PAINEWEBBER/KIDDER, PEABODY
TAX EXEMPT MONEY FUND, INC.
October 13, 1995
Dear Shareholder:
The attached proxy materials describe a proposal that PaineWebber/Kidder,
Peabody Tax Exempt Money Fund, Inc. ("PW/KP Fund") reorganize and become part of
PaineWebber RMA Tax-Free Fund, Inc. ("PW Fund"). If the proposal is approved and
implemented, each shareholder of PW/KP Fund automatically would become a
shareholder of PW Fund. Both Funds are open-end management investment companies
organized as Maryland corporations.
Your board of directors recommends a vote FOR the reorganization proposal.
The board believes that combining the two Funds will benefit PW/KP Fund's
shareholders by providing them with a portfolio that has an investment objective
substantially identical to the investment objective of PW/KP Fund and that will
have lower operating expenses as a percentage of net assets. The attached proxy
materials provide more information about the proposed reorganization and the two
Funds.
Your vote is important no matter how many shares you own. Voting your shares
early will permit PW/KP Fund to avoid costly follow-up mail and telephone
solicitation. After reviewing the attached materials, please complete, date and
sign your proxy card and mail it in the enclosed return envelope today.
Very truly yours,
/s/ MARGO N. ALEXANDER
MARGO N. ALEXANDER
President, PaineWebber/Kidder, Peabody
Tax Exempt Money Fund, Inc.
<PAGE>
PAINEWEBBER/KIDDER, PEABODY
TAX EXEMPT MONEY FUND, INC.
-------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
NOVEMBER 10, 1995
-------------------
To The Shareholders:
A special meeting of shareholders ("Meeting") of PaineWebber/Kidder, Peabody
Tax Exempt Money Fund, Inc. ("PW/KP Fund") will be held on November 10, 1995 at
10:00 a.m., Eastern time, at 1285 Avenue of the Americas, 38th Floor, New York,
New York 10019, for the following purposes:
(1) To consider an Agreement and Plan of Reorganization and Dissolution
under which PaineWebber RMA Tax-Free Fund, Inc. ("PW Fund") would acquire
the assets of PW/KP Fund in exchange solely for shares of common stock in PW
Fund and the assumption by PW Fund of PW/KP Fund's liabilities, followed by
the distribution of those shares to the shareholders of PW/KP Fund and the
subsequent dissolution of PW/KP Fund, all as described in the accompanying
Prospectus/Proxy Statement; and
(2) To transact such other business as may properly come before the
Meeting or any adjournment thereof.
You are entitled to vote at the Meeting and any adjournment thereof if you
owned shares of PW/KP Fund at the close of business on October 4, 1995. IF YOU
ATTEND THE MEETING, YOU MAY VOTE YOUR SHARES IN PERSON. IF YOU DO NOT EXPECT TO
ATTEND THE MEETING, PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY
CARD IN THE ENCLOSED POSTAGE PAID ENVELOPE.
By order of the board of directors,
DIANNE E. O'DONNELL
Secretary
October 13, 1995
1285 Avenue of the Americas
New York, New York 10019
YOUR VOTE IS IMPORTANT
NO MATTER HOW MANY SHARES YOU OWN
Please indicate your voting instructions on the enclosed proxy card, date
and sign the card, and return it in the envelope provided. IF YOU SIGN, DATE AND
RETURN THE PROXY CARD BUT GIVE NO VOTING INSTRUCTIONS, YOUR SHARES WILL BE VOTED
"FOR" THE PROPOSAL NOTICED ABOVE. In order to avoid the additional expense of
further solicitation, we ask your cooperation in mailing in your proxy card
promptly. Unless proxy cards submitted by corporations and partnerships are
signed by the appropriate persons as indicated in the voting instructions on the
proxy card, they will not be voted.
<PAGE>
PAINEWEBBER RMA TAX-FREE FUND, INC.
PAINEWEBBER/KIDDER, PEABODY
TAX EXEMPT MONEY FUND, INC.
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(TOLL FREE) 1-800-647-1568
PROSPECTUS/PROXY STATEMENT
OCTOBER 13, 1995
-------------------
This Prospectus/Proxy Statement ("Proxy Statement") is being furnished to
shareholders of PaineWebber/Kidder, Peabody Tax Exempt Money Fund, Inc. ("PW/KP
Fund") in connection with the solicitation of proxies by its board of directors
for use at a special meeting of shareholders to be held on November 10, 1995, at
10:00 a.m., Eastern time, and at any adjournment thereof ("Meeting").
As more fully described in this Proxy Statement, the primary purpose of the
Meeting is to vote on a proposed reorganization ("Reorganization"). Under the
Reorganization, PaineWebber RMA Tax-Free Fund, Inc. ("PW Fund") would acquire
the assets of PW/KP Fund in exchange solely for shares of common stock in PW
Fund and the assumption by PW Fund of PW/KP Fund's liabilities. Those PW Fund
shares then would be distributed to the shareholders of PW/KP Fund, so that each
shareholder of PW/KP Fund would receive a number of full and fractional shares
of PW Fund having an aggregate net asset value that, on the effective date of
the Reorganization, is equal to the aggregate net asset value of the
shareholder's shares in PW/KP Fund. Following the distribution, PW/KP Fund will
be dissolved.
PW Fund is a diversified money market fund with an investment objective to
provide maximum current income exempt from federal income tax consistent with
liquidity and conservation of capital. PW Fund seeks to achieve its investment
objective by investing substantially all its assets in high grade municipal
money market instruments. Both PW Fund and PW/KP Fund (each a "Fund" and
collectively, "Funds") are money market funds that seek to maintain a stable net
asset value of $1.00 per share.
AN INVESTMENT IN EITHER FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. WHILE EACH FUND SEEKS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00
PER SHARE, THERE CAN BE NO ASSURANCE THAT IT WILL BE ABLE TO DO SO.
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/PROXY STATEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
This Proxy Statement, which should be retained for future reference, sets
forth concisely the information about the Reorganization and PW Fund that a
shareholder should know before voting. This Proxy Statement is accompanied by
the Prospectus of PW Fund, dated August 29, 1995, which is incorporated by this
reference into this Proxy Statement. A Statement of Additional Information dated
Ocotober 13, 1995, relating to the Reorganization and including historical
financial statements, has been filed with the Securities and Exchange Commission
("SEC") and is incorporated herein by this reference. A Prospectus of PW/KP
Fund, dated January 27, 1995 (as supplemented January 30, 1995), a Statement of
Additional Information of PW/KP Fund, dated January 27, 1995, and a Statement of
Additional Information of PW Fund, dated August 29, 1995, have been filed with
the SEC and also are incorporated herein by this reference. Copies of these
documents, as well as PW Fund's Annual Report to Shareholders for the fiscal
year ended June 30, 1995, PW/KP Fund's Annual Report to Shareholders for the
fiscal year ended September 30, 1994, and PW/KP Fund's Semi-Annual Report to
Shareholders for the six-month period ended March 31, 1995, may be obtained
without charge and further inquiries may be made by contacting your PaineWebber
Incorporated ("PaineWebber") investment executive or PaineWebber's correspondent
firms or by calling toll-free 1-800-647-1568.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
VOTING INFORMATION.................................................................... 1
SYNOPSIS.............................................................................. 2
COMPARISON OF PRINCIPAL RISK FACTORS.................................................. 9
THE PROPOSED TRANSACTION.............................................................. 10
MISCELLANEOUS......................................................................... 14
APPENDIX A--AGREEMENT AND PLAN OF REORGANIZATION AND DISSOLUTION...................... A-1
</TABLE>
<PAGE>
PAINEWEBBER/KIDDER, PEABODY
TAX EXEMPT MONEY FUND, INC.
-------------------
PROSPECTUS/PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON
NOVEMBER 10, 1995
-------------------
VOTING INFORMATION
This Prospectus/Proxy Statement ("Proxy Statement") is being furnished to
shareholders of PaineWebber/Kidder, Peabody Tax Exempt Money Fund, Inc. ("PW/KP
Fund") in connection with the solicitation of proxies by its board of directors
for use at a special meeting of shareholders to be held on November 10, 1995,
and at any adjournment thereof ("Meeting"). This Proxy Statement will first be
mailed to shareholders on or about October 13, 1995.
At least one-third of PW/KP Fund's outstanding shares on October 4, 1995,
represented in person or by proxy, must be present for the transaction of
business at the Meeting. If a quorum is not present at the Meeting or a quorum
is present but sufficient votes to approve the proposal are not received, the
persons named as proxies may propose one or more adjournments of the Meeting to
permit further solicitation of proxies. Any such adjournment will require the
affirmative vote of a majority of those shares represented at the Meeting in
person or by proxy. The persons named as proxies will vote those proxies that
they are entitled to vote FOR the proposal in favor of such an adjournment and
will vote those proxies required to be voted AGAINST the proposal against such
adjournment. A shareholder vote may be taken on the proposal in this Proxy
Statement prior to any such adjournment if sufficient votes have been received
and it is otherwise appropriate.
Broker non-votes are shares held in street name for which the broker
indicates that instructions have not been received from the beneficial owners or
other persons entitled to vote and for which the broker does not have
discretionary voting authority. Abstentions and broker non-votes will be counted
as shares present for purposes of determining whether a quorum is present but
will not be voted for or against the adjournment or proposal. Accordingly,
abstentions and broker non-votes effectively will be a vote against adjournment
or against the proposal where the required vote is a percentage of the shares
present or outstanding. Abstentions and broker non-votes will not be counted,
however, as votes cast for purposes of determining whether sufficient votes have
been received to approve the proposal.
The individuals named as proxies on the enclosed proxy card will vote in
accordance with your direction as indicated thereon if your proxy card is
received properly executed by you or by your duly appointed agent or
attorney-in-fact. If you sign, date and return the proxy card, but give no
voting instructions, your shares will be voted in favor of approval of the
Agreement and Plan of Reorganization and Dissolution dated as of September 12,
1995 ("Reorganization Plan"), which is attached to this Proxy Statement as
Appendix A. Under the Reorganization Plan, PaineWebber RMA Tax-Free Fund, Inc.
("PW Fund") would acquire the assets of PW/KP Fund in exchange solely for shares
of common stock in PW Fund and the assumption by PW Fund of PW/KP Fund's
liabilities; those PW Fund shares then would be distributed to PW/KP Fund's
shareholders. (These transactions are collectively referred to herein as the
"Reorganization," and PW/KP Fund and PW Fund may be referred to herein
<PAGE>
individually as a "Fund" or collectively, as "Funds.") After completion of the
Reorganization, PW/KP Fund will be dissolved.
