Aaa by Moody's, AAA by S&P or an equivalent
rating by another NRSRO; or (3) not insured, guaranteed or backed by escrows but
rated Aaa by Moody's, AAA by S&P or an equivalent rating by another NRSRO. All
the Municipal Obligations described above will have, at the time of investment,
ratings of Aaa from Moody's, AAA from S&P or equivalent ratings from another
NRSRO or (with respect to the Municipal Obligations described in (1) above), if
unrated, will have been determined by Mitchell Hutchins to be of comparable
quality to Municipal Obligations that have received such ratings. In addition,
the Fund under normal circumstances invests at least 65% of its total assets in
income-producing securities. 'Long-term' as used in this Prospectus means
Municipal Obligations with maturities in excess of 10 years. No assurance can be
given 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 federal income tax and is not a Tax Preference Item, and
qualified 'private activity' obligations, which generate interest that is exempt
from federal income tax but that, if the obligations were issued after August 7,
1986, is a Tax Preference Item. The types of Municipal Obligations in which the
Fund may invest are described in Appendix A to this Prospectus and in the SAI.
The Fund may invest more than 25% 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 segment.
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 Fund's net asset value,
normally varies 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.
12
<PAGE>
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.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from federal income tax (and also, when
applicable, from treatment as a Tax Preference Item) 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. 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 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 Fund may invest all or a portion of its assets in Municipal Obligations
the interest on which is a Tax Preference Item. Accordingly, stockholders 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 (including any portion that is not a Tax
Preference Item) 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. See 'Taxes.'
Generally, Municipal Obligations which are covered by insurance or a
guarantee would not be rated Aaa or AAA, and might not be considered to be of
investment grade credit quality in the absence of such insurance or guarantee.
Although insurance or guarantees on, or escrows of U.S. government securities
with respect to, Municipal Obligations reduce financial or credit risk with
respect to those Municipal Obligations (i.e., the possibility that owners of the
insured Municipal Obligations will not receive timely scheduled payments of
principal or interest), insured, guaranteed and escrow backed Municipal
Obligations remain subject to market risk (i.e., fluctuations in market value as
a result of changes in prevailing interest rates). Accordingly, insurance or
guarantees on, or escrow backing with respect to, Municipal Obligations do not
ensure the market value of the Fund's assets or the net asset value or the
market price for the Common Stock.
The Fund's investment objective and certain investment limitations
described in the SAI are fundamental policies that may not be changed without
shareholder approval. In addition, the Fund's policy of normally investing at
least 80% of its total assets in insured Municipal Obligations may not be
changed without shareholder approval. All other investment policies may be
changed by the Fund's board of directors without shareholder approval. The Fund
does not consider custodial receipts to be Municipal Obligations in connection
with the foregoing 80% policy, unless such custodial receipts are of the type
utilized in order to provide Secondary Market Insurance for Municipal
Obligations.
INSURANCE
Each insured Municipal Obligation in which the Fund invests will be covered
by Original Issue Insurance, Secondary Market Insurance or Portfolio Insurance.
Original Issue Insurance is purchased with respect to a particular issue of
Municipal Obligations by the issuer thereof or a third party in conjunction with
the original issue of such Municipal Obligations. Secondary Market Insurance is
purchased by the Fund or a third party subsequent to the time of original
issuance of a Municipal Obligation. Both Original Issue Insurance and
13
<PAGE>
Secondary Market Insurance remain in effect as long as the Municipal Obligations
covered thereby remain outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of such Municipal
Obligations. Portfolio Insurance may be purchased by the Fund with respect to
Municipal Obligations which the Fund intends to purchase or already owns and
would generally terminate when the Municipal Obligation is sold by the Fund or
redeemed. The Fund currently intends to emphasize investments in Municipal
Obligations with Original Issue Insurance or Secondary Market Insurance. There
is no limitation on the percentage of the Fund's assets that may be invested in
Municipal Obligations insured by any given insurer.
Original Issue Insurance, Secondary Market Insurance and Portfolio
Insurance generally do not insure payment on an accelerated basis, the payment
of any redemption premium (except with respect to certain premium payments in
the case of certain small issue industrial development and pollution control
Municipal Obligations), the value of the Common Stock or the market value of
Municipal Obligations, or payments of any tender purchase price upon the tender
of the Municipal Obligations. Such insurance also does not insure against
nonpayment of principal of or interest on Municipal Obligations resulting from
the insolvency, negligence or any other act or omission of the trustee or other
paying agent for such obligations.
