<PAGE>
As filed with the Securities and Exchange Commission on September 6, 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:
LEWIS G. COLE SUSAN M. CASEY, ESQ.
RORY M. COHEN, ESQ.
Stroock & Stroock & Lavan Kirkpatrick & Lockhart LLP
7 Hanover Square 1800 M Street, N.W.
New York, New York 10004-2696 Washington, D.C. 20036-5891
Telephone: (212) 806-5400 Telephone: (202) 778-9000
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 6, 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. Prospectus/Proxy
and Caption Statement Caption
--------------- -----------------
<C> <S> <C>
1. Beginning of Registration Statement Cover Page
and Outside Front Cover Page of
Prospectus
2. Beginning and Outside Back Cover Page Table of Contents
of Prospectus
3. Synopsis Information and Risk Factors Synopsis; Comparison of
Principal Risk Factors
4. Information About the Transaction Synopsis; The Proposed
Transaction
5. Information About the Registrant Synopsis; Comparison of
Principal Risk Factors;
Miscellaneous; Prospectus of
PaineWebber RMA New York Municipal
Money Fund, dated August 29, 1995,
previously filed on EDGAR,
Accession Number:
0000950112-95-002294
6. Information About the Company Being Synopsis; Comparison of
Acquired Principal Risk Factors;
Miscellaneous; Prospectus of
PaineWebber/Kidder, Peabody Municipal
Money Market Series - New York
Series, dated February 28, 1995.
7. Voting Information Voting Information
8. Interest of Certain Persons and Not Applicable
Experts
9. Additional Information Required for Not Applicable
Reoffering by Persons Deemed to be
Underwriters
<PAGE>
<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 Statement of Additional
Registrant Information of PaineWebber RMA
New York Municipal Money Fund,
dated August 29, 1995, previously
filed on EDGAR, Accession Number:
0000950112-95-002294
13. Additional Information About the Statement of Additional
Company Being Acquired Information of PaineWebber/Kidder,
Peabody Municipal Money Market
Series - New York Series, dated
February 28, 1995.
14. Financial Statements Annual Report of PaineWebber RMA New
York 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 Municipal Money Market
Series - New York Series for Fiscal
Year Ended October 31, 1994
Semi-Annual Report of PaineWebber/
Kidder, Peabody Municipal Money
Market Series - New York Series,
for Six Months Ended April 30, 1995
as previously filed on EDGAR
Accession Number:
0000950117-95-000250
Pro Forma Financial Statements for
PaineWebber RMA New York Municipal
Money Fund for the year ended
June 30, 1995
</TABLE>
<PAGE>
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 MUNICIPAL
MONEY MARKET SERIES - NEW YORK SERIES
(a series of PaineWebber/Kidder, Peabody
Municipal Money Market Series)
October ___, 1995
Dear Shareholder:
The attached proxy materials describe a proposal that PaineWebber/Kidder,
Peabody Municipal Money Market Series - New York Series ("PW/KP Fund")
reorganize and become part of PaineWebber RMA New York 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 Municipal
Money Market Series - New York Series
<PAGE>
PAINEWEBBER/KIDDER PEABODY MUNICIPAL
MONEY MARKET SERIES - NEW YORK SERIES
(a series of PaineWebber/Kidder, Peabody
Municipal Money Market Series)
------------------
NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS
November 8, 1995
------------------
To the Shareholders:
A special meeting of shareholders ("Meeting") of PaineWebber/Kidder,
Peabody Municipal Money Market Series - New York Series ("PW/KP Fund"), a series
of PaineWebber/Kidder, Peabody Municipal Money Market Series, will be held on
November 8, 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 New York 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 September 25, 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 NEW YORK MUNICIPAL MONEY FUND
(a series of PaineWebber Managed Municipal Trust)
PAINEWEBBER/KIDDER, PEABODY MUNICIPAL
MONEY MARKET SERIES - NEW YORK SERIES
(a series of PaineWebber/Kidder, Peabody
Municipal Money Market Series)
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 Municipal Money Market Series - New
York Series ("PW/KP Fund"), a series of PaineWebber/Kidder, Peabody Municipal