In addition, if you sign, date and return the proxy card, but give no voting
instructions, the duly appointed proxies may vote your shares, in their
discretion, upon such other matters as may come before the Meeting. The proxy
card may be revoked by giving another proxy or by letter or telegram revoking
the initial proxy. To be effective, such revocation must be received by PW/KP
Fund prior to the Meeting and must indicate your name and account number. In
addition, if you attend the Meeting in person, you may, if you wish, vote by
ballot at the Meeting, thereby canceling any proxy previously given.
As of the record date, October 4, 1995 ("Record Date"), PW/KP Fund had
431,308,512 shares of common stock outstanding. The solicitation of proxies, the
cost of which will be borne by the Funds in proportion to their respective net
assets, will be made primarily by mail but also may include telephone or oral
communications by representatives of Mitchell Hutchins Asset Management Inc.
("Mitchell Hutchins"), who will not receive any compensation therefor from the
Funds, or by Shareholder Communications Corporation, professional proxy
solicitors retained by the Funds, who will be paid fees and expenses of up to
approximately $10,500 for soliciting services. Management of each Fund does not
know of any single shareholder or "group" (as that term is used in Section 13(d)
of the Securities Exchange Act of 1934) who owned beneficially 5% or more of the
shares of either Fund as of the Record Date. Directors and officers of PW Fund
own in the aggregate less than 1% of the shares of that Fund.
Under Maryland law, approval of the Reorganization Plan requires the
affirmative vote of a majority of the outstanding shares of PW/KP Fund entitled
to vote at the Meeting. Each outstanding full share of PW/KP Fund is entitled to
one vote, and each outstanding fractional share thereof is entitled to a
proportionate fractional share of one vote. If the Reorganization Plan is not
approved by the requisite vote of shareholders of PW/KP Fund, the persons named
as proxies may propose one or more adjournments of the Meeting to permit further
solicitation of proxies. Although the shareholders of PW/KP Fund may exchange or
redeem out of PW/KP Fund, they do not have the appraisal rights that may be
accorded to shareholders of corporations that propose similar types of
reorganizations under the laws of some states.
SYNOPSIS
The following is a summary of certain information contained elsewhere in
this Proxy Statement, the Prospectuses of the Funds (which are incorporated
herein by this reference), and the Reorganization Plan. Shareholders should read
this Proxy Statement and the Prospectus of PW Fund carefully. As discussed more
fully below, PW/KP Fund's board of directors believes that the Reorganization
will benefit PW/KP Fund's shareholders. The Funds have substantially identical
investment objectives, although their investment policies may differ in some
respects. It is anticipated that, following the Reorganization, the former
shareholders of PW/KP Fund will, as shareholders of PW Fund, be subject to lower
total operating expenses as a percentage of net assets.
2
<PAGE>
THE REORGANIZATION
Each Fund's board of directors considered and approved the Reorganization
Plan at a meeting held on July 20, 1995. The Reorganization Plan provides for
the acquisition of the assets of PW/KP Fund by PW Fund, in exchange solely for
shares of common stock of PW Fund and the assumption by PW Fund of the
liabilities of PW/KP Fund. PW/KP Fund will then distribute those shares to its
shareholders, so that each PW/KP Fund shareholder will receive the number of
full and fractional shares of PW Fund that equals in value such shareholder's
holdings in PW/KP Fund as of the Closing Date (defined below). PW/KP Fund then
will be dissolved as soon as practicable thereafter.
The exchange of PW/KP Fund's assets for PW Fund shares and PW Fund's
assumption of its liabilities will occur as of 12:00 noon, Eastern time, on
November 20, 1995 or such later date as the conditions to the closing are
satisfied ("Closing Date").
Each Fund currently offers a single class of shares. PW Fund shares are
offered primarily to clients of PaineWebber Incorporated ("PaineWebber") and its
correspondent firms who are participants in the Resource Management Account
("RMA") or Business Services Account ("BSA") programs. Shareholders of PW/KP
Fund who receive shares of PW Fund in the Reorganization may be eligible to
become participants in the RMA or BSA programs but will not become participants
in such programs automatically. Among the features of the RMA and BSA programs
is a daily sweep of uninvested cash in amounts of $1.00 or more into a
designated money market fund. PW/KP Fund shareholders who receive shares of PW
Fund in the Reorganization but who do not choose to participate in the RMA or
BSA programs will have uninvested cash of $5,000 or more swept into the PW Fund
on a daily basis, with amounts below $5,000 swept weekly. The RMA and BSA
programs include a full array of premier account services, such as checkwriting,
a Gold or Business Card MasterCard and toll-free telephone access to a customer
service center. The features of the RMA and BSA programs are summarized in the
PW Fund Statement of Additional Information.
For the reasons set forth below under "The Proposed Transaction-- Reasons
for the Reorganization," PW/KP Fund's board of directors, including its
directors who are not "interested persons," as that term is defined in the
Investment Company Act of 1940 ("1940 Act"), of either Fund ("Independent
Directors"), has determined that the Reorganization is in the best interests of
PW/KP Fund, that the terms of the Reorganization are fair and reasonable and
that the interests of PW/KP Fund's shareholders will not be diluted as a result
of the Reorganization. Accordingly, PW/KP Fund's board of directors recommends
approval of the transaction. In addition, PW Fund's board of directors,
including its Independent Directors, has determined that the Reorganization is
in the best interests of PW Fund, that the terms of the Reorganization are fair
and reasonable and that the interests of PW Fund's shareholders will not be
diluted as a result of the Reorganization.
COMPARATIVE FEE TABLE
Certain fees and expenses that PW/KP Fund's shareholders pay, directly or
indirectly, are slightly different from those incurred by PW Fund shareholders.
PaineWebber, the investment adviser and administrator of each Fund, is
currently paid (1) by PW/KP Fund, an annual investment advisory and
administration fee at the annual rate of 0.50% of that Fund's average daily net
assets and (2) by PW Fund, an annual investment advisory and administration fee,
computed daily and paid monthly, at a rate of 0.50% of average daily net assets
up to $1 billion,
3
<PAGE>
0.44% of average daily net assets in excess of $1 billion up to $1.5 billion,
and 0.36% of average daily net assets over $1.5 billion. Based on PW Fund's
average net assets of $1,539,047,222 for the year ended June 30, 1995, PW Fund
paid an investment advisory and administration fee at the effective annual rate
of 0.48% of its average daily net assets, which is less than the current fee
paid by PW/KP Fund. Following the Reorganization, the investment advisory and
administration fee for the combined fund is expected to be 0.45% of its average
daily net assets. With respect to both Funds, PaineWebber (not the Funds) pays
Mitchell Hutchins a fee for its sub-advisory and sub-administration services
("sub-advisory fee") at an annual rate of 20% of the fee received by PaineWebber
for investment advisory and administration services. Following the
Reorganization, PaineWebber will continue to pay Mitchell Hutchins a
sub-advisory fee at the same annual rate.
PW Fund pays PaineWebber an annual fee of $4.00 per active fund account,
plus certain out-of-pocket expenses for certain services not performed by the
Fund's transfer agent. PW/KP Fund does not pay this fee.
The following tables show (1) transaction expenses currently incurred by
shareholders of each Fund and transaction expenses that each shareholder will
incur after giving effect to the Reorganization, and (2) the current fees and
expenses incurred for the fiscal year ended June 30, 1995 by PW Fund and for the
twelve months ended June 30, 1995 (unaudited) by PW/KP Fund, and pro forma fees
for PW Fund after giving effect to the Reorganization.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
COMBINED
PW FUND PW/KP FUND FUND
------- ---------- --------
<S> <C> <C> <C>
Sales charge on purchases of shares.................... None None None
Sales charge on reinvested dividends................... None None None
Redemption fee or deferred sales charge................ None None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
PW/KP COMBINED FUND(1)
PW FUND(1) FUND (PRO FORMA)
---------------------- ----- ----------------------------
<S> <C> <C> <C>
Management Fees..................................... 0.48% 0.50% 0.45%
12b-1 Service Fees.................................. 0.08% 0.12% 0.08%
Other Expenses...................................... 0.07% 0.08% 0.06%
------ ----- ------
Total Fund Operating Expenses....................... 0.63% 0.70%(2) 0.59%
------ ----- ------
------ ----- ------
</TABLE>
- ------------
(1) PaineWebber currently charges PW Fund shareholders an annual $85 account
charge for the RMA program including the Gold MasterCard without a line of
credit. The fee for clients who choose a line of credit for their Gold
MasterCard is $125. The annual account charge for the BSA program, including
the MasterCard Business Card, is $125 ($165 with a MasterCard line of
credit). The
(Footnotes continued on following page)
4
<PAGE>
(Footnotes continued from preceding page)
account charges are not included in the table because certain non-RMA and
non-BSA participants are permitted to purchase shares of PW Fund.
(2) The ratios of total operating expenses as a percentage of average net assets
for PW/KP Fund were 0.69% and 0.70% for the fiscal year ended September 30,
1994 and for the six-month period ended March 31, 1995 (unaudited),
respectively.
EXAMPLE OF EFFECT ON FUND EXPENSES
The following illustrates the expenses on a $1,000 investment under the fees
and expenses stated above, assuming a 5% annual return.
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
PW Fund.................................. $6 $20 $ 35 $79
PW/KP Fund............................... $7 $22 $ 39 $87
Combined Fund............................ $6 $19 $ 33 $74
</TABLE>
This Example assumes that all dividends are reinvested and that the
percentage amounts listed under Annual Fund Operating Expenses remain the same
in the years shown and that the shares are redeemed at the end of each time
period shown. The above tables and the assumption in this Example of a 5% annual
return are required by regulations of the Securities and Exchange Commission
("SEC") applicable to all mutual funds; the assumed 5% annual return is not a
prediction of, and does not represent, either Fund's projected or actual
performance.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND EACH FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
The actual expenses of each Fund will depend upon, among other things, the level
of its average net assets and the extent to which it incurs variable expenses,
such as transfer agency costs.
FORMS OF ORGANIZATION
Each Fund is an open-end management investment company incorporated under
the laws of the State of Maryland. The Articles of Incorporation of PW Fund
authorize the issuance of 20 billion shares, par value $.001 per share. PW/KP
Fund's Articles of Incorporation authorize the issuance of 5 billion shares, par
value $.01 per share. PW Fund commenced operations on October 4, 1982. PW/KP
Fund commenced operations on July 6, 1983. Neither Fund is required to (and
neither does) hold annual shareholder meetings.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective and policies of each Fund are set forth below.