The Fund's policy of investing in Municipal Obligations insured by insurers
whose claims-paying ability is rated Aaa by Moody's, AAA by S&P or the
equivalent by another NRSRO applies only at the time of the Fund's investment in
a Municipal Obligation. A subsequent downgrade by Moody's, S&P or another NRSRO
of an insurer's claims-paying ability would result in a downgrade of the rating
assigned to the Municipal Obligations insured by such insurer, although the
Municipal Obligations may have an independent rating that is higher than the new
rating assigned to the insurer's claims-paying ability. The securities could
experience a decrease in market price as a result of such a downgrade. In the
event the ratings assigned to such Municipal Obligations decline to below
investment grade, such Municipal Obligations would probably become less liquid
or even illiquid. Mitchell Hutchins will consider a downgrade by Moody's, S&P or
another NRSRO of the claims-paying ability of an insurer or the credit
characteristics of a particular issuer in determining whether the Fund should
continue to hold a Municipal Obligation. In making such a determination,
Mitchell Hutchins also will consider such factors as the rating assigned to the
Municipal Obligation independent of the insurance, its assessment of the credit
quality of the issuer of the Municipal Obligation and the price at which the
Municipal Obligation 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 Baa by
Moody's, BBB by S&P or an equivalent rating by another NRSRO do not exceed 5% of
the Fund's net assets. Municipal Obligations rated Baa by Moody's are investment
grade but Moody's considers them 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 Baa or BBB (or equivalent
ratings) to make principal and interest payments than is the case for higher
grade Municipal Obligations.
Although Mitchell Hutchins periodically reviews the financial condition of
each insurer, there can be no assurance that the insurers will be able to honor
their obligations in all circumstances. In the event of a default by an insurer
on its obligations with respect to any Municipal Obligations in the Fund's
portfolio, the Fund would look to the issuer or guarantor of the relevant
Municipal Obligations for payments of principal and interest and such issuer or
any guarantor may not be rated Aaa, AAA or the equivalent. Accordingly, the Fund
could be exposed to greater risk of non-payment in such circumstances which
could adversely affect the Fund's net asset value and the market price per share
of the Common Stock. Alternatively, the Fund could elect to dispose of such
Municipal Obligations; however, the market prices for such Municipal Obligations
may be lower than the Fund's purchase price for them and the Fund could sustain
a capital loss as a result.
14
<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 also limited by the rating agency guidelines applicable to the APS.
See 'Special Leverage Considerations' below 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 or 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 by the issuer 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 up to 20% of its total assets 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 the equivalent by another NRSRO 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 short-term
Municipal Obligations may include variable or floating rate demand notes and
similar instruments that trade as short-term obligations. For temporary
defensive purposes, the Fund may invest without limit in such short-term
Municipal Obligations.
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 total 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. For temporary defensive purposes,
the Fund may invest without limit in such taxable money market instruments.
OTHER PRACTICES
The Fund may invest up to 20% of its net assets in illiquid securities. The
term 'illiquid securities' for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities and
includes, among other things, 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,
15
<PAGE>
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. The Fund may engage in short-sales 'against the box.'
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 August 12, 1993, the Fund issued 800 shares of APS Series A, 800 shares
of APS Series B and 800 shares of APS Series C, having an aggregate liquidation
preference of $120,000,000. The net proceeds to the Fund of the sale of the APS,
after deduction of underwriting discounts and offering expenses, was
$117,667,500. On November 28, 1994, in connection with the acquisition by the
Fund of the assets and liabilities of PaineWebber Premier Intermediate Tax-Free
Income Fund Inc., the Fund issued 600 shares of APS Series D, having an
aggregate liquidation preference of $30,000,000. The Fund has the right to issue
addditional APS or other preferred stock to the maximum extent permitted under
the 1940 Act.
The APS have 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 leveraged. There can be
no assurance, however, that the Fund will be able to realize a higher 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 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 7 days on APS Series A, every 28 days on APS Series B, every
three months on APS Series C and every 7 days on APS Series D. As of March 31,
1995, the dividend rate payable on APS Series A was 4.190%, the dividend rate
payable on APS Series B was 4.124%, the dividend rate payable on APS Series C
was 4.180%, and the dividend rate payable on APS Series D was 4.100%. Based on
those dividend rates, the Fund must experience a net annual return of
approximately 1% in order to cover the annual dividend payments on the APS.
There can be no assurance that the Fund will continue to realize a higher 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
Common Stockholder. 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..... -17.67% -9.96% -2.25% 5.46% 13.17%
</TABLE>
16
<PAGE>
Any decline in the net asset value of the Fund's investments will be borne
entirely by Common Stockholders. 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 annual 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 APS 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 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, and thus might
adversely affect 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 investment policies. These 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.
