<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 26, 1995
REGISTRATION NO. 33-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. [ ]
PAINEWEBBER MANAGED MUNICIPAL TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
1285 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(212) 713-2000
(REGISTRANT'S AREA CODE AND TELEPHONE NUMBER)
DIANNE E. O'DONNELL, ESQ.
MITCHELL HUTCHINS ASSET MANAGEMENT INC.
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<CAPTION>
<S> <C>
SUSAN M. CASEY, ESQ. RORY M.
LEWIS G. COLE, ESQ. COHEN, ESQ. Kirkpatrick &
Stroock & Stroock & Lavan Lockhart LLP 1800 M Street,
7 Hanover Square N.W. Washington, D.C.
New York, New York 10004-2696 20036-5891 Telephone: (202)
Telephone: (212) 806-5400 778-9000
</TABLE>
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: AS SOON AS PRACTICABLE AFTER
THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
The Registrant has filed a declaration registering an indefinite amount of
securities pursuant to Rule 24f-2 under the Investment Company Act of 1940,
as amended. Accordingly, no filing fee is payable herewith. The Registrant
filed on August 24, 1995, the notice required by Rule 24f-2 for its fiscal
year ended June 30, 1995.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE ON OCTOBER 26, 1995
PURSUANT TO RULE 488.
<PAGE>
PAINEWEBBER MANAGED MUNICIPAL TRUST
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following papers and documents:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheet
Letter to Shareholders
Notice of Special Meeting
Part A -- Prospectus/Proxy Statement
Part B -- Statement of Additional Information
Part C -- Other Information
Signature Pages
Exhibits
<PAGE>
PAINEWEBBER MANAGED MUNICIPAL TRUST
FORM N-14 CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
PART A ITEM NO. AND CAPTION PROSPECTUS/PROXY STATEMENT CAPTION
-------------------------------------------- ----------------------------------------------
<C> <S> <C>
Beginning of Registration Statement and
1. Outside Front Cover Page of Prospectus ..... Cover Page
Beginning and Outside Back Cover Page of
2. Prospectus .................................. Table of Contents
3. Synopsis Information and Risk Factors ...... Synopsis; Comparison of Principal Risk Factors
4. Information About the Transaction ........... Synopsis; The Reorganization
5. Information About the Registrant ............ Synopsis; Comparison of Principal Risk
Factors; Miscellaneous; Prospectus of
PaineWebber RMA California Municipal Money
Fund, dated August 29, 1995, previously filed
on EDGAR, Accession Number:
0000950112-95-002294
6. Information About the Company Being Acquired Synopsis; Comparison of Principal Risk
Factors; Miscellaneous; Prospectus of
PaineWebber/Kidder, Peabody California Tax
Exempt Money Fund, dated November 28, 1994, as
supplemented January 30, 1995 (filed herewith)
7. Voting Information .......................... Voting Information
8. Interest of Certain Persons and Experts .... Not Applicable
Additional Information Required for
Reoffering by Persons Deemed to be
9. Underwriters ................................ Not Applicable
</TABLE>
<TABLE>
<CAPTION>
PART B ITEM NO. STATEMENT OF ADDITIONAL
AND CAPTION INFORMATION CAPTION
-------------------------------------------- ---------------------------------------------
<C> <S> <C>
10. Cover Page .................................. Cover Page
11. Table of Contents ........................... Table of Contents
12. Additional Information About
the Registrant .............................. Statement of Additional Information of
PaineWebber RMA California Municipal Money
Fund, dated August 29, 1995, previously filed
on EDGAR, Accession Number:
0000950112-95-002294
13. Additional Information About the Company
Being Acquired .............................. Statement of Additional Information of
PaineWebber/Kidder, Peabody California Tax
Exempt Money Fund, dated November 28, 1994
(filed herewith)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART B ITEM NO. STATEMENT OF ADDITIONAL
AND CAPTION INFORMATION CAPTION
-------------------------------------------- ---------------------------------------------
<C> <S> <C>
14. Financial Statements ........................ Annual Report of PaineWebber RMA California
Municipal Money Fund, for Fiscal Year Ended
June 30, 1995, as previously filed on EDGAR,
Accession Number: 0000889812-95-000459;
Annual Report of PaineWebber/Kidder, Peabody
California Tax Exempt Money Fund for Fiscal
Year Ended July 31, 1995, as previously filed
on EDGAR, Accession Number: 0000889812-95-00524
Pro Forma Financial Statements for PaineWebber RMA
California Municipal Money Fund and
PaineWebber/Kidder, Peabody California Tax
Exempt Money Fund for the twelve months ended
June 30, 1995
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
PAINEWEBBER/KIDDER, PEABODY
CALIFORNIA TAX EXEMPT MONEY FUND
October , 1995
Dear Shareholder:
The attached proxy materials describe a proposal that PaineWebber/Kidder,
Peabody California Tax Exempt Money Fund ("PW/KP Fund") reorganize and become
part of PaineWebber RMA California Municipal Money Fund ("PW Fund"). If the
proposal is approved and implemented, each shareholder of PW/KP Fund
automatically will become a shareholder of PW Fund.
YOUR BOARD OF TRUSTEES 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 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,
MARGO N. ALEXANDER
President,
PaineWebber/Kidder, Peabody
California Tax Exempt Money
Fund
<PAGE>
PAINEWEBBER/KIDDER, PEABODY
CALIFORNIA TAX EXEMPT MONEY FUND
NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS
December 4, 1995
To The Shareholders:
A special meeting of shareholders ("Meeting") of PaineWebber/Kidder,
Peabody California Tax Exempt Money Fund ("PW/KP Fund") will be held on
December 4, 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 Termination
under which PaineWebber RMA California Municipal Money Fund ("PW Fund"), a
series of PaineWebber Managed Municipal Trust, a Massachusetts business
trust, would acquire the assets of PW/KP Fund, in exchange solely for shares
of beneficial interest 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, 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 20, 1995. IF
YOU ATTEND THE MEETING, YOU MAY VOTE YOUR SHARES IN PERSON. IF YOU DO NOT
EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN THE
ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE PAID ENVELOPE.
By order of the board of trustees,
DIANNE E. O'DONNELL
Secretary
October , 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 CALIFORNIA MUNICIPAL MONEY FUND
(A SERIES OF PAINEWEBBER MANAGED MUNICIPAL TRUST)
PAINEWEBBER/KIDDER, PEABODY
CALIFORNIA TAX EXEMPT MONEY FUND
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(TOLL-FREE) 1-800-647-1568
PROSPECTUS/PROXY STATEMENT
OCTOBER , 1995
This Prospectus/Proxy Statement ("Proxy Statement") is being furnished to
shareholders of PaineWebber/ Kidder, Peabody California Tax Exempt Money Fund
("PW/KP Fund"), in connection with the solicitation of proxies by its board
of trustees for use at a special meeting of PW/KP Fund shareholders to be
held on December 4, 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 California Municipal Money Fund ("PW
Fund"), a series of PaineWebber Managed Municipal Trust ("PW Trust"), would
acquire the assets of PW/KP Fund, in exchange solely for shares of beneficial
interest 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 so that each such shareholder would receive a number of full and
fractional shares of PW Fund having an aggregate 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. As soon as practicable following the
distribution, PW/KP Fund will be terminated.
PW Fund is a non-diversified series of PW Trust, which is an open-end
management investment company comprised of two series. PW Fund's investment
objective is to provide maximum current income exempt from federal income tax
and California personal income tax, consistent with liquidity and
conservation of capital. It seeks to achieve its investment objective by
investing 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 $1.00 price 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
ON 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 October , 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 November 28, 1994 (as supplemented January 30, 1995), a Statement of
Additional Information of PW/KP Fund dated November 28, 1994, and a Statement of
Additional Information of PW Fund dated August 29, 1995, have also been filed
with the SEC and are incorporated herein by this reference. Copies of these
documents, as well as PW Fund's Annual Report to Shareholders ("Annual Report")
for the fiscal year ended June 30, 1995 and PW/KP Fund's Annual Report for the
fiscal year ended July 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>
<CAPTION>
<S> <C>
VOTING INFORMATION .......................................... 1
SYNOPSIS .................................................... 2
COMPARISON OF PRINCIPAL RISK FACTORS ........................ 8
THE PROPOSED TRANSACTION .................................... 8
MISCELLANEOUS ............................................... 12
APPENDIX A -- AGREEMENT AND PLAN OF REORGANIZATION AND
TERMINATION ................................................ A-1
APPENDIX B -- [BENEFICIAL OWNERSHIP OF SHARES OF THE FUNDS . B-1]
</TABLE>
<PAGE>
PAINEWEBBER/KIDDER, PEABODY
CALIFORNIA TAX EXEMPT MONEY FUND
PROSPECTUS/PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON
DECEMBER 4, 1995
VOTING INFORMATION
This Prospectus/Proxy Statement ("Proxy Statement") is being furnished to
shareholders of PaineWebber/ Kidder, Peabody California Tax Exempt Money Fund
("PW/KP Fund") in connection with the solicitation of proxies by its board of
trustees for use at a special meeting of shareholders to be held on December
4, 1995, and any adjournment thereof ("Meeting"). This Proxy Statement will
first be mailed to shareholders on or about ______________, 1995.
A majority of the shares of PW/KP Fund outstanding on October 20, 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.
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 any 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 Termination, dated as of September
22, 1995 ("Reorganization Plan"), which is attached to this Proxy Statement
as Appendix A. Under the Reorganization Plan, PaineWebber RMA California
Municipal Money Fund ("PW Fund"), a series of PaineWebber Managed Municipal
Trust ("PW Trust"), would acquire the assets of PW/KP Fund in exchange solely
for shares of beneficial interest 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 individually as a "Fund" or collectively, as "Funds"). After
completion of the Reorganization, PW/KP Fund will be terminated.
<PAGE>
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 20, 1995 ("Record Date"), PW/KP Fund had
shares of beneficial interest 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") or PaineWebber Incorporated
("PaineWebber"), 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 $3,500 for soliciting services. [Except as set forth in
Appendix B, management 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 beneficially owns 5% or more of the shares of either Fund as of the
Record Date.] Trustees and officers of PW Trust own in the aggregate less than
1% of the shares of PW Fund.
Approval of the Reorganization Plan requires the affirmative vote of a
"majority of the outstanding voting securities" of PW/KP Fund. As defined in
the Investment Company Act of 1940 ("1940 Act"), "majority of the outstanding
voting securities" means the lesser of (1) 67% of PW/KP Fund's shares present
at a meeting of shareholders if the owners of more than 50% of PW/KP Fund's
shares then outstanding are present in person or by proxy, or (2) more than
50% of PW/KP Fund's outstanding shares. 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 the 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.
The Declaration of Trust of PW/KP Fund provides that the shareholders
shall have the same right of appraisal upon any merger, consolidation or sale
or exchange of assets of the Fund as a shareholder of a Massachusetts
business corporation would have under the law applicable to Massachusetts
business corporations. The Securities and Exchange Commission ("SEC") has taken
the position, however, that adherence to state statutory procedures regarding
the rights of dissenting shareholders would constitute a violation of Rule 22c-1
under the 1940 Act and that Section 50 of the 1940 Act supersedes such state law
remedies. For that reason, PW/KP Fund does not believe that appraisal rights
under Massachusetts law would be available to dissenting shareholders in the
event that a majority of its shareholders votes to approve the Reorganization
Plan. It is likely, however, that appraisal rights under state law would not
change the amount that any shareholder would receive in the Reorganization for
PW/KP Fund shares. The PW Fund shares to be received by PW/KP Fund shareholders
for their PW/KP Fund shares will be equal in value to the net asset value of
such PW/KP Fund shares. An appraisal of the value of such PW/KP Fund shares
under state law appraisal procedures would presumably also be based upon the net
asset value of such shares.
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, the board of trustees of PW/KP Fund believes that
the Reorganization will benefit PW/KP Fund's shareholders. PW Fund has an
investment objective substantially identical to the investment objective of
2
<PAGE>
PW/KP Fund, although its investment strategy may differ from the investment
strategy of PW/KP Fund in some respects. It is anticipated that, following
the Reorganization, the shareholders of PW/KP Fund will, as shareholders of
PW Fund, be subject to lower total operating expenses as a percentage of net
assets.
THE REORGANIZATION
The Reorganization Plan was considered and approved by the boards of
trustees of PW/KP Fund and PW Trust at meetings thereof 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 PW Fund and the
assumption by PW Fund of the liabilities of PW/KP Fund. PW/KP Fund then will
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 is equal in value to such shareholder's holdings in PW/KP Fund as of the
Closing Date (defined below). PW/KP Fund then will be terminated 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
December 11, 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 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 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," the board of trustees, including the trustees who are
not "interested persons," as that term is defined in the 1940 Act, of either
PW/KP Fund or PW Trust ("Independent Trustees") of PW/KP Fund, 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 trustees recommends
approval of the transaction. In addition, PW Trust's board of trustees,
including its Independent Trustees, 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
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.
3
<PAGE>
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
PW/KP FUND PW FUND COMBINED 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>
COMBINED FUND
PW/KP FUND PW FUND (PRO FORMA)
------------ --------- ---------------
<S> <C> <C> <C>
Management Fees .... 0.50% 0.50% 0.48%
12b-1 Fees .......... 0.12% 0.08% 0.08%
Other Expenses ...... 0.11% 0.11% 0.09%
------------ --------- ---------------
Total Fund Operating
Expenses(1) ........ 0.73% 0.69% 0.65%
============ ========= ===============
<FN>
(1) PW/KP Fund's ratio of total operating expenses as a percentage of
average net assets was 0.73% for the fiscal year ended July 31, 1995.
EXAMPLE OF EFFECT ON FUND EXPENSES
The following illustrates the expenses on a $1,000 investment under the
existing and estimated fees and expenses stated above, assuming a 5% annual
return.
</TABLE>
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
---------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
PW/KP Fund .... $7 $23 $41 $91
PW Fund ....... $7 $22 $38 $86
Combined Fund $7 $21 $36 $81
</TABLE>
This Example assumes that all dividends are reinvested, 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 SEC applicable to all mutual
funds; the assumed 5% annual return is not a prediction of, and does not
represent, the projected or actual performance of either Fund.
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 of PW Trust and PW/KP Fund is an open-end management investment company
organized as a Massachusetts business trust. The Declaration of Trust of each of
PW Trust and PW/KP Fund authorize the trustees to issue an unlimited number of
full and fractional shares of one or more series, par value $.001. Neither PW
Trust nor PW/KP Fund issues share certificates. PW Trust and PW/KP Fund are also
not required to (and do not) hold annual shareholder meetings.
4
<PAGE>
PW Fund, a non-diversified series of PW Trust, commenced operations on
November 7, 1988. PW/KP Fund, a non-diversified management investment company,
commenced operations on August 18, 1987.
Shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable for its obligations. However, the
Declaration of Trust of each of PW Trust and PW/KP Fund expressly disclaims,
and provides indemnification against, such liability. Accordingly, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which a Fund itself would be unable to meet its
obligations, a possibility that PaineWebber, the investment adviser of each
Fund, believes is remote and, thus, does not pose a material risk.
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, and while each Fund seeks to maintain a stable net asset value of
$1.00 per share, there can be no assurance 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 and California personal income tax,
consistent with liquidity and conservation of capital. The Fund seeks to
achieve its objective by investing principally in high-grade California
Municipal Securities (defined below) with remaining maturities of 13 months
or less. Except for temporary purposes, it invests at least 80%, and seeks to
invest 100%, of its net assets in municipal securities issued by the State of
California, its municipalities and public authorities and other issuers if
such obligations pay interest exempt from federal income tax as well as
California personal income tax ("California Municipal Securities"). The Fund
will invest only in California Municipal Securities that are "First Tier
Securities." First Tier Securities are obligations that Mitchell Hutchins (as
sub-adviser and sub-administrator to the Fund) determines, pursuant to
procedures adopted by PW Trust's board of trustees, present minimal credit
risks and are either (1) rated in the highest rating category by at least two
nationally recognized statistical rating organizations ("NRSROs"), (2) rated
in the highest rating category by a single NRSRO if only that NRSRO has
assigned the obligation a rating or (3) unrated, but determined by Mitchell
Hutchins to be of comparable quality.
Under normal market conditions, the Fund intends to invest in California
Municipal Securities that pay interest that is not a tax preference item for
purposes of the federal alternative minimum tax ("AMT"), but may invest in
securities that pay interest that is such a tax preference item if, in
Mitchell Hutchins' judgment, market conditions warrant.
Instruments in which the Fund may invest include variable and floating
rate securities with remaining maturities of 13 months or more issued by
municipal issuers (if subject to a demand feature exercisable within 13
months or less), industrial development bonds, private activity bonds and
participation interests in the foregoing. The Fund may also purchase put
bonds (a municipal bond that gives the holder the unconditional right to sell
the bond back to the issuer or a third party at a specified price and
exercise date). The Fund may also enter into repurchase agreements but does
not intend to do so except as a temporary measure and under unusual
circumstances. The Fund may borrow money for temporary purposes, but not in
an amount in excess of 10% of its total assets at the time of borrowing.
PW/KP FUND. The investment objective of PW/KP Fund is to maximize current
income exempt from federal income tax and California personal income tax,
consistent with the preservation of capital and maintenance of liquidity. The
Fund seeks to achieve this objective by investing primarily in debt
securities of the State of California, its political subdivisions, authorities
and corporations, the interest from which is, in the opinion of
5
<PAGE>
bond counsel to the issuer, exempt from federal income tax and California
personal income tax ("California Municipal Obligations"). To the extent
acceptable California Municipal Obligations are not available for investment,
the Fund will invest in debt securities the interest from which is exempt
from federal income tax in the opinion of bond counsel to the issuer
("municipal obligations"). It is a fundamental policy of the Fund that it
invest at least 80% of the value of its net assets (except when maintaining a
temporary defensive position) in municipal obligations and at least 65% in
California Municipal Obligations.
All of the instruments purchased by the Fund have a remaining maturity of
397 days or less. In compliance with Rule 2a-7 under the 1940 Act, the Fund
invests only in U.S. dollar-denominated securities determined in accordance
with procedures established by its board of trustees to present minimal
credit risks and that are rated in one of the two highest rating categories
for debt obligations by at least two NRSROs (or one NRSRO if the instrument
was rated only by one such organization) or, if unrated, are of comparable
quality as determined in accordance with procedures established by the board
of trustees. The Fund may invest more than 25% of the value of its total
assets in industrial development bonds that are backed only by the assets and
revenues of the non-governmental users. The Fund may also purchase floating
and variable rate demand obligations and participation interests in municipal
obligations from financial institutions. The Fund may enter into repurchase
agreements. The Fund may borrow money from banks, but only for temporary or
emergency purposes (not for leveraging), in an amount up to 10% of total
assets.
OTHER POLICIES OF THE FUNDS. Each Fund maintains a dollar-weighted average
portfolio maturity of 90 days or less. Both Funds may invest 25% or more of
the value of their assets in securities the interest on which is paid from
similar types of projects. Both Funds may invest up to 20% of total assets in
taxable short-term investments, for other than defensive purposes. Each Fund
will invest no more than 10% of its net assets in illiquid securities. Both
Funds may acquire stand-by commitments with respect to municipal securities
and may purchase municipal securities on a "when-issued" basis.
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.
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
6
<PAGE>
on which the offices of a Fund's custodian, and the New York offices of
PaineWebber and PaineWebber's bank, are all open for business. Clients of
PaineWebber or its correspondent firms may redeem shares for their Fund
account by wire, by telephone or by mail.
If the Reorganization is approved, PW/KP Fund shares will cease to be
offered on December 8, 1995, so that shares will no longer be available for
purchase or exchange on December 11, 1995 (the next Business Day). Redemptions
of PW/KP Fund's shares and exchanges of such shares for shares of any other
PaineWebber/Kidder, Peabody money market fund 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 fund, while shares of PW/KP Fund are
exchangeable 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 Business Day, each Fund declares as dividends all of its net
investment income. Dividends are accrued to shareholder accounts daily and
are automatically paid in additional Fund shares monthly. Shares begin
earning dividends on the day of purchase; they do not earn dividends on the
day of redemption. Net investment income includes accrued interest and earned
discount (including original issue and market discount), less amortization of
market premium and accrued expenses. Daily dividends declared by each Fund do
not include any net investment income attributable to the accretion of market
discount on municipal obligations. Any such amounts, which are taxable to
each Fund's shareholders, are distributed annually, unless more frequent
distributions are necessary to maintain a Fund's net asset value per share at
$1.00 or to avoid income or excise taxes.
Each 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. The Funds do not expect to realize net long-term capital gain and thus
do not anticipate payment of any long-term capital gain distribution.
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. Such
distributions will be paid only in cash.
FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION
PW/KP Fund has received an opinion of Stroock & Stroock & Lavan, its
counsel, and PW Trust has received an opinion of Kirkpatrick & Lockhart LLP,
its counsel, 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 [11].
7
<PAGE>
COMPARISON OF PRINCIPAL RISK FACTORS
Because PW Fund's investment objective is substantially identical, and its
investment policies are generally similar, to those of PW/KP Fund, their
investment risks are generally similar. Such risks are those typically
associated with investing in a money market fund concentrating in one state's
securities as described below. See the Prospectus of PW Fund, which
accompanies this Proxy Statement, for a more detailed discussion of risks
associated with investment in PW Fund.
RISK OF INVESTMENT IN CALIFORNIA MUNICIPAL SECURITIES. The principal risk
of investing in PW Fund, after the Reorganization, is the same as the risk of
investing in either Fund before the Reorganization. That risk is the risk of
concentrating investments in one state. Concentration in California Municipal
Securities involves greater risks than investments in a broader geographic
region. The Fund's yield and its ability to maintain a constant net asset
value per share can be affected by political and economic developments within
the State of California (the "State") and by the financial condition of the
State, its public authorities and political subdivisions. California has been
experiencing substantial financial difficulties related to the weak
performance of the once-booming California economy, which has caused
substantial broad-based revenue shortfalls between 1990 and 1993.
California's long-term credit rating has been, and could be further, reduced,
and its ability to provide assistance to its public authorities and political
subdivisions has been, and could be further, impaired. Cutbacks in state aid
could adversely affect the financial condition of cities, counties and
education districts previously subject to severe fiscal constraints and
facing a fall in their own tax collections. In the past, California voters
have passed amendments to the California Constitution and other measures that
limit the taxing and spending authority of California governmental entities,
and future voter initiatives could result in adverse consequences affecting
California Municipal Securities. These factors, among others (including the
outcome of related pending litigation), could reduce the credit standing of
certain issuers of California Municipal Securities. A more detailed
discussion of the risks of investing in California Municipal Securities is
included in the Statement of Additional Information of PW Fund.
The ability of the Funds to invest 25% or more of the value of their
assets in securities the interest on which is paid from similar types of
projects may further increase the risk of investing in the Funds.
INTEREST RATE RISK. 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 is likely to be
true.
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.
8
<PAGE>
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 its
liabilities to be assumed, by PW Fund and the net asset value of a share of
PW Fund will be determined as of the close of regular trading on the New York
Stock Exchange, Inc. on the Closing Date. The amortized cost method will be
used in valuing 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 the board of trustees of PW Trust or PW/KP Fund, as applicable.
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 terminated 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 shareholders and by transferring
thereto the shares previously credited to the account of PW/KP Fund on those
books. Fractional shares of 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 value of PW Fund
shares so issued will equal the aggregate 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 terminated.
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 the Funds in proportion to their respective net assets.
Mitchell Hutchins recommended this method of expense allocation to the
boards of trustees. 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 trustees of PW Trust and PW/KP Fund considered this
expense allocation method in approving the Reorganization and in finding that
the Reorganization is in the best interests of their respective Fund.
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 PW Trust or PW/KP 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
The board of trustees of PW/KP Fund, including a majority of its
Independent Trustees, has determined that the Reorganization is in the best
interests of PW/KP Fund, that the terms of the Reorganization are fair
9
<PAGE>
and reasonable and that the interests of PW/KP Fund's shareholders will not
be diluted as a result of the Reorganization. The board of trustees of PW
Trust, including a majority of its Independent Trustees, 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 trustees 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 investment performance of the Funds;
(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 PaineWebber and Mitchell Hutchins.
The Reorganization was recommended to the boards of trustees of PW Trust and
PW/KP Fund by Mitchell Hutchins at meetings thereof held on July 20, 1995. In
approving the Reorganization, the boards of trustees took into account the fact
that the Funds have substantially identical investment objectives and generally
similar investment policies and that Mitchell Hutchins did not believe there
was a compelling reason to offer two separate California municipal money
market funds. In approving the proposed transaction, the boards of trustees
also took account of Mitchell Hutchins' opinion that PW Fund's objective of
maximum current income exempt from federal income tax and California personal
income tax by investing principally in California Municipal Securities
remains an appropriate one to offer to investors as part of an overall
investment strategy.
The boards were advised by Mitchell Hutchins that combining the two Funds
would eliminate duplicative expenses and achieve other economies of scale in
connection with investment advisory and administration fees, custody fees,
state registration fees, printing expenses, trustees fees and legal and audit
expenses. In approving the Reorganization, the boards considered the fact
that the combined Fund would have lower operating expenses as a percentage of
net assets than either Fund currently experiences.
THE BOARD OF TRUSTEES RECOMMENDS THAT THE
SHAREHOLDERS OF PW/KP FUND VOTE "FOR" THE REORGANIZATION
DESCRIPTION OF SECURITIES TO BE ISSUED
PW Trust is registered with the SEC as an open-end management investment
company. Its trustees are authorized to issue an unlimited number of shares
of beneficial interest of separate series (par value $.001 per share). The
trustees have established PW Fund as one of PW Trust's two series and have
authorized the public offering of a single class of shares of PW Fund. Shares
of PW Fund entitle their holders to one vote per full share and fractional
votes for fractional shares held. On the Closing Date, PW Fund will have
outstanding a single class of shares. Each share of PW Fund is entitled to
participate equally in dividends and the proceeds of any liquidation.
10
<PAGE>
PW Trust does not hold annual meetings of shareholders. There will
normally be no meetings of shareholders for the purpose of electing trustees
unless fewer than a majority of the trustees holding office have been elected
by shareholders, at which time the trustees then in office will call a
shareholders' meeting for the election of trustees. Under the 1940 Act,
shareholders of record of at least two-thirds of the outstanding shares of an
investment company may remove a trustee by votes cast in person or by proxy
at a meeting called for that purpose. The trustees are required to call a
meeting of shareholders for the purpose of voting upon the question of
removal of any trustee when requested in writing to do so by the shareholders
of record holding at least 10% of PW Trust's outstanding shares.
FEDERAL INCOME TAX CONSIDERATIONS
The exchange of PW/KP Fund's assets for shares of PW Fund 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/KP Fund has received an opinion of Stroock & Stroock & Lavan,
its counsel, and PW Trust has received an opinion of Kirkpatrick & Lockhart
LLP, 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 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 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.
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
11
<PAGE>
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.
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) giving effect to the Reorganization:
<TABLE>
<CAPTION>
COMBINED FUND
PW FUND PW/KP FUND PRO FORMA
-------------- -------------- ---------------
<S> <C> <C> <C>
Net Assets ................ $330,936,549 $143,757,936 $474,694,485
Net Asset Value Per Share $1.00 $1.00 $1.00
Shares Outstanding ........ 331,258,452 143,774,342 475,032,794
</TABLE>
MISCELLANEOUS
AVAILABLE INFORMATION
PW Trust and PW/KP Fund are each subject to the informational requirements
of the Securities Exchange Act of 1934 and the 1940 Act and in accordance
therewith filed reports, proxy materials and other information with the SEC.
Such reports, proxy materials 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 materials can also be
obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, Washington, D.C.
20549 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 Trust.
EXPERTS
The financial statements of PW Fund and PW/KP Fund for the fiscal years
ended June 30, 1995 and July 31, 1995, respectively, incorporated herein by
reference and incorporated by reference or included in each Fund's respective
Statement of Additional Information, have been audited by Ernst & Young LLP,
independent auditors, whose reports to the extent indicated thereon are
included in the Funds' Annual Reports to Shareholders. The financial
statements of PW/KP Fund for the year ended July 31, 1995, insofar as it
related to the statement of changes in net assets for the year ended July 31,
1994 and financial highlights for the four years in the period then ended
have previously been audited by Deloitte & Touche LLP, independent auditors.
The financial statements audited by Ernst & Young LLP and Deloitte & Touche
LLP, respectively, have been incorporated herein by reference in reliance on
their reports given on their authority as experts in auditing and accounting.
12
<PAGE>
APPENDIX A--AGREEMENT AND PLAN OF REORGANIZATION AND
TERMINATION
(SEE EXHIBIT 4)
PAINEWEBBER/KIDDER, PEABODY
CALIFORNIA TAX EXEMPT MONEY FUND
(formerly Kidder, Peabody California Tax Exempt Money Fund)
Supplement dated January 30, 1995
to Prospectus dated November 28, 1994
The following information supplements the information contained in the
Fund's Prospectus dated November 28, 1994:
1. Effective January 30, 1995, the following changes occurred with respect to
the Fund:
a. NAME. The name of the Kidder, Peabody California Tax Exempt Money
Fund has been changed to the "PaineWebber/Kidder, Peabody California Tax Exempt
Money Fund."
b. INVESTMENT ADVISER AND SUB-ADVISER. As a result of an asset purchase
transaction by and among Kidder, Peabody Group Inc. ("Kidder, Peabody"), its
parent, General Electric Company, and Paine Webber Group Inc. ("PW Group"), the
investment advisory functions for the Fund have been transferred, on an interim
basis, from Kidder Peabody Asset Management, Inc. ("KPAM") to Mitchell Hutchins
Asset Management Inc. ("Mitchell Hutchins"). During the interim period, Mitchell
Hutchins will provide investment advisory services to the Fund pursuant to a
contract that has substantially the same terms and conditions as the prior
investment advisory agreement between the Fund and KPAM. Fees paid by the Fund
for investment advisory services during the interim period will be paid into
escrow and, if approved by the shareholders, will be paid over to Mitchell
Hutchins. The shareholders' meeting is expected to occur on March 31, 1995.
At the shareholders' meeting, it is also proposed that PaineWebber
Incorporated ("PaineWebber") be appointed as investment adviser and
administrator of the Fund and Mitchell Hutchins be appointed as sub-adviser and
sub-administrator. If approved by the shareholders, PaineWebber and Mitchell
Hutchins, as investment adviser and sub-adviser, respectively, would continue to
manage the Fund in accordance with the Fund's investment objective, policies and
restrictions. During the interim period and thereafter, assuming shareholder
approval, the Fund would pay the same fee for investment advisory and
administration services as previously paid to KPAM, as described in the Fund's
Prospectus. After the interim period, assuming shareholder approval, PaineWebber
(not the Fund) would pay Mitchell Hutchins a fee at the annual rate of 20% of
the fee received by PaineWebber from the Fund.
Mitchell Hutchins is a wholly owned subsidiary of PaineWebber, which is
in turn wholly owned by PW Group, a publicly owned financial services holding
company. PaineWebber, Mitchell Hutchins and PW Group are located at 1285 Avenue
of the Americas, New York, New York 10019. As of December 31, 1994, Mitchell
Hutchins or PaineWebber served as investment adviser or sub-adviser to 29
investment companies with an aggregate of 55 separate portfolios and aggregate
assets of over $22 billion.
c. OTHER SERVICES. PaineWebber also serves as the Fund's distributor
pursuant to the Shareholder Servicing and/or Distribution Plan or Agreement of
the Fund. All references in the Fund's Prospectus to Kidder, Peabody as the
Fund's distributor are replaced with references to PaineWebber.
PFPC Inc., a subsidiary of PNC Bank, National Association, whose
principal address is 400 Bellevue Parkway, Wilmington, Delaware 19809 is the
Fund's transfer agent. All references in the Prospectus to IFTC as the Fund's
transfer agent are replaced with references to PFPC.
1
The address for purchase, exchange and redemption transactions has been
changed to:
PFPC Inc.
P.O. Box 8950
Wilmington, DE 19899
Attn: PaineWebber/Kidder, Peabody California Tax Exempt Money Fund
800-441-7756 (PFPC Account)
800-762-1000 (PaineWebber Account)
d. PROCEDURES RELATED TO VALUATION OF SHARES. The Fund no longer values
its shares daily at 4:00 p.m. The Fund's net asset value is determined once each
business day, at 12:00 noon, eastern time.
e. PURCHASE RESTRICTIONS. Shares of the Fund may be purchased only by
existing shareholders of the Fund.
f. REDEMPTION BY MAIL. Redemption requests received by PFPC by mail are
processed by PFPC. PFPC will mail a check in the appropriate redemption amount
to the shareholder the next business day after receipt of a redemption request
in "good order" as specified in the Prospectus.
g. AUTOMATIC INVESTMENT PLAN. The Automatic Investment Plan no longer
accepts twice monthly orders, but will accept monthly, quarterly and semi-annual
orders.