There can be no assurance that either Fund will achieve its investment
objective. An investment in either Fund is neither insured nor guaranteed by the
U.S. government. While each Fund seeks to maintain a stable net asset value of
$1.00 per share, there can be no assurance that it will be able to do so.
PW Fund. The investment objective of PW Fund is to provide maximum current
income exempt from federal income tax consistent with liquidity and conservation
of capital. The Fund seeks to achieve
5
<PAGE>
its objective by investing substantially all of its assets in money market
instruments with remaining maturities of 13 months or less issued by states,
municipalities and public authorities, the interest from which is exempt from
federal income tax ("Municipal Securities"). The Fund purchases only those
Municipal Securities that are either (1) rated in the highest short-term rating
category by at least two nationally recognized statistical rating organizations
("NRSROs"), (2) rated in the highest short-term rating category by a single
NRSRO if only that NRSRO has assigned the securities a short-term rating or (3)
unrated, but determined by Mitchell Hutchins to be of comparable quality ("First
Tier Securities"). These Municipal Securities include municipal notes, municipal
commercial paper, municipal bonds, floating and variable rate municipal
obligations and participation interests in municipal bonds and floating and
variable rate obligations. Municipal bonds include industrial development bonds,
private activity bonds ("PABs"), moral obligation bonds, municipal lease
obligations and certificates of participation therein and put bonds. The
interest on most PABs is an item of tax preference for purposes of the federal
alternative minimum tax ("AMT"). Under normal market conditions, the Fund
intends to invest in Municipal Securities that pay interest that is not an item
of tax preference for purposes of the AMT ("AMT exempt interest"), but may
invest up to 20% of its total assets in such securities if, in Mitchell
Hutchins' judgment, market conditions warrant.
PW Fund may purchase variable and floating rate securities with remaining
maturities in excess of 13 months issued by municipal issuers.
PW Fund may enter into repurchase agreements with U.S. banks and dealers
with respect to U.S. government securities, commercial paper, bank certificates
of deposit and bankers' acceptances but intends to do so only as a temporary
measure and under unusual circumstances. During unusual market conditions,
including when, in the opinion of Mitchell Hutchins, there are insufficient
Municipal Securities that pay AMT exempt interest ("suitable Municipal
Securities") available, the Fund temporarily may invest more than 20% of its net
assets in Municipal Securities that pay interest subject to the AMT ("other
Municipal Securities").
Under normal circumstances, PW Fund must invest at least 80% of its net
assets in securities that pay interest that is exempt from federal income tax.
However, when Mitchell Hutchins believes unusual circumstances warrant a
defensive posture, including when, in its opinion, neither suitable Municipal
Securities nor other Municipal Securities are available, the Fund may hold cash
and may invest any portion or all of its net assets in taxable money market
instruments, including repurchase agreements.
PW/KP Fund. The investment objective of PW/KP Fund is to maximize short-term
interest income exempt from federal income tax to the extent consistent with the
preservation of capital and the maintenance of liquidity. In seeking to achieve
its objective, the Fund invests primarily in Municipal Obligations considered to
be short-term. "Municipal Obligations" are debt obligations issued by states,
territories and possessions of the United States and the District of Columbia
and their political subdivisions, agencies and instrumentalities, or multistate
agencies or authorities, the interest from which is exempt from federal income
tax in the opinion of bond counsel to the issuer. Except when maintaining a
temporary defensive position, the Fund invests at least 80% of its net assets in
Municipal Obligations.
PW/KP Fund may purchase floating and variable rate demand notes with stated
maturities in excess of 397 days but will not invest more than 10% of the value
of its net assets in floating or variable rate demand obligations as to which
the Fund cannot exercise the demand feature on not more than
6
<PAGE>
seven days' notice if there is no secondary market available for these
obligations and in other securities that are not readily marketable. The Fund
may purchase from financial institutions participation interests in Municipal
Obligations but will not invest more than 10% of the value of its net assets in
participation interests that do not provide the Fund with the right to demand
payment, upon a specified number of days' notice, for all or part of the Fund's
participation interest in the Municipal Obligations, plus accrued interest.
For temporary defensive purposes, PW/KP Fund may invest more than 20% of its
net assets in taxable short-term investments ("Taxable Investments") consisting
of notes of issuers having, at the time of purchase, a quality rating within the
two highest grades by Moody's Investors Service, Inc. ("Moody's") or Standard &
Poor's ("S&P"); obligations of the U.S. government, its agencies or
instrumentalities; commercial paper rated P-1 by Moody's or A-1 or better by
S&P; certificates of deposit of domestic banks, including foreign branches of
domestic banks, with assets of $1 billion or more; bankers' acceptances and
other short-term bank obligations; time deposits; and repurchase agreements in
respect of any of the foregoing with selected securities dealers, banks or other
recognized financial institutions. From time to time, on a temporary basis other
than for defensive purposes (but not to exceed 20% of the Fund's net assets),
the Fund may invest in Taxable Investments. Under normal market conditions, the
Fund anticipates that not more than 5% of the value of its total assets will be
invested in any one category of Taxable Investments. The Fund may invest up to
10% of its assets in time deposits maturing from two business days through seven
calendar days.
Other Policies of Both Funds. Neither Fund will invest more than 10% of its
net assets in securities that are illiquid, including repurchase agreements with
maturities in excess of seven days. Under normal circumstances, both Funds
invest at least 80% of their respective net assets in municipal obligations.
Both Funds may purchase securities on a "when-issued" basis up to certain
amounts.
OPERATIONS OF PW FUND FOLLOWING THE REORGANIZATION
As noted above, there are some differences in the investment policies of the
two Funds, including the restriction of PW Fund to investment in First Tier
Securities. It is not expected, however, that PW Fund will revise its investment
policies following the Reorganization to reflect those of PW/KP Fund. Based on
its review of the investment portfolios of each Fund, Mitchell Hutchins believes
that all of the assets held by PW/KP Fund will be consistent with the investment
policies of PW Fund and thus can be transferred to and held by PW Fund if the
Reorganization is approved.
Currently, PaineWebber serves as investment adviser and Mitchell Hutchins
serves as sub-adviser to both Funds. After the Reorganization, the directors and
officers of PW Fund and its investment adviser, sub-adviser, distributor and
other outside agents will continue to serve PW Fund in their current capacities.
PURCHASES AND REDEMPTIONS
Shares of each Fund are available only through PaineWebber and its
correspondent firms. There is no minimum initial investment in PW Fund. PW Fund
shares are offered primarily to clients of PaineWebber and its correspondent
firms who are participants in the RMA or BSA programs. Shares of PW/KP Fund may
be purchased only by existing shareholders of PW/KP Fund through their
PaineWebber brokerage accounts.
7
<PAGE>
Shares of each Fund may be redeemed at their net asset value per share next
determined after a redemption request is properly received. Within three
Business Days after receipt of the request, redemption proceeds will be credited
to the shareholder's account or sent to the shareholder. A "Business Day" is any
day on which the Boston offices of a Fund's custodian, and the New York City
offices of PaineWebber and PaineWebber's bank, are all open for business.
If the Reorganization is approved, PW/KP Fund shares will cease to be
offered on November 17, 1995, so that shares of PW/KP Fund will no longer be
available for purchase or exchange thereafter. If the Meeting is adjourned and
the Reorganization is approved on a later date, PW/KP Fund shares will no longer
be available for purchase or exchange on the Business Day following the date on
which the Reorganization is approved and all contingencies have been met.
Redemptions of PW/KP Fund's shares and exchanges of such shares for shares of
any other PaineWebber/Kidder, Peabody money market funds may be effected through
the Closing Date.
EXCHANGES
The exchange policies of the Funds differ. Shares of PW Fund are not
exchangeable for shares of any other mutual fund, while shares of PW/KP Fund may
be exchanged for shares of other PaineWebber/Kidder, Peabody money market funds.
After the Reorganization, shares of PW Fund will continue to be not
exchangeable.
DIVIDENDS
Each Fund declares as dividends all of its net investment income each
Business Day and pays dividends in additional Fund shares each month. Shares
begin earning dividends on the day of purchase; shares do not earn dividends on
the day of redemption. Net investment income attributable to the accretion of
market discount on Municipal Securities, which is taxable to shareholders,
normally is distributed annually. PW Fund distributes its net short-term capital
gain, if any, annually but may make more frequent distributions of such gain if
necessary to maintain its net asset value per share at $1.00 or to avoid income
or excise taxes. Distributions by PW/KP Fund of realized securities gains, if
any, generally are declared and paid once a year. Because the Funds do not
expect to realize long-term capital gains, they do not contemplate paying
capital gain distributions.
On or before the Closing Date, PW/KP Fund will declare as a dividend
substantially all of its net tax-exempt interest income, taxable net investment
income and net short-term capital gain, if any, and distribute that amount plus
any previously declared but unpaid dividends, in order to continue to maintain
its tax status as a regulated investment company. PW/KP Fund will pay these
distributions only in cash.
8
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION
PW Fund has received an opinion of Kirkpatrick & Lockhart LLP, its counsel,
and PW/KP Fund has received an opinion of Stroock & Stroock & Lavan, its
counsel, each to the effect that the Reorganization will constitute a tax-free
reorganization within the meaning of section 368(a)(1)(C) of the Internal
Revenue Code of 1986, as amended ("Code"). Accordingly, no gain or loss will be
recognized to either Fund or its shareholders as a result of the Reorganization.
See "The Proposed Transaction--Federal Income Tax Considerations," page 13.
COMPARISON OF PRINCIPAL RISK FACTORS
Because PW Fund's investment objective is substantially identical to that of
PW/KP Fund, the investment risks of the two Funds are generally similar. These
risks are those typically associated with investing in municipal obligations.
Certain differences are identified below. See the Prospectus of PW Fund, which
accompanies this Proxy Statement, for a more detailed discussion of the
investment risks of PW Fund.
There can be no assurance that the Funds will achieve their investment
objectives. In periods of declining interest rates, the Funds' yields will tend
to be somewhat higher than prevailing market rates, and in periods of rising
interest rates the opposite will be true. Also, when interest rates are falling,
net cash inflows from the continuous sale of a Fund's shares are likely to be
invested in portfolio instruments producing lower yields than the balance of
that Fund's portfolio, thereby reducing its yield. In periods of rising interest
rates, the opposite can be true.