17
<PAGE>
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 APS 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 other 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 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.'
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 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.
18
<PAGE>
MANAGEMENT OF THE FUND
Subject to the supervision of the Fund's board of directors, investment
advisory and administration services will be provided to the Fund by Mitchell
Hutchins pursuant to an Investment Advisory and Administration Contract dated
May 26, 1993 ('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 June 30, 1995, total
assets under Mitchell Hutchins' management exceeded $78.6 billion. As of that
date, Mitchell Hutchins served as investment adviser or sub-adviser to 41
registered investment companies with 86 separate portfolios having aggregate
assets of approximately $27.9 billion. Of that amount, more than $4.4 billion
represented assets of registered investment companies investing primarily in
Municipal Obligations.
Pursuant to the Advisory Contract, Mitchell Hutchins provides a continuous
investment program for the Fund and makes investment decisions and place 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 receives 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 higher than the advisory and administration fees
paid by most funds.
The Fund incurs various other expenses in its operations, such as custody
and transfer agency fees, brokerage commissions, professional fees, expenses of
board and shareholder meetings, fees and expenses relating to registration of
its Common Stock, taxes and governmental fees, fees and expenses of the
directors, costs of obtaining insurance, expenses of printing and distributing
shareholder materials, organizational expenses, including costs or losses to any
litigation. For the fiscal year ended March 31, 1995, and for the fiscal period
June 8, 1993 (commencement of operations) through March 31, 1994, the Fund's
total expenses, stated as a percentage of average net assets, were 1.74% and
1.57%, respectively.
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 primary portfolio
manager for four municipal bond funds with aggregate assets of over $843.9
million and he manages or oversees tax-exempt fixed income funds having
aggregate assets of more than $4.4 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.
DIVIDENDS AND OTHER DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
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 the payment of dividends on any
outstanding preferred stock, results in the distribution of all of the Fund's
net investment income. 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.
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<PAGE>
The Fund intends to distribute annually to Common Stockholders
substantially all of its realized net capital gain (the excess of net 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 preferences of the APS or any other
preferred stock. Substantially all of the Fund's net investment income for any
fiscal year will be distributed to stockholders during or 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. See 'Taxes.'
While any shares of the APS are outstanding, the Fund may not declare any
cash dividend or other distribution on its 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 APS (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 RIC. 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.'
DIVIDEND REINVESTMENT PLAN
The Fund has established the 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 them 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 other 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
20
<PAGE>
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 purchased with each
dividend or other distribution for a particular Common Stockholder equals the
result obtained by dividing the amount of the dividend or other distribution
payable to that stockholder 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 maintains all stockholder accounts in the Plan
and furnishes 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 are held by the Transfer Agent in
non-certificated form in the name of the participant, and each stockholder's
proxy includes 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 are paid by the Fund. However, each participant pays 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 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. 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
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
21
<PAGE>
profits. Moreover, if the Fund realizes capital gains as a result of market
transactions, distributions of those gains also will be taxable to its
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 treated by its
stockholders as a Tax Preference Item 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
a Tax Preference Item. 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 realize 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 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 and 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 (2) 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 Plan), in which event, the replacement shares' basis will
be adjusted to reflect the disallowed loss.
Investors also should 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 the important federal tax considerations
generally affecting the Fund and the 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, 800 shares of capital stock are classified as APS Series B, 800 shares of
capital stock are classified as APS Series C and 600 shares of capital stock are
classified as APS Series D. All remaining shares of capital stock are classified
as Common Stock. The description set forth below under 'Common Stock' and
'Auction Preferred Shares' is subject to the provisions contained in the Fund's
Articles of Incorporation and By-Laws.
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<PAGE>
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, and those
offered hereby, when issued, will be, 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
Common Stockholders (one vote per share) and will vote together with Common
Stockholders 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, are
entitled to 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 Repurchases and Tender Offers; Description of
Capital Stock--Conversion to Open-End Investment Company.'
Shares of the Fund and of other closed-end investment companies frequently
trade at a discount to their net asset values. The market value of Municipal
Obligations (and, accordingly, the Fund's net asset value) generally increases
when interest rates decline and decreases when interest rates rise, and these
changes are likely to be greater in the case of a fund having a leveraged
capital structure. Whether investors will realize gains or losses upon the sale
of Common Stock will not depend upon the Fund's net asset value, but will depend
entirely upon whether the market price of the Common Stock at the time of sale
is above or below the original purchase price for the shares. Accordingly, the
Common Stock is designed primarily for long-term investors, and investors in the
Common Stock should not view the Fund as a vehicle for trading purposes.