2. EXCHANGE PRIVILEGES. Effective March 31, 1995 the following
modifications will occur with respect to the Fund:
The exchange privileges of the Fund's shareholders will be modified to
eliminate the exchange privilege with other former Kidder, Peabody funds other
than the former Kidder, Peabody money market funds. The first paragraph of the
section titled "Exchange Privileges" is hereby replaced with the following:
Effective March 31, 1995, Fund shares may be exchanged only with shares
of PaineWebber/Kidder, Peabody money market funds, which are identified below:
PaineWebber/Kidder, Peabody Cash Reserve Fund
PaineWebber/Kidder, Peabody Government Money Fund
PaineWebber/Kidder, Peabody Premium Account Fund
PaineWebber/Kidder, Peabody Tax Exempt Money Fund
PaineWebber/Kidder, Peabody Municipal Money Market
New York Series
PaineWebber/Kidder, Peabody Municipal Money Market
New Jersey Series
PaineWebber/Kidder, Peabody Municipal Money Market
Connecticut Series
2
<PAGE>
PROSPECTUS NOVEMBER 28, 1994
- --------------------------------------------------------------------------------
KIDDER, PEABODY CALIFORNIA TAX EXEMPT MONEY FUND
60 BROAD STREET NEW YORK, NEW YORK 10004-2350 (212) 656-1737
Kidder, Peabody California Tax Exempt Money Fund (the 'Fund') is a
non-diversified, open-end management investment company. The Fund's objective is
the maximization of current income exempt from Federal and State of California
personal income taxes consistent with the preservation of capital and the
maintenance of liquidity. The Fund attempts to achieve its objective by
investing primarily in short-term California Municipal Obligations. See
'Investment Objective and Policies.'
An investment in the Fund is neither insured nor guaranteed by the U.S.
Government. The Fund seeks to maintain a stable net asset value of $1.00 per
share, although there can be no assurance that it will be able to do so at all
times.
Kidder Peabody Asset Management, Inc. ('KPAM'), 60 Broad Street, New York, New
York 10004-2350, a wholly-owned subsidiary of Kidder, Peabody & Co. Incorporated
('Kidder, Peabody'), serves as the Fund's manager and investment adviser. See
'Management of the Fund -- Manager and Investment Adviser.' KPAM receives an
annual fee of .50% of the Fund's average daily net assets.
The Fund's Trustees and shareholders have approved a Plan of Distribution
pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the 'Plan of
Distribution') pursuant to which the Fund pays a maximum annual fee of .12% of
its average daily net assets to Kidder, Peabody. See 'The Distributor.'
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Investors should read this
Prospectus and retain it for future reference. Additional information about the
Fund has been filed with the Securities and Exchange Commission (the 'SEC') in a
Statement of Additional Information dated November 28, 1994 which is hereby
incorporated by reference, and is available without charge upon request made to
the Fund at the above address. Shareholder inquiries may be directed to the Fund
at the same address.
- --------------------------------------------------------------------------------
MANAGER AND INVESTMENT ADVISER
Kidder Peabody Asset Management, Inc.
DISTRIBUTOR
Kidder, Peabody & Co. Incorporated
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
- --------------------------------------------------------------------------------
FEE TABLE
The purpose of the Fee Table is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. For more detailed information on these costs and expenses, see
'Management of the Fund' and 'The Distributor.'
<TABLE>
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES FOR THE FISCAL YEAR ENDED JULY 31, 1994
(as a percentage of average daily net assets)
Management Fees................................................................. .50%
12b-1 Fees...................................................................... .12
Other Expenses.................................................................. .08
---
Shareholder service, reports and pricing.................................... .04%
Professional, Custodian and Trustees'....................................... .03
Organization, Registration and Miscellaneous................................ .01
Total Fund Operating Expenses.......................................... .70%
---
---
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE* 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return, (2)
total annual operating expenses as shown in the
fee table set out above and (3) redemption at the
end of each time period.......................... $7 $22 $39 $87
----------- ----------- ----------- -----------
</TABLE>
- ------------------
* The amounts shown in the example assume reinvestment of all dividends and
distributions and should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown. The assumed
5% annual return is hypothetical and should not be considered a representation
of the Fund's past or future annual return. The actual annual return of the
Fund may be greater or less than the assumed return.
2
<PAGE>
- --------------------------------------------------------------------------------
HIGHLIGHTS
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------------
The Fund The Fund is a non-diversified, open-end, management investment company whose investment
objective is the maximization of current income exempt from Federal and State of California
personal income taxes to the extent consistent with the preservation of capital and the
maintenance of liquidity through investments primarily in short-term debt securities of the
State of California, its political subdivisions, authorities and corporations, the interest
from which is, in the opinion of bond counsel to the issuer, exempt from Federal and State of
California personal income taxes.
- ---------------------------------------------------------------------------------------------------------------------------
Benefits of Mutual funds, such as the Fund, are flexible investment tools that are increasingly
Investing popular -- one of four American households now owns shares of at least one mutual fund -- for
in the very sound reasons. The Fund offers investors the following important benefits:
Fund
Tax Exempt Investing for California Investors
The Fund offers investors the opportunity to receive dividends consisting primarily of income
that is exempt from Federal and California personal income taxation. See 'Investment
Objective and Policies.'
Professional Management
By pooling the monies of many investors, the Fund enables shareholders to obtain the benefits
of full-time professional management and a degree of diversification of investments that is
typically beyond the means of most investors. The Fund's investment adviser reviews the
fundamental characteristics of far more securities than can a typical individual investor and
may employ portfolio management techniques that frequently are not used by individual or many
institutional investors. Additionally, the larger denominations of securities in which the
Fund invests may result in better overall prices for the investments. See 'Investment
Objective and Policies.'
Transaction Savings
By investing in the Fund, a shareholder is able to acquire ownership in a diversified
portfolio of securities without paying the higher transaction costs generally associated with
a series of small securities purchases.
Convenience
Fund shareholders are relieved of the administrative and recordkeeping burdens and
coordination of maturities normally associated with direct ownership of securities.
Quality
All securities in which the Fund invests will be rated in one of the two highest rating
categories for debt obligations by at least two nationally recognized statistical rating
organizations (or one rating organization if the instrument was rated only by one such
organization) or determined to be of comparable quality by the Fund's investment adviser
acting under the supervision of the Trustees if not so rated, and will also be determined to
present minimal credit risks.
</TABLE>
3
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Liquidity
The Fund's convenient purchase and redemption procedures provide shareholders with ready
access to their money and reduce the delays frequently involved in the direct purchase and
sale of securities. See 'Purchase of Shares' and 'Redemption of Shares.'
Exchange Privilege
Shareholders of the Fund may exchange all or a portion of their shares for shares of
specified funds in the Kidder Family of Funds. See 'Exchange Privilege.'
Total Portfolio Approach
The funds in the Kidder Family of Funds are designed to be strategically combined as part of
a total portfolio approach. This investment philosophy acknowledges the interplay of a
shareholder's many different investing needs and preferences and recognizes that every
investment move a shareholder makes alters the balance of his or her overall financial
profile. The Fund may be used in conjunction with other funds in the Kidder Family of Funds
to build a portfolio that maximizes the potential of available assets while meeting many
different -- and changing -- financial needs.
- ---------------------------------------------------------------------------------------------------------------------------
Purchase of The purchase price for shares of the Fund is the net asset value per share next determined
Shares after receipt by the Fund of a purchase order in proper form. See 'Purchase of Shares' and
'Determination of Net Asset Value.'
- ---------------------------------------------------------------------------------------------------------------------------
Redemption of Shares of the Fund may be redeemed at the Fund's net asset value per share next determined
Shares after receipt by the transfer agent of instructions from Kidder, Peabody. See 'Redemption of
Shares' for a discussion of the various alternative methods of redeeming shares of the Fund and
'Determination of Net Asset Value.'
- ---------------------------------------------------------------------------------------------------------------------------
Management KPAM, a wholly-owned subsidiary of Kidder, Peabody, serves as manager and investment adviser of
Services the Fund and receives an annual fee of .50% of the Fund's average daily net assets. See
'Management of the Fund.'
- ---------------------------------------------------------------------------------------------------------------------------
Distributor Kidder, Peabody, a major full-line investment services firm serving domestic and foreign
securities markets, serves as distributor of the Fund's shares. General Electric Capital
Services, Inc., a wholly-owned subsidiary of General Electric Company ('GE'), owns all the
outstanding stock of Kidder, Peabody Group Inc. ('Kidder Group'), the parent company of Kidder,
Peabody. See 'The Distributor.'
- ---------------------------------------------------------------------------------------------------------------------------
Dividends The Fund declares dividends on each day the New York Stock Exchange is open for business of all
of its daily net income to shareholders of record normally as of 4:00 p.m., New York time. See
'Dividends, Distributions and Taxes.'
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Risk Factors Investing in an investment company that invests in Municipal Obligations involves risks. The
value of a Municipal Obligation is dependent on, among other things, the ability of its issuer
to pay interest and repay principal in accordance with the terms of the instrument. In
addition, as a non-diversified fund, the Fund may concentrate investments in individual issuers
to a greater degree than a diversified fund and an investment in the Fund may under certain
circumstances present greater risk to an investor than an investment in a diversified fund.
Further, because the Fund invests primarily in California Municipal Obligations, the Fund is
subject to economic and other factors affecting issuers of those obligations. See 'Investment
Objective and Policies -- Risk Factors -- Investing in California Municipal Obligations' and
' -- Other Investment Considerations.'
</TABLE>
5
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP. Financial statements for the fiscal year ended July 31, 1994 and the
report of independent auditors thereon are included in the Statement of
Additional Information.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-----------------------------------------------------------------------------
1988`D' 1989 1990 1991 1992 1993 1994
<S> <C> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------
Net asset value, beginning of year....... $1.0000 $1.0000 $1.0000 $0.9999 $0.9995 $0.9993 $0.9989
-----------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................... 0.0416 0.0544 0.0507 0.0404 0.0283 0.0180 0.0180
Net realized and unrealized loss on
investments............................ -- -- (0.0001) (0.0004) (0.0002) (0.0004) (0.0007)
-----------------------------------------------------------------------------
Total from investment operations......... 0.0416 0.0544 0.0506 0.0400 0.0281 0.0176 0.0173
DISTRIBUTIONS
Dividends from net investment income..... (0.0416) (0.0544) (0.0507) (0.0404) (0.0283) (0.0180) (0.0180)
-----------------------------------------------------------------------------
Net asset value, end of year............. $1.0000 $1.0000 $0.9999 $0.9995 $0.9993 $0.9989 $0.9982
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Total return............................. 4.20% * 5.56% 5.15% 4.11% 2.93% 1.81% 1.81%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands)... $147,227 $221,844 $259,101 $202,779 $202,854 $202,443 $182,892
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding distribution fees.... .59% * .58% .55% .58% .59% .59% .58%
Expenses, including distribution fees.... .59% * .65% .67% .70% .71% .71% .70%
Net investment income.................... 4.33% * 5.47% 5.07% 4.06% 2.84% 1.79% 1.80%
</TABLE>
'D' From August 17, 1987 (Commencement of Operations) to July 31, 1988.
* Annualized.
6
<PAGE>
- --------------------------------------------------------------------------------
YIELD
The chart below shows the current and effective yields, calculated in accordance
with rules of the SEC, and the average portfolio maturity for the seven-day
periods ended July 31, 1994 and November 1, 1994.
<TABLE>
<CAPTION>
7/31/94 11/1/94
-------- --------
<S> <C> <C>
Current Yield........................................................... 2.20% 2.48%
Effective Yield......................................................... 2.22% 2.51%
Average Portfolio Maturity.............................................. 71 days 38 days
</TABLE>
From time to time, the Fund advertises its 'current yield' and 'effective
yield.' Both yield figures are based on historical earnings and are not intended
to indicate future performance. The 'current yield' of the Fund refers to the
income generated by an investment in the Fund over a seven-day period (which
period will be stated in the advertisement). This income is then 'annualized.'
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The 'effective yield' is calculated similarly but,
when annualized, the income earned by an investment in the Fund is assumed to be
reinvested. The 'effective yield' will be slightly higher than the 'current
yield' because of the compounding effect of this assumed reinvestment. The
Statement of Additional Information describes in more detail the methods used to
calculate the yields of the Fund.
Performance data for the Fund may, in reports and promotional literature,
be compared to: (i) other mutual funds tracked by IBC/Donoghue's Money Fund
Report and Lipper Analytical Services, widely used independent research firms
which rank mutual funds by overall performance, investment objectives, and
assets, or tracked by other services, companies, publications, or persons who
rank mutual funds on overall performance or other criteria; (ii) unmanaged
indices so that investors may compare the Fund's results with those of a group
of unmanaged securities widely regarded by investors as representative of the
securities markets in general; and (iii) the Consumer Price Index, an inflation
measure. Promotional and advertising literature also may refer to discussions of
the Fund and comparative mutual fund data and ratings reported in independent
periodicals.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is the maximization of current income
exempt from Federal and State of California personal income taxes consistent
with the preservation of capital and the maintenance of liquidity. The Fund
attempts to achieve its objective by investing primarily in debt securities of
the State of California, its political subdivisions, authorities and
corporations, the interest from which is, in the opinion of bond counsel to the
issuer, exempt from Federal and State of California personal income taxes
(collectively 'California Municipal Obligations'). To the extent acceptable
California Municipal Obligations are at any time unavailable for investment by
the Fund, the Fund will invest, for temporary defensive purposes, primarily in
other debt securities the interest from which is, in the opinion of bond counsel
to the issuer, exempt from Federal, but not State of California, income tax. The
Fund may not generate as high a level of income as other investment companies
which invest in lower quality or long term securities. The Fund's investment
objective cannot be changed without approval by the holders of a majority of
7
<PAGE>
- --------------------------------------------------------------------------------
the Fund's outstanding voting shares, as defined in the Investment Company Act
of 1940, as amended (the 'Act'). There can be no assurance that the Fund's
investment objective will be achieved.
MUNICIPAL OBLIGATIONS
Debt securities, the interest from which is exempt from Federal income tax in
the opinion of bond counsel to the issuer, are referred to as 'Municipal
Obligations.' Municipal Obligations generally include debt obligations issued to
obtain funds for various public purposes as well as certain industrial
development bonds issued by or on behalf of public authorities. Municipal
Obligations are classified as general obligation bonds, revenue bonds and notes.
General obligation bonds are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable from the revenue derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source, but not from the general taxing power. Tax exempt
industrial development bonds, in most cases, are revenue bonds and generally do
not carry the pledge of the credit of the issuing municipality, but generally
are guaranteed by the corporate entity on behalf of which they are issued. Notes
are short-term instruments which are obligations of the issuing municipalities
or agencies and are sold in anticipation of a bond sale, collection of taxes or
receipt of other revenues. Municipal Obligations include municipal
lease/purchase agreements which are similar to installment purchase contracts
for property or equipment issued by municipalities. Municipal Obligations bear
fixed, variable or floating rates of interest.
MANAGEMENT POLICIES
It is a fundamental policy of the Fund that it invest at least 80% of its net
assets in Municipal Obligations and at least 65% of its net assets in California
Municipal Obligations except when maintaining a temporary defensive position.
The remainder of the Fund's net assets may be invested in securities that are
not California Municipal Obligations and, therefore, may be subject to
California state income tax. See 'Risk Factors -- Investing in California
Municipal Obligations' below, and 'Dividends, Distributions and Taxes.'
The Fund may invest more than 25% of the value of its assets in Municipal
Obligations which are related in such a way that an economic, business, or
political development or change affecting one such security also would affect
the other securities; for example, securities the interest upon which is paid
from revenues of similar types of projects.
The Fund also may invest more than 25% of the value of its assets in
industrial development bonds which, although issued by industrial development
authorities, may be backed only by the assets and revenues of the
non-governmental users. Interest on Municipal Obligations (including certain
industrial development bonds) which are specified private activity bonds, as
defined in the Internal Revenue Code of 1986, as amended (the 'Code'), issued
after August 7, 1986, while exempt from Federal income tax, is a preference item
for the purpose of the alternative minimum tax. Where a regulated investment
company receives such interest, a proportionate share of any exempt-interest
dividend paid by the investment company may be treated as such a preference item
to the shareholder. The Fund does not presently intend to purchase any such
private activity bonds but reserves the right to acquire such bonds in the
future. The Fund does not invest more than 20% of its net assets in obligations
the interest from
8
<PAGE>
- --------------------------------------------------------------------------------
which gives rise to a preference item for the purpose of the alternative minimum
tax and, except for temporary defensive purposes, in other investments subject
to Federal income tax.
The Fund may purchase floating and variable rate demand obligations which
are tax exempt obligations that normally have stated maturities in excess of 397
days, but which permit the holder to demand payment of principal at any time or
at specified intervals not exceeding 397 days, in each case upon not more than
30 days' notice. Variable rate demand notes include master demand notes which
are obligations that permit the Fund to invest fluctuating amounts, which may
change daily without penalty, pursuant to direct arrangements between the Fund,
as lender, and the borrower. The interest rates on these obligations fluctuate
from time to time. Frequently, such obligations are secured by letters of credit
or other credit support arrangements provided by banks. Use of letters of credit
or other support arrangements will not adversely affect the tax exempt status of
these obligations. Because these obligations are direct lending arrangements
between the lender and borrower, it is not contemplated that such instruments
generally will be traded, and there generally is no established secondary market
for these obligations, although they are redeemable at face value. Accordingly,
where these obligations are not secured by letters of credit or other credit
support arrangements, the Fund's right to redeem is dependent on the ability of
the borrower to pay principal and interest on demand. Each obligation purchased
by the Fund will meet the quality criteria established for the purchase of
Municipal Obligations. KPAM, on behalf of the Fund, will consider on an ongoing
basis the creditworthiness of the issuers of the floating and variable rate
demand obligations in the Fund's portfolio. The Fund 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 seven days' notice if there is no secondary market available for these
obligations, and in other securities that are not readily marketable. See
'Investment Restrictions' below.
The Fund may purchase from financial institutions participation interests
in Municipal Obligations (such as industrial development bonds and municipal
lease/purchase agreements). A participation interest gives the purchaser an
undivided interest in the Municipal Obligations in the proportion that the
purchaser's participation interest bears to the total principal amount of
Municipal Obligations. These instruments may be variable rate or fixed rate with
remaining maturities of 397 days or less. If the participation interest is
unrated, or has been given a rating below that which otherwise is permissible
for purchase by the Fund, the participation interest will be backed by an
irrevocable letter of credit or guarantee of a bank that the Trustees have
determined meets the prescribed quality standards for banks set forth below or
the payment obligation otherwise will be collateralized by U.S. Government
securities or other securities deemed appropriate by the Trustees, or the
underlying Municipal Obligations will be permissible investments for the Fund.
For certain participation interests, the Fund will have the right to demand
payment, upon a specified number of days' notice, for all or any part of the
Fund's participation interest in the Municipal Obligations, plus accrued
interest. As to these instruments, the Fund intends to exercise its right to
demand payment only upon a default under the terms of the Municipal Obligations,
as needed to provide liquidity to meet redemptions, or to maintain a high
quality investment portfolio. The Fund will not invest more than 10% of the
value of its net assets in participation interests that do not have this demand
feature, and in other securities that are not readily marketable.
9
<PAGE>
- --------------------------------------------------------------------------------
The Fund may acquire stand-by commitments with respect to Municipal
Obligations held in its portfolio. Under a stand-by commitment, the Fund
obligates a dealer to repurchase at the Fund's option specified securities at a
specified price. The exercise of a stand-by commitment, therefore, is subject to
the ability of the seller to make payment on demand. The Fund will acquire
stand-by commitments solely to facilitate portfolio liquidity and does not
intend to exercise its rights thereunder for trading purposes. The Fund may pay
for stand-by commitments if such action is deemed necessary, thus increasing to
a degree the cost of the underlying Municipal Obligation and similarly
decreasing such security's yield to investors.
The Fund may invest, for other than temporary defensive purposes in an
amount not to exceed 20% of its net assets, or without limitation for temporary
defensive purposes, 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 of Moody's Investors Service, Inc.
('Moody's') or Standard & Poor's Corporation ('S&P'); obligations of the U.S.
Government, its agencies or instrumentalities; commercial paper rated Prime-1 by
Moody's or A-1 or better by S&P; certificates of deposit of U.S. domestic banks,
including foreign branches of domestic banks, with assets of $1 billion or more;
time deposits; bankers' acceptances and other short-term bank obligations; and
repurchase agreements in respect of any of the foregoing with selected
registered or unregistered securities dealers or banks. Under normal market
conditions, the Fund does not invest more than 5% of its total assets in any one
category of Taxable Investments. Dividends paid by the Fund that are
attributable to income earned from Taxable Investments will be taxable to
shareholders. If the Fund purchases Taxable Investments, it will value them
using the amortized cost method and comply with the provisions of Rule 2a-7
under the Act relating to purchases of taxable instruments. To the extent the
Fund is invested in Taxable Investments, it will not be achieving its objective
of maximizing tax exempt income. See 'Dividends, Distributions and Taxes.'
Taxable Investments are more fully described in the Statement of Additional
Information.
The Fund seeks to maintain a net asset value of $1.00 per share for
purchases and redemptions. To do so, the Fund uses the amortized cost method of
valuing its securities pursuant to Rule 2a-7 under the Act, certain requirements
of which are summarized as follows. In accordance with Rule 2a-7, the Fund is
required to maintain a dollar-weighted average portfolio maturity of 90 days or
less, purchase only instruments having remaining maturities of 397 days or less
and invest only in U.S. dollar denominated securities determined in accordance
with procedures established by the Trustees to present minimal credit risks and
which are rated in one of the two highest rating categories for debt obligations
by at least two nationally recognized statistical rating organizations (or one
rating organization if the instrument was rated only by one such organization)
or, if unrated, are of comparable quality as determined in accordance with
procedures established by the Trustees. The nationally recognized statistical
rating organizations currently rating investments of the type the Fund may
purchase are Moody's and S&P and their rating criteria are described in the
Fund's Statement of Additional Information. For further information regarding
the amortized cost method of valuing securities, see 'Determination of Net Asset
Value' in the Fund's Statement of Additional Information. There can be no
assurance that the Fund will be able to maintain a stable net asset value of
$1.00 per share.
10
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
The policies described in this paragraph summarize certain important investment
restrictions of the Fund which can only be changed with the approval of a vote
of a majority of the outstanding voting securities of the Fund, as defined in
the Act. All of the Fund's investment restrictions are set forth in the
Statement of Additional Information. The Fund may (i) borrow money from banks,
but only for temporary or emergency (not leveraging) purposes, in an amount up
to 10% of its total assets (including the amount borrowed) based on the lesser
of cost or market, less liabilities (not including the amount borrowed) at the
time the borrowing is made; (ii) pledge, hypothecate, mortgage or otherwise
encumber its assets, but only in an amount up to 10% of the value of its total
assets to secure borrowings for temporary or emergency purposes; (iii) invest up
to 25% of its assets in the securities of issuers in any single industry,
provided that there is no such limitation on the purchase of Municipal
Obligations or, for temporary defensive purposes, in securities issued by
domestic banks and obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities; (iv) invest up to 10% of its net assets in
repurchase agreements maturing in more than seven days and in securities not
readily marketable (which securities would include floating and variable rate
demand notes as to which the Fund cannot exercise the related demand feature
described above and as to which there is no secondary market); and (v) invest up
to 10% of its net assets in time deposits maturing in from two business days
through seven calendar days.
RISK FACTORS -- INVESTING IN CALIFORNIA MUNICIPAL OBLIGATIONS
There are certain risks associated with the Fund's investment in California
Municipal Obligations. These risks result from certain amendments to the
California Constitution and other statutes that limit the taxing and spending
authority of California governmental entities and from the overall financial
condition of the State of California. Since the start of the State's 1990-91
fiscal year, the State has experienced the worst economic, fiscal and budget
conditions since the 1930s. As a result, the State has experienced recurring
budget deficits for four of the last five fiscal years ending with 1991-92.
Revenues and expenditures were essentially equal in 1992-93, but the original
budget for that year projected revenues exceeding expenditures by $2.6 billion.
The excess of revenues over expenditures for the 1993-94 fiscal year is expected
to be $500 million, after originally being estimated to be $2.0 billion. By June
30, 1994, according to California's Department of Finance, the State's Reserve
for Economic Uncertainties had an accumulated deficit, on a budget basis, of
approximately $2.0 billion. A further consequence of the large budget imbalances
has been that the State depleted its available cash resources and has had to use
a series of external borrowings to meet its cash needs. To meet its cash flow
needs in the 1994-95 fiscal year, the State issued, in July and August 1994,
$4.0 billion of revenue anticipation warrants and $3.0 billion of revenue
anticipation notes. As a result of the deterioration in the State's budget and
cash situation, between October 1991 and July 1994 the rating on the State's
general obligation bonds was reduced by S&P from AAA to A and by Moody's from
Aaa to A. These and other factors may impair the ability of issuers of
California Municipal Obligations to pay interest and principal on their
obligations. See the Statement of Additional Information for a more complete
discussion of such risks.
11
<PAGE>
- --------------------------------------------------------------------------------
OTHER INVESTMENT CONSIDERATIONS
Even though interest-bearing securities are investments which promise a stable
stream of income, the prices of such securities are inversely affected by
changes in interest rates and, therefore, are subject to the risk of market
price fluctuations. The values of fixed-income securities also may be affected
by changes in the credit rating or financial condition of the issuing entities.
New issues of Municipal Obligations usually are offered on a when-issued
basis; that is, delivery and payment for such Municipal Obligations ordinarily
take place within 45 days after the date of the commitment to purchase. The
payment obligation and the interest rate that will be received on the Municipal
Obligations are fixed at the time the Fund enters into the commitment. The Fund
will make commitments to purchase such Municipal Obligations only with the
intention of actually acquiring the securities, but the Fund may sell these
securities before the settlement date if it is deemed advisable, although any
gain realized on such sale would be taxable. The Fund will not accrue income in
respect of a when-issued security prior to its stated delivery date. No
additional when-issued commitments will be made if more than 20% of the Fund's
net assets would be so committed.
Municipal Obligations purchased on a when-issued basis and the securities
held in the Fund's portfolio are subject to changes in value (both generally
changing in the same way, i.e., appreciating when interest rates decline and
depreciating when interest rates rise) based upon the public's perception of the
creditworthiness of the issuer and changes, real or anticipated, in the level of
interest rates. Municipal Obligations purchased on a when-issued basis may
expose the Fund to risk because they may experience such fluctuations prior to
their actual delivery. Purchasing Municipal Obligations on a when-issued basis
can involve a risk that the yields available in the market when the delivery
takes place actually may be higher than those obtained in the transaction
itself. A segregated account of the Fund consisting of cash or liquid debt
securities at least equal to the amount of the when-issued commitments will be
established and maintained at the Fund's custodian bank. Purchasing Municipal
Obligations on a when-issued basis when the Fund is fully or almost fully
invested may result in greater potential fluctuation in the value of the Fund's
net assets and its net asset value per share.
Certain municipal lease/purchase obligations in which the 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
the lease property in the event of foreclosure might prove difficult.
Certain provisions in the Code relating to the issuance of Municipal
Obligations may reduce the volume of Municipal Obligations qualifying for
Federal tax exemption. One effect of these provisions could be to increase the
cost of Municipal Obligations available for purchase by the Fund and thus reduce
available yield. Shareholders should consult their tax advisers concerning the
effect of these provisions on an investment in the Fund. Proposals that may
restrict or eliminate the income tax exemptions for interest on Municipal
Obligations may be introduced in the future. If any such proposal were enacted
that would reduce the availability of Municipal Obligations for investment by
the Fund so as to adversely affect Fund shareholders, the Fund would reevaluate
its investment objective and policies and submit possible changes in the Fund's
structure to shareholders for their consideration. If legislation were enacted
that would treat a
12
<PAGE>
- --------------------------------------------------------------------------------
type of Municipal Obligation as taxable, the Fund would treat such security as a
permissible Taxable Investment within the applicable limits set forth herein.
The Fund's classification as a 'non-diversified' investment company means
that the proportion of the Fund's assets that may be invested in the securities
of a single issuer is not limited by the Act. A 'diversified' investment company
is required by the Act generally to invest, with respect to 75% of its total
assets, not more than 5% of such assets in the securities of a single issuer.
However, the Fund conducts its operations so as to qualify as a 'regulated
investment company' for purposes of the Code, which requires that, at the close
of each quarter of the Fund's taxable year, (i) at least 50% of the market value
of the Fund's total assets be invested in cash, U.S. Government securities, the
securities of other regulated investment companies and other securities with,
for purposes of this calculation, not more than 5% of the Fund's total assets
invested in such other securities of a single issuer; and (ii) not more than 25%
of the Fund's total assets be invested in the securities of any one issuer
(other than U.S. Government securities or the securities of other regulated
investment companies). Since a relatively high percentage of the Fund's assets
may be invested in the obligations of a limited number of issuers, the Fund's
portfolio securities may be more susceptible to any single economic, political
or regulatory occurrence than the portfolio securities of a diversified
investment company.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of its
Trustees. The day-to-day operations of the Fund are conducted through or under
the direction of its officers. The Statement of Additional Information contains
general background information regarding each Trustee and officer of the Fund.
MANAGER AND INVESTMENT ADVISER
KPAM, 60 Broad Street, New York, New York 10004-2350, serves as the Fund's
manager and investment adviser. A wholly-owned subsidiary of Kidder, Peabody,
and a registered investment adviser under the Investment Advisers Act of 1940,
as amended, KPAM currently provides investment management, investment advisory
and administrative services to a wide variety of individual and institutional
clients. The Kidder, Peabody Asset Management Group of Companies (of which KPAM
is the primary entity) provides advisory and consulting services to more than
$18 billion in assets as of September 30, 1994. General Electric Capital
Services, Inc., a wholly-owned subsidiary of GE, owns all the outstanding stock
of Kidder Group, the parent company of Kidder, Peabody.
Under an agreement dated as of October 17, 1994, GE has agreed to sell to
PaineWebber Group Inc. certain assets of Kidder Group and its subsidiaries,
including Kidder, Peabody and KPAM. The consummation of this transaction, which
is subject to a number of conditions and cannot be assured, would result in the
deemed assignment and automatic termination of the agreements pursuant to which
Kidder, Peabody serves as the principal underwriter of the Fund's shares and
KPAM serves as the Fund's manager and investment adviser. Institution of new
arrangements with Kidder, Peabody's and KPAM's successors following the
consummation of
13
<PAGE>
- --------------------------------------------------------------------------------
the transaction will require approval of the Trustees and the separate approval
of the majority of the Trustees who are not 'interested persons' of the Fund
within the meaning of the Act. In addition, the Fund's new management
arrangements will require approval of a 'majority of the outstanding voting
securities' of the Fund, as defined in the Act. No assurance can be given that
any of the foregoing required approvals will be obtained and, if they are not,
the Board will take such action as it determines to be appropriate and in the
best interests of the Fund and its shareholders.
As compensation for KPAM's services, the Fund pays a fee, computed daily
and paid monthly, at an annual rate of .50% of the Fund's average daily net
assets. For the fiscal year ended July 31, 1994, the Fund's total expenses
represented .70% of its average daily net assets.
KPAM provides the Fund with an investment officer authorized by the
Trustees to execute purchases and sales of securities. The chief investment
officer of the Fund is David A. Hartman. KPAM employs a professional staff of
portfolio managers who draw upon a variety of sources, including Kidder,
Peabody, for research information for the Fund.
KPAM pays the salaries of all officers and employees who are employed by
both it and the Fund and, subject to the direction of the Fund's Trustees,
administers the Fund. Operating expenses borne by the Fund generally consist of
fees for necessary professional and brokerage services, costs of regulatory
compliance and costs associated with maintaining trust existence and shareholder
relations.
Although the accounts which are managed or advised by KPAM have varying
investment objectives, from time to time KPAM will be investing assets of such
accounts in investments substantially similar to those which constitute the
principal investments of the Fund. See 'Portfolio Transactions.'
PORTFOLIO TRANSACTIONS
KPAM places the orders for the purchase and sale of the Fund's portfolio
securities. Transactions are allocated to various dealers by KPAM in its best
judgment. The primary consideration is the prompt and effective execution of
orders at the most favorable price. Subject to that primary consideration,
dealers may be selected for research, statistical or other services to enable
KPAM to supplement its own research and analysis with the views and information
of other securities firms. Information so received is in addition to, and not in
lieu of, services required to be performed by KPAM and KPAM's fee is not reduced
as a consequence of its receipt of such supplemental information. Such
information may be useful to KPAM in serving both the Fund and other clients
and, conversely, supplemental information obtained by the placement of business
of other clients may be useful to KPAM in carrying out its obligations to the
Fund. No brokerage commissions have been paid by the Fund to date.
Investment decisions for the Fund are made independently from those of any
other funds that are managed by KPAM. If, however, funds managed by KPAM are
simultaneously engaged in the purchase or sale of the same security, the
transactions are averaged as to price and allocated equitably to each fund. In
some cases, this system might adversely affect the price paid or received by the
Fund or the size of the position obtainable for the Fund. See 'Portfolio
Transactions' in the Statement of Additional Information.
The Fund will not purchase Municipal Obligations during the existence of
any underwriting or selling group relating thereto of which Kidder, Peabody is a
member. Under certain
14
<PAGE>
- --------------------------------------------------------------------------------
circumstances, the Fund may be at a disadvantage because of this limitation in
comparison with other investment companies which have a similar investment
objective but which are not subject to such limitations.
SHARES OF THE FUND
The Fund was organized as a Massachusetts business trust on May 7, 1987 and
commenced operations on August 17, 1987. The Trustees may issue an unlimited
number of full and fractional shares of beneficial interest with $.001 par value
per share. Upon liquidation of the Fund, shareholders are entitled to share pro
rata in the net assets of the Fund available for distribution to shareholders.
Shares have no preemptive or conversion rights and are fully paid and
non-assessable. The shareholders of the Fund are entitled to a full vote for
each full share held and proportionate, fractional votes for fractional shares
held. Meetings of shareholders may be called by the Trustees in their discretion
or upon demand by the holders of at least 10% of the outstanding shares of the
Fund for the purpose of electing or removing Trustees.