Money Market Series ("PW/KP Trust"), in connection with the solicitation of
proxies by PW/KP Trust's board of trustees for use at a special meeting of PW/KP
Fund shareholders to be held on November 8, 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 New York 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 New York State and New York City personal income taxes, consistent with
liquidity and conservation of capital. PW Fund seeks to achieve its 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 ______ __, 1995, and by its Annual Report to
Shareholders ("Annual Report") for the fiscal year ended June 30, 1995, which
are incorporated by this reference into this Proxy Statement. A Statement of
Additional Information of PW Fund, dated August 29, 1995, relating to the
<PAGE>
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 February 28, 1995 (as
supplemented ____, 1995), a Statement of Additional Information of PW/KP Fund
dated February 28, 1995, and a Statement of Additional Information of PW Fund
dated August 29, 1995 have been filed with the SEC and also are incorporated
herein by this reference. Copies of these documents, as well as PW/KP Fund's
Annual Report for the fiscal year ended October 31, 1994, and each Fund's
Semi-Annual Report, if applicable, 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
VOTING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SYNOPSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
COMPARISON OF PRINCIPAL RISK FACTORS . . . . . . . . . . . . . . . . . 7
THE PROPOSED TRANSACTION . . . . . . . . . . . . . . . . . . . . . . . 8
MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
APPENDIX A -- AGREEMENT AND PLAN OF REORGANIZATION AND
TERMINATION. . . . . . . . . . . . . . . . . . . . . . . A-1
APPENDIX B -- [BENEFICIAL OWNERSHIP OF SHARES OF PW FUND AND
PW/KP FUND . . . . . . . . . . . . . . . . . . . . . . . B-1]
<PAGE>
PAINEWEBBER/KIDDER, PEABODY MUNICIPAL
MONEY MARKET SERIES - NEW YORK SERIES
(a series of PaineWebber/Kidder, Peabody Municipal
Money Market Series)
______________
PROSPECTUS/PROXY STATEMENT
Special Meeting of Shareholders
To Be Held on
November 8, 1995
______________
VOTING INFORMATION
This Prospectus/Proxy Statement ("Proxy Statement") is being furnished to
shareholders of PaineWebber/Kidder, Peabody Municipal Money Market Series - New
York Series ("PW/KP Fund"), a series of PaineWebber/Kidder, Peabody Municipal
Money Market Series ("PW/KP Trust"), in connection with the solicitation of
proxies by its board of trustees for use at a special meeting of shareholders to
be held on November 8, 1995, and any adjournment thereof ("Meeting"). This
Proxy Statement will first be mailed to shareholders on or about October ,
1995.
At least thirty percent of the shares of PW/KP Fund outstanding on
September 25, 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 any such proposal in favor of such an
adjournment and will vote those proxies required to be voted AGAINST any such
proposal against such adjournment. A shareholder vote may be taken on one or
more of the proposals in this Proxy Statement prior to any such adjournment if
sufficient votes have been received and it is otherwise appropriate.
Broker non-votes are shares held in street name for which the broker
indicates that instructions have not been received from the beneficial owners or
other persons entitled to vote and for which the broker does not have
discretionary voting authority. Abstentions and broker non-votes will be
counted as shares present for purposes of determining whether a quorum is
present but will not be voted for or against any adjournment or proposal.
Accordingly, abstentions and broker non-votes effectively will be a vote against
adjournment or against any 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 a 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 1,
1995 ("Reorganization Plan"), which is attached to this Proxy Statement as
Appendix A. Under the Reorganization Plan, PaineWebber RMA New York 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"). After completion of the Reorganization, PW/KP Fund will be
terminated. (PW/KP Fund and PW Fund may be referred to herein individually as a
"Fund", or collectively, as "Funds.")