Each Fund may purchase variable and floating rate securities with remaining
maturities in excess of 13 months (or 397 days). The yield on these securities
is adjusted in relation to changes in specific rates, such as the prime rate,
and different securities may have different adjustment rates. The Funds'
investments in these securities must comply with conditions established by the
SEC under which they may be considered to have remaining maturities of 13 months
or less. Certain of these obligations carry a demand feature that gives the
Funds the right to tender them back to the issuer or a remarketing agent and
receive the principal amount of the obligation prior to maturity. The demand
feature may or may not be backed by letters of credit or other credit support
arrangements provided by banks or other financial institutions, the credit
standing of which affects the credit quality of the obligation.
PW Fund may enter into repurchase agreements but will do so only as a
temporary measure and under unusual circumstances. PW/KP Fund is authorized to
invest up to 10% of its assets in repurchase agreements maturing in more than
seven days and, for temporary defensive purposes, may commit more than 20% of
its net assets to repurchase agreements. Repurchase agreements carry certain
risks not associated with direct investments in securities, including possible
decline in the market value of the underlying securities and delays and costs to
the Fund if the other party to the repurchase agreement becomes insolvent.
Both Funds may purchase securities on a "when-issued" basis, that is, for
delivery beyond the normal settlement date at a stated price and yield. A Fund
generally would not pay for such securities or start earning interest on them
until they are received. However, when a Fund purchases securities on a
when-issued basis, it immediately assumes the risks of ownership, including the
risk of price fluctuation. Failure by the issuer to deliver a security purchased
on a when-issued basis may result in a loss or
9
<PAGE>
missed opportunity to make an alternative investment. PW Fund expects that
commitments to purchase when-issued securities normally will not exceed 25% of
its assets. PW/KP Fund may commit up to 20% of its net assets to such purchases.
Certain municipal lease/purchase obligations in which PW/KP Fund may invest
may contain "non-appropriation" clauses which provide that the municipality has
no obligation to make lease payments in future years unless money is
appropriated for such purpose on a yearly basis. Although "non-appropriation"
lease/purchase obligations are secured by the leased property, disposition of
leased property in the event of foreclosure might prove difficult.
Both Funds invest in high quality securities. While PW Fund purchases only
securities rated in the highest short-term rating category by NRSROs or
determined to be of comparable quality, PW/KP Fund invests in securities rated
in one of the two highest rating categories by NRSROs or determined to be of
comparable quality.
THE PROPOSED TRANSACTION
REORGANIZATION PLAN
The terms and conditions under which the proposed transaction may be
consummated are set forth in the Reorganization Plan. Significant provisions of
the Reorganization Plan are summarized below; however, this summary is qualified
in its entirety by reference to the Reorganization Plan, which is attached as
Appendix A to this Proxy Statement.
The Reorganization Plan contemplates (a) the acquisition by PW Fund on the
Closing Date of the assets of PW/KP Fund in exchange solely for PW Fund shares
and the assumption by PW Fund of PW/KP Fund's liabilities, and (b) the
constructive distribution of such shares to the shareholders of PW/KP Fund.
The assets of PW/KP Fund to be acquired by PW Fund include all cash, cash
equivalents, securities, receivables and other property owned by PW/KP Fund. PW
Fund will assume from PW/KP Fund all debts, liabilities, obligations and duties
of PW/KP Fund of whatever kind or nature; provided, however, that PW/KP Fund
will use its best efforts, to the extent practicable, to discharge all of its
known debts, liabilities, obligations and duties prior to the Closing Date. PW
Fund also will deliver its shares to PW/KP Fund, which then will be
constructively distributed to PW/KP Fund's shareholders.
The value of PW/KP Fund's assets to be acquired, and the amount of PW/KP
Fund's liabilities to be assumed, by PW Fund and the net asset value of a share
of PW Fund will be determined as of 12:00 noon, Eastern time, on the Closing
Date. The amortized cost method of valuation will be used to value each Fund's
securities. All other assets and liabilities will be valued at fair value as
determined in good faith by or under the direction of each Fund's respective
board of directors.
On, or as soon as practicable after, the Closing Date, PW/KP Fund will
distribute pro rata to its shareholders of record the shares of PW Fund it
received, so that each PW/KP Fund shareholder will receive a number of full and
fractional shares of PW Fund equal in value to the shareholder's holdings in
PW/KP Fund; PW/KP Fund will be dissolved as soon as practicable thereafter. Such
distribution will be accomplished by opening accounts on the books of PW Fund in
the names of PW/KP Fund
10
<PAGE>
shareholders and by transferring thereto the shares previously credited to the
account of PW/KP Fund on those books. Fractional shares in PW Fund will be
rounded to the third decimal place.
Accordingly, immediately after the Reorganization, each former shareholder
of PW/KP Fund will own shares of PW Fund that will be equal in value to that
shareholder's shares of PW/KP Fund immediately prior to the Reorganization.
Moreover, because shares of PW Fund will be issued at net asset value in
exchange for the net assets of PW/KP Fund, the aggregate net asset value of PW
Fund shares so issued will equal the aggregate net asset value of PW/KP Fund
shares. The net asset value per share of PW Fund will be unchanged by the
transaction. Thus, the Reorganization will not result in a dilution of any
shareholder's interest.
Any transfer taxes payable upon issuance of shares of PW Fund in a name
other than that of the registered holder of the shares on the books of PW/KP
Fund shall be paid by the person to whom such shares are to be issued as a
condition of such transfer. Any reporting responsibility of PW/KP Fund will
continue to be its responsibility up to and including the Closing Date and such
later date on which it is dissolved.
The cost of the Reorganization, including professional fees and the cost of
soliciting proxies for the Meeting, consisting principally of printing and
mailing expenses, together with the cost of any supplementary solicitation, will
be borne by both Funds in proportion to their respective net assets. Mitchell
Hutchins recommended this method of expense allocation to the directors of each
Fund. Mitchell Hutchins based its recommendations on its belief that this method
is fair because, for the reasons discussed under "Reasons for the
Reorganization," the Reorganization has the potential to benefit both Funds. The
directors of each Fund considered this expense allocation method in approving
the Reorganization and finding that the Reorganization is in the best interests
of their respective Funds.
The consummation of the Reorganization is subject to a number of conditions
set forth in the Reorganization Plan, some of which may be waived by each Fund.
In addition, the Reorganization Plan may be amended in any mutually agreeable
manner, except that no amendment may be made subsequent to the Meeting that has
a material adverse effect on the shareholders' interests.
REASONS FOR THE REORGANIZATION
PW/KP Fund's board of directors, including a majority of its Independent
Directors, has determined that the Reorganization is in the best interests of
PW/KP Fund, that the terms of the Reorganization are fair and reasonable and
that the interests of PW/KP Fund's shareholders will not be diluted as a result
of the Reorganization. PW Fund's board of directors, including a majority of its
Independent Directors, has determined that the Reorganization is in the best
interests of PW Fund, that the terms of the Reorganization are fair and
reasonable and that the interests of PW Fund's shareholders will not be diluted
as a result of the Reorganization.
In considering the Reorganization, the boards of directors made an extensive
inquiry into a number of factors, including the following:
(1) the compatibility of the investment objectives, policies and
restrictions of the Funds;
(2) the effect of the Reorganization on expected investment performance
of the Funds;
11
<PAGE>
(3) the effect of the Reorganization on the expense ratio of PW Fund
relative to each Fund's current expense ratio;
(4) the costs to be incurred by each Fund as a result of the
Reorganization;
(5) the tax consequences of the Reorganization;
(6) possible alternatives to the Reorganization, including continuing to
operate on a stand-alone basis or liquidation; and
(7) the potential benefits of the Reorganization to other persons,
especially Mitchell Hutchins and PaineWebber.
The Reorganization was recommended to the Funds' directors by Mitchell
Hutchins at meetings of the Funds' boards of directors held on July 20, 1995. In
recommending the Reorganization, Mitchell Hutchins advised the boards of
directors that the investment advisory and administration fee schedule
applicable to PW Fund would be equal to or lower than that currently in effect
for PW/KP Fund. Further, the directors of PW/KP Fund were advised by Mitchell
Hutchins that, because PW Fund has greater net assets than PW/KP Fund, combining
the two Funds would reduce the expenses borne by the shareholders of PW/KP Fund
as a percentage of net assets. The boards were also advised that following the
Reorganization, the expense ratio for PW Fund is likely to decrease because the
investment advisory and administration fee paid by that Fund decreases as the
size of the Fund increases.
The directors were advised by Mitchell Hutchins that the Funds have
substantially identical investment objectives and generally similar investment
policies, with the material differences noted. Mitchell Hutchins also noted its
belief that there is no compelling reason to maintain and market two
substantially similar funds that invest in short-term municipal securities, the
interest on which is exempt from federal income tax. In approving the
Reorganization, the directors noted that PW Fund's overall objective to provide
maximum current income exempt from federal income tax consistent with liquidity
and conservation of capital remains an appropriate one to offer to investors as
part of an overall investment strategy.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS
OF PW/KP FUND VOTE "FOR" THE REORGANIZATION.
DESCRIPTION OF SECURITIES TO BE ISSUED
PW Fund is registered with the SEC as an open-end management investment
company. Its directors are authorized to issue 20 billion shares of common stock
(par value $.001 per share). Shares of PW Fund entitle their holders to one vote
per full share and fractional votes for fractional shares held.
PW Fund does not hold annual meetings of shareholders. There normally will
be no meetings of shareholders for the purpose of electing directors unless
fewer than a majority of the directors holding office have been elected by
shareholders, at which time the directors then in office will call a
shareholders' meeting for the election of directors. The directors are required
to call a meeting of shareholders for the purpose of voting upon the question of
removal of any director when requested in writing to do so by the shareholders
of record holding at least 10% of PW Fund's outstanding shares.