In the interest of economy and convenience, certificates representing the
Fund's shares are not physically issued. Investors Fiduciary Trust Company
('IFTC'), the Fund's custodian, and transfer, dividend disbursing and
recordkeeping agent, maintains a record of each shareholder's ownership. Each
shareholder receives confirmation of orders from Kidder, Peabody. Fund shares
and any dividends paid by the Fund are reflected in statements from Kidder,
Peabody.
The Declaration of Trust (the 'Declaration') establishing the Fund provides
that the name of the Fund refers to the Trustees under the Declaration
collectively as Trustees, but not as individuals or personally; and no Trustee,
shareholder, officer, employee or agent of the Fund shall be held to any
personal liability, nor shall resort be had to their private property for the
satisfaction of any obligation or claim or otherwise in connection with the
affairs of the Fund but the Trust Estate only shall be liable. For more
information on the Fund's shares and organization as a Massachusetts business
trust, see the Statement of Additional Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund declares dividends of all of its daily net investment income on each
day the New York Stock Exchange (the 'NYSE') is open for business. Dividends are
paid monthly and are automatically reinvested in additional Fund shares at net
asset value or, at the shareholder's option, paid in cash. The Fund's earnings
for Saturdays, Sundays and holidays are declared as dividends on the preceding
business day. The amount of the dividend may fluctuate and may be omitted on
some days if net realized losses on portfolio securities exceed the Fund's net
investment income. If a shareholder redeems all of his shares at any time during
the month, all dividends to which the shareholder is entitled are paid to him
together with the proceeds of the redemption. Distributions of net realized
securities gains, if any, are paid once a year, but the Fund may make
distributions on a more frequent basis to comply with the distribution
requirements of the Code, in all events in a manner consistent with the
provisions of the Act. A shareholder may choose whether to receive distributions
in cash or to reinvest in additional Fund shares at net asset value.
The Fund qualified as a regulated investment company under the Code for the
fiscal year ended July 31, 1994, and plans to continue to so qualify as long as
the Fund determines that such qualification is in the best interest of its
shareholders. Such qualification relieves the Fund of any
15
<PAGE>
- --------------------------------------------------------------------------------
liability for Federal income tax to the extent its income is distributed to
shareholders in accordance with applicable provisions of the Code. Regulated
investment companies, such as the Fund, are subject to a non-deductible 4%
excise tax, measured with respect to certain undistributed amounts of taxable
investment income and capital gains.
Except for dividends from Taxable Investments, the Fund anticipates that
all dividends paid by it will not be subject to Federal income tax and that
substantially all dividends paid by the Fund will not be subject to State of
California personal income tax (but may be subject to California corporation
franchise tax). To the extent that a shareholder is obligated to pay state or
local taxes outside of California, dividends earned by an investment in the Fund
may represent taxable income. Dividends derived from Taxable Investments,
together with distributions from any net realized short-term securities gains of
the Fund and gains from the sale or other disposition of certain market discount
bonds, are subject to Federal income tax as ordinary income, whether or not
reinvested. Distributions from net realized long-term securities gains of the
Fund generally are subject to Federal income tax as long-term capital gains for
shareholders who are citizens or residents of the United States. The Code
provides that the net capital gain of an individual generally will not be
subject to Federal income tax at a rate in excess of 28%. No dividend paid by
the Fund will qualify for the dividends-received deduction allowable to certain
U.S. corporations.
Under the Code, interest on indebtedness incurred or continued to purchase
or carry shares of the Fund which is deemed to relate to tax exempt dividends
will not be deductible. Depending on the circumstances, the Internal Revenue
Service ('IRS') may consider Fund shares to have been purchased or carried with
borrowed funds even though the shares are not directly traceable to the borrowed
funds.
Although all or a substantial portion of the dividends paid by the Fund may
be excluded by shareholders of the Fund from their gross income for Federal
income tax purposes, the Fund may purchase specified private activity bonds, the
interest from which may be (i) a preference item for purposes of the alternative
minimum tax, (ii) a component of the 'adjusted current earnings' preference item
for purposes of the corporate alternative minimum tax as well as a component in
computing the corporate environmental tax or (iii) a factor in determining the
extent to which a shareholder's Social Security benefits are taxable. If the
Fund purchases such securities, the portion of the Fund's dividends related
thereto will not necessarily be tax exempt to an investor who is subject to the
alternative minimum tax and/or tax on Social Security benefits and may cause an
investor to be subject to such taxes.
The Fund is required to withhold and remit to the U.S. Treasury 31% of
taxable dividends and distributions from net realized securities gains of the
Fund paid to a shareholder ('backup withholding') if such shareholder fails to
certify either that the Taxpayer Identification Number, furnished in connection
with opening an account, is correct, or that such shareholder has not received
notice from the IRS of being subject to backup withholding as a result of a
failure to properly report taxable dividend or interest income on a Federal
income tax return. Furthermore, the Fund may be notified by the IRS to institute
backup withholding if the IRS determines a shareholder's Taxpayer Identification
Number is incorrect or if a shareholder has failed to properly report taxable
dividend and interest income on a Federal income tax return.
A Taxpayer Identification Number is either the Social Security number or
employer identification number of the record owner of the account. Any tax
withheld as a result of backup
16
<PAGE>
- --------------------------------------------------------------------------------
withholding does not constitute an additional tax imposed on the record owner of
the account, and may be claimed as a credit on the record owner's Federal income
tax return.
Statements as to the tax status of each shareholder's dividends and
distributions are mailed annually. Shareholders are urged to consult their own
tax advisers regarding specific questions as to Federal, state or local taxes.
DETERMINATION OF NET ASSET VALUE
Net asset value is determined twice daily at 12:00 noon, New York time, and as
of the close of regular trading on the NYSE, normally 4:00 p.m., New York time,
Monday through Friday, except that net asset value is not computed on any day
when no orders to purchase, sell, exchange or redeem Fund shares have been
received, when there is not sufficient trading in the Fund's portfolio
securities that the Fund's net asset value per share might be materially
affected by changes in the value of such portfolio securities or when the NYSE
is not open for trading. The determination of net asset value is made by
subtracting from the value of the assets of the Fund the amount of its
liabilities and dividing the remainder by the number of outstanding shares of
the Fund. Expenses and fees of the Fund, including KPAM's fee, are accrued daily
and taken into account for the purpose of determining net asset value.
The Fund attempts to maintain a net asset value of $1.00 per share for
purchases and redemptions, although there can be no assurance that the Fund will
always be able to do so. In order to effectuate this policy, the Fund may, under
certain circumstances, consider the sale of portfolio instruments prior to
maturity to realize capital gains or losses, withhold dividends, make
distributions from capital or capital gains, or reduce the number of outstanding
shares of the Fund held by a shareholder. The Fund determines the value of its
portfolio securities by the amortized cost method of valuation which involves
valuing a security at its cost at the time of purchase and thereafter assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument.
Additional information concerning the amortized cost method of valuation and
certain conditions imposed upon its use is contained in the Statement of
Additional Information.
PURCHASE OF SHARES
GENERAL INFORMATION
Kidder, Peabody, 10 Hanover Square, New York, New York 10005-3592, is the
distributor of the Fund's shares. Shares must be purchased and maintained
through a brokerage account at Kidder, Peabody (an 'Account'). Thus, an investor
who wishes to purchase Fund shares but has no existing Account must establish
one. Kidder, Peabody charges no maintenance fee in connection with an Account
through which an investor purchases or holds shares of the Fund. See 'The
Distributor.'
Fund shares are sold on a continuous basis at their net asset value next
determined after an order and good funds (e.g., cash, Federal funds or certified
checks drawn on a United States bank) are received. Kidder, Peabody regards
instructions received from an investor as merely an indication of interest until
the existence of good funds can be verified. During the period prior to receipt
of good funds, an investor's money will not be invested. When verification is
obtained, an indication of interest becomes an order. If an investor does not
have a sufficient credit balance
17
<PAGE>
- --------------------------------------------------------------------------------
in his Account, payment for shares must be converted into Federal funds before a
purchase order is effective. Purchase orders received before 12:00 noon, New
York time, for which payment has been received by Kidder, Peabody will be
executed at that time and the shareholder will receive the dividend declared on
that day. Purchase orders received after 12:00 noon, New York time, and purchase
orders received earlier in the same day for which payment has not been received
by 12:00 noon, New York time, will be executed at the close of regular trading
on the NYSE, normally 4:00 p.m., New York time, if payment has been received by
Kidder, Peabody by that time and the shareholder will receive the dividend
declared on the following day.
The minimum initial investment is $1,000. Credit balances in an Account are
swept automatically into shares of the Fund. Credit balances from $1 to $4,999
are swept as of the close of business each Friday for settlement on the next
business day and credit balances of $5,000 or more are swept daily for
settlement on the next business day. Also, for Fund shareholders who subscribe
to the Kidder, Peabody Premium Account asset management system, credit balances
of $1 or more in such shareholder's Account are invested automatically in shares
of the Fund on the next business day following the day the Account is so
credited. Also, upon request made to a shareholder's Investment Executive,
dividend income earned from any Tax Exempt Securities Trust with respect to
which Kidder, Peabody is or was a sponsor or co-sponsor may be used to purchase
Fund shares without regard to a minimum purchase requirement. In addition, the
minimum investment requirement for initial purchases of shares of the Fund is
waived for clients of a newly employed Kidder, Peabody Investment Executive so
long as the purchase is made with the proceeds from a redemption of shares of a
money market fund sponsored by a firm other than Kidder, Peabody. The Fund
reserves the right at any time to vary the minimum initial and/or to impose a
minimum subsequent purchase amount. It is not recommended that the Fund be used
as a vehicle for Individual Retirement Accounts or other qualified retirement
plans.
All shares purchased are entered, confirmed and credited to the
shareholder's Account at the net asset value next determined as described in
'Determination of Net Asset Value.' Share certificates are issued only upon
written request of the shareholder. The Fund reserves the right to reject any
purchase order.
AUTOMATIC INVESTMENT PLAN
The Fund offers its shareholders an Automatic Investment Plan under which a
shareholder may authorize Kidder, Peabody to place monthly, twice monthly or
quarterly, as selected by the shareholder, a purchase order for Fund shares in
an amount not less than $100. The purchase price is paid automatically from a
designated bank account of the shareholder. The Fund reserves the right to
terminate or change the provisions of the Automatic Investment Plan.
REDEMPTION OF SHARES
A shareholder may redeem Fund shares on any day that net asset value is
determined by following the procedures set forth below.
REDEMPTION THROUGH KIDDER, PEABODY
Kidder, Peabody wires the terms of any redemption request properly received to
IFTC. The price at which a redemption request is executed is the net asset value
per share next determined after
18
<PAGE>
- --------------------------------------------------------------------------------
proper redemption instructions are received. Payment for redemption orders, if
any, that are received before 12:00 noon, New York time, normally is made on the
same business day. Shares redeemed in this manner will not be entitled to the
dividend declared on the day of redemption. Redemption orders, if any, that are
received between 12:00 noon, New York time, and the close of regular trading on
the NYSE, normally 4:00 p.m., New York time, are effective at the 4:00 p.m.
price on that day, but payment normally is made on the next business day
following the redemption. Shares redeemed in this manner are entitled to the
dividend declared on the day of redemption. Proceeds of a redemption generally
are credited to the shareholder's Account, or sent to the shareholder, as
applicable.
REDEMPTION BY MAIL
Shares may be redeemed by submitting a written request in 'good order' to IFTC
at the following address:
Kidder, Peabody California Tax Exempt Money Fund
c/o Investors Fiduciary Trust Company
P.O. Box 419211
Kansas City, Missouri 64141
IFTC transmits any redemption request which it receives to Kidder, Peabody.
The redemption request is then treated as if it had been made through Kidder,
Peabody. See 'Redemption through Kidder, Peabody' above.
A redemption request is considered to have been received in 'good order' if
the following conditions are satisfied:
(1) the request is in writing, states the number of shares to be
redeemed and identifies the shareholder's Fund account number;
(2) the request is signed by each registered owner exactly as the
shares are registered; and
(3) the signatures on the written redemption request have been
guaranteed by a bank, broker-dealer, municipal securities broker or dealer,
government securities broker or dealer, credit union, a member firm of a
national securities exchange, registered securities association or clearing
agency, or savings association (the purpose of a signature guarantee is to
protect shareholders against the possibility of fraud.) The transfer agent
may reject redemption instructions if the guarantor is neither a member of
nor a participant in a signature guarantee program (currently known as
'STAMP'sm'').
Additional supporting documents may be required for redemptions by
corporations, executors, administrators, trustees and guardians.
GENERAL REDEMPTION POLICIES
Signature guarantees (as described above) are required in connection with any
redemption of shares by mail and share ownership transfer requests. These
requirements may be waived by the Fund in certain instances.
If the shares to be redeemed represent an investment for which the Fund has
not yet received good funds, the Fund reserves the right not to honor the
redemption request until such
19
<PAGE>
- --------------------------------------------------------------------------------
time as it has assured itself that good funds have been collected, which may
take 15 or more business days. If purchases are made with good funds, no
redemption delay would occur.
Due to the relatively high cost of maintaining a Fund account, the Fund
reserves the right to redeem, upon not less than 45 days' notice, any Fund
account reduced by a shareholder to a value of $500 or less.
Kidder, Peabody has established procedures pursuant to which shares of the
Fund held by a client having a deficiency (i.e., amount owed to Kidder, Peabody
resulting from Account activity or otherwise and other amounts authorized by the
client to be paid to others from the Account, less the amount of any free credit
cash balance) in his Account will be redeemed automatically to the extent of
that deficiency, unless the client notifies Kidder, Peabody to the contrary in
advance. The amount of the redemption will be the lesser of (a) the total net
asset value of Fund shares held in the client's Account or (b) the deficiency in
the client's Account at the close of business on the redemption day adjusted for
purchase and sale transactions in other securities settling on the following
business day. Accordingly, a client who has previously consented to this
automatic redemption procedure and who wishes to pay for a securities
transaction other than through such automatic redemption procedure must do so
not later than the day before the settlement date for that transaction.
THE DISTRIBUTOR
Kidder, Peabody acts as distributor of the Fund's shares pursuant to a
Distribution Agreement dated March 15, 1990. To reimburse Kidder, Peabody for
the services it provides and for the expenses it bears under the Distribution
Agreement, the Fund has adopted the Plan of Distribution. Trustees and
shareholders of the Fund approved a Plan of Distribution on July 28, 1988 and
November 16, 1988, respectively, which was amended on November 15, 1989. The
Distribution Agreement and the Plan of Distribution were most recently continued
by action of the Trustees of the Fund on March 2, 1994.
The Plan of Distribution provides that the Fund reimburse Kidder, Peabody
for the expenses incurred by it in connection with the distribution of the
Fund's shares at the annual rate of up to .12% of the Fund's average daily net
assets. The expenses which may be reimbursed include compensation to Investment
Executives and other employees of Kidder, Peabody, printing of prospectuses and
reports for other than existing shareholders, and the preparation, printing and
distribution of sales literature and advertising materials. It is not
anticipated that items reimbursable under the Plan of Distribution generally
will include any profit to Kidder, Peabody. The Fund is not authorized to
reimburse Kidder, Peabody for expenses incurred more than 12 months prior to the
date of such reimbursement. Kidder, Peabody anticipates that there will be no
carryover of expenses from one year to the next. The expenses to be reimbursed
are for activities primarily intended to result in the sale of Fund shares and
the maintenance of Fund accounts and account balances, and there will be no
reimbursement for expenses related to Kidder, Peabody's overhead. Kidder,
Peabody currently intends that .10% per annum of the Fund's average daily net
assets will be paid to its Investment Executives proportionately in respect of
Fund share balances maintained by their respective clients. For the fiscal year
ended July 31, 1994, the Fund reimbursed Kidder, Peabody an amount equal to .12%
of the Fund's average daily net assets.
20
<PAGE>
- --------------------------------------------------------------------------------
The Plan of Distribution remains in effect from year to year, provided such
continuance is approved annually by vote of the Trustees, including a majority
of those Trustees who are not interested persons and who have no direct or
indirect financial interest in the Plan of Distribution, cast in person at a
meeting called for such purpose. The Plan of Distribution may not be amended to
increase materially the amount to be spent for the services described therein
without approval of the shareholders of the Fund, and all material amendments of
the Plan must also be approved by the Trustees in the manner described above.
The Plan of Distribution may be terminated at any time, without payment of any
penalty, by vote of a majority of the Trustees as described above, or by vote by
the holders of a majority of the outstanding voting securities of the Fund, as
defined in the Act, on not more than 30 days' written notice to any other party
to the Plan of Distribution. So long as the Plan of Distribution is in effect,
the election and nomination of Trustees who are not interested persons of the
Fund shall be committed to the discretion of the Trustees who are not interested
persons. The Trustees have determined that, in their judgment, there is a
reasonable likelihood that the Plan of Distribution will continue to benefit the
Fund and its shareholders.
Pursuant to the Plan of Distribution, Kidder, Peabody provides the Fund's
Trustees, at least quarterly, with a written report of the amounts expended
under the Plan of Distribution. The report includes an itemization of the
distribution expenses incurred by Kidder, Peabody on behalf of the Fund and the
purpose of such expenditures. In their quarterly review of the Plan of
Distribution, the Trustees consider its continued appropriateness and the level
of compensation provided therein. For the fiscal year ended July 31, 1994,
Kidder, Peabody incurred distribution expenses of approximately $610,046, of
which approximately $248,610 was recovered in the form of reimbursements made by
the Fund to Kidder, Peabody at the rate provided in the Plan of Distribution.
EXCHANGE PRIVILEGE
Shares of the Fund may be exchanged for shares of certain other funds in the
Kidder Family of Funds, to the extent such shares are offered for sale in the
shareholder's state of residence. For a list of the funds in the Kidder Family
of Funds for which shares may be exchanged and for a description of each of
those funds, please see 'Redemption and Exchange of Shares' in the Statement of
Additional Information. Under the Choice Pricing System'sm' (pursuant to which
non-money market funds in the Kidder Family of Funds offer multiple classes of
shares to the public), an exchange of shares of a non-money market fund with
other funds' shares will be limited to shares of the same class or the sole
class (money market funds only) of shares of a fund from or to which the
exchange is to be effected. For example, if a holder of Class A shares of
Kidder, Peabody Global Equity Fund ('Global Equity Fund') exchanges his shares
for shares of Kidder, Peabody Cash Reserve Fund, Inc. ('Cash Reserve Fund') (a
money market fund) and thereafter wishes to exchange those shares for shares of
Kidder, Peabody Government Income Fund, Inc., he may receive only Class A shares
in the latter transaction. As another example, if a holder of shares of Cash
Reserve Fund acquired as a result of an initial investment and not from an
exchange with shares of another fund wishes to exchange his shares for shares of
Global Equity Fund, he may receive Class A, B or C shares (depending on his
eligibility for Class C shares) in the exchange transaction. Thereafter, any
further exchanges would be subject to the principle described above limiting
subsequent exchanges to the same class or the sole class of
21
<PAGE>
- --------------------------------------------------------------------------------
shares of other funds. If shares acquired in an exchange are subject to payment
of a sales charge higher than the sales charge paid on the shares relinquished
in the exchange (or any predecessor of those shares), the exchange will be
subject to payment of an amount equal to the difference, if any, between the
sales charge previously paid and the sales charge payable on the shares acquired
in the exchange.
Although the Fund currently imposes no limit on the number of times the
Exchange Privilege may be exercised by any shareholder, the Fund may impose such
limits in the future, in accordance with applicable provisions of the Act and
rules thereunder. In addition, the Exchange Privilege may be terminated or
revised at any time upon 60 days' prior written notice to Fund shareholders, and
is available only to residents of states in which exchanges are permitted under
state law. The exchange of shares of one fund for shares of another is treated
for Federal income tax purposes as a sale of the shares given in exchange by the
shareholder, so that a shareholder may recognize a taxable gain or loss on an
exchange.
Upon receipt of proper instructions and all necessary supporting documents,
Fund shares submitted for exchange will be redeemed at their net asset value
next determined and simultaneously invested in shares of the fund being
acquired. Settlement of an exchange would occur one business day after the date
on which the request for exchange was received in proper form, unless the dollar
amount of the transaction exceeds 5% of the Fund's net assets on any given day,
in which case settlement would occur within five business days after the date on
which the request for exchange was received in proper form. The proceeds of a
redemption of Fund shares made to facilitate the exchange of those shares for
shares of another fund must be equal to at least (1) the minimum initial
investment requirement imposed by the fund into which the exchange is being
sought if the shareholder seeking the exchange has not previously invested in
that fund or (2) the minimum subsequent investment requirement imposed by the
fund into which the exchange is being sought if the shareholder has previously
made an investment in that fund.
A shareholder of the Fund wishing to exercise the Exchange Privilege should
obtain from Kidder, Peabody a copy of the current prospectus of the fund into
which an exchange is being sought and review that prospectus carefully before
making the exchange. Kidder, Peabody reserves the right to reject any exchange
request at any time.
CUSTODIAN, AND TRANSFER, DIVIDEND DISBURSING AND
RECORDKEEPING AGENT
IFTC, 127 West 10th Street, Kansas City, Missouri 64105, serves as the Fund's
custodian, and transfer, dividend disbursing and recordkeeping agent.
COUNSEL AND INDEPENDENT AUDITORS
Stroock & Stroock & Lavan, 7 Hanover Square, New York, New York 10004-2696, is
counsel for the Fund. Deloitte & Touche LLP, 2 World Financial Center, New York,
New York 10281, has been selected as independent auditors of the Fund.
22
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
No person has been authorized to give any information or to make any
representations not contained in this Prospectus or in the Statement
of Additional Information incorporated into this Prospectus by
reference in connection with the offering made by this Prospectus,
and, if given or made, any such other information or representations
must not be relied upon as having been authorized by the Fund or its
distributor. This Prospectus does not constitute an offering by the
Fund or by its distributor in any jurisdiction in which such
offering may not lawfully be made.
<TABLE>
<S> <C>
- --------------------------------------------------------
CONTENTS
- --------------------------------------------------------
Fee Table 2
- --------------------------------------------------------
Highlights 3
- --------------------------------------------------------
Financial Highlights 6
- --------------------------------------------------------
Yield 7
- --------------------------------------------------------
Investment Objective and Policies 7
- --------------------------------------------------------
Management of the Fund 13
- --------------------------------------------------------
Portfolio Transactions 14
- --------------------------------------------------------
Shares of the Fund 15
- --------------------------------------------------------
Dividends, Distributions and Taxes 15
- --------------------------------------------------------
Determination of Net Asset Value 17
- --------------------------------------------------------
Purchase of Shares 17
- --------------------------------------------------------
Redemption of Shares 18
- --------------------------------------------------------
The Distributor 20
- --------------------------------------------------------
Exchange Privilege 21
- --------------------------------------------------------
Custodian, and Transfer,
Dividend Disbursing and
Recordkeeping Agent 22
- --------------------------------------------------------
Counsel and Independent Auditors 22
- --------------------------------------------------------
</TABLE>
Kidder,
Peabody
California
Tax
Exempt
Money
Fund
Prospectus
November 28, 1994
[LOGO]
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
PART B
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO.
PAINEWEBBER MANAGED MUNICIPAL TRUST
FILE NO.
<PAGE>
PAINEWEBBER RMA CALIFORNIA MUNICIPAL MONEY FUND
(a series of PaineWebber Managed Municipal Trust)
PAINEWEBBER/KIDDER, PEABODY
CALIFORNIA TAX EXEMPT MONEY FUND
1285 Avenue of the Americas
New York, New York 10019
(Toll-Free) 1-800-647-1568
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information relates to the proposed
reorganization whereby PaineWebber RMA California Municipal Money Fund ("PW
Fund"), a series of PaineWebber Managed Municipal Trust, would acquire the
assets of PaineWebber/Kidder, Peabody California Tax Exempt Money Fund
("PW/KP Fund"), in exchange solely for shares of beneficial interest in PW
Fund and the assumption by PW Fund of PW/KP Fund's liabilities. The following
documents, each of which is attached hereto, are incorporated herein by this
reference:
(1) The Statement of Additional Information of PW Fund, dated August 29,
1995, previously filed on EDGAR, Accession Number 0000950112-95-002294.
(2) The Statement of Additional Information of PW/KP Fund, dated November
28, 1994.
(3) The Annual Report to Shareholders of PW Fund for the fiscal year ended
June 30, 1995, previously filed on EDGAR, Accession Number
0000889812-95-000459.
(4) The Annual Report to Shareholders of PW/KP Fund for the fiscal year
ended July 31, 1995, previously filed on EDGAR, Accession Number
0000889812-95-00524.
(5) Pro Forma Financial Statements for PW Fund and PW/KP Fund for the
twelve months ended June 30, 1995.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Prospectus/Proxy Statement dated October
, 1995 relating to the above-referenced transaction. A copy of that
Prospectus/Proxy Statement may be obtained by calling a PaineWebber
Incorporated investment executive or correspondent firm or by calling
toll-free 1-800-647-1568. This Statement of Additional Information is dated
October , 1995.
<PAGE>
Statement of Additional Information
November 28, 1994
Kidder, Peabody California Tax Exempt Money Fund
60 BROAD STREET NEW YORK, NEW YORK 10004-2350 (212) 656-1737
Kidder, Peabody California Tax Exempt Money Fund (the 'Fund') is a
non-diversified, open-end management investment company whose investment
objective is the maximization of current income exempt from Federal and State of
California personal income taxes consistent with the preservation of capital and
the maintenance of liquidity. The Fund attempts to achieve its objective by
investing primarily in short-term California Municipal Obligations.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Fund's Prospectus. A copy of the Fund's Prospectus can
be obtained from the Fund at the above address. The date of the Prospectus to
which this Statement relates is November 28, 1994.
- --------------------------------------------------------------------------------
MANAGER AND INVESTMENT ADVISER
Kidder Peabody Asset Management, Inc.
DISTRIBUTOR
Kidder, Peabody & Co. Incorporated
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements and should be read in conjunction with the
section in the Fund's Prospectus entitled 'Investment Objective and Policies.'
MUNICIPAL OBLIGATIONS
Municipal Obligations generally include debt obligations issued to obtain funds
for various public purposes, including the construction of a wide range of
public facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which Municipal Obligations may be issued include refunding
outstanding obligations, obtaining funds for general operating expenses and
lending such funds to other public institutions and facilities. In addition,
certain types of industrial development bonds are issued by or on behalf of
public authorities to obtain funds to provide for the construction, equipment,
repair or improvement of privately operated housing facilities, sports
facilities, convention or trade show facilities, airport, mass transit,
industrial, port or parking facilities, air or water pollution control
facilities and certain local facilities for water supply, gas, electricity, or
sewage or solid waste disposal; the interest paid on such obligations may be
exempt from Federal income tax, although current tax laws place substantial
limitations on the size of such issues. Such obligations are considered to be
Municipal Obligations, if the interest paid thereon qualifies as exempt from
Federal income tax in the opinion of bond counsel to the issuer. There are, of
course, variations in Municipal Obligations, both within a particular
classification and between classifications.
Floating and variable rate demand obligations are tax exempt obligations
which may have a stated maturity in excess of 397 days, but which permit the
holder to demand payment of principal upon a specified number of days' notice.
The issuer of such obligations ordinarily has a corresponding right, after a
given period, to prepay in its discretion the outstanding principal amount of
the obligation plus accrued interest upon a specified number of days' notice to
the noteholders. The interest rate on a floating rate demand obligation is based
on a known lending rate, such as a bank's prime rate, and is adjusted
automatically each time such rate is adjusted. The interest rate on a variable
rate demand obligation is adjusted at specified intervals. Because floating and
variable rate demand obligations are direct lending arrangements between the
lender and borrower, it is not contemplated that such instruments generally will
be traded, and there is no established secondary market for these obligations,
although they are redeemable (and thus immediately repayable by the borrower) at
face value, plus accrued interest, at any time. Accordingly, where these
obligations are not secured by letters of credit or other credit support
arrangements, the Fund's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. Each obligation purchased by
the Fund will meet the quality criteria established for the purchase of
Municipal Obligations.
The yields on Municipal Obligations are dependent on a variety of factors,
including general economic and monetary conditions, money market factors,
conditions in the municipal market, size of a particular offering, maturity of
the obligation and rating of the issue. The imposition of the Fund's management
and investment advisory fee, as well as other operating
2
<PAGE>
- --------------------------------------------------------------------------------
expenses, including fees paid under its Plan of Distribution pursuant to Rule
12b-1 (the 'Plan of Distribution'), has the effect of reducing the yield to
shareholders.
Municipal lease obligations or installment purchase contract obligations
(collectively, 'lease obligations') have special risks not normally associated
with Municipal Obligations. Although lease obligations do not constitute general
obligations of the municipality for which the municipality's taxing power is
pledged, a lease obligation ordinarily is backed by the municipality's covenant
to budget for, appropriate and make the payments due under the lease obligation.
However, certain lease obligations contain 'non-appropriation' clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such purpose
on a yearly basis. Although 'non-appropriation' leased obligations are secured
by the leased property, disposition of the property in the event of foreclosure
might prove difficult. The Fund will seek to minimize these risks by investing
only in those lease obligations that (1) are rated in one of the two highest
rating categories for debt obligations by at least two nationally recognized
statistical rating organizations (or one rating organization if the lease
obligation was rated only by one such organization) or (2) if unrated, are
purchased principally from the issuer or domestic banks or other responsible
third parties, in each case only if the seller shall have entered into an
agreement with the Fund providing that the seller or other responsible third
party will either remarket or repurchase the lease obligation within a short
period after demand by the Fund. The staff of the Securities and Exchange
Commission (the 'SEC') currently considers certain lease obligations to be
illiquid. Accordingly, the Trustees have established guidelines to be used by
KPAM in determining the liquidity of municipal lease obligations. In addition,
the Fund will invest no more than 10% of the value of its net assets in lease
obligations that are illiquid and in other illiquid securities. See 'Investment
Restriction No. 7' below.
RATINGS OF MUNICIPAL OBLIGATIONS
If, subsequent to its purchase by the Fund, (a) an issue of rated Municipal
Obligations ceases to be rated in the highest rating category by at least two
rating organizations (or one rating organization if the instrument was rated by
only one such organization), or the Fund's Trustees determine that it is no
longer of comparable quality; or (b) Kidder Peabody Asset Management, Inc.
('KPAM'), the Fund's manager and investment adviser, becomes aware that any
portfolio security not so highly rated or any unrated security has been given a
rating by any rating organization below the rating organization's second highest
rating category, the Fund's Trustees will reassess promptly whether such
security presents minimal credit risk and will cause the Fund to take such
action as it determines is in the best interest of the Fund and its
shareholders, provided that the reassessment required by clause (b) is not
required if the portfolio security is disposed of or matures within five
business days of KPAM becoming aware of the new rating and the Fund's Trustees
are subsequently notified of KPAM's actions.
To the extent that the ratings given by Moody's Investors Service, Inc.
('Moody's') or Standard & Poor's Corporation ('S&P') for Municipal Obligations
may change as a result of changes in such organizations or their rating systems,
the Fund will attempt to use comparable ratings as standards for its investments
in accordance with the investment policies contained in the Fund's Prospectus
and this Statement of Additional Information. The ratings of Moody's and
3
<PAGE>
- --------------------------------------------------------------------------------
S&P represent their opinions as to the quality of the Municipal Obligations
which they undertake to rate. It should be emphasized, however, that ratings are
relative and subjective and are not absolute standards of quality. Although
these ratings are an initial criterion for selection of portfolio securities,
KPAM also will evaluate these securities and the creditworthiness of the issuers
of such securities. See 'Ratings of Securities.'
TAXABLE INVESTMENTS
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities include a variety of U.S. Treasury securities which differ in
their interest rates, maturities and times of issuance: Treasury Bills have
initial maturities of one year or less; Treasury Notes have initial maturities
of one to ten years; and Treasury Bonds generally have initial maturities of
greater than ten years. Some obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, such as Government National Mortgage Association
pass-through certificates, are supported by the full faith and credit of the
U.S. Treasury; others, such as those of the Federal Home Loan Banks, by the
right of the issuer to borrow from the U.S. Treasury; others, such as those
issued by the Federal National Mortgage Association, by discretionary authority
of the U.S. Government to purchase certain obligations of the agency or
instrumentality; and others, such as those issued by the Student Loan Marketing
Association, only by the credit of the agency or instrumentality. These
securities bear fixed, floating or variable rates of interest. Interest may
fluctuate based on generally recognized reference rates or the relationship of
rates. While the U.S. Government provides financial support to such U.S.
Government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so, since it is not so obligated by law. The Fund invests
in such securities only when it is satisfied that the credit risk with respect
to the issuer is minimal.
Commercial paper consists of short-term unsecured promissory notes issued
to finance short-term credit needs.
Certificates of deposit are certificates representing the obligation of a
bank to repay funds deposited with it for a specified period of time.
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate.
Investments in time deposits generally are limited to London branches of
domestic banks that have total assets in excess of $1 billion. Time deposits
which may be held by the Fund will not benefit from insurance from the Bank
Insurance Fund or the Savings Association Insurance Fund administered by the
Federal Deposit Insurance Corporation.
Bankers' acceptances are credit instruments evidencing the obligation of a
bank to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. Other short-term bank obligations may include
uninsured, direct obligations bearing fixed, floating or variable rates of
interest.