<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
Trust 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, September 25, 1995 ("Record Date"), PW/KP Fund had
__________ shares of beneficial interest outstanding. The solicitation of
proxies, the cost of which will be borne by PW Fund and PW/KP Fund in proportion
to their respective net assets, will be made primarily by mail but also may
include telephone or oral communications by representatives of 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 $2,000 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. Although the shareholders of PW/KP Fund
may exchange or redeem out of the Fund, they do not have the appraisal rights
that may be accorded to shareholders of corporations that propose similar types
of reorganizations under the laws of some states.
SYNOPSIS
The following is a summary of certain information contained elsewhere in
this Proxy Statement, the Prospectuses for the Funds (which are incorporated
herein by this reference), and the Reorganization Plan. Shareholders should
read this entire Proxy Statement and the Prospectus of PW Fund carefully. As
discussed more fully below, the board of trustees of PW/KP Trust believes that
the Reorganization will benefit PW/KP Fund's shareholders. PW Fund has an
investment objective substantially identical to the investment objective of
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 PROPOSED REORGANIZATION
The Reorganization Plan was considered and approved by the boards of
trustees of PW/KP Trust and PW Trust at meetings 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.
2
<PAGE>
The exchange of PW/KP Fund's assets for PW Fund shares and PW Fund's
assumption of its liabilities will occur as of 4:00 p.m., Eastern time, on
November 13, 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 the designated money market fund. PW/KP
Fund shareholders who receive shares of PW Fund in the Reorganization but who do
not choose to participate in the RMA or BSA programs will have uninvested cash
of $5,000 or more swept into the PW Fund on a daily basis, with amounts below
$5,000 swept weekly. The RMA and BSA programs include a full array of premier
account services, such as checkwriting, a Gold or Business Card MasterCard and
toll-free telephone access to a customer service center. The features of the
RMA and BSA programs are summarized in the PW Fund Statement of Additional
Information.
For the reasons set forth below under "The Proposed Transaction -- Reasons
for the Reorganization," the board of trustees of PW/KP Trust, including the
trustees who are not "interested persons" of PW/KP Trust or PW Trust as that
term is defined in the 1940 Act ("Independent Trustees"), 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 Trust'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 PW/KP Fund and PW 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
the shareholders of PW Fund and the twelve months ended June 30, 1995
(unaudited) by the shareholders of PW/KP Fund, and pro forma fees for PW Fund
shares after giving effect to the Reorganization.
SHAREHOLDER TRANSACTION EXPENSES
PW/KP FUND PW FUND COMBINED FUND
---------- ------- -------------
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
3
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
PW/KP FUND PW FUND COMBINED FUND
(Pro Forma)
---------- -------- -------------
Management Fees 0.50% 0.50% 0.50%
12b-1 Fees 0.12% 0.08% 0.08%
Other Expenses 0.19% 0.13% 0.11%
----- ----- -----
Total Fund Operating Expenses(1)(2) 0.81% 0.71% 0.69%
===== ===== =====
(1) PW/KP Fund's ratio of total operating expenses as a percentage of
average net assets were 0.78% and 0.80%, respectively, for the fiscal
year ended October 31, 1994 and for the six-month period ended
April 30, 1995 (unaudited).
(2) In the case of PW Fund, "Total Fund Operating Expenses" are those that
would have been incurred by the Fund had PaineWebber not waived a portion
of its fees during the fiscal year. After giving effect to the waiver,
Total Fund Operating Expenses for the fiscal year ended June 30, 1995
were 0.68%.
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.
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ----------- ---------
PW/KP Fund..................... $8 $26 $45 $100
PW Fund........................ $7 $23 $40 $ 88
Combined Fund.................. $7 $22 $38 $ 86
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 Securities and Exchange Commission ("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 any class of
each Fund's shares.
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 attributable to each Fund's shares will depend upon, among
other things, the level of average net assets, and the extent to which each Fund
incurs variable expenses, such as transfer agency costs.