12
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
The exchange of PW/KP Fund's assets for PW Fund shares and PW Fund's
assumption of PW/KP Fund's liabilities is intended to qualify for federal income
tax purposes as a tax-free reorganization under section 368(a)(1)(C) of the
Code. PW Fund has received an opinion of Kirkpatrick & Lockhart LLP, its
counsel, and PW/KP Fund has received an opinion of Stroock & Stroock & Lavan,
its counsel, each substantially to the effect that--
(1) PW Fund's acquisition of PW/KP Fund's assets in exchange solely for
PW Fund shares and PW Fund's assumption of PW/KP Fund's liabilities,
followed by PW/KP Fund's distribution of those shares to its shareholders
constructively in exchange for their PW/KP Fund shares, will constitute a
"reorganization" within the meaning of section 368(a)(1)(C) of the Code, and
each Fund will be "a party to a reorganization" within the meaning of
section 368(b) of the Code;
(2) No gain or loss will be recognized to PW/KP Fund on the transfer to
PW Fund of its assets in exchange solely for PW Fund shares and PW Fund's
assumption of PW/KP Fund's liabilities or on the subsequent distribution of
those shares to PW/KP Fund's shareholders in constructive exchange for their
PW/KP Fund shares;
(3) No gain or loss will be recognized to PW Fund on its receipt of the
transferred assets in exchange solely for PW Fund shares and its assumption
of PW/KP Fund's liabilities;
(4) PW Fund's basis for the transferred assets will be the same as the
basis thereof in PW/KP Fund's hands immediately prior to the Reorganization,
and PW Fund's holding period for those assets will include PW/KP Fund's
holding period therefor;
(5) A PW/KP Fund shareholder will recognize no gain or loss on the
constructive exchange of all its PW/KP Fund shares solely for PW Fund shares
pursuant to the Reorganization; and
(6) A PW/KP Fund shareholder's basis for the PW Fund shares to be
received by it in the Reorganization will be the same as the basis for its
PW/KP Fund shares to be constructively surrendered in exchange for those PW
Fund shares, and its holding period for those PW Fund shares will include
its holding period for those PW/KP Fund shares, provided they are held as
capital assets by the shareholder on the Closing Date.
Each such opinion states that no opinion is expressed as to the effect of
the Reorganization on the Funds or any shareholder with respect to any asset as
to which any unrealized gain or loss is required to be recognized for federal
income tax purposes at the end of a taxable year (or on the termination or
transfer thereof) under a mark-to-market system of accounting.
Utilization by PW Fund after the Reorganization of pre-Reorganization
capital losses realized by PW/KP Fund could be subject to limitation in future
years under the Code.
Shareholders of PW/KP Fund should consult their tax advisers regarding the
effect, if any, of the Reorganization in light of their individual
circumstances. Because the foregoing discussion only relates to the federal
income tax consequences of the Reorganization, those shareholders also should
consult their tax advisers as to state and local tax consequences, if any, of
the Reorganization.
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<PAGE>
CAPITALIZATION
The following table shows the capitalization of each Fund as of June 30,
1995 (unaudited, with respect to PW/KP Fund) and on a pro forma combined basis
(unaudited) as of that date, giving effect to the Reorganization:
<TABLE>
<CAPTION>
COMBINED FUND
PW FUND PW/KP FUND (PRO FORMA)
-------------- ------------ --------------
<S> <C> <C> <C>
Net Assets.................................. $1,562,040,318 $413,080,867 $1,975,121,185
Net Asset Value Per Share................... $1.00 $1.00 $1.00
Shares Outstanding.......................... 1,563,026,155 413,082,838 1,976,108,993
</TABLE>
MISCELLANEOUS
AVAILABLE INFORMATION
Each Fund is subject to the information requirements of the Securities
Exchange Act of 1934 and the 1940 Act and in accordance therewith files reports,
proxy material and other information with the SEC. Such reports, proxy material
and other information can be inspected and copied at the Public Reference Room
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies
of such material can also be obtained from the Public Reference Branch, Office
of Consumer Affairs and Information Services, Securities and Exchange
Commission, Washington, D.C. 20459 at prescribed rates.
LEGAL MATTERS
Certain legal matters in connection with the issuance of PW Fund shares as
part of the Reorganization will be passed upon by Kirkpatrick & Lockhart LLP,
counsel to PW Fund.
EXPERTS
The audited financial statements of PW Fund and PW/KP Fund, incorporated
herein by reference and incorporated by reference or included in their
respective Statements of Additional Information, have been audited by Ernst &
Young LLP and Deloitte & Touche LLP, independent auditors, whose reports thereon
are included in the Funds' Annual Reports to Shareholders for the fiscal years
ended June 30, 1995 and September 30, 1994, respectively. The financial
statements audited by Ernst & Young LLP and Deloitte & Touche LLP have been
incorporated herein by reference in reliance on their reports given on their
authority as experts in auditing and accounting.
14
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION AND DISSOLUTION
THIS AGREEMENT AND PLAN OF REORGANIZATION AND DISSOLUTION ("Agreement") is
made as of September 12, 1995, between PaineWebber RMA Tax-Free Fund, Inc., a
Maryland corporation ("Acquiring Fund"), and PaineWebber/Kidder, Peabody Tax
Exempt Money Fund, Inc., a Maryland corporation ("Target") (individually a
"Fund" and collectively "Funds.")
This Agreement is intended to be, and is adopted as, a plan of a
reorganization described in section 368(a)(1)(C) of the Internal Revenue Code of
1986, as amended ("Code"). The reorganization will involve the transfer to
Acquiring Fund of Target's assets solely in exchange for voting shares of common
stock in Acquiring Fund ("Acquiring Fund Shares") and the assumption by
Acquiring Fund of Target's liabilities, followed by the constructive
distribution of the Acquiring Fund Shares to the holders of shares of common
stock in Target ("Target Shares") in exchange therefor, all upon the terms and
conditions set forth herein. The foregoing transactions are referred to herein
as the "Reorganization."
In consideration of the mutual promises herein, the parties covenant and
agree as follows:
1. PLAN OF REORGANIZATION AND DISSOLUTION OF TARGET
1.1. Target agrees to assign, sell, convey, transfer, and deliver all of its
assets described in paragraph 1.2 ("Assets") to Acquiring Fund. Acquiring Fund
agrees in exchange therefor--
(a) to issue and deliver to Target the number of full and fractional
Acquiring Fund Shares determined by dividing the net value of Target (computed
as set forth in paragraph 2.1) by the net asset value (computed as set forth in
paragraph 2.2) ("NAV") of an Acquiring Fund Share; and
(b) to assume all of Target's liabilities described in paragraph 1.3
("Liabilities").
Such transactions shall take place at the Closing (as defined in paragraph
3.1).
1.2. The Assets shall include, without limitation, all cash, cash equivalents,
securities, receivables (including interest and dividends receivable), claims
and rights of action, rights to register shares under applicable securities
laws, books and records, deferred and prepaid expenses shown as assets on
Target's books, and other property owned by Target at the Effective Time (as
defined in paragraph 3.1).
1.3. The Liabilities shall include (except as otherwise provided herein) all
of Target's liabilities, debts, obligations, and duties of whatever kind or
nature, whether absolute, accrued, contingent, or otherwise, whether or not
arising in the ordinary course of business, whether or not determinable at the
Effective Time, and whether or not specifically referred to in this Agreement,
including without limitation Target's share of the expenses described in
paragraph 7.2. Notwithstanding the foregoing, Target agrees to use its best
efforts to discharge all of its known Liabilities prior to the Effective Time.
1.4. Before the Effective Time, Target shall declare and pay to its
shareholders a dividend in an amount large enough so that it will have
distributed substantially all (and in any event not less than 90%) of its
investment company taxable income (computed without regard to any deduction for
dividends paid) and net interest income excludable from gross income under
section 103(a) of the Code for the current taxable year through the Effective
Time.
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1.5. At the Effective Time (or as soon thereafter as is reasonably
practicable), Target shall constructively distribute the Acquiring Fund Shares
received by it pursuant to paragraph 1.1 to Target's shareholders of record,
determined as of the Effective Time (collectively "Shareholders" and
individually a "Shareholder"), in exchange for their Target Shares. Such
distribution shall be accomplished by the Funds' transfer agent ("Transfer
Agent") opening accounts on Acquiring Fund's share transfer books in the
Shareholders' names and transferring such Acquiring Fund Shares thereto. Each
Shareholder's account shall be credited with the respective pro rata number of
full and fractional (rounded to the third decimal place) Acquiring Fund Shares
due that Shareholder. All outstanding Target Shares, including any represented
by certificates, shall simultaneously be canceled on Target's share transfer
records. Acquiring Fund shall not issue certificates representing the Acquiring
Fund Shares in connection with the Reorganization.
1.6. As soon as reasonably practicable after distribution of the Acquiring
Fund Shares pursuant to paragraph 1.5, Target shall be dissolved and any further
actions shall be taken in connection therewith as required by applicable law.
1.7. Any reporting responsibility of Target to a public authority is and shall
remain its responsibility up to and including the date on which it is dissolved.
1.8. Any transfer taxes payable upon issuance of Acquiring Fund Shares in a
name other than that of the registered holder on Target's books of the Target
Shares constructively exchanged there for shall be paid by the person to whom
such Acquiring Fund Shares are to be issued, as a condition of such transfer.
2. VALUATION
2.1. For purposes of paragraph 1.1(a), Target's net value shall be (a) the
value of the Assets computed as of 12:00 noon on the date of the Closing
("Valuation Time"), using the valuation procedures set forth in Target's
then-current prospectus and statement of additional information less (b) the
amount of the Liabilities as of the Valuation Time.
2.2. For purposes of paragraph 1.1(a), the NAV of an Acquiring Fund Share
shall be computed as of the Valuation Time, using the valuation procedures set
forth in Acquiring Fund's then-current prospectus and statement of additional
information.
2.3. All computations pursuant to paragraphs 2.1 and 2.2 shall be made by or
under the direction of Mitchell Hutchins Asset Management Inc.
2.4 If the difference between the NAVs per share of the Funds equals or
exceeds $.0025, at the Valuation Time, or such earlier or later day and time as
the parties may agree and set forth in writing signed by their duly authorized
officers, as computed by using the market values of the Funds' assets in
accordance with the policies and procedures established by the Funds (or as
otherwise mutually determined by the Funds' boards of directors), either Fund
may postpone the Valuation Time until such time as such per share NAV difference
is less than $.0025.
A-2
<PAGE>
3. CLOSING AND EFFECTIVE TIME
3.1. The Reorganization, together with related acts necessary to consummate
the same ("Closing"), shall occur at the Funds' principal office on November 20,
1995, or at such other place and/or on such other date as the parties may agree.