Repurchase agreements involve the acquisition by the Fund of an underlying
debt instrument for a relatively short period (usually not more than one week),
subject to an obligation of the seller to repurchase, and the Fund to resell,
the instrument at a fixed price. The
4
<PAGE>
- --------------------------------------------------------------------------------
Fund's custodian will have custody of, and will hold in a segregated account,
securities acquired by the Fund under a repurchase agreement. Repurchase
agreements are considered by the staff of the SEC to be loans by the Fund. The
Fund enters into repurchase agreements only with selected registered or
unregistered securities dealers or banks and requires that additional securities
be deposited with it if the value of the securities purchased should decrease
below resale price. KPAM will consider on an ongoing basis the value of the
collateral to assure that it always equals or exceeds the repurchase price.
Certain costs may be incurred by the Fund in connection with the sale of the
securities if the seller does not repurchase them in accordance with the
repurchase agreement. KPAM considers on an ongoing basis the creditworthiness of
the institutions with which it enters into repurchase agreements.
RISK FACTORS -- INVESTING IN CALIFORNIA MUNICIPAL OBLIGATIONS
Certain California (the 'State') constitutional amendments, legislative
measures, executive orders, civil actions and voter initiatives, as well as the
general financial condition of the State, could adversely affect the ability of
issuers of California Municipal Obligations to pay interest and principal on
such obligations. The following information constitutes only a brief summary,
does not purport to be a complete description, and is based on information drawn
from official statements relating to securities offerings of the State and
various local agencies, available as of the date of this Statement of Additional
Information. While the Fund has not independently verified such information, it
has no reason to believe that such information is not correct in all material
respects.
RECENT DEVELOPMENTS. Since the start of the State's 1990-91 fiscal year,
the State has faced the worst economic, fiscal and budget conditions since the
1930s. Construction, manufacturing (especially aerospace), exports and financial
services, among others, have all been severely affected. Job losses have been
the worst of any post-war recession. Unemployment reached 9.2% in 1993 and is
expected to remain well above 9% through 1994. According to the State's
Department of Finance, recovery from the recession in California is not expected
in meaningful terms until late 1994, notwithstanding signs of recovery elsewhere
in the nation.
The recession has seriously affected State tax revenues, which basically
mirror economic conditions. It has also caused increased expenditures for health
and welfare programs. The State has also been facing a structural imbalance in
its budget with the largest programs supported by the General Fund -- K-12
schools and community colleges, health and welfare, and corrections -- growing
at rates higher than the growth rates for the principal revenue sources of the
General Fund. As a result, the State has experienced recurring budget deficits.
The Controller reports that expenditures exceeded revenues for four of the five
fiscal years ending with 1991-92. Revenues and expenditures were essentially
equal in 1992-93, but the original budget for that year projected revenues
exceeding expenditures by $2.6 billion. By June 30, 1994, according to the
Department of Finance, the State's Reserve for Economic Uncertainties had a
deficit, on a budget basis, of approximately $2.0 billion.
A further consequence of the large budget imbalances over the last three
fiscal years has been that the State depleted its available cash resources and
has had to use a series of external borrowings to meet its cash needs. To meet
its cash flow needs in the 1994-95 fiscal year, the State
5
<PAGE>
- --------------------------------------------------------------------------------
issued, in July and August 1994, $4.0 billion of revenue anticipation warrants
which mature on April 25, 1996, and $3.0 billion of revenue anticipation notes
which matured on June 28, 1995.
The 1994-95 Budget Act is projected to have $41.9 billion of General Fund
revenues and transfers and $40.9 billion of budgeted expenditures. In addition,
the 1994-95 Budget Act anticipates deferring retirement of about $1 billion of
the accumulated budget deficit to the 1995-96 fiscal year when it is intended to
be fully retired by June 30, 1996.
As a result of the deterioration in the State's budget and cash situation,
the rating agencies reduced the State's credit ratings. Between October 1991 and
July 1994 the rating on the State's general obligation bonds was reduced by S&P
from 'AAA' to 'A,' by Moody's from 'Aaa' to 'A1.'
On January 17, 1994, an earthquake of the magnitude of an estimated 6.8 on
the Richter Scale struck Los Angeles causing significant damage to public and
private structures and facilities. Although some individuals and businesses
suffered losses totaling in the billions of dollars, the overall effect of the
earthquake on the regional and State economy is not expected to be serious.
STATE FINANCES. State moneys are segregated into the General Fund and
approximately 400 Special Funds. The General Fund consists of the revenues
received into the State Treasury and earnings from State investments, which are
not required by law to be credited to any other fund. The General Fund is the
principal operating fund for the majority of governmental activities and is the
depository of most major State revenue sources.
The Special Fund for Economic Uncertainties is funded with General Fund
revenues and was established to protect the State from unforeseen reduced levels
of revenues and/or unanticipated expenditure increases. Amounts in the Special
Fund for Economic Uncertainties may be transferred by the Controller as
necessary to meet cash needs of the General Fund. The Controller is required to
return monies so transferred without payment of interest as soon as there are
sufficient monies in the General Fund. For budgeting and accounting purposes,
any appropriation made from the Special Fund for Economic Uncertainties is
deemed an appropriation from the General Fund. For year-end reporting purposes,
the Controller is required to add the balance in the Special Fund for Economic
Uncertainties to the balance in the General Fund so as to show the total monies
then available for General Fund purposes.
Inter-fund borrowing has been used for many years to meet temporary
imbalances of receipts and disbursements in the General Fund. As of June 30,
1994, the General Fund had outstanding loans in the aggregate principal amount
of $5.2 billion, which consisted of $4.0 billion of internal loans to the
General Fund from the Special Fund for Economic Uncertainties and other Special
Funds and $1.2 billion of external loans represented by the 1994 revenue
anticipation warrants.
ARTICLES XIIIA AND XIIIB TO THE STATE CONSTITUTION AND OTHER REVENUE LAW
CHANGES. Prior to 1977, revenues of the State government experienced significant
growth primarily as a result of inflation and continuous expansion of the tax
base of the State. In 1978, State voters approved an amendment to the State
Constitution known as Proposition 13, which added Article XIIIA to the State
Constitution, reducing ad valorem local property taxes by more than 50%. In
addition, Article XIIIA provides that additional taxes may be levied by cities,
counties and
6
<PAGE>
- --------------------------------------------------------------------------------
special districts only upon approval of not less than a two-thirds vote of the
'qualified electors' of such district, and requires not less than a two-thirds
vote of each of the two houses of the State Legislature to enact any changes in
State taxes for the purpose of increasing revenues, whether by increased rate or
changes in methods of computation.
Primarily as a result of the reductions in local property tax revenues
received by local governments following the passage of Proposition 13, the
Legislature undertook to provide assistance to such governments by substantially
increasing expenditures from the General Fund for that purpose beginning in the
1978-79 fiscal year. In recent years, in addition to such increased
expenditures, the indexing of personal income tax rates (to adjust such rates
for the effects of inflation), the elimination of certain inheritance and gift
taxes and the increase of exemption levels for certain other such taxes had a
moderating impact on the growth in State revenues. In addition, the State has
increased expenditures by providing a variety of tax credits, including renters'
and senior citizens' credits and energy credits.
The State is subject to an annual 'appropriations limit' imposed by Article
XIIIB of the State Constitution adopted in 1979. Article XIIIB prohibits the
State from spending 'appropriations subject to limitation' in excess of the
appropriations limit imposed. 'Appropriations subject to limitations' are
authorizations to spend 'proceeds of taxes,' which consist of tax revenues, and
certain other funds, including proceeds from regulatory licenses, user charges
or other fees to the extent that such proceeds exceed 'the cost reasonably borne
by such entity in providing the regulation, product or service.' One of the
exclusions from these limitations is 'debt service' (defined as 'appropriations
required to pay the cost of interest and redemption charges, including the
funding of any reserve or sinking fund required in connection therewith, on
indebtedness existing or legally authorized as of January 1, 1979 or on bonded
indebtedness thereafter approved' by voters). In addition, appropriations
required to comply with mandates of courts or the Federal government and,
pursuant to Proposition 111 enacted in June 1990, appropriations for qualified
capital outlay projects and appropriations of revenues derived from any increase
in gasoline taxes and motor vehicle weight fees above January 1, 1990 levels are
not included as appropriations subject to limitation. In addition, a number of
recent initiatives were structured or proposed to create new tax revenues
dedicated to certain specific uses, with such new taxes expressly exempted from
the Article XIIIB limits (e.g., increased cigarette and tobacco taxes enacted by
Proposition 99 in 1988). The appropriations limit also may be exceeded in cases
of emergency. However, unless the emergency arises from civil disturbance or
natural disaster declared by the Governor, and the appropriations are approved
by two-thirds of the Legislature, the appropriations limit for the next three
years must be reduced by the amount of the excess.
The State's appropriations limit in each year is based on the limit for the
prior year, adjusted annually for changes in California per capita personal
income and changes in population, and adjusted, when applicable, for any
transfer of financial responsibility of providing services to or from another
unit of government. The measurement of change in population is a blended average
of statewide overall population growth, and change in attendance at local school
and community college ('K-14') districts. As amended by Proposition 111, the
appropriations limit is tested over consecutive two-year periods. Any excess of
the aggregate 'proceeds of taxes' received over such two-year period above the
combined
7
<PAGE>
- --------------------------------------------------------------------------------
appropriations limits for those two years is divided equally between transfers
to K-14 districts and refunds to taxpayers.
As originally enacted in 1979, the State's appropriations limit was based
on its 1978-79 fiscal year authorizations to expend proceeds of taxes and was
adjusted annually to reflect changes in cost of living and population (using
different definitions, which were modified by Proposition 111). Commencing with
the 1991-92 fiscal year, the State's appropriations limit is adjusted annually
based on the actual 1986-87 limit, and as if Proposition 111 had been in effect.
The State Legislature has enacted legislation to implement Article XIIIB which
defines certain terms used in Article XIIIB and sets forth the methods for
determining the State's appropriations limit. Government Code Section 7912
requires an estimate of the State's appropriations limit to be included in the
Governor's Budget, and thereafter to be subject to the budget process and
established in the Budget Act.
For the 1990-91 fiscal year, the State appropriations limit was $32.2
billion, and appropriations subject to limitation were $7.51 million under the
limit. The limit for the 1991-92 fiscal year was $34.2 billion, and
appropriations subject to limitations were $3.8 billion under the limit. The
limit for the 1992-93 fiscal year was $35.01 billion, and the appropriations
subject to limitation were $4.27 billion under the limit. The estimated limits
for the 1993-94 and 1994-95 fiscal years are $36.60 billion and $36.61 billion,
respectively, and the estimated appropriations subject to limitation are $3.77
billion and $5.49 billion, respectively, under the limit.
In November 1988, State voters approved Proposition 98, which changed State
funding of public education below the university level and the operation of the
State's appropriations limit, primarily by guaranteeing K-14 schools a minimum
share of General Fund revenues. Under Proposition 98 (as modified by Proposition
111, which was enacted in June 1990), K-14 schools are guaranteed the greater of
(a) 40.9% of General Fund revenues ('Test 1'), (b) the amount appropriated to
K-14 schools in the prior year, adjusted for changes in the cost of living
(measured as in Article XIIIB by reference to California per capita personal
income) and enrollment ('Test 2'), or (c) a third test, which would replace
'Test 2' in any year when the percentage growth in per capita General Fund
revenues from the prior year plus .5% is less than the percentage growth in
California per capita personal income ('Test 3'). Under 'Test 3', schools would
receive the amount appropriated in the prior year adjusted for changes in
enrollment and per capita General Fund revenues, plus an additional small
adjustment factor. If 'Test 3' is used in any year, the difference between 'Test
3' and 'Test 2' would become a 'credit' to schools which would be the basis of
payments in future years when per capita General Fund revenue growth exceeds per
capita personal income growth.
Proposition 98 permits the Legislature by two-thirds vote of both houses,
with the Governor's concurrence, to suspend the K-14 school's minimum funding
formula for a one-year period. In the fall of 1989, the Legislature and the
Governor utilized this provision to avoid having 40.3% of revenues generated by
a special supplemental sales tax enacted for earthquake relief go to K-14
schools. Proposition 98 also contains provisions transferring certain State tax
revenues in excess of the Article XIIIB limit to K-14 schools.
The 1991-92 Budget Act, applying 'Test 2' of Proposition 98, appropriated
approximately $18.5 billion for K-14 schools pursuant to Proposition 98. During
the course of the fiscal year,
8
<PAGE>
- --------------------------------------------------------------------------------
revenues proved to be substantially below expectations. By the time the
Governor's Budget was introduced in January 1992, it became clear that per
capita growth in General Fund revenues for 1991-92 would be far smaller than the
growth in California per capita personal income and the Governor's Budget
therefore reflected a reduction in Proposition 98 funding in 1991-92 by applying
'Test 3' rather than 'Test 2.'
In response to the changing revenue situation and to fully fund the
Proposition 98 guarantee in both the 1991-92 and 1992-93 fiscal years without
exceeding it, the Legislature enacted several bills as part of the 1992-93
budget package which responded to the fiscal crisis in education funding. In
fiscal year 1991-92, Proposition 98 appropriations for K-14 schools were reduced
by $1.083 billion. In order to not adversely impact cash received by school
districts, however, a short-term loan was appropriated from the non-Proposition
98 State General Fund. The Legislature then appropriated $16.6 billion to K-14
schools for 1992-93 (the minimum guaranteed by Proposition 98) but designated
$1.083 billion of this amount to 'repay' the prior year loan, thereby reducing
cash outlays in 1992-93 by that amount.
The 1993-94 Budget Act projects the Proposition 98 minimum funding level at
$13.5 billion based on the 'Test 3' calculation where the guarantee is
determined by the change in per capita growth in General Fund revenues, which
are projected to decrease on a year-over-year basis. This amount also takes into
account increased property taxes transferred to school districts from other
local governments.
The 1994-95 Budget Act has appropriated $14.4 billion of Proposition 98
funds for K-14 schools based on Test 12. This exceeds the minimum Proposition 98
guarantee by $8 million to maintain K-12 funding per pupil at $4,217. Based upon
updated State revenues, growth rates and inflation factors, the 1994-95 Budget
Act appropriates an additional $286 million within Proposition 98 for the
1993-94 fiscal year, to reflect a need in appropriations for school districts
and county offices of education, as well as an anticipated deficiency in special
education funding. These appropriations increase the 1993-94 Proposition 98
guarantee to $13.8 billion, which exceeds the minimum guarantee in that year by
$272 million and provides per pupil funding of $4,225.
SOURCES OF TAX REVENUE. The California personal income tax, which in fiscal
1991-92 contributed about 42% of General Fund revenues, is closely modeled after
the Federal income tax law. It is imposed on net taxable income (gross income
less exclusions and deductions). The tax is progressive with rates ranging from
1% to 11%. Personal, dependent, and other credits are allowed against the gross
tax liability. In addition, taxpayers may be subject to an alternative minimum
tax ('AMT') which is similar to the Federal AMT. This is designed to ensure that
excessive use of tax preferences does not reduce taxpayers' liabilities below
some minimum level. Legislation enacted in July 1991 added two new marginal tax
rates, at 10% and 11%, effective for tax years 1991 through 1995. After 1995,
the maximum personal income tax rate is scheduled to return to 9.3%, and the AMT
rate is scheduled to drop from 8.5% to 7%.
The personal income tax is adjusted annually by the change in the consumer
price index to prevent taxpayers from being pushed into higher tax brackets
without a real increase in income.
The sales tax is imposed upon retailers for the privilege of selling
tangible personal property in California. Most retail sales and leases are
subject to the tax. However, exemptions
9
<PAGE>
- --------------------------------------------------------------------------------
have been provided for certain essentials such as food for home consumption,
prescription drugs, gas, electricity and water. Sales tax accounted for about
39% of General Fund revenue in 1991-92. Bank and corporation tax revenues
comprised about 11% of General Fund revenue in 1991-92. In 1989, Proposition 99
added a 25 cents per pack excise tax on cigarettes, and a new equivalent excise
tax on other tobacco products.
GENERAL FINANCIAL CONDITION OF THE STATE. Revenues in the most recent
fiscal years have been unusually difficult to forecast with a high degree of
accuracy due in major part to the volatility in the personal income tax. The
1986-87 through 1989-90 fiscal years were affected by both the Federal Tax
Reform Act of 1986 and subsequent State conformity legislation. The difficulty
with recent forecasts has occurred because taxpayers have changed their behavior
as a result of these events. Capital gains are now fully taxed. This revenue
component is subject to taxpayer discretion and is very sensitive to change in
tax law, market conditions and individual circumstances. Capital gains have
always been a volatile item and since it is contributing a greater percentage of
total revenue, it makes these collections subject to greater variance.
Primarily because of changes to the Federal and State tax statutes,
revenues for the fiscal year 1987-88 were approximately $1.1 billion less than
originally estimated. This shortfall in revenues was made up through the
application of approximately $900 million from the Special Fund for Economic
Uncertainties and a variety of expenditure reduction actions initiated by the
Governor. As a result, the Special Fund for Economic Uncertainties was
substantially depleted by June 30, 1988.
The State entered the 1988-89 fiscal year with essentially no budget
reserve. The 1988-89 Budget Act called for significant spending cuts to balance
expected revenues and expenditures and to provide an estimated balance of
approximately $600 million in the Special Fund for Economic Uncertainties at
year-end.
Revenues for the 1989-90 fiscal year were approximately $517.7 million less
than presented in the Governor's Budget in January 1990 and $1.021 billion less
than estimated in July 1989, primarily owing to lower than estimated receipts
from individual and corporate taxes. The shortfall in revenues was made up
through the transfer of moneys from the Special Fund for Economic Uncertainties
and a variety of expenditure reduction actions initiated by the Administration.
As a result, the Special Fund for Economic Uncertainties was fully depleted by
June 30, 1990.
The California State Controller reported that the State's General Fund
ended the 1990-91 fiscal year with a negative budgetary basis balance of $1.316
billion. In order to pay necessary cash expenses through June 1991, including
payment of $4.1 billion of 1990 Revenue Anticipation Notes which were due June
28, 1991, the General Fund borrowed $1.390 billion from the Special Fund for
Economic Uncertainties and $3.266 billion from other Special Funds as of the end
of the fiscal year. Data on General Fund revenues for the 1990-91 fiscal year
show that revenues in all major categories (except insurance taxes) were lower
than receipts in 1989-90, the first time this has happened on a year-over-year
basis since the 1930s.
The Governor's 1991-92 Budget originally projected a $7 billion gap between
revenues and program needs (including restoration of a budget reserve) through
June 30, 1992. However, as revenues remained depressed in early 1991, the
estimate of the budget gap eventually increased
10
<PAGE>
- --------------------------------------------------------------------------------
to $14.3 billion. The legislature passed the 1991-92 Budget Bill on June 22,
1991, but it was not signed by the Governor until July 16, 1991, as the
balancing of the budget required enactment of dozens of additional bills to
raise revenues and change programs and laws. The 1991-92 Budget Act projected
General Fund expenditures of $43.4 billion and Special Fund expenditures of
$10.6 billion. The Department of Finance estimated that there would be a balance
in the Special Fund For Economic Uncertainties on June 30, 1992 of $1.2 billion.
The $14.3 billion estimated budget gap between revenues over the two fiscal
years 1990-91 and 1991-92 and estimated program needs based on existing laws,
including restoration of a prudent reserve for economic uncertainties, were
addressed through a combination of temporary and permanent changes in laws and
some one-time budget adjustments. The major features of the budget solutions
were: program funding reductions totaling $5.1 billion; a total of $5.1 billion
of increased State tax revenues; savings of $2.1 billion by returning certain
health and welfare programs to counties; and additional miscellaneous savings or
revenue gains and one-time accounting charges totaling $2.0 billion.
The 1992-93 Governor's Budget proposed expenditures of $56.3 billion in the
General and Special Funds for the 1992-93 fiscal year, a 1.6% increase over
corresponding figures for the 1991-92 fiscal year. General Fund expenditures
were projected at $43.8 billion, an increase of 0.2% over the 1991-92 Revised
Governor's Budget. The Budget estimated $45.7 billion of revenues and transfers
for the General Fund (a 4.7% change over 1991-92) and $12.4 billion for Special
Funds (a 9.6% change over 1991-92). To balance the proposed budget, program
reductions totaling $4.365 billion and revenue and transfer increases of $872
million were proposed for the 1991-92 and 1992-93 fiscal years. The 1992-93
Governor's Budget eliminated the deficit from 1991-92 and estimated $105.4
million as a year-end balance in the Special Fund for Economic Uncertainties,
representing approximately 0.2% of General Fund expenditures.
In early 1992, the Director of Finance acknowledged that actual economic
conditions were worse than the projections in the Governor's Budget. Because the
State had accumulated a significant budget deficit over two consecutive years,
and the continuing recession depressed revenue estimates for the coming year,
the State faced a major challenge to enact a balanced budget. The State also
began the 1992-93 fiscal year with essentially no cash reserves. By June 1992,
it was estimated that approximately $7.9 billion of budget actions would be
required to end the 1992-93 fiscal year without a budget deficit. The severity
of the budget actions needed led to a long delay in adopting the budget.
With the failure to enact a budget by July 1, 1992, the State had no legal
authority to pay many of its vendors until the budget was passed. Starting on
July 1, 1992, the Controller was required to issue 'registered warrants' in lieu
of normal warrants backed by cash to pay many State obligations. Available cash
was used to pay constitutionally mandated and priority obligations, such as debt
service on bonds and revenue anticipation warrants. Between July 1 and September
4, 1992, the Controller issued an aggregate of approximately $3.8 billion of
registered warrants payable from the General Fund, all of which were called for
redemption by September 4, 1992 following enactment of the 1992-93 Budget Act
and issuance by the State of $3.3 billion of interim notes.
11
<PAGE>
- --------------------------------------------------------------------------------
The Legislature enacted the 1992-93 Budget Bill on August 29, 1992, and it
was signed by the Governor on September 2, 1992. The 1992-93 Budget Act provides
for expenditures of $57.4 billion and consists of General Fund expenditures of
$40.8 billion and Special Fund and Bond Fund expenditures of $16.6 billion. The
Department of Finance estimates there will be a balance in the Special Fund for
Economic Uncertainties of $28 million on June 30, 1993.
The $7.9 billion estimated budget gap was closed through a combination of
increased revenues and transfers and expenditure cuts such as:
1. General Fund savings in health and welfare programs totalling $1.6
billion.
2. General Fund reductions of $1.9 billion for K-12 schools and
community colleges. This was accomplished by requiring schools to repay
$1.1 billion in excess appropriations from 1991-92.
3. Redirecting property taxes from cities ($200 million) and counties
($525 million) to schools. These shifts are permanent and will reduce the
State General Funds obligation for schools. The State will also redirect
property taxes from special districts ($375 million) and redevelopment
agencies ($200 million) to schools. The shift from redevelopment agencies
is a one-time shift.
4. Program cuts for higher education totalling $415 million ($246
million for the University of California, $143 million for California State
University, and $26 million Student Aid Commission). These reductions are
partially offset by $141 million in increased student fees.
5. A total of $1.6 billion of transfers and accelerated collections of
State revenues by conforming state schedules for estimated payments for
personal income and bank and corporate taxes with federal schedules ($105
million), accelerating settlement of outstanding tax disputes ($300
million), reaching an agreement with the Federal government to repay
federal contractors over a ten-year period beginning in 1992-93, rather
than making a lump sum payment in 1992-93 ($580 million), accelerating
liquidation of unclaimed properties through the sale of all unclaimed
securities received prior to July 1, 1992, rather than maintaining them for
three years ($70 million), transfers from Special Funds ($423 million), and
other miscellaneous actions ($122 million).
6. Approximately $1.0 billion from various additional program
reductions.
In May 1993, the Department of Finance projected that the General Fund
would end the fiscal year on June 30, 1993 with an accumulated budget deficit of
about $2.8 billion, and a negative fund balance of about $2.2 billion (the
difference being certain reserves for encumbrances and school funding costs). As
a result, the State issued $5 billion of revenue anticipation notes and
warrants.
The Governor's 1993-94 Budget, introduced on January 8, 1993, proposed
General Fund expenditures of $37.3 billion, with projected revenues of $39.9
billion. It also proposed Special Fund expenditures of $12.4 billion and Special
Fund revenues of $12.1 billion. To balance the budget in the face of declining
revenues, the Governor proposed a series of revenue shifts from local
government, reliance on increased federal aid and reductions in state spending.
12
<PAGE>
- --------------------------------------------------------------------------------
The 'May Revision' of the Governor's Budget, released on May 20, 1993,
indicated that the revenue projections of the January Budget Proposal were
tracking well, with the full year 1992-93 about $80 million higher than the
January projection. Personal income tax revenue was higher than projected, sales
tax was close to target, and bank and corporation taxes were lagging behind
projections. The May Revision projected the State would have an accumulated
deficit of about $2.75 billion by June 30, 1993. The Governor proposed to
eliminate this deficit over an 18-month period. He also agreed to retain the
0.5% sales tax scheduled to expire June 30 for a six-month period, dedicated to
local public safety purposes, with a November election to determine a permanent
extension. Unlike previous years, the Governor's Budget and May Revision did not
calculate a 'gap' to be closed, but rather set forth revenue and expenditure
forecasts and proposals designed to produce a balanced budget.
The 1993-94 Budget Act was signed by the Governor on June 30, 1993, along
with implementing legislation. The Governor vetoed about $71 million in
spending. With enactment of the Budget Act, the State carried out its regular
cash flow borrowing program for the fiscal year, which included issuance of
approximately $2 billion of revenue anticipation notes which matured on June 28,
1994.
The 1993-94 Budget Act was predicated on General Fund revenues and
transfers estimated at $40.6 billion, about $700 million higher than the January
Governor's Budget, but still about $400 million below 1992-93 (and the second
consecutive year of actual decline). The principal reasons for declining
revenues were the continued weak economy and the expiration (or repeal) of three
fiscal steps taken in 1991 -- a half cent temporary sales tax, a deferral of
operating loss carryforwards, and repeal by initiative of a sales tax on candy
and snack foods.
The 1993-94 Budget Act also assumed Special Fund revenues of $11.9 billion,
an increase of 2.9% over 1992-93.
The 1993-94 Budget Act included General Fund expenditures of $38.5 billion
(a 6.3% reduction from projected 1992-93 expenditures of $41.1 billion), in
order to keep a balanced budget within the available revenues. The Budget also
included Special Fund expenditures of $12.1 billion, a 4.2% increase.
The 1993-94 Budget Act contained no General Fund tax/revenue increases
other than a two-year suspension of the renters' tax credit.
Administration reports during the course of the 1993-94 fiscal year
indicated that while economic recovery appeared to have started in the second
half of the fiscal year, recessionary conditions continued longer than had been
anticipated when the 1993-94 Budget Act was adopted. Overall, revenues to the
1993-1994 fiscal year were about $800 million lower than original projections,
and expenditures were about $780 million higher, primarily because of higher
health and welfare caseloads, lower property taxes which require greater State
support for K-14 education to make up the shortfall, and lower than anticipated
Federal government payments for immigration-related costs. The reports in May
and June 1994, indicated that revenues in the second half of the 1993-94 fiscal
year have been very close to the projections made in the Governor's Budget of
January 10, 1994, which is consistent with a slow turn around in the economy.
13
<PAGE>
- --------------------------------------------------------------------------------
The Department of Finance's July 1994 Bulletin, including the final June
receipts, reported that June revenues were $114 million (2.5%) above projection,
with final end-of-year results at $377 million (about 1%) above the May Revision
projections. Part of this result was due to end-of-year adjustments and
reconciliations. Personal income tax and sales tax continued to track
projections very well. The largest factor in the higher anticipated revenues was
from bank and corporation taxes, which were $140 million (18.4%) above
projection in June.
During the 1993-94 fiscal year, the State implemented the Deficit
Retirement Plan, which was part of the 1993-94 Budget Act, by issuing $1.2
billion of revenue anticipation warrants in February 1994 maturing December 21,
1994. This borrowing reduced the cash deficit at the end of the 1993-94 fiscal
year. Nevertheless, because of the $1.5 billion variance from the original
1993-94 Budget Act assumptions, the General Fund ended the fiscal year at June
30, 1994 carrying forward an accumulated deficit of approximately $2 billion.
Because of the revenue shortfall and the State's reduced internal
borrowable cash resources, in addition to the $1.2 billion of revenue
anticipation warrants issued as part of the Deficit Retirement Plan, the State
issued an additional $2.0 billion of revenue anticipation warrants, maturing
July 26, 1994, which were needed to fund the State's obligations and expenses
through the end of the 1993-94 fiscal year.
The 1994-95 fiscal year represents the fourth consecutive year the Governor
and Legislature were faced with a very difficult budget environment to produce a
balanced budget. Many program cost and budgetary adjustments were made in the
last three years. The Governor's Budget Proposal, as updated in May and June
1994, recognized that the accumulated deficit could not be repaid in one year,
and proposed a two-year solution. The budget proposal sets forth revenue and
expenditure forecasts and revenue and expenditure proposals which result in
operating surpluses for the budget for both 1994-95 and 1995-96, and lead to the
elimination of the accumulated budget deficit, estimated at about $2.0 billion
at June 30, 1994, by June 30, 1996.
The 1994-95 Budget Act, signed by the Governor on July 8, 1994, projects
revenues and transfers of $41.9 billion, $2.1 billion higher than revenues in
1993-94. This reflects the Administration's forecast of an improving economy.
The 1994-95 Budget Act projects Special Fund revenues of $12.1 billion, a
decrease of 2.4% from 1993-94 estimated revenues. The 1994-95 Budget Act
projects General Fund expenditures of $40.9 billion, an increase of $1.6 billion
over the 1993-94 fiscal year. The 1994-95 Budget Act also projects Special Fund
expenditures of $13.7 billion, a 5.4% increase over 1993-94 fiscal year
estimated expenditures.
The 1994-95 Budget Act contains no tax increases. Under legislation enacted
for the 1993-94 Budget Act, the renters' tax credit was suspended for two years
(1993 and 1994). A ballot proposition to permanently restore the renters' tax
credit after this year failed at the June 1994 election. The Legislature enacted
a further one-year suspension of the renters' tax credit, for 1995, saving about
$390 million in the 1995-96 fiscal year.
The 1994-95 Budget Act assumes that the State will use a cash flow
borrowing program in 1994-95 which combines one-year notes and two-year
warrants, which have now been issued. Issuance of the warrants allows the State
to defer repayment of approximately $1.0 billion of its accumulated budget
deficit into the 1995-96 fiscal year. The Budget Adjustment Law, described
14
<PAGE>
- --------------------------------------------------------------------------------
above, enacted along with the 1994-95 Budget Act is designed to ensure that the
warrants will be repaid in the 1995-96 fiscal year.
RECENT ECONOMIC TRENDS. The State's tax revenue experience clearly reflects
sharp declines in employment, income and retail sales on a scale not seen in
over 50 years. The May 1994 Revision to the 1994-95 Governor's Budget, released
May 20, 1994 (the 'May 1994 Revision'), assumes the State will start to recover
from recessionary conditions in 1994, with a modest upturn beginning in 1994 and
continuing in 1995, a year later than predicted in the May 1993 Department of
Finance economic projection. Pre-recession job levels are not expected to be
reached until 1997. The following are excerpts from the May 1994 Revision
discussion of economic conditions.
There is growing evidence that California is showing signs of an economic
turn around, and the May 1994 Revision forecast is revised up from the 1994-95
Governor's Budget forecast. Since the 1994-95 Governor's Budget forecast, 1993
non-farm employment has been revised upward by 31,000. Employment in the early
months of 1994 has shown encouraging signs of growth, several months sooner than
was contemplated in the 1994-95 Governor's Budget forecast. Between December and
April, payrolls are up by 50,000 jobs. The Northridge Earthquake may have
dampened economic activity briefly during late January and February, but the
rebuilding effects are now adding a small measure of stimulus.
Sectors which are contributing to California's recovery include
construction and related manufacturing, wholesale and retail trade,
transportation and several service industries such as amusements and recreation,
business services and management consulting. Electronics is showing modest
growth and the rate of decline in aerospace manufacturing is slowly diminishing.
These trends are expected to continue, and by next year, much of the
restructuring in the finance and utilities industries should be nearly
completed. Thus, the State's recovery should gain momentum over the next two
years.
As a result of these factors, average 1994 nonfarm employment is now
forecast to maintain 1993 levels compared to a projected 0.6% decline in the
1994-95 Governor's Budget. 1995 employment is expected to be up 1.6%, compared
to 0.7% in the 1994-95 Governor's Budget.
The housing forecast remains essentially unchanged. Although existing home
sales have strengthened and subdivision surveys indicated increased new home
sales, building permits are up only slightly from recession lows. Gains are
expected in the months ahead, but higher mortgage interest rates will dampen the
upturn. Essentially, the earthquake adds a few thousand units to the forecast,
but this effect is offset by higher interest rates.
Interest rates represent one of several downside risks to the forecast. The
rise in interest rates has occurred more rapidly than contemplated in the
1994-95 Governor's Budget forecast. In addition to affecting housing, higher
rates may also dampen consumer spending, given the high proportion of California
homeowners with adjustable-rate mortgages. The May 1994 Revision forecast
includes a further rise in the Federal Funds rate to nearly 5% by the beginning
of 1995. Should rates rise more steeply, housing and consumer spending would be
adversely affected.
The employment upturn is still tenuous. The Employment Development
Department revised down February's employment gain and March was revised to a
small decline. Unemployment rates in California have historically been volatile.