4
<PAGE>
FORMS OF ORGANIZATION
PW Trust and PW/KP Trust (each a "Trust" and collectively, "Trusts") are
open-end management investment companies organized as Massachusetts business
trusts. Each Trust's Declaration of Trust authorizes its trustees to issue an
unlimited number of full and fractional shares of one or more series, par value
$.001. The Trusts do not issue share certificates. The Trusts are also not
required to (and do not) hold annual shareholder meetings.
PW Fund, a non-diversified series of PW Trust, commenced operations on
November 10, 1988. PW/KP Fund, a non-diversified series of PW/KP Trust,
commenced operations on February 1, 1991.
Shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable for its obligations. However, the
Declaration of Trust of each Trust 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 objectives 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 New York State and New York City
personal income taxes, consistent with liquidity and conservation of capital.
The Fund seeks to achieve its objective by investing principally in high-grade
New York 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 New
York State, its municipalities and public authorities and other issuers if such
obligations pay interest exempt from federal income tax as well as New York
State and New York City personal income taxes ("New York Municipal
Securities"). PW Fund will invest only in New York Municipal Securities that are
"First Tier Securities." First Tier Securities are obligations that Mitchell
Hutchins Asset Management Inc. ("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 New York
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.
5
<PAGE>
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 New York State and New York City
personal income taxes, consistent with the preservation of capital and
maintenance of liquidity. The Fund seeks to achieve this objective by investing
primarily in debt securities of New York State, 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 income tax ("New York
Municipal Obligations"). To the extent acceptable New York 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 New York 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 PW/KP Trust's board of 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 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 15% 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 could be transferred to and
held by PW.
Fund if the Reorganization is approved.
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 account.
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
6
<PAGE>
credited to the shareholder's account or sent to the shareholder. A "Business
Day" is any day on which the offices of a Fund's custodian, and the New York
City 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, telephone or by mail.
If the Reorganization is approved, purchases of all shares of PW/KP Fund
will cease on ______ ___ , 1995, so that shares of PW/KP Fund will no longer be
available for purchase or exchange starting on that date through the Closing
Date. If the Meeting with respect to PW/KP Fund is adjourned and the
Reorganization is approved on a later date, PW/KP Fund shares will no longer be
available for purchase or exchange on the Business Day following the date on
which the Reorganization is approved and all contingencies are met. Redemptions
of PW/KP Fund's shares and exchanges of such shares for shares of any other
PaineWebber 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 certain other PaineWebber/Kidder, Peabody 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;shares do not earn dividends on the day of
redemption. Net investment income includes accrued interest and earned discount
(including original issue discount and, except for municipal obligations
acquired by the Funds prior to May 1,1993, 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 distributions.
On or before the Closing Date, PW/KP Fund will declare as a dividend
substantially all of its net tax-exempt interest income, taxable net
investment income and net short-term capital gain, if any, and distribute that
amount plus any previously declared but unpaid dividends, in order to continue
to maintain its tax status as a regulated investment company. [Such
distributions by PW/KP Fund will be paid only in cash.]
FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION
PW/KP Trust 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, the
investment risks are generally similar. Such risks are those typically
associated with investing in a money market fund and 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 NEW YORK 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 New York Municipal
Securities involves greater risks than investments from 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 New York (the "State") and by the financial condition of the State, its
public authorities and political subdivisions, particularly the City of New York
("the City"). Although the State reduced its accumulated General Fund deficits
and experienced operating surpluses in Fiscal Year ("FY") FY 1991-92 through
1993-94, it continues to experience substantial financial difficulties related
to the recent recession, resulting in, among other things, reductions in General
Fund receipts. An estimated budget gap of approximately $4.7 billion is
projected for FY 1995-96, unless numerous and substantial corrective measures
are successfully implemented. The City (which is constrained in its fiscal
flexibility by an already heavy local tax burden, urgent social needs and its
extensive and deteriorating infrastructure) and most suburban county governments
have experienced serious fiscal problems related to the recessionary performance
of the regional economy, which has caused substantial broad-based and recurring
revenue shortfalls. Both the State of New York's credit rating and the City's
credit rating have been, and could be further impaired.