All acts taking place at the Closing shall be deemed to take place
simultaneously as of 12:00 noon on the date thereof or at such other time as the
parties may agree ("Effective Time"). If, immediately before the Valuation Time,
(a) the New York Stock Exchange, Inc. ("NYSE") is closed to trading or trading
thereon is restricted or (b) trading or the reporting of trading on the NYSE or
elsewhere is disrupted, so that accurate appraisal of the net value of Target
and the NAV per Acquiring Fund Share is impracticable, the Effective Time shall
be postponed until the first business day after the day when such trading shall
have been fully resumed and such reporting shall have been restored. This is
from the Agreement and Plan of Reorganization and Dissolution, (Appendix A).
3.2. Target shall deliver to Acquiring Fund at the Closing a schedule of the
Assets as of the Effective Time, which shall set forth for all portfolio
securities included therein their adjusted tax basis and holding period by lot.
Target's custodian shall deliver at the Closing a certificate of an authorized
officer stating that (a) the Assets held by the custodian will be transferred to
Acquiring Fund at the Effective Time and (b) all necessary taxes in conjunction
with the delivery of the Assets, including all applicable federal and state
stock transfer stamps, if any, have been paid or provision for payment has been
made.
3.3. Target shall deliver to Acquiring Fund at the Closing a list of the names
and addresses of the Shareholders and the number of outstanding Target Shares
owned by each Shareholder, all as of the Effective Time, certified by the
Secretary or Assistant Secretary of Target. The Transfer Agent shall deliver at
the Closing a certificate as to the opening on Acquiring Fund's share transfer
books of accounts in the Shareholders' names. Acquiring Fund shall issue and
deliver a confirmation to Target evidencing the Acquiring Fund Shares to be
credited to Target at the Effective Time or provide evidence satisfactory to
Target that such Acquiring Fund Shares have been credited to Target's account on
Acquiring Fund's books. At the Closing, each party shall deliver to the other
such bills of sale, checks, assignments, stock certificates, receipts, or other
documents as the other party or its counsel may reasonably request.
3.4. Each Fund shall deliver to the other at the Closing a certificate
executed in its name by its President or a Vice President in form and substance
satisfactory to the recipient and dated the Effective Time, to the effect that
the representations and warranties it made in this Agreement are true and
correct at the Effective Time except as they may be affected by the transactions
contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1. Target represents and warrants as follows:
4.1.1. Target is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Maryland, and a copy of its
Articles of Incorporation is on file with the Department of Assessments and
Taxation of Maryland;
A-3
<PAGE>
4.1.2. Target is duly registered as an open-end management investment
company under the Investment Company Act of 1940 ("1940 Act"), and such
registration will be in full force and effect at the Effective Time;
4.1.3. At the Closing, Target will have good and marketable title to the
Assets and full right, power, and authority to sell, assign, transfer, and
deliver the Assets free of any liens or other encumbrances; and upon delivery
and payment for the Assets, Acquiring Fund will acquire good and marketable
title thereto;
4.1.4. Target's current prospectus and statement of additional
information conform in all material respects to the applicable requirements of
the Securities Act of 1933 ("1933 Act") and the 1940 Act and the rules and
regulations thereunder and do not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading;
4.1.5. Target is not in violation of, and the execution and delivery of
this Agreement and consummation of the transactions contemplated hereby will not
conflict with or violate, Maryland law or any provision of Target's Articles of
Incorporation or By-Laws or of any agreement, instrument, lease, or other
undertaking to which Target is a party or by which it is bound or result in the
acceleration of any obligation, or the imposition of any penalty, under any
agreement, judgment, or decree to which Target is a party or by which it is
bound, except as previously disclosed in writing to and accepted by Acquiring
Fund;
4.1.6. Except as disclosed in writing to and accepted by Acquiring Fund,
all material contracts and other commitments of or applicable to Target (other
than this Agreement and investment contracts) will be terminated, or provision
for discharge of any liabilities of Target thereunder will be made, at or prior
to the Effective Time, without either Fund's incurring any liability or penalty
with respect thereto and without diminishing or releasing any rights Target may
have had with respect to actions taken or omitted to be taken by any other party
thereto prior to the Closing;
4.1.7. Except as otherwise disclosed in writing to and accepted by
Acquiring Fund, no litigation, administrative proceeding, or investigation of or
before any court or governmental body is presently pending or (to Target's
knowledge) threatened against Target or any of its properties or assets that, if
adversely determined, would materially and adversely affect Target's financial
condition or the conduct of its business; Target knows of no facts that might
form the basis for the institution of any such litigation, proceeding, or
investigation and is not a party to or subject to the provisions of any order,
decree, or judgment of any court or governmental body that materially or
adversely affects its business or its ability to consummate the transactions
contemplated hereby;
4.1.8. The execution, delivery, and performance of this Agreement have
been duly authorized as of the date hereof by all necessary action on the part
of Target's board of directors, which has made the determinations required by
Rule 17a-8(a) under the 1940 Act; and, subject to approval by Target's
shareholders and receipt of any necessary exemptive relief or no-action
assurances requested from the Securities and Exchange Commission ("SEC") or its
staff with respect to sections 17(a) and 17(d) of the 1940 Act, this Agreement
will constitute a valid and legally binding obligation of Target, enforceable in
accordance with its terms, except as the same may be limited by bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium, and similar laws
relating to or affecting creditors' rights and by general principles of equity;
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4.1.9. At the Effective Time, the performance of this Agreement shall
have been duly authorized by all necessary action by Target's shareholders;
4.1.10. No governmental consents, approvals, authorizations, or filings
are required under the 1933 Act, the Securities Exchange Act of 1934 ("1934
Act"), or the 1940 Act for the execution or performance of this Agreement by
Target, except for (a) the filing with the SEC of a registration statement by
Acquiring Fund on Form N-14 relating to the Acquiring Fund Shares issuable
hereunder, and any supplement or amendment thereto ("Registration Statement"),
including therein a prospectus/proxy statement ("Proxy Statement"), (b) receipt
of the exemptive relief referenced in subparagraph 4.1.8, and (c) such consents,
approvals, authorizations, and filings as have been made or received or as may
be required subsequent to the Effective Time;
4.1.11. On the effective date of the Registration Statement, at the time
of the shareholders' meeting referred to in paragraph 5.2, and at the Effective
Time, the Proxy Statement will (a) comply in all material respects with the
applicable provisions of the 1933 Act, the 1934 Act, and the 1940 Act and the
regulations thereunder and (b) not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which such
statements were made, not misleading; provided that the foregoing shall not
apply to statements in or omissions from the Proxy Statement made in reliance on
and in conformity with information furnished by Acquiring Fund for use therein;
4.1.12. The Liabilities were incurred by Target in the ordinary course of
its business;
4.1.13. Target qualified for treatment as a regulated investment company
under Subchapter M of the Code ("RIC") for each past taxable year since it
commenced operations and will continue to meet all the requirements for such
qualification for its current taxable year; and it has no earnings and profits
accumulated in any taxable year in which the provisions of Subchapter M did not
apply to it. The Assets shall be invested at all times through the Effective
Time in a manner that ensures compliance with the foregoing;
4.1.14. Target is not under the jurisdiction of a court in a proceeding
under Title 11 of the United States Code or similar case within the meaning of
section 368(a)(3)(A) of the Code;
4.1.15. Not more than 25% of the value of Target's total assets
(excluding cash, cash items, and U.S. government securities) is invested in the
stock and securities of any one issuer, and not more than 50% of the value of
such assets is invested in the stock and securities of five or fewer issuers;
and
4.1.16. Target will be dissolved as soon as reasonably practicable after
the Reorganization, but in all events within six months after the Effective
Time.
4.2. Acquiring Fund represents and warrants as follows:
4.2.1. Acquiring Fund is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Maryland, and a copy of its
Articles of Incorporation is on file with the Department of Assessments and
Taxation of Maryland;
4.2.2. Acquiring Fund is duly registered as an open-end management
investment company under the 1940 Act, and such registration will be in full
force and effect at the Effective Time;
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4.2.3. No consideration other than Acquiring Fund Shares (and Acquiring
Fund's assumption of the Liabilities) will be issued in exchange for the Assets
in the Reorganization;
4.2.4. The Acquiring Fund Shares to be issued and delivered to Target
hereunder will, at the Effective Time, have been duly authorized and, when
issued and delivered as provided herein, will be duly and validly issued and
outstanding shares of Acquiring Fund, fully paid and non-assessable. Except as
contemplated by this Agreement, Acquiring Fund does not have outstanding any
options, warrants, or other rights to subscribe for or purchase any of its
shares, nor is there outstanding any security convertible into any of its
shares;
4.2.5. Acquiring Fund's current prospectus and statement of additional
information conform in all material respects to the applicable requirements of
the 1933 Act and the 1940 Act and the rules and regulations thereunder and do
not include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading;
4.2.6. Acquiring Fund is not in violation of, and the execution and
delivery of this Agreement and consummation of the transactions contemplated
hereby will not conflict with or violate, Maryland law or any provision of
Acquiring Fund's Articles of Incorporation or By-Laws or of any provision of any
agreement, instrument, lease, or other undertaking to which Acquiring Fund is a
party or by which it is bound or result in the acceleration of any obligation,
or the imposition of any penalty, under any agreement, judgment, or decree to
which Acquiring Fund is a party or by which it is bound, except as previously
disclosed in writing to and accepted by Target;
4.2.7. Except as otherwise disclosed in writing to and accepted by
Target, no litigation, administrative proceeding, or investigation of or before
any court or governmental body is presently pending or (to Acquiring Fund's
knowledge) threatened against Acquiring Fund or any of its properties or assets
that, if adversely determined, would materially and adversely affect Acquiring
Fund's financial condition or the conduct of its business; Acquiring Fund knows
of no facts that might form the basis for the institution of any such
litigation, proceeding, or investigation and is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental body
that materially or adversely affects its business or its ability to consummate
the transactions contemplated hereby;
4.2.8. The execution, delivery, and performance of this Agreement have
been duly authorized as of the date hereof by all necessary action on the part
of Acquiring Fund's board of directors, which has made the determinations
required by Rule 17a-8(a) under the 1940 Act; and, subject to receipt of any
necessary exemptive relief or no-action assurances requested from the SEC or its
staff with respect to sections 17(a) and 17(d) of the 1940 Act, this Agreement
will constitute a valid and legally binding obligation of Acquiring Fund,
enforceable in accordance with its terms, except as the same may be limited by
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium, and
similar laws relating to or affecting creditors' rights and by general
principles of equity;
4.2.9. No governmental consents, approvals, authorizations, or filings
are required under the 1933 Act, the 1934 Act, or the 1940 Act for the execution
or performance of this Agreement by Acquiring Fund, except for (a) the filing
with the SEC of the Registration Statement, (b) receipt of the exemptive relief
referenced in subparagraph 4.2.8, and (c) such consents, approvals,
authorizations, and filings as have been made or received or as may be required
subsequent to the Effective Time;
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4.2.10. On the effective date of the Registration Statement, at the time
of the shareholders' meeting referred to in paragraph 5.2, and at the Effective
Time, the Proxy Statement will (a) comply in all material respects with the
applicable provisions of the 1933 Act, the 1934 Act, and the 1940 Act and the
regulations thereunder and (b) not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which such
statements were made, not misleading; provided that the foregoing shall not
apply to statements in or omissions from the Proxy Statement made in reliance on
and in conformity with information furnished by Target for use therein;
4.2.11. Acquiring Fund qualified for treatment as a RIC for each past
taxable year since it commenced operations and will continue to meet all the
requirements for such qualification for its current taxable year; Acquiring Fund
intends to continue to meet all such requirements for the next taxable year; and
it has no earnings and profits accumulated in any taxable year in which the
provisions of Subchapter M of the Code did not apply to it;
4.2.12. Acquiring Fund has no plan or intention to issue additional
Acquiring Fund Shares following the Reorganization except for shares issued in
the ordinary course of its business as an open-end investment company; nor does
Acquiring Fund have any plan or intention to redeem or otherwise reacquire any
Acquiring Fund Shares issued to the Shareholders pursuant to the Reorganization,
other than through redemptions arising in the ordinary course of that business;
4.2.13. Acquiring Fund (a) will actively continue Target's business in
substantially the same manner that Target conducted that business immediately
before the Reorganization, (b) has no plan or intention to sell or otherwise
dispose of any of the Assets, except for dispositions made in the ordinary
course of that business and dispositions necessary to maintain its status as a
RIC, and (c) expects to retain substantially all the Assets in the same form as
it receives them in the Reorganization, unless and until subsequent investment
circumstances suggest the desirability of change or it becomes necessary to make
dispositions thereof to maintain such status;
4.2.14. There is no plan or intention for Acquiring Fund to be dissolved
or merged into another corporation or business trust or any "fund" thereof
(within the meaning of section 851(h)(2) of the Code) following the
Reorganization;
4.2.15. Immediately after the Reorganization, (a) not more than 25% of
the value of Acquiring Fund's total assets (excluding cash, cash items, and U.S.