15
<PAGE>
- --------------------------------------------------------------------------------
The July 1994 Bulletin of the Department of Finance reports that the
economy continued to show signs of recovery, although several labor market
indicators were weak in June. Based on a survery of employers, nonfarm
employment fell 12,000 in June, although it was still up over 17,000 since
December 1993. The Bulletin noted, however, that data from payroll tax records
and income tax withholding receipts for late 1993 and the first part of 1994
were stronger than the employer survey results would indicate, suggesting steady
job gains thus far in 1994. The unemployment rate, which is volatile, remained
unchanged in June at 8.3%, still much higher than the national average. The
trend in the first six months of 1994, however, appeared to be downward, and was
below the 10.1% peak in March.
Housing permits were reported rising slowly, to a 93,000 annual rate in
May, continuing a modest recovery evident since late 1993. Retail sales for
January-April 1994 were up 4.3% over the same period a year earlier. Sales had
grown less than 1% in both 1992 and 1993.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies. These
restrictions cannot be changed without approval by the holders of a majority of
the outstanding shares of the Fund, defined in the Investment Company Act of
1940, as amended (the 'Act'), as the lesser of (i) 67% of the Fund's shares
present at a meeting if the holders of more than 50% of the outstanding shares
are present in person or by proxy, or (ii) more than 50% of the Fund's
outstanding shares. The Fund may not:
1. Purchase securities other than Municipal Obligations and Taxable
Investments as those terms are referred to above and in the Prospectus.
2. Borrow money, except from banks for temporary or emergency (not
leveraging) purposes, in an amount up to 10% of the Fund's total assets
(including the amount borrowed) based upon the lesser of cost or market,
less liabilities (not including the amount borrowed) at the time the
borrowing is made. While borrowings exceed 5% of the value of the Fund's
total assets, the Fund will not make any additional investments.
3. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except in an amount up to 10% of the value of its total assets, but only to
secure borrowings for temporary or emergency purposes.
4. Make loans to others, except through the purchase of qualified debt
obligations and entry into repurchase agreements referred to above and in
the Prospectus.
5. Purchase or sell real estate investment trust securities,
commodities or commodity contracts, or oil and gas interests, but this
shall not prevent the Fund from investing in Municipal Obligations secured
by real estate or interests therein.
6. Sell securities short or purchase securities on margin.
7. Purchase securities subject to restrictions on disposition under
the Securities Act of 1933. The Fund may not enter into repurchase
agreements maturing in more than seven days or purchase securities that are
not readily marketable (which securities include floating and variable rate
demand notes as to which the Fund cannot exercise the demand feature
described in the Fund's Prospectus on less than seven days notice and as to
which there is
16
<PAGE>
- --------------------------------------------------------------------------------
no secondary market), if, in the aggregate, more than 10% of its net assets
would be so invested. The Fund may not invest in time deposits maturing in
more than seven days and time deposits maturing in from two business days
through seven calendar days may not exceed 10% of the Fund's net assets.
8. Underwrite securities of other issuers, except that the Fund may
bid separately or as part of a group for the purchase of Municipal
Obligations directly from an issuer for its own portfolio to take advantage
of the lower purchase price available.
9. Purchase the securities of any other registered investment company,
except in connection with a merger, consolidation, reorganization or
acquisition of assets.
10. Purchase securities of any issuer for the purpose of exercising
control or management.
11. Invest more than 25% of its assets in the securities of issuers in
any single industry; however, there is no limitation on the purchase of
Municipal Obligations and, for temporary defensive purposes, securities
issued by domestic banks and obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
For purposes of restriction 11, industrial development bonds, where payment
of principal and interest is the ultimate responsibility of companies within the
same industry, are grouped together as an 'industry.'
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage resulting from a change in value of
portfolio securities or amount of net assets will not be considered a violation
of any of the foregoing restrictions.
MANAGEMENT OF THE FUND
Information regarding the Trustees and officers of the Fund, including
information as to their principal business occupations during the last five
years, is listed below. Each Trustee who is an 'interested person' of the Fund,
as defined in the Act, is indicated by an asterisk.
*George V. Grune, Jr., Chairman of the Trustees and President. Executive
Managing Director of the Asset Management Division of Kidder, Peabody & Co.
Incorporated ('Kidder, Peabody') and President and a director of KPAM.
David J. Beaubien, Trustee. Chairman of Yankee Environmental Systems, Inc.,
manufacturer of meteorological measuring instruments. Director of IEC, Inc.,
manufacturer of electronic assemblies, Belfort Instruments, Inc., manufacturer
of environmental instruments, and Oriel Corp., manufacturer of optical
instruments. Prior to January 1991, Senior Vice President of EG&G, Inc., a
company which makes and provides a variety of scientific and technically
oriented products and services.
William W. Hewitt, Jr., Trustee. Trustee of The Guardian Asset Allocation
Fund, The Guardian Baillie Gifford International Fund, The Guardian Bond Fund,
Inc., The Guardian Cash Fund, Inc., The Guardian Cash Management Trust, The
Guardian Park Ave. Fund, The Guardian Stock Fund, Inc. and The Guardian U.S.
Government Trust.
17
<PAGE>
- --------------------------------------------------------------------------------
*Russell H. Johnson, Trustee and Vice Chairman. Managing Director of
Kidder, Peabody and a Managing Director and director of KPAM. Prior to April
1993 and December 1991, Senior Vice President of KPAM and Kidder, Peabody,
respectively.
Thomas R. Jordan, Trustee. Principal of The Dilenschneider Group, Inc., a
corporate communications and public policy counseling firm. Prior to January
1992, Senior Vice President of Hill & Knowlton, a public relations and public
affairs firm. Prior to April 1991, President of The Jordan Group, a management
consulting and strategies development firm.
Carl W. Schafer, Trustee. President of the Atlantic Foundation, a
charitable foundation supporting mainly oceanographic exploration and research.
Director of Ardic Exploration and Development Ltd. and Hidden Lake Gold Mines
Ltd., gold mining companies, Electronic Clearing House, Inc., a financial
transactions processing company, International Agritech Resources, Inc., an
agribusiness investment and consulting firm, Wainoco Oil Corporation and
BioTechniques Laboratories Inc., an agricultural biotechnology company. Prior to
January 1993, Chairman of the Investment Advisory Committee of the Howard Hughes
Medical Institute and director of Ecova Corporation, a toxic waste treatment
firm. Prior to January 1990, principal of Rockefeller and Company, Inc., manager
of investments.
Robert B. Jones, Senior Vice President. Senior Vice President of Kidder,
Peabody and Senior Vice President and director of KPAM. Prior to December 1990,
Vice President of Kidder, Peabody.
David A. Hartman, Executive Vice President and Chief Investment Officer.
Senior Vice President of Kidder, Peabody and KPAM.
John J. Boretti, Vice President and Chief Financial Officer. Vice President
of Kidder, Peabody and Vice President and Chief Financial Officer of KPAM. Prior
to October 1992, self employed as a consultant. Prior to August 1992, director,
Executive Vice President, Chief Financial Officer and Treasurer of USF&G Review
Management Corp, Vice President and director of USF&G Investment Management
Corp., Treasurer of USF&G Mutual Funds, Executive Vice President, Treasurer and
Chief Financial Officer of USF&G Investment Services, Inc. and director of Axe
Houghton Management. Prior to December 1990, Vice President of USF&G Financial
Services.
Lawrence H. Kaplan, Senior Vice President, General Counsel and Secretary.
Vice President and Associate General Counsel of Kidder, Peabody, a director,
Senior Vice President, Assistant Secretary and General Counsel of KPAM and an
officer and/or director of various Kidder, Peabody subsidiaries. Prior to
November 1990, an attorney in private practice associated with the law firm of
Brown & Wood.
Ronald A. Huether, Treasurer and Assistant Secretary. Vice President and
Treasurer of KPAM and Vice President of Kidder, Peabody.
Lisa S. Kellman, Assistant Secretary. Assistant Vice President of Kidder,
Peabody and KPAM. Prior to January 1993, Administrative Officer of Kidder,
Peabody.
Leonard I. Chubinsky, Assistant Vice President and Assistant Secretary.
Assistant Vice President and Assistant General Counsel of Kidder, Peabody and
Assistant Vice President of KPAM. Prior to July 1992, attorney with
Curtiss-Wright Corporation, a diversified manufacturing company.
18
<PAGE>
- --------------------------------------------------------------------------------
Helen V. Del Bove, Assistant Treasurer. Vice President of KPAM and
Assistant Vice President of Kidder, Peabody. Prior to December 1987,
Administrative Officer of KPAM.
Certain of the Trustees and officers of the Fund are directors and/or
trustees and officers of other mutual funds managed by KPAM. The address of each
of the non-interested Trustees is: Mr. Beaubien, Montague Industrial Park, 101
Industrial Road, Box 7461, Turners Falls, Massachusetts 01376; Mr. Hewitt, P.O.
Box 2359, Princeton, New Jersey 08543-2359; Mr. Jordan, 200 Park Avenue, New
York, New York 10166; and Mr. Schafer, P.O. Box 1164, Princeton, New Jersey
08542. The address of the other Trustees and officers is 60 Broad Street, New
York, New York 10004-2350.
By virtue of the management responsibilities assumed by KPAM under the
Investment Advisory and Administration Agreement, the Fund requires no executive
employees other than its officers, each of whom is employed by either Kidder,
Peabody or KPAM and none of whom devotes full time to the affairs of the Fund.
Trustees and officers of the Fund, as a group, owned less than 1% of the
outstanding shares of beneficial interest of the Fund as of November 1, 1994. No
officer, director or employee of KPAM or any affiliate receives any compensation
from the Fund for serving as an officer or Trustee of the Fund. The Fund pays
each Trustee who is not an officer, director or employee of KPAM or any of its
affiliates an annual retainer of $1,000 and $375 for each Trustees' meeting
attended, and reimburses the Trustee for out-of-pocket expenses associated with
attendance at Trustees' meetings. The Chairman of the Trustees' audit committee
receives an annual fee of $250. For the fiscal year ended July 31, 1994, the
Fund paid $11,875 in Trustees' fees and expenses.
INVESTMENT ADVISORY AND OTHER SERVICES
KPAM, 60 Broad Street, New York, New York 10004-2350, the Fund's manager and
investment adviser, is a wholly-owned subsidiary of Kidder, Peabody. Kidder,
Peabody, the Fund's distributor, is a major full-line investment services firm
serving the United States and foreign securities markets. General Electric
Capital Services, Inc., a wholly-owned subsidiary of General Electric Company,
owns all the outstanding stock of Kidder, Peabody Group Inc., the parent company
of Kidder, Peabody. KPAM also serves as the investment adviser to other open-end
investment companies distributed by Kidder, Peabody.
Subject to the supervision and direction of the Fund's Trustees, KPAM
manages the Fund's portfolio in accordance with the stated policies of the Fund.
KPAM provides the Fund with investment officers who are authorized by the
Trustees to execute purchases and sales of securities and employs a professional
staff of portfolio managers who draw upon a variety of sources, including
Kidder, Peabody, for research information for the Fund. KPAM makes investment
decisions for the Fund and places the purchase and sale orders for portfolio
transactions. In addition, KPAM pays the salaries of all officers and employees
who are employed by both it and the Fund, maintains office facilities, furnishes
statistical and research data, clerical help and accounting, data processing,
bookkeeping, internal auditing and legal services and certain other services
required by the Fund, prepares reports to shareholders, tax returns to and
filings with the SEC and state Blue Sky authorities, is responsible for the
19
<PAGE>
- --------------------------------------------------------------------------------
calculation of the net asset value of shares and generally assists in all
aspects of the Fund's operations. KPAM bears all expenses in connection with the
performance of its services.
Expenses incurred in the operation of the Fund, including, but not limited
to, taxes, interest, brokerage fees and commissions, fees of Trustees who are
not officers, directors, stockholders or employees of KPAM or Kidder, Peabody,
SEC fees and related expenses, state Blue Sky qualification fees, charges of the
custodian and transfer, dividend disbursing and recordkeeping agent, charges and
expenses of any outside service used for pricing of the Fund's portfolio
securities and calculating net asset value, outside auditing and legal expenses,
and costs of maintenance of trust existence, investor services, printing of
prospectuses and statements of additional information for regulatory purposes or
for distribution to shareholders, shareholders' reports and trust meetings, are
borne by the Fund.
The Investment Advisory and Administration Agreement remains in effect for
successive annual periods ending on May 28th of each year provided continuance
is approved at least annually by (i) the Trustees of the Fund or (ii) vote by
the holders of a majority, as defined in the Act, of the outstanding voting
securities of the Fund, provided that in either event the continuance is also
approved by a majority of the Trustees who are not interested persons, as
defined in the Act, of the Fund or KPAM, by vote cast in person at a meeting
called for the purpose of voting on such approval. The Trustees, including a
majority of the Trustees who are not 'interested persons,' voted to continue the
Investment Advisory and Administration Agreement at a meeting held on March 2,
1994. The Investment Advisory and Administration Agreement was approved by
shareholders in accordance with the terms of the Act on November 16, 1988. The
Investment Advisory and Administration Agreement is terminable without penalty,
on not more than 60 days' nor less than 30 days' notice, by the Trustees of the
Fund or by vote of the holders of a majority of the outstanding voting
securities of the Fund or by KPAM. The Investment Advisory and Administration
Agreement will terminate automatically in the event of its assignment.
As compensation for KPAM's services rendered to the Fund, the Fund pays a
fee, computed daily and paid monthly, at an annual rate of .50% of the Fund's
average daily net assets. The fees paid to KPAM for the fiscal years ended July
31, 1992, 1993 and 1994 were $1,018,787, $1,009,226 and $1,026,841 respectively.
KPAM has agreed that if, in any fiscal year, the aggregate expenses of the
Fund (including fees pursuant to the Investment Advisory and Administration
Agreement but excluding interest, taxes, brokerage and distribution fees and
extraordinary expenses) exceed the expense limitation of any state having
jurisdiction over the Fund, KPAM will reimburse the Fund for such excess
expense. This expense reimbursement obligation is not limited to the amount of
KPAM's fee. Such expense reimbursement, if any, will be estimated, reconciled
and credited on a monthly basis. The Fund believes that currently the most
stringent state expense limitation applicable to the Fund is 2 1/2% of the first
$30 million of the average daily net assets of the Fund, 2% of the next $70
million and 1 1/2% of the remaining average daily net assets of the Fund. During
the fiscal year ended July 31, 1994, the Fund's expenses did not exceed such
limitations.
KPAM shall not be liable for any error of judgment or mistake of law or for
any loss suffered by the Fund in connection with the matters to which the
Investment Advisory and
20
<PAGE>
- --------------------------------------------------------------------------------
Administration Agreement relates, except for a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard by it of its obligations and duties under the
Investment Advisory and Administration Agreement.
Investors Fiduciary Trust Company ('IFTC'), 127 West 10th Street, Kansas
City, Missouri 64105, serves as the Fund's custodian, and transfer, dividend
disbursing and recordkeeping agent. As custodian, IFTC maintains custody of the
Fund's portfolio securities. As transfer agent, it maintains the Fund's official
record of shareholders, as dividend disbursing agent, it is responsible for
crediting dividends to shareholders' accounts and, as recordkeeping agent, it
maintains certain accounting and financial records of the Fund.
Kidder, Peabody, 10 Hanover Square, New York, New York 10005-3592, is the
distributor of the Fund's shares and is acting on a best efforts basis.
The Trustees believe that the Fund's expenditures under the Fund's Plan of
Distribution pursuant to Rule 12b-1 benefit the Fund and its shareholders by
providing better shareholder services. For the fiscal year ended July 31, 1994,
Kidder, Peabody received $248,610 from the Fund, of which $145,821 was spent on
payments to Kidder, Peabody Investment Executives and $102,789 was spent on
overhead-related expenses.
Deloitte & Touche LLP, 2 World Financial Center, New York, New York 10281,
acts as independent auditors for the Fund. In such capacity, Deloitte & Touche
LLP audits the Fund's annual financial statements.
Stroock & Stroock & Lavan, 7 Hanover Square, New York, New York 10004-2696,
is counsel for the Fund.
PRINCIPAL SHAREHOLDERS
To the knowledge of the Fund, Nathaniel N. Ratner, Trustee, UDT 12/17/82, The
Nathaniel N. and Sara Ratner Living Trust, 666 Upas Street, San Diego,
California 92103-5043, owned of record 8.53% of the Fund's outstanding shares of
beneficial interest on November 1, 1994.
The Fund is not aware as to whether or to what extent shares owned of
record also are owned beneficially.
PORTFOLIO TRANSACTIONS
Portfolio securities are purchased from and sold to parties acting as either
principal or agent. Newly-issued securities ordinarily are purchased directly
from the issuer or from an underwriter; other purchases and sales are allocated
to various dealers. Usually no brokerage commissions, as such, are paid by the
Fund for such purchases and sales, although the price paid usually includes an
undisclosed compensation to the dealer acting as agent. The prices paid to
underwriters of newly-issued securities usually include a concession paid by the
issuer to the underwriter, and purchases of after-market securities from dealers
normally are executed at a price between the bid and asked price. No brokerage
commissions have been paid by the Fund to date.
Transactions are allocated to various dealers by KPAM in its best judgment.
The primary consideration is the prompt and effective execution of orders at the
most favorable price. Subject
21
<PAGE>
- --------------------------------------------------------------------------------
to that primary consideration, dealers may be selected for research, statistical
or other services to enable KPAM to supplement its own research and analysis
with the views and information of other securities firms.
Information so received supplements, but does not replace, that to be
provided by KPAM, and KPAM's fee is not reduced as a consequence of the receipt
of any such supplemental information. Such information may be useful to KPAM in
serving both the Fund and other clients and, conversely, supplemental
information obtained by the placement of business of its clients may be useful
to KPAM in carrying out its obligations to the Fund.
Investment decisions for the Fund are made independently from those of any
other fund managed by KPAM. If, however, funds managed by KPAM are
simultaneously engaged in the purchase or sale of the same security, the
transactions are averaged as to price and allocated equitably to each fund. In
some cases, this system might adversely affect the price paid or received by the
Fund or the size of the position obtainable for, or disposable by, the Fund.
No portfolio transactions are executed through Kidder, Peabody. Kidder,
Peabody engages in and acts as a dealer in or an underwriter of Municipal
Obligations and Taxable Investments. Kidder, Peabody's activities may have some
effect on the market for the Fund's portfolio of such securities, and Kidder,
Peabody may be competing in the market place with the Fund in the purchase and
sale of such securities.
SHARES OF THE FUND
The Declaration of Trust of the Fund permits the Trustees to issue an unlimited
number of full and fractional shares of a single class and to divide or combine
the shares into a greater or lesser number of shares without thereby changing
the proportionate beneficial interests in the Fund. Each share represents an
equal proportionate interest in the Fund with each other share. Upon liquidation
of the Fund, shareholders are entitled to share pro rata in the net assets of
the Fund available for distribution to shareholders. Shares have no preemptive
or conversion rights. Shares are fully paid and non-assessable by the Fund.
The shareholders of the Fund are entitled to a full vote for each full
share held (and proportionate, fractional votes for fractional shares held). The
Trustees themselves have the power to alter the number and the terms of office
of the Trustees, and they may at any time lengthen their own terms and make
their terms of unlimited duration (subject to certain removal procedures) and
appoint their own successors, provided that always at least a majority of the
Trustees have been elected by the shareholders of the Fund. The voting rights of
shareholders are not cumulative, so that holders of more than 50% of the shares
voting can, if they choose, elect all Trustees being selected, while the holders
of the remaining shares would be unable to elect any Trustees. The Fund is not
required to hold Annual Meetings of Shareholders. The Trustees may call Special
Meetings of Shareholders for action by shareholder vote as may be required by
the Act or the Declaration of Trust.
The Fund is a trust fund of the type commonly known as a 'Massachusetts
business trust.' Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the Fund, which is not the case with a corporation. The
Declaration of Trust provides that shareholders shall not be subject to any
22
<PAGE>
- --------------------------------------------------------------------------------
personal liability for the acts or obligations of the Fund and that every
written agreement, obligation, instrument or undertaking made by the Fund shall
contain a provision to the effect that the shareholders are not personally
liable thereunder.
Special counsel for the Fund is of the opinion that no personal liability
will attach to the shareholders under any undertaking containing such provision
when adequate notice of such provision is given, except possibly in a few
jurisdictions. With respect to all types of claims in the latter jurisdictions
and with respect to tort claims, contract claims where the provision referred to
is omitted from the undertaking, claims for taxes and certain statutory
liabilities in other jurisdictions, a shareholder may be held personally liable
to the extent that claims are not satisfied by the Fund. However, upon payment
of any such liability the shareholder will be entitled to reimbursement from the
general assets of the Fund. The Trustees intend to conduct the operations of the
Fund, with the advice of counsel, in such a way so as to avoid, as far as
possible, ultimate liability of the shareholders for the liabilities of the
Fund.
The Declaration of Trust further provides that no Trustee, officer,
employee or agent of the Fund is liable to the Fund or to a shareholder, nor is
any Trustee, officer, employee or agent liable to any third persons in
connection with the affairs of the Fund, except as such liability may arise from
his or its own bad faith, willful misfeasance, gross negligence, or reckless
disregard of his or its duties. It also provides that all third persons shall
look solely to the Fund property for satisfaction of claims arising in
connection with the affairs of the Fund. With the exceptions stated, the
Declaration of Trust provides that a Trustee, officer, employee or agent is
entitled to be indemnified against all liability in connection with the affairs
of the Fund.
REDEMPTION AND EXCHANGE OF SHARES
The right of redemption may be suspended or the date of payment postponed (a)
for any period during which the New York Stock Exchange ('NYSE') is closed other
than for customary weekend and holiday closings, (b) when trading in the markets
the Fund normally utilizes is restricted, or when an emergency, as defined by
the rules and regulations of the SEC, exists, making disposal of the Fund's
investments or determination of its net asset value not reasonably practicable,
or (c) for any other periods as the SEC by order may permit for protection of
the Fund's shareholders.
Shares of the Fund may be exchanged for shares of the following funds in
the Kidder Family of Funds, to the extent such shares are offered for sale in
the shareholder's state of residence:
Kidder, Peabody Adjustable Rate Government Fund, a series of Kidder,
Peabody Investment Trust ('Trust I'), seeks high current income while
limiting the degree of fluctuation of its net asset value resulting
from movements in interest rates by investing in adjustable rate
securities and securities that are issued or guaranteed by the U.S.
Government, its agencies and instrumentalities.
Kidder, Peabody Asset Allocation Fund, a series of Trust I, seeks
total return by following a systematic investment strategy that
actively allocates the fund's assets among common stocks, U.S.
Treasury notes and U.S. Treasury bills.
23
<PAGE>
- --------------------------------------------------------------------------------
Kidder, Peabody Cash Reserve Fund, Inc., a general purpose money
market fund, seeks maximum current income to the extent consistent
with the preservation of capital and the maintenance of liquidity.
Kidder, Peabody Emerging Markets Equity Fund, a series of Kidder,
Peabody Investment Trust II ('Trust II'), seeks long term capital
appreciation through an actively managed portfolio consisting
primarily of equity securities of issuers in emerging markets in Asia,
Latin America, the Middle East, Southern Europe, Eastern Europe and
Africa.
Kidder, Peabody Equity Income Fund, Inc. seeks reasonably high current
dividend and interest income and long-term capital appreciation, while
limiting risk to principal, through investments primarily in equity
securities.
Kidder, Peabody Global Equity Fund, a series of Trust I, seeks long
term growth of capital through investments primarily in foreign equity
securities.
Kidder, Peabody Global Fixed Income Fund, a series of Trust I, seeks
total return through an actively managed portfolio of fixed income
securities issued primarily by governmental authorities, foreign
government related issuers and supranational organizations.
Kidder, Peabody Government Income Fund, Inc. seeks high current income
through investments in securities that are issued or guaranteed by the
U.S. Government, its agencies and instrumentalities.
Kidder, Peabody Government Money Fund, Inc., a money market fund,
seeks maximum current income to the extent consistent with the
preservation of capital and the maintenance of liquidity through
investments in short-term money market instruments issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
Kidder, Peabody Intermediate Fixed Income Fund, a series of Trust I,
seeks maximum total return through an actively managed portfolio
consisting primarily of intermediate term, fixed income securities
rated in the three highest grades by recognized rating agencies.
Kidder, Peabody Municipal Bond Fund, a series of Trust II, seeks as
high a level of current interest income that is exempt from Federal
income taxation as is consistent with prudent investment management
and the preservation of capital through investments primarily in high
quality municipal obligations.
Kidder, Peabody Municipal Money Market Series -- Connecticut Series, a
money market fund designed for Connecticut investors, seeks maximum
current income exempt from Federal and Connecticut income taxation to
the extent consistent with the preservation of capital and the
maintenance of liquidity.
Kidder, Peabody Municipal Money Market Series -- New Jersey Series, a
money market fund designed for New Jersey investors, seeks maximum
current income exempt from Federal and New Jersey income taxation to
the extent consistent with the preservation of capital and the
maintenance of liquidity.
24
<PAGE>
- --------------------------------------------------------------------------------
Kidder, Peabody Municipal Money Market Series -- New York Series, a
money market fund designed for New York investors, seeks maximum
current income exempt from Federal, New York State and New York City
income taxation to the extent consistent with the preservation of
capital and the maintenance of liquidity.
Kidder, Peabody Premium Account Fund, a general purpose money market
fund for persons subscribing to the Kidder, Peabody Premium Account
asset management system, seeks maximum current income to the extent
consistent with the preservation of capital and the maintenance of
liquidity.
Kidder, Peabody Small Cap Equity Fund, a series of Kidder, Peabody
Investment Trust III, seeks long-term capital appreciation through
investments primarily in equity securities of small capitalization
companies.
Kidder, Peabody Tax Exempt Money Fund, Inc., a money market fund,
seeks maximum current income exempt from Federal income taxation to
the extent consistent with the preservation of capital and the
maintenance of liquidity.
The right of exchange may be suspended or postponed if (a) there is a
suspension of the redemption of Fund shares under Section 22(e) of the Act, or
(b) the Fund temporarily delays or ceases the sale of its shares because it is
unable to invest amounts effectively in accordance with its applicable
investment objective, policies and restrictions.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund will not be computed on the following NYSE
holidays (observed): New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas. If one of these
holidays falls on a Saturday or Sunday, the NYSE will be closed on the preceding
Friday or the following Monday, respectively. The days on which net asset value
is determined are the Fund's business days. Net asset value is computed by
dividing the value of the Fund's total assets less liabilities by the total
number of shares outstanding. The Fund's expenses and fees, including KPAM's
fee, are accrued daily and taken into account for the purpose of determining net
asset value. It is the Fund's policy to attempt to maintain a net asset value of
$1.00 per share for purposes of sales and redemptions, although there can be no
assurance that the Fund will always be able to do so.
The Fund maintains a dollar-weighted average portfolio maturity of 90 days
or less, purchases only instruments having remaining maturities of 397 days or
less and invests only in securities which present minimal credit risks and are
of high quality as determined by any major rating service or, in the case of any
instrument that is not rated, of comparable quality as determined by the
Trustees.
The valuation of the Fund's portfolio securities is based on their
amortized cost, which does not take into account unrealized gains or losses.
This involves valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument.
While this method provides certainty in valuation, it may result in periods
during which value, as
25
<PAGE>
- --------------------------------------------------------------------------------
determined by amortized cost, is higher or lower than the price the Fund would
receive if it sold the instrument.
In connection with the utilization of the amortized cost method of
valuation, the Trustees have established procedures reasonably designed, taking
into account current market conditions and the Fund's investment objective, to
stabilize net asset value per share as computed for the purpose of sales and
redemptions at $1.00. These procedures include periodic review, as the Trustees
deem appropriate and at such intervals as are reasonable in light of current
market conditions, of the relationship between the amortized cost value per
share and the net asset value per share based on available indications of market
value. In such review, market quotations and market equivalents are obtained
from an independent pricing service (the 'Service') approved by the Trustees.
The Service values the Fund's investments based on methods which include
consideration of: yields or prices of municipal bonds of comparable quality,
coupon, maturity and type; indications of values from dealers; and general
market conditions. The Service also may employ electronic data processing
techniques and/or a matrix system to determine valuations.
In the event of a difference of over 1/2 of 1% between the Fund's net asset
value based on available market quotations or market equivalents and $1.00 per
share based on amortized cost, the Trustees will promptly consider what action,
if any, should be taken. The Trustees also will take such action as they deem
appropriate to eliminate or to reduce to the extent reasonably practicable any
material dilution or other unfair results which might arise from differences
between the two. Such action may include redeeming shares in kind, selling
portfolio instruments prior to maturity to realize capital gains or losses, or
to shorten the average portfolio maturity, withholding dividends, making
distributions from capital or capital gains, utilizing a net asset value per
share as determined by using available market quotations, or reducing the number
of its outstanding shares. Any reduction of outstanding shares will be effected
by having each shareholder proportionately contribute to the Fund's capital the
necessary shares that represent the excess upon such determination. Each
shareholder will be deemed to have agreed to such contribution in these
circumstances by his investment in the Fund.
DIVIDENDS, DISTRIBUTIONS AND TAXES
If, at the close of each quarter of its taxable year, at least 50% of the value
of the Fund's total assets consists of municipal tax exempt obligations, then
the Fund may designate and pay Federal exempt-interest dividends from interest
earned on all such tax exempt obligations. Such exempt-interest dividends may be
excluded by shareholders of the Fund from their gross income for Federal income
tax purposes. Dividends derived from Taxable Investments, together with
distributions from any net realized short-term securities gains, generally are
taxable as ordinary income for Federal income tax purposes whether or not
reinvested. Distributions from net realized long-term securities gains generally
are taxable as long-term capital gains to a shareholder who is a citizen or
resident of the United States, whether or not reinvested and regardless of the
length of time the shareholder has held his shares.
If, at the close of each quarter of its taxable year, at least 50% of the
value of the Fund's total assets consists of obligations which, when held by an
individual, the interest therefrom is exempt
26
<PAGE>
- --------------------------------------------------------------------------------
from California taxation, and if the Fund qualifies as a management company
under the California Revenue and Taxation Code, then the Fund will be qualified
to pay dividends to its shareholders that are exempt from California personal
income tax (but not from California franchise tax). However, the total amount of
such California exempt-interest dividends paid by the Fund to a non-corporate
shareholder with respect to any taxable year cannot exceed such shareholder's
pro rata share of interest received by the Fund during such year that is exempt
from California personal income tax less any expenses and expenditures deemed to
relate to such interest.
For shareholders subject to the California personal income tax,
exempt-interest dividends derived from California Municipal Obligations will not
be subject to the California personal income tax. Distributions from net
realized short-term capital gains to California resident shareholders will be
subject to the California personal income tax as ordinary income. Distributions
from net realized long-term capital gains may constitute long-term capital gains
for individual California resident shareholders. Unlike under Federal tax law,
the Fund's shareholders will not be subject to California personal income tax,
or receive a credit for California taxes paid by the Fund, on undistributed
capital gains. In addition, California tax law does not consider any portion of
the exempt-interest dividends paid an item of tax preference for the purpose of
computing the California alternative minimum tax.
The Internal Revenue Code of 1986, as amended, provides that if a
shareholder has not held his Fund shares for more than six months (or such
shorter period as the Internal Revenue Service may prescribe by regulation) and
has received an exempt-interest dividend with respect to such shares, any loss
incurred on the sale of such shares will be disallowed to the extent of the
exempt-interest dividend received.
Ordinarily, gains and losses realized from portfolio transactions will be
treated as capital gain or loss. However, all or a portion of any gain realized
from the sale or other disposition of certain market discount bonds will be
treated as ordinary income under Section 1276 of the Code.
DETERMINATION OF CURRENT AND EFFECTIVE YIELDS
The Fund provides current and effective yield quotations based on its daily
dividends. See 'Dividends, Distributions and Taxes' in the Fund's Prospectus.
Such quotations are made in reports, sales literature and advertisements
published by the Fund.
Current yield is computed by determining the net change exclusive of
capital changes in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of a seven day calendar period, dividing
the net change in account value by the value of the account at the beginning of
the period and multiplying the return over the seven day period by 365/7. For
purposes of the calculation, net change in account value reflects the value of
additional shares purchased with dividends from the original share and dividends
declared on both the original share and any such additional shares, but does not
reflect realized gains or losses or unrealized appreciation or depreciation.
Effective yield is computed by annualizing the seven-day return with all
dividends reinvested in additional shares of the Fund.
27
<PAGE>
- --------------------------------------------------------------------------------
Current and effective yields fluctuate and are not necessarily
representative of future results. The shareholder should remember that yield is
a function of the type and quality of the instruments in the portfolio,
portfolio maturity and operating expenses. See 'Investment Objective and
Policies' in the Fund's Prospectus and 'Investment Advisory and Other Services'
above. Current and effective yield information is useful in reviewing the Fund's
performance, but because current and effective yields will fluctuate such
information may not provide a basis for comparison with bank deposits, other
investments which pay a fixed yield for a stated period of time or other
investment companies which may use a different method of calculating yield. A
shareholder's principal in the Fund is not guaranteed. See 'Determination of Net
Asset Value' for a discussion of the manner in which the Fund's price per share
is determined.
Historical and comparative yield information may be presented by the Fund.