Any additional offerings of the Fund's Common Stock, if made, will require
approval of its 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 March 31, 1995.
<TABLE>
<CAPTION>
AMOUNT
AMOUNT OUTSTANDING
HELD EXCLUSIVE OF
BY AMOUNT HELD
REGISTRANT BY REGISTRANT
AMOUNT OR FOR ITS OR FOR ITS
TITLE OF CLASS AUTHORIZED ACCOUNT ACCOUNT
------------------------- ----------- ---------- ---------------
<S> <C> <C> <C>
Common Stock............. 199,997,000 -- 20,628,363
APS Series A............. 800 -- 800
APS Series B............. 800 -- 800
APS Series C............. 800 -- 800
APS Series D............. 600 -- 600
</TABLE>
23
<PAGE>
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 preemptive 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 '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 Common Stockholders 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, 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
outstanding shares of preferred stock, including any 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
24
<PAGE>
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 asset coverage or APS basic
maintenance amount 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.
The foregoing voting provisions will not apply with respect to the 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 APS 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 the APS or any other 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 Common Stockholders,
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 from net asset value and that any such discount may not be in the
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 a 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 that may be
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.'
25
<PAGE>
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. The market price of shares of the Common Stock will be determined by,
among other things, the relative demand for and supply of such shares in the
market, the Fund's investment performance, the Fund's dividends and yield and
investor perception of the Fund's overall attractiveness as an investment as
compared with other investment alternatives. Nevertheless, the fact that the
Common Stock may be the subject of tender offers at net asset value from time to
time may reduce the spread that might otherwise exist between the market price
of the Common Stock and net asset value per share. In the opinion of Mitchell
Hutchins, sellers may be less inclined to accept a significant discount if they
have a reasonable expectation of being able to recover net asset value in
conjunction with a possible tender offer.
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.
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 could be presented to the Fund at the option of the holder thereof for
redemption 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
26
<PAGE>
shares of APS. The Fund might have to liquidate portfolio securities to finance
such redemptions. 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.
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 preferred stock outstanding to vote as a single class on certain matters.
See 'Description of Capital Stock--Auction Preferred Shares.'
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<PAGE>
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; 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
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 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.
The Table of Contents for the SAI is as follows:
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Investment Policies and Restrictions.................................. 1
Hedging and Related Income Strategies................................. 10
Directors and Officers................................................ 16
Control Persons and Principal Holders of Securities................... 22
Investment Advisory Arrangements...................................... 22
Portfolio Transactions................................................ 23
Valuation of Common Stock............................................. 24
Taxes................................................................. 25
Additional Information................................................ 27
Financial Information................................................. 28
Appendix A............................................................ A-1
Appendix B............................................................ B-1
</TABLE>
28
<PAGE>
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 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.
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
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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 tax-free 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. See 'Taxes' and 'Other
Investment Practices.'
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 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 frequently will 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.
PARTICIPATION INTERESTS
The Fund may invest in participation interests in municipal bonds,
including IDBs, 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
A-2
<PAGE>
guarantees supporting such participation interests 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
custodian 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 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 market 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 to 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
A-3
<PAGE>
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, the 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. The Fund
does not expect to invest more than 5% of its net assets in tender option bonds
during the coming year.
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-rated
interest payable on the Municipal Obligation to the extent that the
average level of a particular index exceeds a specified base level. The
Fund would use Municipal Obligations with embedded caps 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.
A-4
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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 PROSPECTUS AND, IF GIVEN OR MADE, SUCH 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.
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TABLE OF CONTENTS
PAGE
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Fund Expenses................................... 2
Prospectus Summary.............................. 3
Financial Highlights............................ 9
The Fund........................................ 11
The Offering.................................... 11
Use of Proceeds................................. 11
Trading History................................. 11
Investment Objective and Policies............... 12
Insurance....................................... 13
Other Investment Practices...................... 15
Special Leverage Considerations................. 16
Management of the Fund.......................... 19
Dividends and Other Distributions; Dividend
Reinvestment Plan............................. 19
Taxes........................................... 21
Description of Capital Stock.................... 22
Custodian, Transfer and Dividend Disbursing
Agent and Registrar........................... 28
Further Information............................. 28
Appendix A...................................... A-1
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PAINEWEBBER PREMIER
INSURED MUNICIPAL
INCOME FUND INC.
COMMON STOCK
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P R O S P E C T U S
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PAINEWEBBER INCORPORATED
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AUGUST 1, 1995
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(COPYRIGHT)1995 PAINEWEBBER, INC.
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