government securities) will be invested in the stock and securities of any one
issuer and (b) not more than 50% of the value of such assets will be invested in
the stock and securities of five or fewer issuers; and
4.2.16. Acquiring Fund does not own, directly or indirectly, nor at the
Effective Time will it own, directly or indirectly, nor has it owned, directly
or indirectly, at any time during the past five years, any shares of Target.
4.3. Each Fund represents and warrants as follows:
4.3.1. The fair market value of the Acquiring Fund Shares, when received
by the Shareholders, will be approximately equal to the fair market value of
their Target Shares constructively surrendered in exchange therefor;
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4.3.2. Its management (a) is unaware of any plan or intention of
Shareholders to redeem or otherwise dispose of any portion of the Acquiring Fund
Shares to be received by them in the Reorganization and (b) does not anticipate
dispositions of those Acquiring Fund Shares at the time of or soon after the
Reorganization to exceed the usual rate and frequency of dispositions of shares
of Target as an open-end investment company. Consequently, its management
expects that the percentage of Shareholder interests, if any, that will be
disposed of as a result of or at the time of the Reorganization will be de
minimis. Nor does its management anticipate that there will be extraordinary
redemptions of Acquiring Fund Shares immediately following the Reorganization;
4.3.3. The Shareholders will pay their own expenses, if any, incurred in
connection with the Reorganization;
4.3.4. Immediately following consummation of the Reorganization,
Acquiring Fund will hold substantially the same assets and be subject to
substantially the same liabilities that Target held or was subject to
immediately prior thereto, plus any liabilities and expenses of the parties
incurred in connection with the Reorganization;
4.3.5. The fair market valuea going concern basis of the Assets will
equal or exceed the Liabilities to be assumed by Acquiring Fund and those to
which the Assets are subject;
4.3.6. There is no intercompany indebtedness between the Funds that was
issued or acquired, or will be settled, at a discount;
4.3.7. Pursuant to the Reorganization, Target will transfer to Acquiring
Fund, and Acquiring Fund will acquire, at least 90% of the fair market value of
the net assets, and at least 70% of the fair market value of the gross assets,
held by Target immediately before the Reorganization. For the purposes of this
representation, any amounts used by Target to pay its Reorganization expenses
and redemptions and distributions made by it immediately before the
Reorganization (except for (a) distributions made to conform to its policy of
distributing all or substantially all of its income and gains to avoid the
obligation to pay federal income tax and/or the excise tax under section 4982 of
the Code and (b) redemptions not made as part of the Reorganization) will be
included as assets thereof held immediately before the Reorganization;
4.3.8. None of the compensation received by any Shareholder who is an
employee of Target will be separate consideration for, or allocable to, any of
the Target Shares held by such Shareholder-employee; none of the Acquiring Fund
Shares received by any such Shareholder-employee will be separate consideration
for, or allocable to, any employment agreement; and the consideration paid to
any such Shareholder-employee will be for services actually rendered and will be
commensurate with amounts paid to third parties bargaining at arm's-length for
similar services; and
4.3.9. Immediately after the Reorganization, the Shareholders will not
own shares constituting "control" of Acquiring Fund within the meaning of
section 304(c) of the Code.
5. COVENANTS
5.1. Each Fund covenants to operate its respective business in the ordinary
course between the date hereof and the Closing, it being understood that (a)
such ordinary course will include declaring and paying customary dividends and
other distributions and such changes in operations as are contemplated
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by each Fund's normal business activities and (b) each Fund will retain
exclusive control of the composition of its portfolio until the Closing;
provided that Target shall not dispose of more than an insignificant portion of
its historic business assets during such period without Acquiring Fund's prior
consent.
5.2. Target covenants to call a shareholders' meeting to consider and act upon
this Agreement and to take all other action necessary to obtain approval of the
transactions contemplated hereby.
5.3. Target covenants that the Acquiring Fund Shares to be delivered hereunder
are not being acquired for the purpose of making any distribution thereof, other
than in accordance with the terms hereof.
5.4. Target covenants that it will assist Acquiring Fund in obtaining such
information as Acquiring Fund reasonably requests concerning the beneficial
ownership of Target Shares.
5.5. Target covenants that Target's books and records (including all books and
records required to be maintained under the 1940 Act and the rules and
regulations thereunder) will be turned over to Acquiring Fund at the Closing.
5.6. Each Fund covenants to cooperate in preparing the Proxy Statement in
compliance with applicable federal securities laws.
5.7. Each Fund covenants that it will, from time to time, as and when
requested by the other Fund, execute and deliver or cause to be executed and
delivered all such assignments and other instruments, and will take or cause to
be taken such further action, as the other Fund may deem necessary or desirable
in order to vest in, and confirm to, (a) Acquiring Fund, title to and possession
of all the Assets, and (b) Target, title to and possession of the Acquiring Fund
Shares to be delivered hereunder, and otherwise to carry out the intent and
purpose hereof.
5.8. Acquiring Fund covenants to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act, and such
state securities laws it may deem appropriate in order to continue its
operations after the Effective Time.
5.9. Subject to this Agreement, each Fund covenants to take or cause to be
taken all actions, and to do or cause to be done all things reasonably
necessary, proper, or advisable to consummate and effectuate the transactions
contemplated hereby.
6. CONDITIONS PRECEDENT
Each Fund's obligations hereunder shall be subject to (a) performance by the
other Fund of all the obligations to be performed hereunder at or before the
Effective Time, (b) all representations and warranties of the other Fund
contained herein being true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated
hereby, as of the Effective Time, with the same force and effect as if made at
and as of the Effective Time, and (c) the following further conditions that, at
or before the Effective Time:
6.1. This Agreement and the transactions contemplated hereby shall have been
duly adopted and approved by Target's board of directors and shall have been
approved by Target's shareholders in accordance with applicable law.
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6.2. All necessary filings shall have been made with the SEC and state
securities authorities, and no order or directive shall have been received that
any other or further action is required to permit the parties to carry out the
transactions contemplated hereby. The Registration Statement shall have become
effective under the 1933 Act, no stop orders suspending the effectiveness
thereof shall have been issued, and the SEC shall not have issued an unfavorable
report with respect to the Reorganization under section 25(b) of the 1940 Act
nor instituted any proceedings seeking to enjoin consummation of the
transactions contemplated hereby under section 25(c) of the 1940 Act. All
consents, orders, and permits of federal, state, and local regulatory
authorities (including the SEC and state securities authorities) deemed
necessary by either Fund to permit consummation, in all material respects, of
the transactions contemplated hereby shall have been obtained, except where
failure to obtain same would not involve a risk of a material adverse effect on
the assets or properties of either Fund, provided that either Fund may for
itself waive any of such conditions.
6.3. At the Effective Time, no action, suit, or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or to obtain damages or other relief in connection with,
the transactions contemplated hereby.
6.4. Target shall have received an opinion of Kirkpatrick & Lockhart LLP,
counsel to Acquiring Fund, substantially to the effect that:
6.4.1. Acquiring Fund is a corporation duly organized and validly
existing under the laws of the State of Maryland with power under its Articles
of Incorporation to own all of its properties and assets and, to the knowledge
of such counsel, to carry on its business as presently conducted;
6.4.2. This Agreement (a) has been duly authorized, executed, and
delivered by Acquiring Fund and (b) assuming due authorization, execution, and
delivery of this Agreement by Target, is a valid and legally binding obligation
of Acquiring Fund, enforceable in accordance with its terms, except as the same
may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium, and similar laws relating to or affecting creditors' rights and by
general principles of equity;
6.4.3. The Acquiring Fund Shares to be issued and distributed to the
Shareholders under this Agreement, assuming their due delivery as contemplated
by this Agreement, will be duly authorized and validly issued and outstanding
and fully paid and non-assessable, and no shareholder of Acquiring Fund has any
preemptive right to subscribe for or purchase such shares;
6.4.4. The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate Acquiring Fund's Articles of Incorporation or By-Laws or any provision
of any agreement (known to such counsel, without any independent inquiry or
investigation) to which Acquiring Fund is a party or by which it is bound or (to
the knowledge of such counsel, without any independent inquiry or investigation)
result in the acceleration of any obligation, or the imposition of any penalty,
under any agreement, judgment, or decree to which Acquiring Fund is a party or
by which it is bound, except as set forth in such opinion or as previously
disclosed in writing to and accepted by Target;
6.4.5. To the knowledge of such counsel (without any independent inquiry
or investigation), no consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by Acquiring Fund of the
transactions contemplated herein, except such as have been
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obtained under the 1933 Act, the 1934 Act, and the 1940 Act and such as may be
required under state securities laws;
6.4.6. Acquiring Fund is registered with the SEC as an investment
company, and to the knowledge of such counsel no order has been issued or
proceeding instituted to suspend such registration; and
6.4.7. To the knowledge of such counsel (without any independent inquiry
or investigation), (a) no litigation, administrative proceeding, or
investigation of or before any court or governmental body is pending or
threatened as to Acquiring Fund or any of its properties or assets and (b)
Acquiring Fund is not a party to or subject to the provisions of any order,
decree, or judgment of any court or governmental body that materially and
adversely affects Acquiring Fund's business, except as set forth in such opinion
or as otherwise disclosed in writing to and accepted by Target.