RATINGS OF SECURITIES
RATINGS IN GENERAL
A rating of a rating service represents the service's opinion as to the credit
quality of the security being rated. However, ratings are general and are not
absolute standards of quality or guarantees as to the creditworthiness of an
issuer. Consequently, KPAM believes that the quality of Municipal Obligations
should be continuously reviewed and that individual analysts give different
weightings to the various factors involved in credit analysis. A rating is not a
recommendation to purchase, sell or hold a security, because it does not take
into account market value or suitability for a particular investor. When a
security has received a rating from more than one service, each rating should be
evaluated independently. Ratings are based on current information furnished by
the issuer or obtained by the rating services from other sources which they
consider reliable. Ratings may be changed, suspended or withdrawn as a result of
changes in, or unavailability of, such information, or for other reasons. KPAM,
through independent analysis, attempts to discern variations in credit ratings
of the published services, and to anticipate changes in credit ratings. The
following is a description of the characteristics of ratings used by Moody's and
S&P.
RATING BY MOODY'S
MUNICIPAL BONDS
AAA. Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as 'gilt edge.'
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. Although the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such bonds.
AA. Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa bonds or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the long
term risks appear somewhat larger than in Aaa bonds.
28
<PAGE>
- --------------------------------------------------------------------------------
CONDITIONAL RATINGS. The designation 'Con.' followed by a rating indicates
bonds for which the security depends upon the completion of some act or the
fulfillment of some condition. These are bonds secured by (a) earnings of
projects under construction, (b) earnings of projects unseasoned in operating
experience, (c) rentals which begin when facilities are completed, or (d)
payments to which some other limiting condition attaches. A parenthetical rating
denotes probable credit stature upon completion of construction or elimination
of the basis of the condition.
Note: Those bonds in the Aa group which Moody's believes possess the
strongest investment attributes are designated by the symbol Aa1.
MUNICIPAL NOTES
MIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
VARIABLE AND FLOATING RATE DEMAND OBLIGATIONS
Moody's assigns a dual rating, one representing an evaluation of the degree of
risk associated with scheduled principal and interest payments and the other
representing an evaluation of the degree of risk associated with the demand
feature (VMIG) to variable and floating rate demand obligations.
Depending upon the maturity of a variable or floating rate obligation, it
is assigned either a municipal bond and VMIG rating or a municipal note and VMIG
rating. The VMIG ratings include the following:
VMIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
VMIG 2. This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
COMMERCIAL PAPER
PRIME-1. This designation is the highest commercial paper rating assigned
by Moody's. Denotes superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
29
<PAGE>
- --------------------------------------------------------------------------------
-- Well established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2. Denotes a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
If an issuer represents to Moody's that its commercial paper obligations
are supported by the credit of another entity or entities, Moody's, in assigning
ratings to such issuers, evaluates the financial strength of the indicated
affiliated corporations, commercial banks, insurance companies, foreign
governments, or other entities, but only as one factor in the total rating
assessment.
RATINGS BY S&P
MUNICIPAL BONDS
AAA. Bonds rated AAA have the highest rating. Capacity to pay interest and
repay principal is extremely strong.
AA. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
In order to provide more detailed indications of credit quality, the AA
rating described above may be modified by the addition of a plus or a minus sign
to show relative standing within the rating category.
PROVISIONAL RATINGS. The letter 'p' indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, although addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
MUNICIPAL NOTES
SP-1. Notes rated SP-1 have very strong or strong capacity to pay principal
and interest. Those issues determined to possess overwhelming safety
characteristics are designated as SP-1+.
Notes due in three years or less normally receive a note rating. Notes
maturing beyond three years normally receive a bond rating, although the
following criteria are used in making that assessment:
-- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely the issue will be rated as a
note).
-- Source of payment (the more dependent the issue is on the market
for its refinancing, the more likely it will be rated as a note).
30
<PAGE>
- --------------------------------------------------------------------------------
VARIABLE AND FLOATING RATE DEMAND OBLIGATIONS
S&P assigns dual ratings to all long-term debt issues that have as part of their
provisions a demand feature. The first rating addresses the likelihood of
repayment of principal and interest as due, and the second rating addresses only
the demand feature. The long-term debt rating symbols are used for bonds to
denote the long-term maturity and the commercial paper rating symbols are
usually used to denote the put (demand) option (for example, AAA/A-1+).
Normally, demand notes receive note rating symbols combined with commercial
paper symbols (for example, SP-1/A-1+).
COMMERCIAL PAPER
A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designations 1, 2, and 3 to indicate the relative degree of safety.
A-1. This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are designated A-1+.
31
<PAGE>
Kidder, Peabody California Tax Exempt Money Fund
- --------------------------------------------------------------------------------
Schedule of Investments as of July 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE % OF NET
AMOUNT (NOTE 2a) ASSETS
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
TAX EXEMPT INVESTMENTS -- 99.2%
California Ed. Facs. Auth., (Occidental College), Ser. 85, 3.20% 12/01/94,
(LOC Morgan Guaranty)......................................................... $ 7,400,000 $ 7,400,000 4.0%
California Hlth. Fac. Fin. (Hlth. Dimension Inc.), Ser. A, 2.35%, 8/01/94, (LOC
Bank of America).............................................................. 1,670,000 1,670,000 0.9
California Poll. Ctl. Fin. Auth., (Pacific Gas & Elec.), Ser. 88C, 2.70%,
9/07/94, (LOC Credit Suisse).................................................. 5,000,000 5,000,000 2.7
California Poll. Ctl. Fin. Auth., (Pacific Gas & Elec.), Ser. 88C, 3.05%,
9/08/94, (LOC Credit Suisse).................................................. 3,500,000 3,500,000 1.9
California Poll. Ctl. Fin. Auth., (Pacific Gas & Elec.), Ser. 88C, 3.30%,
10/06/94, (LOC Credit Suisse)................................................. 8,000,000 8,000,000 4.4
California School Cash Reserve, Ser. A, 4.50%, 7/05/95.......................... 7,500,000 7,550,145 4.1
California Dept. of Water Resources, Tax Exempt Commercial Paper, Ser. 1, 2.65%,
8/10/94....................................................................... 3,506,000 3,506,000 1.9
Chino Redev. Agcy., Water System, Pre-Refunded Bonds, 7.70%, 8/01/94 @102,
(AMBAC Insured)(b)............................................................ 1,300,000 1,326,172 0.7
Indio Hsg. Auth., (Smoketree Apts. Proj.-Sterling Builders), Var. Rt. Demand
Nts., 2.80%, (LOC Bank of Toyko)(a)........................................... 9,150,000 9,150,000 5.0
Irvine Multi-Family Hsg., Var. Rt. Demand Nts., Ser. 1983, 2.75%, (LOC
Citibank)(a).................................................................. 14,600,000 14,600,000 8.0
Kern Cnty., Board of Education, Tax and Rev. Antic. Nts., 4.25%, 6/30/95........ 6,720,000 6,749,546 3.7
Lancaster Redev. Agcy., (Woodcreek Gardens Apts. Proj.), Var. Rt. Demand Nts.,
Ser. 85J, 3.10%, (LOC Bank of Tokyo)(a)....................................... 5,300,000 5,300,000 2.9
Los Angeles Cnty., (Museum Proj.), Var. Rt. Demand Nts., Ser. A, 2.85%, (LOC
Bank of America)(a)........................................................... 1,900,000 1,900,000 1.1
Los Angeles Cnty., (Museum Proj.), Var. Rt. Demand Nts., Ser. B, 2.85%, (LOC
Bank of America)(a)........................................................... 2,900,000 2,900,000 1.6
Los Angeles Cnty. Transportation Comm., (MTA), Tax Exempt Commercial Paper,
3.00%, 9/07/94, (LOC National Westminister Bank, ABN-Amro Group, CIBC, Bank of
America)...................................................................... 5,921,000 5,921,000 3.2
Los Angeles Unified School District, Tax & Rev. Antic. Nts., 4.50%, 7/10/95..... 5,000,000 5,040,789 2.8
Los Angeles Wastewater, Ser. A, 8.50%, 6/01/95, (MBIA Insured)(b)............... 1,570,000 1,633,642 0.9
Los Angeles Wastewater, Tax Exempt Commercial Paper, 2.30%, 9/01/94............. 5,500,000 5,499,124 3.0
Midway School District 1992, (Capital Projects), Var. Rt. Demand Nts., 3.00%,
(LOC Bank of California)(a)................................................... 4,200,000 4,200,000 2.3
Northern California Power Agcy., Pre-Refunded Bonds, Geothermal #3, 9.75%,
7/01/95 @102.................................................................. 3,640,000 3,903,835 2.1
Oakland Hlth. Facs. Rev. Bds. (Children's Hosp. Med. Ctr.), Var. Rt. Demand
Nts., Ser. 88A, 2.75%, (LOC Banque Paribas)(a)................................ 4,000,000 4,000,000 2.2
Oakland Redev., (Central Dist. Redev.), 4.20%, 2/01/95, (AMBAC Insured)(b)...... 730,000 735,576 0.4
</TABLE>
See Notes to Financial Statements.
32
<PAGE>
Kidder, Peabody California Tax Exempt Money Fund
- --------------------------------------------------------------------------------
Schedule of Investments as of July 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE % OF NET
AMOUNT (NOTE 2a) ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Orange Cnty., (The Lakes Proj.), Var. Rt. Demand Nts., Ser. 1991A, 2.75%, (LOC
Citibank)(a).................................................................. $ 7,500,000 $ 7,500,000 4.1
Orange Cnty., Apt. Dev. Rev., (Park Ridge), Var. Rt. Demand Nts., Issue I,
2.80%, (LOC Bank of America)(a)............................................... 5,300,000 5,300,000 2.9
Orange Cnty., Local Transportation, Sales Tax Exempt Commercial Paper Nts.,
2.60%, 9/09/94................................................................ 5,000,000 5,000,000 2.7
Orange Cnty., Local Transportation, Sales Tax Exempt Commercial Paper Nts.,
2.65%, 10/06/94............................................................... 4,000,000 4,000,000 2.2
Orange Cnty., Mun. Water Dist., (Allen-McCollouch Pipeline Aug. Proj.), Var. Rt.
Demand Nts., Ser. A, 2.75%, (LOC National Westminster Bank)(a)................ 3,035,000 3,035,000 1.7
Commonwealth of Puerto Rico Highway, Var. Rt. Demand Nts., Ser. X, 2.60%, (LOC
Swiss Bank, Landesbank Hesser, Union Bank of Switzerland)(a).................. 1,900,000 1,900,000 1.1
Riverside Cnty., Ctfs. of Part., Var. Rt. Demand Nts., Ser 85A, 2.85%, (LOC
Sanwa Bank)(a)................................................................ 10,500,000 10,500,000 5.7
Riverside Cnty., Ctfs. of Part., Var. Rt. Demand Nts., Ser 85C, 2.85%, (LOC
Sanwa Bank)(a)................................................................ 1,100,000 1,100,000 0.6
Riverside Cnty., Ctfs. of Part., Var. Rt. Demand Nts., Ser 85D, 2.85%, (LOC
Sanwa Bank)(a)................................................................ 300,000 300,000 0.2
Sacramento Cnty., Mun. Util. Dist., Tax Exempt Commercial Paper, Ser. H, 3.25%,
8/23/94, (LOC Morgan Guaranty/Bank of America)................................ 3,700,000 3,700,000 2.0
Sacramento Cnty., Mun. Util. Dist., Tax Exempt Commercial Paper, Ser. H, 2.80%,
9/07/94, (LOC Morgan Guaranty/Bank of America)................................ 5,000,000 5,000,000 2.7
San Diego Cnty., (Lusk Mira Mesa Multi-Family Apts.), Var. Rt. Demand Nts., Ser.
85E, 2.80%, (LOC Bank of America)(a).......................................... 1,800,000 1,800,000 1.0
San Diego Cnty., (Lusk Mira Mesa Multi-Family Apts.), Var. Rt. Demand Nts., Ser.
85F, 2.80%, (LOC Bank of America)(a).......................................... 1,400,000 1,400,000 0.8
San Francisco City & Cnty., Sewer Rev., 5.50%, 10/01/94, (AMBAC Insured)(b)..... 2,500,000 2,512,815 1.4
San Francisco City & Cnty., (Redev. Agcy.), Var. Rt. Demand Nts., Ser. 85B,
2.75%, (LOC Citibank)(a)...................................................... 2,200,000 2,200,000 1.2
San Francisco City & Cnty., Unified School District, Tax and Rev. Antic. Nts.,
3.50%, 8/12/94................................................................ 5,000,000 5,001,029 2.7
Santa Ana Town & Country, Var. Rt. Demand Nts., 2.75%, (LOC Banque
Paribas)(a)................................................................... 2,000,000 2,000,000 1.1
Santa Clara Cnty., Traffic Sales Tax Rev., 6.40%, 4/01/95, (MBIA Insured)(b).... 1,000,000 1,018,111 0.6
Southern California Public Power Auth., Trans. Proj. Rev. Bds., (1991 Sub.),
Var. Rt. Demand Nts., 2.70%, (LOC Swiss Bank) (AMBAC Insured)(a)(b)........... 5,000,000 5,000,000 2.7
</TABLE>
See Notes to Financial Statements.
33
<PAGE>
Kidder, Peabody California Tax Exempt Money Fund
- --------------------------------------------------------------------------------
Schedule of Investments as of July 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE % OF NET
AMOUNT (NOTE 2a) ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
University of California, (UCLA Medical Center), 8.00%, 12/01/94................ $ 2,425,000 $ 2,466,552 1.3%
Upland Community Redev. Agcy., (North Woods 156 Proj.), Var. Rt. Demand Nts.,
Ser. A, 2.95%, (LOC Sanwa Bank)(a)............................................ 1,200,000 1,200,000 0.7
------------ --------
TOTAL INVESTMENTS (COST $181,419,167)........................................... 181,419,336 99.2
OTHER ASSETS LESS LIABILITIES................................................... 1,472,388 0.8
------------ --------
NET ASSETS...................................................................... $182,891,724 100.0%
------------ --------
------------ --------
</TABLE>
Summary of Combined Ratings (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S STANDARD & POOR'S % OF VALUE
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
M1G-1 SP1 44.3%
P1 (c) A1+ & A1 (c) 48.4
Not Rated (d) Not Rated (d) 4.6
Aaa, Aa AAA, AA 2.7
------
100.0%
------
------
</TABLE>
Notes to Schedule of Investments:
(a) Securities payable on demand, secured by bank letters of credit or other
comparable credit agreements. The interest rate, which will change
periodically, is based upon bank prime rates or an index of market interest
rates.
(b) Insured or guaranteed by the respective stated municipal bond insurance
company.
(c) P1 and A1 are the highest ratings assigned tax-exempt commercial paper by
Moody's and Standard & Poor's, respectively.
(d) Securities which, while not rated, are determined by the Fund's Board of
Trustees to be of comparable quality to those rated securities in which the
Fund may invest.
See Notes to Financial Statements.
34
<PAGE>
Kidder, Peabody California Tax Exempt Money Fund
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities as of July 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments, at value (cost $181,419,167) (Note 2a).......................................... $181,419,336
Cash......................................................................................... 675,483
Interest receivable.......................................................................... 956,785
Prepaid expenses (Note 2e)................................................................... 11,267
------------
TOTAL ASSETS....................................................... 183,062,871
------------
LIABILITIES
Payables:
Due to investment adviser (Note 3)...................................................... $80,268
Distribution fees (Note 3).............................................................. 19,264
Dividends............................................................................... 33,183 132,715
-------
Accrued expenses............................................................................. 38,432
------------
TOTAL LIABILITIES.................................................. 171,147
------------
NET ASSETS
At value..................................................................................... $182,891,724
------------
------------
Net assets were comprised of:
Aggregate paid-in-capital......................................................................... $183,222,720
Accumulated net realized capital losses (Note 2e)................................................. (331,165)
Unrealized appreciation on investments (Note 2e).................................................. 169
------------
Net assets........................................................................................ $182,891,724
------------
------------
NET ASSET VALUE
Offering, and redemption price per share ($182,891,724[div]183,222,720 outstanding shares of
Beneficial Interest, $.001 par value) (Note 4)............................................... $1.00
-----
-----
</TABLE>
See Notes to Financial Statements.
35
<PAGE>
Kidder, Peabody California Tax Exempt Money Fund
- --------------------------------------------------------------------------------
Statement of Operations for the Year Ended July 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest income (net of $381,322 amortization of premiums) (Note 2b)........................ $5,131,094
EXPENSES
Investment advisory (Note 3)................................................................ $1,026,841
Distribution (Note 3)....................................................................... 246,442
Shareholder servicing....................................................................... 42,615
Prospectus and shareholders' reports........................................................ 29,940
Custodian................................................................................... 26,250
Professional................................................................................ 22,949
Pricing..................................................................................... 22,795
Miscellaneous............................................................................... 14,839
Trustees' fees and expenses................................................................. 11,373
Federal and state registration.............................................................. 644
----------
TOTAL EXPENSES.................................................... 1,444,688
----------
NET INVESTMENT INCOME....................................................................... 3,686,406
NET REALIZED LOSS ON INVESTMENT TRANSACTIONS (NOTE 2B)...................................... (96,966)
CHANGE IN UNREALIZED APPRECIATION ON INVESTMENTS............................................ 87
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....................................... $3,589,527
----------
----------
</TABLE>
See Notes to Financial Statements.
36
<PAGE>
Kidder, Peabody California Tax Exempt Money Fund
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JULY 31, JULY 31,
1993 1994
<S> <C> <C>
---------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income....................................................................... $ 3,637,112 $ 3,686,406
Net realized loss on investment transactions................................................ (85,579) (96,966)
Change in unrealized appreciation on investments............................................ 82 87
---------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.............................. 3,551,615 3,589,527
---------------------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME (NOTE 2C).............................. (3,637,112) (3,686,406)
---------------------------
NET CAPITAL SHARE TRANSACTIONS (NOTE 4)..................................................... (326,219) (19,453,923)
---------------------------
TOTAL DECREASE IN NET ASSETS...................................................... (411,716) (19,550,802)
NET ASSETS
Beginning of year........................................................................... 202,854,242 202,442,526
---------------------------
End of year................................................................................. $202,442,526 $182,891,724
---------------------------
---------------------------
</TABLE>
See Notes to Financial Statements.
37
<PAGE>
Kidder, Peabody California Tax Exempt Money Fund
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------------------------------------------------------------------
1988`D' 1989 1990 1991 1992 1993 1994
<S> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------
Net asset value, beginning of year...... $1.0000 $1.0000 $1.0000 $0.9999 $0.9995 $0.9993 $0.9989
-------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................... 0.0416 0.0544 0.0507 0.0404 0.0283 0.0180 0.0180
Net realized and unrealized loss on
investments........................... -- -- (0.0001) (0.0004) (0.0002) (0.0004) (0.0007)
-------------------------------------------------------------------------------
Total from investment operations........ 0.0416 0.0544 0.0506 0.0400 0.0281 0.0176 0.0173
DISTRIBUTIONS
Dividends from net investment income.... (0.0416) (0.0544) (0.0507) (0.0404) (0.0283) (0.0180) (0.0180)
-------------------------------------------------------------------------------
Net asset value, end of year............ $1.0000 $1.0000 $0.9999 $0.9995 $0.9993 $0.9989 $0.9982
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Total return............................ 4.20%* 5.56% 5.15% 4.11% 2.93% 1.81% 1.81%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in
thousands)............................ $ 147,227 $221,844 $259,101 $202,779 $202,854 $202,443 $182,892
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses, excluding distribution fees... .59%* .58% .55% .58% .59% .59% .58%
Expenses, including distribution fees... .59%* .65% .67% .70% .71% .71% .70%
Net investment income................... 4.33%* 5.47% 5.07% 4.06% 2.84% 1.79% 1.80%
</TABLE>
'D' From August 17, 1987 (Commencement of Operations) to July 31, 1988.
* Annualized.
See Notes to Financial Statements.
38
<PAGE>
Kidder, Peabody California Tax Exempt Money Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. The Fund is registered under the Investment Company Act of 1940 ('Act') as a
non-diversified, open-end management investment company. Kidder Peabody Asset
Management, Inc. ('KPAM'), a wholly-owned subsidiary of Kidder, Peabody & Co.
Incorporated ('Kidder'), serves as the Fund's manager and investment adviser and
administrator. General Electric Capital Services, Inc., a wholly-owned
subsidiary of General Electric Company, has a 100% interest in Kidder, Peabody
Group Inc., the parent company of Kidder. Kidder acts as the exclusive
distributor of the Fund's shares, which are sold without a sales charge.
2. It is the Fund's policy to maintain a continuous net asset value per share of
$1.00; the Fund has adopted certain investment, portfolio valuation and dividend
and distribution policies to enable it to do so.
(a) Investments are valued at amortized cost, which has been determined by
the Trustees of the Fund to represent the fair value of the Fund's investments.
Securities not subject to amortization are valued at cost which approximates
market.
(b) Security transactions are recorded on a trade date basis. Interest
income, adjusted for amortization of premiums and, when appropriate, discounts
on investments, is earned from settlement date and recognized on the accrual
basis. Realized gain and loss from securities transactions are recorded on the
identified cost basis.
(c) It is the policy of the Fund to declare dividends daily from net
investment income. Such dividends normally are paid monthly. Dividends from net
realized capital gains, if any, are declared and paid annually after the end of
the fiscal year in which earned. To the extent that the Fund earns net realized
capital gains which can be offset by capital loss carryovers, if any, it is the
policy of the Fund not to distribute such gains.
(d) It is the policy of the Fund to continue to qualify as a regulated
investment company, which can distribute tax exempt dividends, by complying with
the provisions available to certain investment companies, as defined in
applicable sections of the Internal Revenue Code, and to make distributions of
income and net realized capital gain sufficient to relieve it from all, or
substantially all, Federal income and California state income taxes.
(e) Prepaid registration fees are charged to income as the related shares are
issued.
At July 31, 1994, the Fund had an accumulated net capital loss of $331,165
for book purposes. For tax purposes, the Fund had a net capital loss
carryforward at July 31, 1994 of $252,758, of which $2,374 expires in 1996, $995
expires in 1998, $62,563 expires in 1999, $64,540 expires in 2000, and $25,320
expires in 2001, and $96,966 expires in 2002.
At July 31, 1994, for Federal income tax purposes, the cost of investments
was the same as the cost for financial reporting purposes (see Schedule of
Investments).
3. KPAM is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment, and other services necessary to
the operations of the Fund. Fees paid by the Fund for such services are payable
monthly and calculated daily by applying an annual rate of 1/2 of 1% to the net
assets of the Fund, determined as of the close of each business day. Total
annual expenses of the Fund, exclusive of taxes, interest, all brokers'
commissions and other normal charges incidental to the purchase and sale of
portfolio securities, but including fees paid to KPAM, are not expected to
exceed the limits prescribed by any state in which the Fund's shares are offered
for sale, and KPAM will reimburse the Fund for any expenses in excess of such
limits. No expense reimbursement was required for the year ended July 31, 1994.
Kidder is the exclusive distributor of the Fund's shares. For its services,
which include payment of sales commissions to registered representatives and
various other promotional and sales related expenses, it receives from the Fund
a distribution fee accrued daily and paid monthly at the rate of .12% per annum
of the Fund's daily net assets.
Certain officers and/or Trustees of the Fund are officers and/or directors of
KPAM. Each Trustee who is not an 'affiliated person' receives an annual fee of
$1,000 and an attendance fee of $375 per meeting.
4. The Declaration of Trust permits the Trustees to issue an unlimited number of
shares of a single class. At July 31, 1994, paid-in-capital amounted to
$183,222,720. Trans-
39
<PAGE>
Kidder, Peabody California Tax Exempt Money Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
actions in shares of Beneficial Interest were all at $1.00 per share and are
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JULY 31, JULY 31,
1993 1994
<S> <C> <C>
- ---------------------------------------------------------
Shares sold................. 813,673,393 886,015,887
Shares issued to shareholders
in connection with the
reinvestment of
dividends................. 3,559,606 3,558,169
---------------------------
TOTAL.................. 817,232,999 889,574,056
Shares redeemed............. (817,559,218) (909,027,979)
---------------------------
NET DECREASE........... (326,219) (19,453,923)
---------------------------
---------------------------
</TABLE>
5. The Fund's investment strategy is to invest in obligations of the State of
California and its municipalities. Payment of the principal and interest of such
securities depends upon the revenue generated by the property financed by the
securities, and the securities are not necessarily general obligations of the
issuer. Additionally, many of the securities are guaranteed by Letters of Credit
issued from various institutions. If the issuer or guarantor defaults or if
bankruptcy proceedings are commenced with respect to either entity, the
realization of proceeds may be delayed or limited. (See the Fund's Schedule of
Investments for information on individual securities and unaudited summary of
combined ratings.)
- --------------------------------------------------------------------------------
Report of Independent Auditors
- --------------------------------------------------------------------------------
The Trustees and Shareholders,
Kidder, Peabody California Tax Exempt Money Fund:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Kidder, Peabody California Tax Exempt Money
Fund, as of July 31, 1994, the related statements of operations for the year
then ended and of changes in net assets for each of the years in the two-year
period then ended, and the financial highlights for each of the periods
presented. These financial statements and the financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at July 31,
1994, by correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Kidder, Peabody
California Tax Exempt Money Fund at July 31, 1994, the results of its
operations, the changes in its net assets and the financial highlights for the
periods presented in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
September 9, 1994
40
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
<TABLE>
<S> <C>
- ---------------------------------------------
Contents
- ---------------------------------------------
Investment Objective and Policies 2
- ---------------------------------------------
Management of the Fund 17
- ---------------------------------------------
Investment Advisory and Other Services 19
- ---------------------------------------------
Principal Shareholders 21
- ---------------------------------------------
Portfolio Transactions 21
- ---------------------------------------------
Shares of the Fund 22
- ---------------------------------------------
Redemption and Exchange of Shares 23
- ---------------------------------------------
Determination of Net Asset Value 25
- ---------------------------------------------
Dividends, Distributions and Taxes 26
- ---------------------------------------------
Determination of Current and Effective Yields 27
- ---------------------------------------------
Ratings of Securities 28
- ---------------------------------------------
Financial Statements 32
- ---------------------------------------------
</TABLE>
Kidder,
Peabody
California
Tax
Exempt
Money
Fund
Statement of
Additional
Information
November 28, 1994
PaineWebber RMA California Municipal Money Fund & PaineWebber/Kidder, Peabody
California Tax Exempt Money Fund
STATEMENT OF NET ASSETS
June 30, 1995 (unaudited)
<TABLE>
<CAPTION>
PaineWebber PW/KP California
Principal RMA California Tax Exempt Pro Forma
Amount Maturity Interest Municipal Money Combined
(000) Dates Rates Value Value Value
- --------- --------- ---------- ------------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
INVESTMENTS IN MUNICIPAL SECURITIES-- 103.34% 104.77% 103.77%
$9,200 California State Revenue Anticipation Warrants......... 04/25/96 5.750% $7,318,589 $2,032,640 $9,351,229
4,000 California Educational Facilities Authority
Adjustable Rate Bonds
(Occidental College)................................. 12/01/95 3.800 4,000,000 4,000,000
17,500 California Educational Facilities Authority
Tax Exempt Commercial Paper
(Carnegie Institute of Washington)............... 07/12/95 to 3.700 to 14,500,000 3,000,000 17,500,000
09/14/95 4.100
4,700 California Health Facilities Financing Authority....... A 4.050 4,700,000 4,700,000
14,500 California Health Facilities Financing Authority
(Kaiser Permanente)................................... A 3.900 10,100,000 4,400,000 14,500,000
8,100 California Health Facilities Financing Authority
(Long Beach Memorial)................................ A 3.900 8,100,000 8,100,000
5,760 California Health Facilities Financing Authority
(Memorial Health).................................... A 4.000 5,760,000 5,760,000
6,400 California Health Facilities Financing Authority
(N. T. Enloe Memorial Hospital)....................... A 4.200 6,400,000 6,400,000
5,000 California Health Facilities Financing Authority
(Scripps Memorial Hospital)........................... A 3.900 5,000,000 5,000,000
9,180 California Health Facilities Financing Authority
(St. Joseph's Health Systems)........................ A 4.100 8,480,000 700,000 9,180,000
6,300 California Health Facilities Financing Authority
(Sutter Health)....................................... A 4.050 4,000,000 2,300,000 6,300,000
6,000 California Health Facilities Financing Authority
(West Sutter Adventist Health)........................ A 3.800 6,000,000 6,000,000
5,200 California Pollution Control Financing Authority
(Exxon Corporation).................................. A 4.100 5,200,000 5,200,000
</TABLE>
PaineWebber RMA California Municipal Money Fund & PaineWebber/Kidder, Peabody
California Tax Exempt Money Fund
<TABLE>
<CAPTION>
PaineWebber PW/KP California
Principal RMA California Tax Exempt Pro Forma
Amount Maturity Interest Municipal Money Combined
(000) Dates Rates Value Value Value
- --------- --------- ---------- ------------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
INVESTMENT IN MUNICIPAL SECURITIES--(CONTINUED)
$1,100 California Pollution Control Financing Authority
(Minnesota Mining & Manufacturing)....................A 4.100 % $1,100,000 $ $1,100,000
22,100 California Pollution Control Financing Authority
Tax Exempt Commercial Paper
(Pacific Gas & Electric Company)..................... 07/17/95 to 3.900 to 16,100,000 6,000,000 22,100,000
09/12/95 4.200
9,800 California Pollution Control Financing Authority
Tax Exempt Commercial Paper
(Southern California Edison)......................... 07/19/95 to 3.100 to 3,300,000 6,500,000 9,800,000
09/13/95 4.150
12,600 California Pollution Control Financing Authority
(Southern California Edison)......................... A 4.500 11,800,000 800,000 12,600,000
2,250 California School Cash Reserves Authority Notes......... 07/05/95 4.500 2,250,178 2,250,178
12,700 California State Department of Water.................... A 3.950 12,700,000 12,700,000
18,909 California State Department of Water
Tax Exempt Commercial Paper........................... 08/14/95 to 3.300 to 10,000,000 8,909,000 18,909,000
09/27/95 4.100
6,300 California Statewide Community Development Authority.... A 3.750 to 5,300,000 1,000,000 6,300,000
4.000
2,800 California Statewide Community Development Authority
(House Ear Institute)................................ A 4.350 1,800,000 1,000,000 2,800,000
6,000 California Statewide Community Development Authority
Tax and Revenue Anticipation Notes................... 07/17/95 4.500 6,002,028 6,002,028
2,800 Anaheim Certificate of Participation.................... A 4.050 2,800,000 2,800,000
1,875 Contra Costa County Tax and Revenue Anticipation Notes.. 07/03/96 4.500 1,008,150 882,131 1,890,281
12,925 Del Mar Race Track Authority
Tax Exempt Commercial Paper........................... 08/25/95 to 3.300 to 8,425,000 4,500,000 12,925,000
09/11/95 3.850
13,700 East Bay Municipal Utility District
Tax Exempt Commercial Paper........................... 08/23/95 to 3.100 to 11,900,000 1,800,000 13,700,000
09/11/95 3.750
</TABLE>
PaineWebber RMA California Municipal Money Fund & PaineWebber/Kidder, Peabody
California Tax Exempt Money Fund
<TABLE>
<CAPTION>
PaineWebber PW/KP California
Principal RMA California Tax Exempt Pro Forma
Amount Maturity Interest Municipal Money Combined
(000) Dates Rates Value Value Value
- --------- --------- ---------- ------------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
INVESTMENT IN MUNICIPAL SECURITIES--(CONTINUED)
$2,555 Grand Terrace Multi-Family Housing Authority............ A 3.850% $2,555,000 $ $2,555,000
2,500 Indio Housing Authority ................................ A 4.150 2,500,000 2,500,000
(Smoketree Apartments)
5,200 Lancaster Redevelopment Agency.......................... A 3.950 5,200,000 5,200,000
4,300 Loma Linda Hospital Revenue
(University Medical Center)........................... A 4.000 4,300,000 4,300,000
4,700 Los Angeles Certificates of Participation............... A 4.050 4,700,000 4,700,000
5,700 Los Angeles County Tax and Revenue Anticipation Notes... 07/01/96 4.500 3,523,450 2,214,740 5,738,190
24,946 Los Angeles County Transportation Commission
Tax Exempt Commercial Paper........................... 07/21/95 to 3.300 to 15,246,000 9,700,000 24,946,000
09/20/95 4.150
12,000 Los Angeles County Unified School District
Tax and Revenue Anticipation Notes.................... 07/10/95 to 4.500 5,534,729 6,523,593 12,058,322
07/03/96
21,450 Los Angeles Department of Water & Power
Tax Exempt Commercial Paper........................... 07/27/95 to 3.100 to 14,550,000 6,900,000 21,450,000
09/13/95 3.900
22,300 Los Angeles Wastewater System
Tax Exempt Commercial Paper........................... 08/10/95 to 3.300 to 15,700,000 6,600,000 22,300,000
09/11/95 4.150
23,600 Newport Beach Hospital Revenue
(Hoag Memorial Hospital).............................. A 4.250 14,600,000 9,000,000 23,600,000
3,640 Northern California Public Power Agency (pre-refunded
with US Government Securities to 07/01/95 @ 102)..... 07/01/95 9.750 3,712,785 3,712,785
1,100 Richmond County Transportation Commission............... A 4.500 1,100,000 1,100,000
3,060 Riverside County Certificates of Participation.......... A 4.100 3,060,000 3,060,000
20,000 Riverside County Transportation
Tax Exempt Commercial Paper........................... 07/14/95 to 3.800 to 11,500,000 8,500,000 20,000,000
08/22/95 4.150
20,300 Sacramento Municipal Utility District
Tax Exempt Commercial Paper.......................... 07/24/95 to 3.000 to 13,500,000 6,800,000 20,300,000
09/20/95 4.150
</TABLE>
PaineWebber RMA California Municipal Money Fund & PaineWebber/Kidder, Peabody
California Tax Exempt Money Fund
<TABLE>
<CAPTION>
PaineWebber PW/KP California
Principal RMA California Tax Exempt Pro Forma
Amount Maturity Interest Municipal Money Combined
(000) Dates Rates Value Value Value
- --------- --------- ---------- ------------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
INVESTMENT IN MUNICIPAL SECURITIES--(CONCLUDED)
$8,000 San Bernardino County Tax and Revenue
Anticipation Notes................................... 07/05/96 4.500% $5,528,930 $2,513,150 $8,042,080
3,500 San Diego Gas and Electric
Tax Exempt Commercial Paper.......................... 09/08/95 to 3.050 2,500,000 1,000,000 3,500,000
09/11/95
3,000 San Francisco Multi-Family Housing Authority............ A 4.150 3,000,000 3,000,000
2,160 San Francisco Rincon Housing Authority.................. A 3.900 2,160,000 2,160,000
6,000 Santa Barbara County Tax and Revenue
Anticipation Notes.................................. 07/05/96 4.500 4,027,280 2,013,640 6,040,920
1,700 Santa Clara County Electric............................. A 4.050 1,700,000 1,700,000
16,260 Santa Clara County Transit District..................... A 4.200 12,460,000 3,800,000 16,260,000
4,000 Solano County Tax and Revenue Anticipation Notes........ 11/01/95 5.000 4,008,384 4,008,384
12,450 Southern California Metropolitan Water District
Tax Exempt Commercial Paper........................... 08/29/95 to 3.100 to 8,450,000 4,000,000 12,450,000
09/12/95 3.850
7,000 Southern California Public Power Revenue................ A 3.900 7,000,000 7,000,000
3,000 Stockton Unified School District
Tax and Revenue Anticipation Notes................... 12/08/95 5.250 3,006,904 3,006,904
3,050 Upland Community Redevelopment Housing Agency........... A 4.400 1,950,000 1,100,000 3,050,000
14,500 West Basin Municipal Water District
Tax Exempt Commercial Paper........................... 08/15/95 to 2.950 to 8,000,000 6,500,000 14,500,000
09/13/95 4.050
2,500 Yuba County Tax and Revenue Anticipation Notes.......... 10/26/95 5.000 2,502,131 2,502,131
--------- ---------- ----------
Total Investments (cost--$341,986,753, $150,621,679 and $492,608,432 which approximate
cost for federal income tax purposes)--103.34%, 104.77% and 103.77%, respectively... 341,986,753 150,621,679 492,608,432
Liabilities in excess of other assets --(3.34%, 4.77% and 3.77%, respectively).......... (11,050,204) (6,863,743) (17,913,947)
----------- ------------ -----------
Net Assets (applicable to 331,258,452, 143,774,342 and 475,032,794, respectively,
shares of beneficial interest at $1.00 per share)--100.00%......................... $330,936,549 $143,757,936 $474,694,485
=========== ============ ===========
</TABLE>
- ------------
A - Variable Rate Demand Notes are payable on demand. The interest rate shown
is the current rate as of June 30, 1995.