TENDER OPTION BONDS. Unlike PW Fund, PW/KP Fund is authorized to purchase
tender option bonds, although it has not done so. A tender option bond is a
Municipal Obligation (generally held pursuant to a custodial arrangement) having
a relatively long maturity, and bearing interest at a fixed rate substantially
higher than prevailing short-term tax exempt rates, that has been coupled with
the agreement of a third party, such as a bank, broker-dealer or other financial
institution, pursuant to which such institution grants the security holders the
option, at periodic intervals, to tender their securities to the institution and
receive the face value thereof. As consideration for providing the option, the
financial institution receives periodic fees equal to the difference between the
municipal obligation's fixed coupon rate and the rate, as determined by a
remarketing or similar agent at or near the commencement of such period, that
would cause the securities, coupled with the tender option, to trade at par on
the date of such determination. Thus, after payment of this fee, the security
holder effectively holds a demand obligation that bears interest at the
prevailing short-term tax-exempt rate. In certain instances and for certain
tender option bonds, the option may be terminable in the event of a default in
payment of principal or interest on the underlying municipal obligations and for
other reasons.
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 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 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 each
Trust's board of trustees, 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 trustees of the
Trusts. Mitchell Hutchins based its recommendations on its belief that this
method is fair because, for the reasons discussed under "Reasons for the
Reorganization," the transaction has the potential to benefit both Funds. The
trustees of each Trust considered the expense allocation method in approving the
Reorganization and in finding that the Reorganization is in the best interests
of each 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 each Trust. 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 Trust, 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 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
9
<PAGE>
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
(after the Reorganization) 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 each Trust's board of trustees 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 with the differences noted and that Mitchell Hutchins did
not consider there to be a compelling reason to offer two separate New York
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 New York
State and New York City personal income taxes by investing principally in New
York 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 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 PW Fund or PW/KP Fund. The
board of PW Trust considered the fact that the impact of these lower expenses
would not be immediately apparent to shareholders of PW Fund, as PaineWebber had
been waiving a portion of its fee with respect to PW Fund, but noted that the
fee waiver was voluntary and could be discontinued at any time.
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.
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
10
<PAGE>
of any trustee when requested in writing to do so by the shareholders of record
holding at least 10% of the 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 Trust 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--
(i) 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;
(ii) 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;
(iii) 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 PW/KP
Fund's liabilities;
(iv) 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 Reorganiza-
tion, and PW Fund's holding period for those assets will include PW/KP
Fund's holding period therefor;
(v) 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
(vi) 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 federal
income tax consequences of the Reorganization, shareholders also should consult
their tax advisers as to state and local tax consequences, if any, of the
Reorganization.
11
<PAGE>
CAPITALIZATION
The following table shows the capitalization of each Fund as of June 30,
1995 (unaudited, with respect to PW/KP Fund), and on a pro forma combined basis
(unaudited) giving effect to the Reorganization:
PW FUND PW/KP FUND COMBINED FUND
(Pro Forma)
------- ---------- ------------
Net Assets $192,798,770 $47,254,185 $240,052,955
Net Asset Value Per Share $1.00 $1.00 $1.00
Shares Outstanding $192,932,698 $47,256,106 $240,188,804
MISCELLANEOUS
AVAILABLE INFORMATION
Each Trust is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and in accordance therewith files 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 audited financial statements of PW Fund and PW/KP Fund, incorporated
herein by reference and incorporated by reference or included in each Fund's
Statement of Additional Information, have been audited by Ernst & Young LLP,
independent auditors, and Deloitte & Touche LLP, independent auditors,
respectively, whose reports thereon are included in the Funds' Annual Reports to
Shareholders for the fiscal years ended June 30, 1995, and October 31, 1994,
respectively. The financial statements audited by Ernst & Young LLP and
Deloitte & Touche LLP have been incorporated herein by reference in reliance on
their reports given on their authority as experts in auditing and accounting.