In rendering such opinion, such counsel may (i) rely, as to matters governed
by the laws of the State of Maryland, on an opinion of competent Maryland
counsel, (ii) make assumptions regarding the authenticity, genuineness, and/or
conformity of documents and copies thereof without independent verification
thereof, (iii) limit such opinion to applicable federal and state law, and (iv)
define the word "knowledge" and related terms to mean the knowledge of attorneys
then with such firm who have devoted substantive attention to matters directly
related to this Agreement and the Reorganization.
6.5. Acquiring Fund shall have received an opinion of Stroock & Stroock &
Lavan, counsel to Target, substantially to the effect that:
6.5.1. Target is a corporation duly organized and validly existing under
the laws of the State of Maryland with power under its Articles of Incorporation
to own all of its properties and assets and, to the knowledge of such counsel,
to carry on its business as presently conducted;
6.5.2. This Agreement (a) has been duly authorized, executed, and
delivered by Target and (b) assuming due authorization, execution, and delivery
of this Agreement by Acquiring Fund, is a valid and legally binding obligation
of Target, enforceable in accordance with its terms, except as the same may be
limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium, and similar laws relating to or affecting creditors' rights and by
general principles of equity;
6.5.3. The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate Target's Articles of Incorporation or By-Laws or any provision of any
agreement (known to such counsel, without any independent inquiry or
investigation) to which Target is a party or by which it is bound or (to the
knowledge of such counsel, without any independent inquiry or investigation)
result in the acceleration of any obligation, or the imposition of any penalty,
under any agreement, judgment, or decree to which Target is a party or by which
it is bound, except as set forth in such opinion or as previously disclosed in
writing to and accepted by Acquiring Fund;
6.5.4. To the knowledge of such counsel (without any independent inquiry
or investigation), no consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by Target of the
transactions contemplated herein, except such as have been obtained under the
1933 Act, the 1934 Act, and the 1940 Act and such as may be required under state
securities laws;
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6.5.5. Target is registered with the SEC as an investment company, and to
the knowledge of such counsel no order has been issued or proceeding instituted
to suspend such registration; and
6.5.6. To the knowledge of such counsel (without any independent inquiry
or investigation), (a) no litigation, administrative proceeding, or
investigation of or before any court or governmental body is pending or
threatened as to Target or any of its properties or assets and (b) Target is not
a party to or subject to the provisions of any order, decree, or judgment of any
court or governmental body that materially and adversely affects its business,
except as set forth in such opinion or as otherwise disclosed in writing to and
accepted by Acquiring Fund.
In rendering such opinion, such counsel may (i) rely, as to matters governed
by the laws of the State of Maryland, on an opinion of competent Maryland
counsel, (ii) make assumptions regarding the authenticity, genuineness, and/or
conformity of documents and copies thereof without independent verification
thereof, (iii) limit such opinion to applicable federal and state law, and (iv)
define the word "knowledge" and related terms to mean the knowledge of attorneys
then with such firm who have devoted substantive attention to matters directly
related to this Agreement and the Reorganization.
6.6. Acquiring Fund shall have received an opinion of Kirkpatrick & Lockhart
LLP, its counsel, addressed to and in form and substance satisfactory to it, and
Target shall have received an opinion of Stroock & Stroock & Lavan, its counsel,
addressed to and in form and substance satisfactory to it, each as to the
federal income tax consequences mentioned below (each a "Tax Opinion"). In
rendering its Tax Opinion, each such counsel may rely as to factual matters,
exclusively and without independent verification, on the representations made in
this Agreement (or in separate letters addressed to such counsel) and the
certificates delivered pursuant to paragraph 3.4. Each Tax Opinion shall be
substantially to the effect that, based on the facts and assumptions stated
therein, for federal income tax purposes:
6.6.1. Acquiring Fund's acquisition of the Assets in exchange solely for
Acquiring Fund Shares and Acquiring Fund'sumption of the Liabilities, followed
by Target's distribution of those shares to the Shareholders constructively in
exchange for the Shareholders' Target Shares, will constitute a reorganization
within the meaning of section 368(a)(1)(C) of the Code, and each Fund will be "a
party to a reorganization" within the meaning of section 368(b) of the Code;
6.6.2. No gain or loss will be recognized to Target on the transfer to
Acquiring Fund of the Assets in exchange solely for Acquiring Fund Shares and
Acquiring Fund's assumption of the Liabilities or on the subsequent distribution
of those shares to the Shareholders in constructive exchange for their Target
Shares;
6.6.3. No gain or loss will be recognized to Acquiring Fund on its
receipt of the Assets in exchange solely for Acquiring Fund Shares and its
assumption of the Liabilities;
6.6.4. Acquiring Fund's basis for the Assets will be the same as the
basis thereof in Target's hands immediately before the Reorganization, and
Acquiring Fund's holding period for the Assets will include Target's holding
period therefor;
6.6.5. A Shareholder will recognize no gain or loss on the constructive
exchange of all its Target Shares solely for Acquiring Fund Shares pursuant to
the Reorganization; and
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6.6.6. A Shareholder's basis for the Acquiring Fund Shares to be received
by it in the Reorganization will be the same as the basis for its Target Shares
to be constructively surrendered in exchange for those Acquiring Fund Shares,
and its holding period for those Acquiring Fund Shares will include its holding
period for those Target Shares, provided they are held as capital assets by the
Shareholder at the Effective Time.
Notwithstanding subparagraphs 6.6.2 and 6.6.4, each Tax Opinion may state
that no opinion is expressed as to the effect of the Reorganization on the Funds
or any Shareholder with respect to any asset as to which any unrealized gain or
loss is required to be recognized for federal income tax purposes at the end of
a taxable year (or on the termination or transfer thereof) under a
mark-to-market system of accounting.
At any time before the Closing, (a) Acquiring Fund may waive any of the
foregoing conditions if, in the judgment of its board of directors, such waiver
will not have a material adverse effect on its shareholders' interests, and (b)
Target may waive any of the foregoing conditions if, in the judgment of its
board of directors, such waiver will not have a material adverse effect on the
Shareholders' interests.
7. BROKERAGE FEES AND EXPENSES
7.1. Each Fund represents and warrants to the other that there are no brokers
or finders entitled to receive any payments in connection with the transactions
provided for herein.
7.2. Except as otherwise provided herein, all expenses incurred in connection
with the transactions contemplated by this Agreement (whether or not they are
consummated) will be borne by the Funds proportionately, as follows: each such
expense will be borne by the Funds in proportion to their respective net assets
as of the close of business on the last business day of the month in which such
expense was incurred. Such expenses include: (a) expenses incurred in connection
with entering into and carrying out the provisions of this Agreement; (b)
expenses associated with the preparation and filing of the Registration
Statement; (c) registration or qualification fees and expenses of preparing and
filing such forms as are necessary under applicable state securities laws to
qualify the Acquiring Fund Shares to be issued in connection herewith in each
state in which Target's shareholders are resident as of the date of the mailing
of the Proxy Statement to such shareholders; (d) printing and postage expenses;
(e) legal and accounting fees; and (f) solicitation costs.
8. ENTIRE AGREEMENT; SURVIVAL
Neither party has made any representation, warranty, or covenant not set
forth herein, and this Agreement constitutes the entire agreement between the
parties. The representations, warranties, and covenants contained herein or in
any document delivered pursuant hereto or in connection herewith shall survive
the Closing.
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9. TERMINATION OF AGREEMENT
This Agreement may be terminated at any time at or prior to the Effective
Time, whether before or after approval by Target's shareholders:
9.1. By either Fund (a) in the event of the other Fund's material breach of
any representation, warranty, or covenant contained herein to be performed at or
prior to the Effective Time, (b) if a condition to its obligations has not been
met and it reasonably appears that such condition will not or cannot be met, or
(c) if the Closing has not occurred on or before March 31, 1996; or
9.2. By the parties' mutual agreement.
In the event of termination under paragraphs 9.1.(c) or 9.2, there shall be
no liability for damages on the part of either Fund, or the directors or
officers of either Fund, to the other Fund.
10. AMENDMENT
This Agreement may be amended, modified, or supplemented at any time,
notwithstanding approval thereof by Target's shareholders, in such manner as may
be mutually agreed upon in writing by the parties; provided that following such
approval no such amendment shall have a material adverse effect on the
Shareholders' interests.
11. MISCELLANEOUS
11.1. This Agreement shall be governed by and construed in accordance with
the internal laws of the State of Maryland; provided that, in the case of any
conflict between such laws and the federal securities laws, the latter shall
govern.
11.2. Nothing expressed or implied herein is intended or shall be construed
to confer upon or give any person, firm, trust, or corporation other than the
parties and their respective successors and assigns any rights or remedies under
or by reason of this Agreement.
IN WITNESS WHEREOF, each party has caused this Agreement to be executed by
its duly authorized officer.
<TABLE>
<S> <C>
ATTEST: PAINEWEBBER RMA TAX-FREE FUND, INC.
By: /s/ ILENE SHORE /s/ DIANNE E. O'DONNELL
.......................................... .............................................
Assistant Secretary Vice President
ATTEST: PAINEWEBBER/KIDDER, PEABODY TAX
EXEMPT MONEY FUND, INC.
By: /s/ S. H. JOHNSON /s/ SCOTT GRIFF
.......................................... .............................................
Assistant Secretary Vice President
</TABLE>
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