Weighted average maturity 58, 61 and 59 days, respectively.
See Notes to Pro Forma Combined Financial Statements.
<TABLE>
<CAPTION>
Pro Forma Combined
Statement of Operations For the Twelve Months Ended June 30, 1995
(Unaudited)
PaineWebber PW/KP California
RMA California Tax-Exempt
Municipal Money Money Pro Forma
Fund Fund Adjustments Combined
--------------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
INTEREST $11,412,918 $5,562,103 $0 $16,975,021
---------- ---------- --------- -----------
EXPENSES:
Investment advisory and administration fees 1,587,620 807,203 (100,208) 2,294,615
Distribution fees 255,931 193,729 (64,576) 385,084
Transfer agency and service fees 114,625 39,630 (19,624) 134,631
Custody Fees 94,141 38,479 (26,750) 105,870
Other 168,127 95,618 (69,871) 193,874
---------- ---------- --------- -----------
2,220,444 1,174,659 (281,029) 3,114,074
---------- ---------- --------- -----------
NET INVESTMENT INCOME 9,192,474 4,387,444 281,029 13,860,947
REALIZED (LOSSES) FROM INVESTMENT TRANSACTIONS (32,808) (62,879) (95,687)
---------- ---------- --------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $9,159,666 $4,324,565 $281,029 $13,765,260
========== ========== ======== ===========
See Notes to Pro Forma Combined Financial Statements
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Capitalization
as of June 30, 1995
(Unaudited)
PaineWebber PW/KP California PaineWebber
RMA California Tax-Exempt RMA California
Municipal Money Money Municipal Money
Fund Fund Fund (as adjusted)(1)
---------------- ----------------- ---------------------
<S> <C> <C> <C>
Shareholders' Equity:
Capital stock shares of $0.001 par value per share
(unlimited amount authorized)
331,258,452 shares outstanding for PaineWebber RMA Cal
Municipal Money Fund (Actual) 143,774,342 shares
outstanding for PW/KP California Tax-Exempt Money Fund (Actual)
475,032,794 shares outstanding for PaineWebber RMA Cal Municipal
Money Fund (As adjusted) $331,258,452 $143,774,342 $475,032,794 (2) (3)
Accumulated net realized losses from investments (321,903) (16,406) (338,309) (4)
------------ ----------- ------------
Net Assets $330,936,549 $143,757,936 $474,694,485
============ ============ ============
</TABLE>
(1) The adjusted balances are presented as if the Reorganization involving
both Funds was effective as of June 30, 1995
for information purposes only. The actual effective time of the
Reorganization is expected to be December 1995, at which
time the results would be reflective of the actual composition of
shareholders' equity at that date.
(2) Assumes the issuance of 143,774,342 shares in exchange for the net assets
applicable to capital stock holders of PW/KP California
Tax-Exempt Money Fund. The exchange is based on the net asset value of
$1.00.
(3) Does not include the impact of estimated Reorganization costs of $150,000.
(4) Assumes PW/KP California Tax-Exempt Money Fund's net realized losses from
investment transactions carry forward into PaineWebber RMA California
Municipal Money Fund.
Notes To Pro Forma Combined Financial Statements
(unaudited)
Basis of Presentation:
Subject to approval of the Plan of Reorganization by the shareholders of
PaineWebber/Kidder, Peabody California Tax Exempt Money Fund ("PW/KP California
Tax Exempt"), PaineWebber RMA California Municipal Money Fund ("RMA
California") would acquire the assets of PW/KP California Tax Exempt in
exchange solely for the assumption by RMA California of PW/KP California Tax
Exempt's liabilities and shares of RMA California that correspond, in aggregate,
to the outstanding shares of PW/KP California Tax Exempt Income. Shares of RMA
California will be distributed to PW/KP California Tax Exempt's shareholders at
$1.00 per share, and PW/KP California Tax Exempt will be terminated as soon as
practicable thereafter. Each PW/KP California Tax Exempt shareholder will
receive the number of full and fractional shares of RMA California equal in
value to such shareholders' holdings in the corresponding shares of PW/KP
California Tax Exempt as of the closing date of the merger.
If the shareholders approve the Plan of Reorganization at a meeting expected to
be held on December 1, 1995, PW/KP California Tax Exempt will merge into RMA
California in December 1995. The pro forma combined financial statements
reflect the financial position of RMA California and PW/KP California Tax Exempt
at June 30, 1995 and the combined results of operations of RMA California and
PW/KP California Tax Exempt for the twelve months ended June 30, 1995. Certain
expenses have been adjusted to reflect the expected combined entity. Pro forma
operating expenses include the actual expenses of the Funds adjusted for certain
items.
As a result of the Reorganization, expenses will be reduced due to duplication
of certain fixed expenses and the reduction in investment advisory and
administration fees due to the increased asset base. It is estimated that costs
of approximately $150,000 associated with the merger will be charged to the
Funds in proportion to their respective net assets.
The pro forma combined financial statements are presented for the information of
the reader and may not necessarily be representative of what the actual combined
financial statements would have been had the Reorganization occurred at June 30,
1995. The pro forma combined financial statements should be read in conjunction
with the historical financial statements of the constituent Funds included in
the statement of additional information.
APPENDIX B -- BENEFICIAL OWNERSHIP OF SHARES OF PW FUND AND PW/KP FUND
<PAGE>
PAINEWEBBER MANAGED MUNICIPAL TRUST
PART C
OTHER INFORMATION -- EXHIBIT INDEX
ITEM 15. INDEMNIFICATION
Section 2 of "Indemnification" in Article X of the Declaration of Trust
provides that the appropriate series of the Registrant will indemnify its
trustees and officers to the fullest extent permitted by law against claims
and expenses asserted against or incurred by them by virtue of being or
having been a trustee or officer; provided that no such person shall be
indemnified where there has been an adjudication or other determination, as
described in Article X, that such person is liable to the Registrant or its
shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office
or did not act in good faith in the reasonable belief that his or her action
was in the best interest of the Registrant. Section 2 of "Indemnification" in
Article X also provides that the Registrant may maintain insurance policies
covering such rights of indemnification.
Additionally, "Limitation of Liability" in Article X of the Declaration of
Trust provides that the trustees or officers of the Registrant shall not be
personally liable to any person extending credit to, contracting with or
having a claim against the Trust or a particular series thereof; and that,
provided they have exercised reasonable care and have acted under the
reasonable belief that their actions are in the best interest of the
Registrant, the trustees and officers shall not be liable for neglect or
wrongdoing by them or any officer, agent, employee or investment adviser of
the Registrant.
Section 2 of Article XI of the Declaration of Trust additionally provides
that, subject to the provisions of Section 1 of Article XI and to Article X,
trustees shall not be liable for errors of judgment or mistakes of fact or
law, or for any act or omission in accordance with advice of counsel or other
experts, or failing to follow such advice, with respect to the meaning and
operation of the Declaration of Trust.
Article IX of the By-Laws provides that the Registrant may purchase and
maintain insurance on behalf of any person who is or was a trustee, officer
or employee of the Trust, or is or was serving at the request of the Trust as
a trustee, officer or employee of a corporation, partnership, joint venture,
trust or other enterprise against any liability asserted against him or her
and incurred by him or her in any such capacity or arising out of his or her
status as such, whether or not the Registrant would have the power to
indemnify him or her against such liability, provided that the Registrant may
not acquire insurance protecting any trustee or officer against liability to
the Registrant or its shareholders to which he or she would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his or her
office.
Section 9 of the Investment Advisory and Administration Contract between
PaineWebber and the Registrant provides that PaineWebber shall not be liable
for any error of judgment or mistake of law or for any loss suffered by any
series ("Fund") or the Registrant in connection with the matters to which the
Contract relates, except for a loss resulting from the willful misfeasance,
bad faith, or gross negligence of PaineWebber in the performance of its
duties or from its reckless disregard of its obligations and duties under the
Contract. Section 10 of the Contract provides that the trustees shall not be
liable for any obligations of the Registrant under the Contract and that
PaineWebber shall look only to the assets and property of the Registrant in
settlement of such right or claim and not to the assets and property of the
trustees.
Section 9 of the Sub-Advisory and Sub-Administration Contract between
PaineWebber and Mitchell Hutchins contains provisions similar to Section 9 of
the Investment Advisory and Administration Contract between the Registrant
and PaineWebber, with respect to PaineWebber.
Section 9 of the Distribution Contract between the Registrant and
PaineWebber provides that the Registrant will indemnify PaineWebber, its
officers, directors and controlling persons against all liabilities arising
from any alleged untrue statement of material fact in the Registration
Statement or from any alleged omission to state in the Registration Statement
a material fact required to be stated in it or
C-1
<PAGE>
necessary to make the statements in it, in light of the circumstances under
which they were made, not misleading, except insofar as liability arises from
untrue statements or omissions made in reliance upon and in conformity with
information furnished by PaineWebber to the Registrant for use in the
Registration Statement; and provided that this indemnity agreement shall not
protect any such persons against liabilities arising by reason of their bad
faith, gross negligence or willful malfeasance and shall not inure to the
benefit of any such persons unless a court of competent jurisdiction or
controlling precedent determines that such result is not against public
policy as expressed in the Securities Act of 1933. Section 9 also provides
that PaineWebber agrees to indemnify, defend and hold the Registrant, its
officers and trustees free and harmless of any claims arising out of any
alleged untrue statement or any alleged omission of material fact contained
in information furnished by PaineWebber for use in the Registration Statement
or arising out of an agreement between PaineWebber and any retail dealer, or
arising out of supplementary literature or advertising used by PaineWebber in
connection with the Contract.
Section 6 of the Service Contract provides that PaineWebber shall be
indemnified and held harmless by the Registrant against all liabilities,
except those arising out of bad faith, gross negligence, willful malfeasance
or reckless disregard of its duties under the Contract.
Section 10 of the Distribution Contract and Section 7 of the Service
Contract contain provisions similar to that of Section 10 of the Investment
Advisory and Administration Contract, with respect to PaineWebber, as
appropriate.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be provided to trustees, officers and
controlling persons of the Registrant, pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer
or controlling person of the Registrant in connection with the successful
defense of any action, suit or proceeding or payment pursuant to any
insurance policy) is asserted against the Registrant by such trustee, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- --------------- ------------------------------------------------------------------------------------------
<S> <C>
(1) (a)Declaration of Trust(1)
(b)Amendment effective January 28, 1988(3)
(c)Amendment effective August 23, 1988(4)
(d)Amendment effective March 28, 1991(6)
(e)Amendment effective July 1, 1991(7)
(2) By-Laws of the Trust(1)
(3) Not Applicable.
(4) Agreement and Plan of Reorganization and Termination (filed herewith)
(5) All agreements defining the rights of holders of the securities being registered -- None
(6) (a)Investment Advisory Contract(5)
(b)Sub-Advisory and Sub-Administration Contract(5)
(7) Distribution Contract(3)
C-2
<PAGE>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- --------------- ------------------------------------------------------------------------------------------
(8) Bonus, Profit-Sharing, Pension or Other Similar Contracts --None
(9) (a)Custodian Agreement(2)
(b)Transfer Agency and Service Contract(5)
(10) Distribution Agreement and Rule 12b-1 Plan(8)
Opinion and Consent of Kirkpatrick and Lockhart LLP regarding the legality of the
(11) securities being issued (filed herewith)
(a)Opinion and Consent of Kirkpatrick & Lockhart LLP regarding certain tax matters (filed
(12) herewith)
(b)Opinion and Consent of Stroock & Stroock & Lavan regarding certain tax matters (filed
herewith)
(13) Not Applicable.
(14) (a)Consent of Ernst & Young LLP (filed herewith)
(b)Consent of Deloitte & Touche LLP (filed herewith)
(c)Consent of Orrick, Herrington & Sutcliffe (filed herewith)
(15) Omitted Financial Statements -- None
(16) Copies of manually signed Powers of Attorney -- None
(17) Additional Exhibits
(a)Declaration pursuant to Rule 24f-2 (previously filed on EDGAR, Accession Number:
0000898432-95-000309)
(b)Proxy Card (filed herewith)
(c)Financial Data Schedule (filed herewith)
</TABLE>
- ---------------
(1) Incorporated by reference from Post-Effective Amendment No. 5 to
registration statement, SEC File No. 2-89016, filed January 30, 1987.
(2) Incorporated by reference from Post-Effective Amendment No. 7 to
registration statement SEC File No. 2-89016, filed February 1, 1988.
(3) Incorporated by reference from Post-Effective Amendment No. 8 to
registration statement, SEC File No. 2-89016, filed March 31, 1988.
(4) Incorporated by reference from Post-Effective Amendment No. 11 to
registration statement, SEC File No. 2-89016, filed October 24, 1988.
(5) Incorporated by reference from Post-Effective Amendment No. 18 to
registration statement, SEC File No. 2-89016, filed January 29, 1991.
(6) Incorporated by reference from Post-Effective Amendment No. 21 to
registration statement, SEC File No. 2-89016.
(7) Incorporated by reference from Post-Effective Amendment No. 22 to
registration statement, SEC File No. 2-89016, filed January 29, 1992.
(8) Incorporated by reference from Post-Effective Amendment No. 28 to the
registration statement, SEC File No. 2-89016, filed August 29, 1994.
C-3
<PAGE>
ITEM 17. UNDERTAKINGS
(1) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through the use of the prospectus which is a
part of this Registration Statement by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(c) of the Securities Act of
1933, the reoffering prospectus will contain the information called for by
the applicable registration form for reoffering by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new Registration Statement
for the securities offered therein, and the offering of the securities at
that time shall be deemed to be the initial bona fide offering of them.
C-4
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, as amended, this Registration
Statement has been signed on behalf of the Registrant, in the City of New
York and the State of New York, on the 22nd day of September, 1995.
PAINEWEBBER MANAGED MUNICIPAL TRUST
By: /s/ Dianne E. O'Donnell
-------------------------------------
Dianne E. O'Donnell
Vice President, Secretary
Each of the undersigned directors and officers of PaineWebber Managed
Municipal Trust ("Trust") hereby severally constitutes and appoints Victoria
E. Schonfeld, Dianne E. O'Donnell, Gregory K. Todd, Elinor W. Gammon and
Robert A. Wittie, and each of them singly, our true and lawful attorneys,
with full power to them to sign for each of us, and in each of our names and
in the capacities indicated below, any and all amendments to the Registration
Statement of the Fund, and all instruments necessary or desirable in
connection therewith, filed with the Securities and Exchange Commission,
hereby ratifying and confirming our signatures as they may be signed by said
attorney to any and all amendments to said Registration Statement.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------------------- ----------------------
<S> <C> <C>
/S/ Margo N. Alexander President (Chief Executive Officer) September 22, 1995
------------------------------
Margo N. Alexander
/s/ E. Garrett Bewkes, Jr. Trustee and Chairman of the Board of September 22, 1995
------------------------------ Trustees
E. Garrett Bewkes, Jr.
/s/ Meyer Feldberg Trustee September 22, 1995
------------------------------
Meyer Feldberg
/s/ George W. Gowen Trustee September 22, 1995
------------------------------
George W. Gowen
/s/ Frederic V. Malek Trustee September 22, 1995
------------------------------
Frederic V. Malek
/s/ Frank P. L. Minard Trustee September 22, 1995
------------------------------
Frank P. L. Minard
/s/ Judith Davidson Moyers Trustee September 22, 1995
------------------------------
Judith Davidson Moyers
/s/ Thomas F. Murray Trustee September 22, 1995
------------------------------
Thomas F. Murray
/s/ Julian F. Sluyters Vice President and Treasurer (Principal September 22, 1995
------------------------------ Financial and Accounting Officer)
Julian F. Sluyters
</TABLE>
C-5
<PAGE>
PAINEWEBBER MANAGED MUNICIPAL TRUST
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- --------------- ----------------------------------------------------------------------------------- ------------
<S> <C> <C>
(1) (a)Declaration of Trust(1)
(b)Amendment effective January 28, 1988(3)
(c)Amendment effective August 23, 1988(4)
(d)Amendment effective March 28, 1991(6)
(e)Amendment effective July 1, 1991(7)
(2) By-Laws of the Trust(1)
(3) Not Applicable.
(4) Agreement and Plan of Reorganization and Termination (filed herewith)
(5) All agreements defining the rights of holders of the securities being registered --
None
(6) (a)Investment Advisory Contract(5)
(b)Sub-Advisory and Sub-Administration Contract(5)
(7) Distribution Contract(3)
(8) Bonus, Profit-Sharing, Pension or Other Similar Contracts --None
(9) (a)Custodian Agreement(2)
(b)Transfer Agency and Service Contract(5)
(10) Distribution Agreement and Rule 12b-1 Plan(8)
(11) Opinion and Consent of Kirkpatrick and Lockhart LLP regarding the legality of the
securities being issued (filed herewith)
(12) (a)Opinion and Consent of Kirkpatrick & Lockhart LLP regarding certain tax matters
(filed herewith)
(b)Opinion and Consent of Stroock & Stroock & Lavan regarding certain tax matters
(filed herewith)
(13) Not Applicable.
(14) (a)Consent of Ernst & Young LLP (filed herewith)
(b)Consent of Deloitte & Touche LLP (filed herewith)
(c)Consent of Orrick, Herrington & Sutcliffe (filed herewith)
(15) Omitted Financial Statements -- None
(16) Copies of manually signed Powers of Attorney --None
<PAGE>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- --------------- ----------------------------------------------------------------------------------- ------------
<S> <C> <C>
(17) Additional Exhibits
(a)Declaration pursuant to Rule 24f-2 (previously filed on EDGAR, Accession Number:
0000898432-95-000309)
(b)Proxy Card (filed herewith)
(c)Financial Data Schedule (filed herewith)
</TABLE>
- ---------------
[FN]
(1) Incorporated by reference from Post-Effective Amendment No. 5 to
registration statement, SEC File No. 2-89016, filed January 30, 1987.
(2) Incorporated by reference from Post-Effective Amendment No. 7 to
registration statement SEC File No. 2-89016, filed February 1, 1988.
(3) Incorporated by reference from Post-Effective Amendment No. 8 to
registration statement, SEC File No. 2-89016, filed March 31, 1988.
(4) Incorporated by reference from Post-Effective Amendment No. 11 to
registration statement, SEC File No. 2-89016, filed October 24, 1988.
(5) Incorporated by reference from Post-Effective Amendment No. 18 to
registration statement, SEC File No. 2-89016, filed January 29, 1991.
(6) Incorporated by reference from Post-Effective Amendment No. 21 to
registration statement, SEC File No. 2-89016.
(7) Incorporated by reference from Post-Effective Amendment No. 22 to
registration statement, SEC File No. 2-89016, filed January 29, 1992.
(8) Incorporated by reference from Post-Effective Amendment No. 28 to the
registration statement, SEC File No. 2-89016, filed August 29, 1994.
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
THIS AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION ("Agreement") is
made as of September 22, 1995, between PaineWebber Managed Municipal Trust, a
Massachusetts business trust ("PW Trust"), on behalf of PaineWebber RMA
California Municipal Money Fund, a segregated portfolio of assets ("series")
thereof ("Acquiring Fund"), and PaineWebber/Kidder, Peabody California Tax
Exempt Money Fund, a Massachusetts business trust ("Target"). (Acquiring Fund
and Target are sometimes referred to herein individually as a "Fund" and
collectively as the "Funds," and PW Trust and Target are sometimes referred
to herein individually as an "Investment Company" and collectively as the
"Investment Companies.")
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
beneficial interest 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 beneficial interest 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." All agreements,
representations, actions, and obligations described herein made or to be
taken or undertaken by Acquiring Fund are made and shall be taken or
undertaken by PW Trust on its behalf.
In consideration of the mutual promises herein, the parties covenant and
agree as follows:
1. PLAN OF REORGANIZATION AND TERMINATION 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
A-1
<PAGE>
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.
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 terminated 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
terminated.
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 therefor 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 Investment Companies'
boards of trustees), either Fund may postpone the Valuation Time until such
time as such per share NAV difference is less than $.0025.
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 December 11, 1995, or at such other place and/or on such other date as
A-2
<PAGE>
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.
3.2. Target shall deliver to PW Trust 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 PW Trust 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. PW Trust 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 Investment Company 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 an unincorporated voluntary association with
transferable shares organized as a business trust under a written
instrument ("Business Trust"); it is duly organized, validly existing, and
in good standing under the laws of the Commonwealth of Massachusetts; and
a copy of its Declaration of Trust is on file with the Secretary of the
Commonwealth of Massachusetts;
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
A-3
<PAGE>
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, Massachusetts law or any provision of
Target's Declaration of Trust 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 PW Trust;
4.1.6. Except as disclosed in writing to and accepted by PW Trust, 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 PW
Trust, 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 trustees, 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;
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 PW Trust 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
A-4
<PAGE>
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 PW Trust 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 terminated 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. PW Trust is a Business Trust; it is duly organized, validly
existing, and in good standing under the laws of the Commonwealth of
Massachusetts; and a copy of its Declaration of Trust is on file with the
Secretary of the Commonwealth of Massachusetts;
4.2.2. PW Trust 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;
4.2.3. Acquiring Fund is a duly established and designated series of
PW Trust;
4.2.4. 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;
4.2.5. 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 to the extent that under Massachusetts law shareholders of a
Business Trust may, under certain circumstances, be held personally liable
for its obligations. 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;
4.2.6. 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;
A-5
<PAGE>
4.2.7. 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, Massachusetts law
or any provision of PW Trust's Declaration of Trust 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;
4.2.8. 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 PW Trust with respect to
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;
4.2.9. 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 PW Trust's board of trustees, 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;
4.2.10. 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 PW Trust, except for (a)
the filing with the SEC of the Registration Statement, (b) receipt of the
exemptive relief referenced in subparagraph 4.2.9, and (c) such consents,
approvals, authorizations, and filings as have been made or received or as
may be required subsequent to the Effective Time;
4.2.11. 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 Target for use therein;
4.2.12. Acquiring Fund is a "fund" as defined in section 851(h)(2) of
the Code; it 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;
4.2.13. 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 a series of an open-end
A-6
<PAGE>
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;
4.2.14. 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;
4.2.15. 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;
4.2.16. 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
4.2.17. 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;
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 value on a 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;
A-7
<PAGE>
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 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 PW Trust in obtaining such
information as PW Trust 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 PW Trust 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
A-8
<PAGE>
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. PW Trust 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 trustees and shall have
been approved by Target's shareholders in accordance with applicable law.
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 PW Trust, substantially to the effect that:
6.4.1. Acquiring Fund is a duly established series of PW Trust, a
Business Trust duly organized and validly existing under the laws of the
Commonwealth of Massachusetts with power under its Declaration of Trust 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 PW Trust on behalf of Acquiring Fund and (b) assuming due
authorization, execution, and delivery of this Agreement by
A-9
<PAGE>
Target, is a valid and legally binding obligation of PW Trust with
respect to 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, except to the extent
that under Massachusetts law shareholders of a Business Trust may, under
certain circumstances, be held personally liable for its obligations, 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 PW Trust's Declaration of Trust or By-Laws or any provision of any
agreement (known to such counsel, without any independent inquiry or
investigation) to which PW Trust (with respect to 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 PW Trust (with respect to
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
PW Trust on behalf of Acquiring Fund 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;
6.4.6. PW Trust 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 PW Trust (with respect to Acquiring Fund) or any of its
properties or assets attributable or allocable to Acquiring Fund and (b)
PW Trust (with respect to 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 Commonwealth of Massachusetts, on an opinion of competent
Massachusetts 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. PW Trust shall have received an opinion of Stroock & Stroock & Lavan,
counsel to Target, substantially to the effect that:
6.5.1. Target is a Business Trust duly organized and validly existing
under the laws of the Commonwealth of Massachusetts with power under its
Declaration of Trust to own all of its properties and assets and, to the
knowledge of such counsel, to carry on its business as presently
conducted;
A-10
<PAGE>
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 PW Trust on behalf of 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 Declaration of Trust 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 PW
Trust;
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;
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 PW Trust.
In rendering such opinion, such counsel may (i) rely, as to matters governed
by the laws of the Commonwealth of Massachusetts, on an opinion of competent
Massachusetts 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. PW Trust 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's assumption 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;
A-11
<PAGE>
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
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 PW Trust's board of trustees,
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 trustees, such waiver will not have a material
adverse effect on the Shareholders' interests.
7. BROKERAGE FEES AND EXPENSES
7.1. Each Investment Company 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.
A-12
<PAGE>
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.
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 trustees or
officers of either Investment Company, 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 Commonwealth of Massachusetts; 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.
11.3. The parties acknowledge that each Investment Company is a Business
Trust. Notice is hereby given that this instrument is executed on behalf of
each Investment Company's trustees solely in their capacity as trustees, and
not individually, and that each Investment Company's obligations under this
instrument are not binding on or enforceable against any of its trustees,
officers, or shareholders, but are only binding on and enforceable against
the respective Funds' assets and property. Each Fund agrees that, in
asserting any rights or claims under this Agreement, it shall look only to
the other Fund's assets and property in settlement of such rights or claims
and not to such trustees or shareholders.
A-13
<PAGE>
IN WITNESS WHEREOF, each party has caused this Agreement to be executed
by its duly authorized officer.
ATTEST:
PAINEWEBBER MANAGED MUNICIPAL TRUST,
on behalf of its series,
PAINEWEBBER RMA CALIFORNIA
MUNICIPAL MONEY FUND
<TABLE>
<CAPTION>
<S> <C>
By: /s/ Ilene Shore /s/ Dianne E. O'Donnell
------------------------------------
Assistant Secretary Vice President
ATTEST: PAINEWEBBER/KIDDER, PEABODY
CALIFORNIA TAX EXEMPT MONEY FUND
By: /s/ Scott Griff /s/ Gregory K. Todd
------------------------------------
Assistant Secretary Vice President
</TABLE>
A-14
September 25, 1995
PaineWebber Managed Municipal Trust
1285 Avenue of the Americas
New York, New York 10019
Dear Ladies and Gentlemen:
You have requested our opinion as to certain matters
regarding the issuance by PaineWebber Managed Municipal Trust
("Trust") of shares of beneficial interest (the "Shares") of
PaineWebber RMA California Municipal Money Fund ("PW Fund"), a
series of the Trust, pursuant to an Agreement and Plan of
Reorganization and Termination ("Plan") between the Trust, on
behalf of PW Fund, and PaineWebber/Kidder, Peabody California Tax
Exempt Money Fund ("PW/KP Fund"), a Massachusetts business trust.
Under the Plan, PW Fund would acquire the assets of PW/KP
Fund in exchange for the Shares and the assumption by PW Fund of
PW/KP Fund's liabilities. In connection with the Plan, the Trust
is about to file a Registration Statement on Form N-14 ("Form
N-14") for the purpose of registering the Shares under the
Securities Act of 1933, as amended ("1933 Act") to be issued
pursuant to the Plan.
We have examined originals or copies believed by us to be
genuine of the Trust's Declaration of Trust and By-Laws, minutes
of meetings of the Trust's board of trustees, the Plan, and such
other documents relating to the authorization and issuance of the
Shares as we have deemed relevant. Based upon that examination,
we are of the opinion that the Shares being registered by the
Form N-14 may be issued in accordance with the Plan and the
Trust's Declaration of Trust and By-Laws, subject to compliance
with the 1933 Act, the Investment Company Act of 1940, as
amended, and applicable state laws regulating the distribution of
securities, and when so issued, those Shares will be legally
issued, fully paid and non-assessable.
The Trust is an entity of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law, Trust
shareholders could, under certain circumstances, be held
personally liable for the obligations of the Trust or a series of
the Trust ("Series"), including PW Fund. The Trust's Declaration
of Trust states that the creditors of, contractors with, and
claimants against, the Trust or a Series shall look only to the
assets of that Trust or such Series for payment. It also
requires that notice of such disclaimer be given in each note,
bond, contract, certificate, undertaking or instrument made or
issued by the officers or the trustees of the Trust on behalf of
the Trust or a Series. The Declaration of Trust further
provides: (i) for indemnification from Trust or Series assets,
as appropriate, for all losses and expenses of any shareholder
held personally liable for the obligations of the Trust or Series
by virtue of ownership of Shares of a Series; and (ii) for a
Series to assume the defense of any claim against the shareholder
for any act or obligation of the Series. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which the Trust or a
Series would be unable to meet its obligations.
We hereby consent to this opinion accompanying the Form N-14
that the Trust plans to file with the Securities and Exchange
Commission and to the reference to our firm under the caption
"Miscellaneous -- Legal Matters" in the Prospectus/Proxy
Statement filed as part of the Form N-14.
Sincerely yours,
KIRKPATRICK & LOCKHART LLP
By:
Elinor W. Gammon
THEODORE L. PRESS
(202) 778-9025
[email protected]
September 25, 1995
PaineWebber Managed Municipal Trust
1285 Avenue of the Americas
New York, NY 10019
Ladies and Gentlemen:
PaineWebber Managed Municipal Trust ("PW Trust"), on behalf of
PaineWebber RMA California Municipal Money Fund, a segregated portfolio of
assets ("series") thereof ("Acquiring Fund"), has requested our opinion as to
certain federal income tax consequences of the proposed acquisition by Acquiring
Fund of PaineWebber/Kidder, Peabody California Tax Exempt Money Fund ("Target"),
pursuant to an Agreement and Plan of Reorganization and Termination between them
dated as of September 22, 1995 ("Plan"), attached as an exhibit to the
prospectus/proxy statement to be furnished in connection with the solicitation
of proxies by Target's board of trustees for use at a special meeting of Target
shareholders ("Special Meeting") to be held on December 4, 1995 ("Proxy"),
included in the registration statement on Form N-14 to be filed with the
Securities and Exchange Commission ("SEC") on or about the date hereof
("Registration Statement"). Specifically, Acquiring Fund has requested our
opinion:
(1) that the acquisition by Acquiring Fund of Target's assets in
exchange solely for voting shares of beneficial interest in Acquiring Fund and
the assumption by Acquiring Fund of Target's liabilities, followed by the
distribution of those shares by Target pro rata to its shareholders of record as
of the Effective Time (as hereinafter defined) ("Shareholders") constructively
in exchange for their shares of beneficial interest in Target ("Target Shares")
(such transaction sometimes being referred to herein as the "Reorganization"),
will constitute a "reorganization" within the meaning of section 368(a)(1)(C)
and that each Fund will be a "party to a reorganization" within the meaning of
section 368(b),
- ---------------
1 Acquiring Fund and Target are sometimes referred to herein individually either
by such names or as a "Fund" and collectively as the "Funds," and PW Trust and
Target are sometimes referred to herein individually either by such names or
as an "Investment Company" and collectively as the "Investment Companies."