12
<PAGE>
APPENDIX A - AGREEMENT AND PLAN OF REORGANIZATION AND
TERMINATION
(See Exhibit 4)
13
<PAGE>
APPENDIX B - BENEFICIAL OWNERSHIP OF SHARES OF PW FUND AND PW/KP FUND
14
<PAGE>
Prospectus February 28, 1995
- --------------------------------------------------------------------------------
PaineWebber/Kidder, Peabody Municipal Money Market Series
1285 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019 1-800-762-1000
PaineWebber/Kidder, Peabody Municipal Money Market Series (the 'Fund') is
an open-end, management investment company. The Fund's objective is
maximization of current income exempt from Federal and, where applicable,
State income taxes, consistent with the preservation of capital and the
maintenance of liquidity.
The Fund permits investors to invest in any of six separate portfolios (each,
a 'Series'): the Connecticut Series, New Jersey Series, New York Series,
Ohio Series, Pennsylvania Series and Texas Series, although shares of
the Ohio Series, Pennsylvania Series and Texas Series are not currently
being offered. Moreover, shares of the New York Series are offered
only to existing shareholders of the New York Series. Each Series seeks
to achieve the Fund's investment objective by investing in Municipal
Obligations (as defined herein) primarily issued by issuers in the State after
which it is named and believed to be exempt from Federal and from that
State's income tax. See 'Investment Objective and Policies.' It is
anticipated that substantially all dividends paid by each Series will be
exempt from Federal income tax and also, where applicable, will be
exempt from the personal income tax of the State after which the Series is
named. Each of the Connecticut Series, New Jersey Series, New York Series,
Ohio Series, Pennsylvania Series and Texas Series is non-diversified for
purposes of the Investment Company Act of 1940, as amended (the 'Act').
An investment in any Series is neither insured nor guaranteed by the
U.S. Government. Each Series seeks to maintain a stable net asset value of
$1.00 per share, although there can be no assurance that the Series will be
able to do so at all times.
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), 1285 Avenue
of the Americas, New York, New York 10019, a wholly owned subsidiary of
PaineWebber Incorporated ('PaineWebber'), serves as the Fund's investment
adviser and administrator. See 'Management of the Fund --
Investment Adviser and Administrator.' Mitchell Hutchins receives an annual
fee of .50% of the value of each Series' average daily net assets.
The Fund's Board of Trustees has approved a Plan of Distribution pursuant
to Rule 12b-1 (the 'Plan of Distribution') pursuant to which each Series
pays a maximum annual fee of .12% of its average daily net assets to
PaineWebber. 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 February 28, 1995
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.
- --------------------------------------------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Mitchell Hutchins Asset Management Inc.
DISTRIBUTOR
PaineWebber 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.' The Fee Table
does not reflect any fee waivers or expense reimbursement arrangements that
may be in effect.
ANNUAL FUND OPERATING EXPENSES FOR THE FISCAL YEAR ENDED OCTOBER 31, 1994
(as a percentage of average daily net assets)
- --------------------------------------------------------------------------------
\
<TABLE>
<CAPTION>
CONNECTICUT NEW JERSEY NEW YORK OHIO PENNSYLVANIA TEXAS
SERIES SERIES SERIES SERIES* SERIES* SERIES*
----------- ---------- -------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Management Fees.............................. .50% .50% .50% .50% 50% 50%
12b-1 Fees................................... .12% .12% .12% .12% .12% .12%
Other Expenses............................... .28% .23% .16% .16% .16% .16%
----- ----- -------- ------- ----- -------
Shareholder Services and Custodian....... .07% .06% .05% .05% .05% .05%
Registration, Trustees' and
Professional........................... .06% .05% .03% .03% .03% .03%
All Other Expenses....................... .15% .12% .08% .08% .08% .08%
Total Fund Operating Expenses................ .90% .85% .78% .78% .78% .78%
----- ----- -------- ------- ----- -------
----- ----- -------- ------- ----- -------
EXAMPLE**:
You would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual
return, (2) an operating expense ratio as
shown in the tables above and (3)
redemption at the end of each time period:
1 YEAR.................................. $ 9 $ 9 $ 8 $ 8 $ 8 $ 8
3 YEARS................................. $ 29 $ 27 $ 25 $ 25 $ 25 $ 25
5 YEARS................................. $ 50 $ 47 $ 43 $ 43 $ 43 $ 43
10 YEARS................................. $ 111 $105 $ 97 $ 97 $ 97 $ 97
----- ----- -------- ------- ----- -------
</TABLE>
- ------------
* The Ohio Series, Pennsylvania Series and Texas Series are not presently
being offered and the amounts shown above are estimates based on the
expenses incurred by the Series that were operating during the fiscal
year ended October 31, 1994.