(2) that Target, the Shareholders, and Acquiring Fund will recognize no
gain or loss upon the Reorganization, and
(3) regarding the basis and holding period after the Reorganization of
the transferred assets and the shares of Acquiring Fund issued pursuant thereto.
In rendering this opinion, we have examined (1) Target's currently
effective prospectus, dated November 28, 1994 (as supplemented January 30,
1995), and statement of additional information ("SAI"), dated November 28, 1994,
and Acquiring Fund's currently effective prospectus and SAI, both dated August
29, 1995, (2) the Proxy, (3) the Plan, and (4) such other documents as we have
deemed necessary or appropriate for the purposes hereof. As to various matters
of fact material to this opinion, we have relied, exclusively and without
independent verification, on statements of responsible officers of each Fund and
the representations described below and made in the Plan (as contemplated in
paragraph 6.6 thereof) (collectively "Representations").
FACTS
PW Trust is an unincorporated voluntary association with transferable
shares formed as a business trust under the laws of the Commonwealth of
Massachusetts (commonly referred to as a "Massachusetts business trust")
pursuant to a Declaration of Trust dated November 21, 1986; Acquiring Fund
commenced operations as a series thereof on November 7, 1988. Target is a
Massachusetts business trust formed pursuant to a Declaration of Trust dated May
7, 1987, and commenced operations on August 18, 1987. Each Investment Company
is registered with the SEC as an open-end management investment company under
the Investment Company Act of 1940 ("1940 Act"). PaineWebber Incorporated
("PaineWebber") serves as each Fund's investment adviser and administrator and
is the distributor of each Fund's shares. Mitchell Hutchins Asset Management
Inc. ("Mitchell Hutchins"), a wholly owned subsidiary of PaineWebber, serves as
sub-adviser and sub-administrator to each Fund.
The Reorganization, together with all related acts necessary to
consummate the same ("Closing"), shall occur as of 12:00 noon on December 11,
1995 (or on such other date or at such other time as the parties may agree)
("Effective Time"). 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) for the current taxable year through the Effective Time.
- ---------------
2 All section references are to the Internal Revenue Code of 1986, as amended
("Code"), and all "Treas. Reg. Section" references are to the regulations
under the Code ("Regulations").
The Funds' investment objectives, which are substantially identical, and
investment policies, which are generally similar, are described in the Proxy and
their respective prospectuses and SAIs. Although there are some differences in
those policies, it is not expected that Acquiring Fund will revise its
investment policies following the Reorganization to reflect Target's. Mitchell
Hutchins believes that all of Target's assets will be consistent with Acquiring
Fund's investment policies and thus can be transferred to and held by Acquiring
Fund pursuant to the Reorganization.
The Reorganization was recommended by Mitchell Hutchins to each
Investment Company's board of trustees (each a "board") at meetings thereof held
on July 20, 1995. In considering the Reorganization, each board made an
extensive inquiry into a number of factors (which are described in the Proxy,
together with Mitchell Hutchins's advice and recommendations to the boards and
the purposes of the Reorganization). Pursuant thereto, each board approved the
Plan, subject to approval of Target's shareholders. In doing so, each board,
including a majority of its members who are not "interested persons" (as that
term is defined in the 1940 Act) of either Investment Company, determined that
the Reorganization is in its Fund's best interests, that the terms of the
Reorganization are fair and reasonable, and that its Fund's shareholders'
interests will not be diluted as a result of the Reorganization.
The Plan, which specifies that it is intended to be, and is adopted as,
a plan of a reorganization described in section 368(a)(1)(C), provides in
relevant part for the following:
(1) The acquisition by Acquiring Fund of 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
(collectively "Assets") in exchange solely for
(a) the number of full and fractional shares of beneficial
interest in Acquiring Fund ("Acquiring Fund Shares") determined by dividing the
net value of Target by the net asset value ("NAV") of an Acquiring Fund Share,
and
(b) Acquiring Fund's assumption of 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 the Plan, including without limitation Target's
share of the expenses incurred in connection with the Reorganization
(collectively "Liabilities") (Target having agreed in the Plan to use its best
efforts to discharge all of its known liabilities and obligations prior to the
Effective Time),
(2) The constructive distribution of such Acquiring Fund Shares to the
Shareholders, and
(3) The subsequent termination of Target.
The distribution described in (2) will be accomplished by transferring
the Acquiring Fund Shares then credited to Target's account on Acquiring Fund's
share transfer records to open accounts on those records established in the
Shareholders' names, with each Shareholder's account being credited with the
respective pro rata number of full and fractional (rounded to three decimal
places) Acquiring Fund Shares due such Shareholder. All outstanding Target
Shares, including any represented by certificates, simultaneously will be
canceled on Target's share transfer records.
REPRESENTATIONS
The representations enumerated below have been made to us by appropriate
officers of each Investment Company.
Each of PW Trust, on behalf of Acquiring Fund, and Target has
represented and warranted to us as follows:
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;
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;
3. The Shareholders will pay their own expenses, if any,
incurred in connection with the Reorganization;
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;
5. The fair market value on a 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;
6. There is no intercompany indebtedness between the Funds that
was issued or acquired, or will be settled, at a discount;
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
and (b) redemptions not made as part of the Reorganization) will be included as
assets thereof held immediately before the Reorganization;
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
9. Immediately after the Reorganization, the Shareholders will
not own shares constituting "control" of Acquiring Fund within the meaning of
section 304(c).
Target also has represented and warranted to us as follows:
1. The Liabilities were incurred by Target in the ordinary
course of its business;
2. Target qualified for treatment as a regulated investment
company ("RIC") under Subchapter M of the Code ("Subchapter M") 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;
3. 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);
4. 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
5. Target will be terminated as soon as reasonably practicable
after the Reorganization, but in all events within six months after the
Effective Time.
PW Trust also has represented and warranted to us on behalf of Acquiring
Fund as follows:
1. Acquiring Fund is a "fund" as defined in section 851(h)(2);
it qualified for treatment as a RIC under Subchapter M 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 did not apply to it;
2. 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 a series of 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;
3. 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 under Subchapter M, 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. 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)) following the Reorganization;
5. 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
6. 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.
OPINION
Based solely on the facts set forth above, and conditioned on (1) the
Representations being true at the time of Closing and (2) the Reorganization
being consummated in accordance with the Plan, our opinion (as explained more
fully in the next section of this letter) is as follows:
1. Acquiring Fund's acquisition of the Assets in exchange
solely for the Acquiring Fund Shares and Acquiring Fund's assumption of the
Liabilities, followed by Target's distribution of those shares pro rata to the
Shareholders constructively in exchange for their Target Shares, will constitute
a reorganization within the meaning of section 368(a)(1)(C), and each Fund will
be "a party to a reorganization" within the meaning of section 368(b);
2. No gain or loss will be recognized to Target on the transfer
of the Assets to Acquiring Fund in exchange solely for the Acquiring Fund Shares
and Acquiring Fund's assumption of the Liabilities or upon the subsequent
distribution of those shares to the Shareholders in constructive exchange for
their Target Shares (section 361);
3. No gain or loss will be recognized to Acquiring Fund on its
receipt of the Assets in exchange solely for the Acquiring Fund Shares and its
assumption of the Liabilities (section 1032(a));
4. Acquiring Fund's basis for the Assets will be the same as
the basis thereof in Target's hands immediately before the Reorganization
(section 362(b)), and Acquiring Fund's holding period for the Assets will
include Target's holding period therefor (section 1223(2));
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 (section 354(a)); and
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 (section 358(a)), 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 on the Closing Date (section
1223(1)).
The foregoing opinion (1) is based on, and is conditioned on the
continued applicability of, the provisions of the Code and the Regulations,
judicial decisions, and rulings and other pronouncements of the Internal Revenue
Service ("Service") in existence on the date hereof and (2) is applicable only
to the extent each Fund is solvent. We express no opinion about the tax
treatment of the transactions described herein if either Fund is insolvent.
ANALYSIS
I. The Reorganization Will Be a Reorganization under Section 368(a)(1)(C), and
Each Fund Will Be a Party to a Reorganization.
A. Each Fund Is a Separate Corporation.
A reorganization under section 368(a)(1)(C) (a "C reorganization")
involves the acquisition by one corporation, in exchange solely for all or a
part of its voting stock, of substantially all of the properties of another
corporation. For the transaction to qualify under that section, therefore, both
entities involved therein must be corporations (or associations taxable as
corporations). Each Investment Company, however, is a Massachusetts business
trust, not a corporation, and Acquiring Fund is a separate series of PW Trust.
Treasury Regulation section 301.7701-4(b) provides that certain
arrangements known as trusts (because legal title is conveyed to trustees for
the benefit of beneficiaries) will not be classified as trusts for purposes of
the Code because they are not simply arrangements to protect or conserve the
property for the beneficiaries. These "business or commercial trusts" are
created simply as devices to carry on profit-making businesses that normally
would have been carried on through corporations or partnerships. Treasury
Regulation section 301.7701-4(c) further provides that an "`investment' trust
will not be classified as a trust if there is a power under the trust agreement
to vary the investment of the certificate holders." See Commissioner v. North
American Bond Trust, 122 F.2d 545 (2d Cir. 1941), cert. denied, 314 U.S. 701
(1942).
Based on these criteria, neither Investment Company qualifies as a trust
for federal income tax purposes. While each Investment Company is an
"investment trust," it does not have a fixed pool of assets -- each Fund has
been a managed portfolio of securities, and its investment adviser has had the
authority to buy and sell securities for it. Neither Investment Company is
simply an arrangement to protect or conserve property for the beneficiaries, but
each is designed to carry on a profit-making business. In addition, the word
"association" has long been held to include "Massachusetts business trusts,"
such as the Investment Companies. See Hecht v. Malley, 265 U.S. 144 (1924).
Accordingly, we believe that each Investment Company will be treated as a
corporation for federal income tax purposes.
PW Trust as such, however, is not participating in the Reorganization,
but rather a series of PW Trust is a participant. Ordinarily, a transaction
involving a segregated pool of assets (such as Acquiring Fund) could not qualify
as a reorganization, because the pool would not be a corporation. Under section
851(h), however, Acquiring Fund is treated as a separate corporation for all
purposes of the Code save the definitional requirement of section 851(a) (which
is satisfied by PW Trust). Thus, we believe that Acquiring Fund will be a
separate corporation, and each Fund's shares will be treated as shares of
corporate stock, for purposes of section 368(a)(1)(C).
B. Satisfaction of Section 368(a)(2)(F).
Under section 368(a)(2)(F), if two or more parties to a transaction
described in section 368(a)(1) (other than subparagraph (E) thereof) are
"investment companies," the transaction will not be considered a reorganization
with respect to any such investment company or its shareholders unless, among
other things, the investment company is a RIC or --
(1) not more than 25% of the value of its total assets is invested
in the stock and securities of any one issuer and
(2) not more than 50% of the value of its total assets is invested
in the stock and securities of five or fewer issuers.
Each Fund will meet the requirements for qualification and treatment as a RIC
for its respective current taxable year, and the foregoing percentage tests will
be satisfied by each Fund. Accordingly, we believe that section 368(a)(2)(F)
will not cause the Reorganization to fail to qualify as a C reorganization with
respect to either Fund.
C. Transfer of "Substantially All" of the Properties.
For an acquisition to qualify as a C reorganization, the acquiring
corporation must acquire "substantially all of the properties" of the transferor
corporation solely in exchange for all or part of the acquiring corporation's
stock. For purposes of issuing private letter rulings, the Service considers
the transfer of at least 70% of the transferor's gross assets, and at least 90%
of its net assets, held immediately before the reorganization to satisfy the
"substantially all" requirement. Rev. Proc. 77-37, 1977-2 C.B. 568. The
Reorganization will involve such a transfer. Accordingly, we believe that the
Reorganization will involve the transfer to Acquiring Fund of substantially all
of Target's properties.
D. Qualifying Consideration.
For an acquisition to qualify as a C reorganization, the acquiring
corporation must acquire at least 80% (by fair market value) of the transferor's
property solely in exchange for voting stock. Section 368(a)(2)(B)(iii). The
assumption of liabilities by the acquiring corporation or its acquisition of
property subject to liabilities normally are disregarded (section 368(a)(1)(C)),
but the amount of any such liabilities will be treated as money paid for the
transferor's property if the acquiring corporation exchanges any money or
property (other than its voting stock) therefor. Section 368(a)(2)(B). Because
Acquiring Fund will exchange only the Acquiring Fund Shares, and no money or
other property, for the Assets, we believe that the Reorganization will satisfy
the solely-for-voting-stock requirement to qualify as a C reorganization.
E. Requirements of Continuity.
Treasury Regulation section 1.368-1(b) sets forth two prerequisites to a
valid reorganization: (1) a continuity of the business enterprise under the
modified corporate form ("continuity of business") and (2) a continuity of
interest therein on the part of those persons who, directly or indirectly, were
the owners of the enterprise prior to the reorganization ("continuity of
interest").
1. Continuity of Business.
The continuity of business enterprise test as set forth in Treas. Reg.
Section 1.368-1(d)(2) requires that the acquiring corporation must either (i)
continue the acquired corporation's historic business ("business continuity") or
(ii) use a significant portion of the acquired corporation's historic business
assets in a business ("asset continuity").
While there is no authority that deals directly with the requirement of
continuity of business in the context of a transaction such as the
Reorganization, Rev. Rul. 87-76, 1987-2 C.B. 84, deals with a somewhat similar
situation. In that ruling, P was a RIC that invested exclusively in municipal
securities. P acquired the assets of T in exchange for P common stock in a
transaction that was intended to qualify as a C reorganization. Prior to the
exchange, T sold its entire portfolio of corporate securities and purchased a
portfolio of municipal bonds. The Service held that this transaction did not
qualify as a reorganization for the following reasons: (1) because T had sold
its historic assets prior to the exchange, there was no asset continuity; and
(2) the failure of P to engage in the business of investing in corporate
securities after the exchange caused the transaction to lack business continuity
as well.
The Funds' investment objectives are substantially identical and their
investment policies are generally similar. Furthermore, Acquiring Fund will
actively continue Target's business in the same manner that Target conducted it
immediately before the Reorganization. Accordingly, there will be business
continuity.
Acquiring Fund not only will continue Target's historic business, but
Acquiring Fund also (1) has no plan or intention to sell or otherwise dispose of
any of the Assets, except for dispositions made in the ordinary course of its
business and dispositions necessary to maintain its status as a RIC, and (2)
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. Although there are some differences in the
Funds' investment policies, Mitchell Hutchins believes that all of Target's
assets will be consistent with Acquiring Fund's investment policies and thus can
be transferred to and held by Acquiring Fund pursuant to the Reorganization.
Accordingly, there will be asset continuity as well.
For all the foregoing reasons, we believe that the Reorganization will
meet the continuity of business requirement.
2. Continuity of Interest.
For purposes of issuing private letter rulings, the Service considers
the continuity of interest requirement of Treas. Reg. Section 1.368-1(b)
satisfied if ownership in an acquiring corporation on the part of a transferor
corporation's former shareholders is equal in value to at least 50% of the value
of all the formerly outstanding shares of the transferor corporation. Rev.
Proc. 77-37, supra; but see Rev. Rul. 56-345, 1956-2 C.B. 206 (continuity of
interest was held to exist in a reorganization of two RICs where immediately
after the reorganization 26% of the shares were redeemed in order to allow
investment in a third RIC); also see Reef Corp. v. Commissioner, 368 F.2d 125
(5th Cir. 1966), cert. denied, 386 U.S. 1018 (1967) (a redemption of 48% of a
transferor corporation's stock was not a sufficient shift in proprietary
interest to disqualify a transaction as a reorganization under section
368(a)(2)(F) ("F Reorganization"), even though only 52% of the transferor's
shareholders would hold all the transferee's stock); Aetna Casualty and Surety
Co. v. U.S., 568 F.2d 811, 822-23 (2d Cir. 1976) (redemption of a 38.39%
minority interest did not prevent a transaction from qualifying as an F
Reorganization); Rev. Rul. 61-156, 1961-2 C.B. 62 (a transaction qualified as an
F Reorganization even though the transferor's shareholders acquired only 45% of
the transferee's stock, while the remaining 55% of that stock was issued to new
shareholders in a public underwriting immediately after the transfer).
No minimum holding period for shares of an acquiring corporation is
imposed under the Code on the acquired corporation's shareholders. Rev. Rul.
66-23, 1966-1 C.B. 67, provides generally that "unrestricted rights of ownership
for a period of time sufficient to warrant the conclusion that such ownership is
definite and substantial" will suffice and that "ordinarily, the Service will
treat five years of unrestricted . . . ownership as a sufficient period" for
continuity of interest purposes.
A preconceived plan or arrangement by or among an acquired corporation's
shareholders to dispose of more than 50% of an acquiring corporation's shares
could be problematic. Shareholders with no such preconceived plan or
arrangement, however, are basically free to sell any part of the shares received
by them in the reorganization without fear of breaking continuity of interest,
because the subsequent sale will be treated as an independent transaction from
the reorganization.
Neither Fund (1) is aware of any plan or intention of Shareholders to
dispose of any portion of the Acquiring Fund Shares to be received by them in
the Reorganization or (2) anticipates dispositions thereof 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, each Fund 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. Accordingly, we believe that the
Reorganization will meet the continuity of interest requirement of Treas. Reg.
Section 1.368-1(b).
F. Distribution by Target.
Section 368(a)(2)(G)(i) provides that a transaction will not qualify as
a C reorganization unless the corporation whose properties are acquired
distributes the stock it receives and its other property in pursuance of the
plan of reorganization. Under the Plan -- which we believe constitutes a "plan
of reorganization" within the meaning of Treas. Reg. Section 1.368-2(g) --
Target will distribute all the Acquiring Fund Shares to its shareholders in
constructive exchange for their Target Shares; as soon as is reasonably
practicable thereafter, Target will be dissolved. Accordingly, we believe that
the requirements of section 368(a)(2)(G)(i) will be satisfied.
G. Business Purpose.
All reorganizations must meet the judicially imposed requirements of the
"business purpose doctrine," which was established in Gregory v. Helvering, 293
U.S. 465 (1935), and is now set forth in Treas. Reg. Section Section 1.368-
1(b), -1(c), and -2(g) (the last of which provides that, to qualify as a
reorganization, a transaction must be "undertaken for reasons germane to the
continuance of the business of a corporation a party to the reorganization").
Under that doctrine, a transaction must have a bona fide business purpose (and
not a purpose to avoid federal income tax) to constitute a valid reorganization.
The substantial business purposes of the Reorganization are described in the
Proxy. Accordingly, we believe that the Reorganization is being undertaken for
bona fide business purposes (and not a purpose to avoid federal income tax) and
therefore meets the requirements of the business purpose doctrine.
For all the foregoing reasons, we believe that the Reorganization will
constitute a reorganization within the meaning of section 368(a)(1)(C).
H. Both Funds are Parties to the Reorganization.
Section 368(b)(2) and Treas. Reg. Section 1.368-1(f) provide that if
one corporation transfers substantially all of its properties to a second
corporation in exchange for all or a part of the voting stock of the second
corporation, then both corporations are parties to a reorganization. Target is
transferring substantially all of its properties to Acquiring Fund in exchange
for Acquiring Fund Shares. Accordingly, we believe that each Fund will be "a
party to a reorganization."
II. No Gain or Loss Will Be Recognized to Target.
Under sections 361(a) and (c), no gain or loss will be recognized to a
corporation that is a party to a reorganization (1) on the exchange of property,
pursuant to the plan of reorganization, solely for stock or securities in
another corporate party to the reorganization or (2) on the distribution to its
shareholders, pursuant to that plan, of stock in such other corporation that was
received by the distributing corporation in the exchange. (Such a distribution
is required by section 368(a)(2)(G)(i) for a reorganization to qualify as a C
reorganization.) Section 361(c)(4) provides that specified provisions requiring
recognition of gain on certain distributions shall not apply to a distribution
described in (2) above.
Section 357(a) provides in pertinent part that, except as provided in
section 357(b), if a taxpayer receives property that would be permitted to be
received under section 361 without recognition of gain if it were the sole
consideration and, as part of the consideration, another party to the exchange
assumes a liability of the taxpayer or acquires from the taxpayer property
subject to a liability, then that assumption or acquisition shall not be treated
as money or other property and shall not prevent the exchange from being within
section 361. Section 357(b) applies where the principal purpose of the
assumption or acquisition was a tax avoidance purpose or not a bona fide
business purpose.
As noted above, the Reorganization will constitute a C reorganization,
each Fund will be a party to a reorganization, and the Plan constitutes a plan
of reorganization. Target will exchange the Assets solely for the Acquiring
Fund Shares and Acquiring Fund's assumption of the Liabilities and then will be
dissolved pursuant to the Plan, distributing those shares to its shareholders in
constructive exchange for their Target Shares. As also noted above, we believe
that the Reorganization is being undertaken for bona fide business purposes (and
not a purpose to avoid federal income tax); we also do not believe that the
principal purpose of Acquiring Fund's assumption of the Liabilities is avoidance
of federal income tax on the proposed transaction. Accordingly, we believe that
no gain or loss will be recognized to Target on the Reorganization.
- ---------------
3 Notwithstanding anything herein to the contrary, 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.
III. No Gain or Loss Will Be Recognized to Acquiring Fund.
Section 1032(a) provides that no gain or loss will be recognized to a
corporation on the receipt by it of money or other property in exchange for its
shares. Acquiring Fund will issue the Acquiring Fund Shares to Target in
exchange for the Assets, which consist of money and securities. Accordingly, we
believe that no gain or loss will be recognized to Acquiring Fund on the
Reorganization.
IV. Acquiring Fund's Basis for the Assets Will Be a Carryover Basis, and Its
Holding Period Will Include Target's Holding Period.
Section 362(b) provides that property acquired by a corporation in
connection with a reorganization will have the same basis in that corporation's
hands as the basis of the property in the transferor corporation's hands
immediately before the exchange, increased by any gain recognized to the
transferor on the transfer. As noted above, the Reorganization will constitute
a C reorganization and Target will recognize no gain on the Reorganization under
section 361(a). Accordingly, we believe that Acquiring Fund's basis for the
Assets will be the same as the basis thereof in Target's hands immediately
before the Reorganization.
Section 1223(2) provides that where property acquired in an exchange has
a carryover basis, the property will have a holding period in the hands of the
acquiror that includes the holding period of the property in the transferor's
hands. As stated above, Acquiring Fund's basis for the Assets will be a
carryover basis. Accordingly, we believe that Acquiring Fund's holding period
for the Assets will include Target's holding period therefor.
V. No Gain or Loss Will Be Recognized to a Shareholder.
Under section 354(a), no gain or loss is recognized to a shareholder who
exchanges shares for other shares pursuant to a plan of reorganization, where
the shares exchanged, as well as the shares received, are those of a corporation
that is a party to the reorganization. As stated above, the Reorganization will
constitute a C reorganization, the Plan constitutes a plan of reorganization,
and each Fund will be a party to a reorganization. Accordingly, we believe that
under section 354 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.
VI. A Shareholder's Basis for Acquiring Fund Shares Will Be a Substituted
Basis, and its Holding Period therefor Will Include its Holding Period for its
Target Shares.
Section 358(a)(1) provides, in part, that in the case of an exchange to
which section 354 applies, the basis of any shares received in the transaction
without the recognition of gain is the same as the basis of the property
transferred in exchange therefor, decreased by, among other things, the fair
market value of any other property and the amount of any money received in the
transaction and increased by the amount of any gain recognized on the exchange
by the shareholder.
As noted above, the Reorganization will constitute a C reorganization
and under section 354 no gain or loss will be recognized to a Shareholder on the
constructive exchange of its Target Shares for Acquiring Fund Shares in the
Reorganization. No property will be distributed to the Shareholders other than
the Acquiring Fund Shares, and no money will be distributed to them pursuant to
the Reorganization. Accordingly, we believe that 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.
Under section 1223(1), the holding period of property received in an
exchange includes the holding period of the property exchanged therefor if the
acquired property has, for the purpose of determining gain or loss, the same
basis in the holder's hands as the property exchanged therefor ("substituted
basis") and such property was a capital asset. As noted above, a Shareholder
will have a substituted basis for the Acquiring Fund Shares it receives in the
Reorganization; accordingly, provided that the Shareholder held its Target
Shares as capital assets on the Closing Date, we believe its holding period for
those Acquiring Fund Shares will include its holding period for those Target
Shares.
We hereby consent to this opinion accompanying the Registration
Statement and to the references to our firm under the captions "Synopsis --
Federal Income Tax Consequences of the Reorganization" and "The Proposed
Transaction -- Federal Income Tax Considerations" in the Proxy.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By: /s/ Theodore L. Press
--------------------------
Theodore L. Press
September 22, 1995
PaineWebber/Kidder, Peabody California
Tax Exempt Money Fund
1285 Avenue of the Americas
New York, New York 10019
Re: Registration Statement on Form N-14
Ladies and Gentlemen:
You have requested our opinion as to certain Federal income tax
consequences of the reorganization contemplated by the Agreement
and Plan of Reorganization and Termination, substantially in the
form included as Appendix A to the Registration Statement on Form
N-14 of PaineWebber Managed Municipal Trust, the initial filing of
which will be made with the Securities and Exchange Commission on
or about the date hereof (the "Registration Statement"), between
PaineWebber/Kidder, Peabody California Tax Exempt Money Fund
("PW/KP Fund"), a Massachusetts business trust, and PaineWebber RMA
California Municipal Money Fund ("PW Fund"), a series of
PaineWebber Managed Municipal Trust ("PW Trust"), a Massachusetts
business trust.
In rendering this opinion, we have examined the Agreement and Plan
of Reorganization and Termination, the Registration Statement, and
such other documents as we have deemed necessary or relevant for
the purpose of this opinion. In issuing our opinion, we have
relied, exclusively and without independent verification, on the
representations set forth in the Agreement and Plan of
Reorganization and Termination. We have examined such matters of
law as we have deemed necessary or appropriate for the purpose of
this opinion. We note that our opinion is based on our examination
of such law, our review of the documents described above, the
representations in the Registration Statement and the Agreement and
Plan of Reorganization and Termination, the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the
regulations, published rulings and announcements thereunder, and
the judicial interpretations thereof currently in effect. Any
change in applicable law or any of the facts and circumstances
described in the Registration Statement, or inaccuracy of any
representations on which we have relied, may affect the continuing
validity of our opinion.
Capitalized terms not defined herein have the respective meanings
given such terms in the Agreement and Plan of Reorganization and
Termination.
Based on the foregoing, it is our opinion that for Federal income
tax purposes:
(a) PW Fund's acquisition of the Assets in exchange solely
for PW Fund shares and PW Fund's assumption of the Liabilities,
followed by PW/KP Fund's distribution of those PW Fund shares to
the Shareholders constructively in exchange for the Shareholders'
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;
(b) No gain or loss will be recognized to PW/KP Fund on the
transfer to PW Fund of the Assets in exchange solely for PW Fund
shares and PW Fund's assumption of the Liabilities or on the
subsequent distribution of those PW Fund shares to the Shareholders
in constructive exchange for their PW/KP Fund shares;
(c) No gain or loss will be recognized to PW Fund on its
receipt of the Assets in exchange solely for PW Fund shares and its
assumption of the Liabilities;
(d) PW Fund's basis for the Assets will be the same as the
basis thereof in PW/KP Fund's hands immediately before the
Reorganization, and PW Fund's holding period for the Assets will
include PW/KP Fund's holding period therefor;
(e) A Shareholder will recognize no gain or loss on the
constructive exchange of all of its PW/KP Fund shares solely for PW
Fund shares pursuant to the Reorganization; and
(f) A 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
shares, provided they are held as capital assets by the Shareholder
at the Effective Time.
Notwithstanding the above, no opinion is expressed as to the effect
of the Reorganization on PW/KP Fund or PW Fund 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.
We hereby consent to the filing of this opinion as an exhibit to
the Registration Statement and to the reference to us in the
Prospectus/Proxy Statement included in the Registration Statement,
and to the filing of this opinion as an exhibit to any Registration
Statement, and to the filing of this opinion as an exhibit to any
application made by or on behalf of PW Trust or any distributor or
dealer in connection with the registration and qualification of PW
Trust or PW Fund shares under the securities laws of any state or
jurisdiction. In giving such permission, we do not admit hereby
that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933 or the rules
and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
/s/ STROOCK & STROOCK & LAVAN
STROOCK & STROOCK & LAVAN
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
incorporation by reference of our reports on PaineWebber RMA California
Municipal Money Fund and PaineWebber/Kidder, Peabody California Tax Exempt Money
Fund dated August 17, 1995 and September 21, 1995, respectively, in this
Registration Statement (Form N-14) of PaineWebber Managed Municipal Trust.
ERNST & YOUNG LLP
New York, New York
September 22, 1995
CONSENT OF INDEPENDENT AUDITORS
PaineWebber Managed Municipal Trust:
We consent to the incorporation by reference in this Registration Statement on
Form N-14 of our report dated September 9, 1994, appearing in the annual report
to shareholders of Kidder, Peabody California Tax Exempt Money Fund for the year
ended July 31, 1994 and to the reference to us under the caption "Experts"
appearing in the Prospectus/Proxy Statement, which is a part of such
Registration Statement.
Deloitte & Touche LLP
New York, New York
September 25, 1995
September 22, 1995
Mitchell Hutchins
1285 Avenue of the Americas
New York, New York 10019
Re: PaineWebber/Kidder, Peabody California Tax Exempt
Money Fund, a series of PaineWebber Managed
Municipal Trust (the "California Fund")
We hereby consent to the filing of this consent as an exhibit to the
registration statement on Form N-14 for the California Fund dated as of the date
hereof (the "Registration Statement") and to the use of our name as counsel to
the California Fund with respect to California law in the Registration Statement
and the Prospectus for the California Fund.
Very truly yours,
Orrick, Herrington & Sutcliffe
PROXY
PaineWebber/Kidder, Peabody California Tax Exempt Money Fund
Special Meeting of Shareholders - December 4, 1995
The undersigned hereby appoints as proxies Dianne E. O'Donnell and Rita Barnett
and each of them (with power of substitution) to vote for the undersigned all
shares of beneficial interest of the undersigned at the aforesaid meeting and
any adjournment thereof with all the power the undersigned would have if
personally present. The shares represented by this proxy will be voted as
instructed. UNLESS INDICATED TO THE CONTRARY, THIS PROXY SHALL BE DEEMED TO
GRANT AUTHORITY TO VOTE "FOR" ALL PROPOSALS. THIS PROXY IS SOLICITED ON BEHALF
OF THE BOARD OF TRUSTEES OF PAINEWEBBER/ KIDDER, PEABODY CALIFORNIA TAX EXEMPT
MONEY FUND.
YOUR VOTE IS IMPORTANT
Please date and sign this proxy on the reverse side and return it in the
enclosed envelope to Alamo Direct Mail Services, Inc., 10 Lucon Drive, Deer
Park, NY 11729.
Please indicate your vote by an "X" in the appropriate box below. The Board of
Trustees recommends a vote "FOR"
FOR AGAINST ABSTAIN
1. To consider an Agreement and Plan of Reorganization and Termination
under which PaineWebber RMA California Municipal Money Fund ("PW Fund"), a
series of PaineWebber Managed Municipal Trust, a Massachusetts business trust,
would acquire the assets of PaineWebber/Kidder, Peabody California Tax Exempt
Money Fund ("PW/KP Fund"), in exchange solely for shares of beneficial interest
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, all as
described in the accompanying Prospectus/ Proxy Statement; and
____ ____ ____
Continued and to be signed on reverse side
FOR AGAINST ABSTAIN
2. To consider and vote upon such other business as may properly come
before the meeting or any adjournments thereof.
____ ____ ____
This proxy will not be voted unless it is dated and signed exactly as
instructed below.
If shares are held jointly, each shareholder named should sign. If only one
signs, his or her signature will be binding. If the shareholder is a
corporation, the President or a Vice President should sign in his or her own
name, indicating title. If the shareholder is a partnership, a partner should
sign in his or her own name, indicating that he or she is a "Partner."
Sign exactly as name appears hereon.
_____________________________ (L.S.)
_____________________________ (L.S.)
Date ________________________ , 1995
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000739243
<NAME> PAINEWEBBER MANAGED MUNICIPAL TRUST
<SERIES>
<NUMBER> 1
<NAME> PAINEWEBBER RMA CALIFORNIA MUNICIPAL MONEY FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 341987
<INVESTMENTS-AT-VALUE> 341987
<RECEIVABLES> 5990
<ASSETS-OTHER> 2147
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 350124
<PAYABLE-FOR-SECURITIES> 18622
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 566
<TOTAL-LIABILITIES> 19188
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 331258
<SHARES-COMMON-STOCK> 331258
<SHARES-COMMON-PRIOR> 295472
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (321)
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 330937
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11412
<OTHER-INCOME> 0
<EXPENSES-NET> (2220)
<NET-INVESTMENT-INCOME> 9192
<REALIZED-GAINS-CURRENT> (32)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 9160
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (9192)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1651147
<NUMBER-OF-SHARES-REDEEMED> (1624313)
<SHARES-REINVESTED> 8952
<NET-CHANGE-IN-ASSETS> 35753
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (289)
<GROSS-ADVISORY-FEES> 1588
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2220
<AVERAGE-NET-ASSETS> 319914
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.029
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (0.029)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.69
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>