** 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 past or future annual return. The actual
annual returns of the Series may be greater or less than the assumed
return.
2
<PAGE>
- --------------------------------------------------------------------------------
HIGHLIGHTS
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------
The Fund
The Fund is an open-end, management investment company whose investment objective is the
maximization of current income exempt from Federal and, where applicable, from State income taxes
to the extent consistent with the preservation of capital and the maintenance of liquidity. The
Fund permits investors to invest in any of six Series: the Connecticut Series, New Jersey Series, New
York Series, Ohio Series, Pennsylvania Series and Texas Series, although shares of the Ohio Series,
Pennsylvania Series and Texas Series are not currently being offered. Moreover, shares of the New
York Series are offered only to existing shareholders of the New York Series. Each Series seeks to
achieve the Fund's investment objective by investing primarily in the debt securities of the State
after which it is named, such State's political subdivisions, authorities and corporations, the
interest from which is, in the opinion of bond counsel to the issuer, exempt from Federal and such
State's income taxes.
- ------------------------------------------------------------------------------------------------------------------
Benefits of
Investing
in the
Fund
Mutual funds, such as the Fund, are flexible investment tools that are increasingly popular
-- one of four American households now owns shares of at least one mutual fund -- for very sound
reasons. The Fund offers investors the following important benefits:
Tax Exempt Investing
The Fund offers investors the opportunity to receive dividends consisting primarily of income that is
exempt from Federal income tax and also, where applicable, is exempt from the personal income tax of the
State after which the Series is named. The State of Texas currently has no State income tax. 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. Mitchell
Hutchins 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 each Series 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 portfolio of securities without paying the higher transaction
costs generally associated with a series of small securities purchases.
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------
Convenience
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 a Series invests are rated in one of the two highest rating
categories for debt obligations by at least two nationally recognized statistical rating
organizations ('NRSRO') (or one rating organization if the instrument was rated only by one
such organization) or, if unrated, are determined to be of comparable quality in accordance
with procedures established by the Trustees, and also are determined to present minimal credit
risks.
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.'
- ------------------------------------------------------------------------------------------------------------------
Purchase
of Shares
The purchase price for shares of any Series is the net asset value per share next determined
after receipt by the Fund of a purchase order in proper form. Each Series seeks to maintain a
constant net asset value of $1.00 per share, although there is no assurance it will be able to
do so. See 'Purchase of Shares' and 'Determination of Net Asset Value.'
- ------------------------------------------------------------------------------------------------------------------
Redemption
of Shares
Shares of a Series may be redeemed at such Series' net asset value per share next determined
after receipt by the transfer agent of instructions from PaineWebber. See 'Redemption of
Shares' for a discussion of the various alternative methods of redeeming shares of a Series and
'Determination of Net Asset Value.'
- ------------------------------------------------------------------------------------------------------------------
Management
Services
Mitchell Hutchins, a wholly owned subsidiary of PaineWebber, serves as investment adviser and
administrator of the Fund and receives an annual fee of .50% of each Series' average daily net
assets. See 'Management of the Fund.'
- ------------------------------------------------------------------------------------------------------------------
Distributor
PaineWebber, a wholly owned subsidiary of Paine Webber Group Inc. ('PW Group'), serves as
distributor of the Fund's shares. PW Group is a publicly owned financial services holding
company. See 'The Distributor.'
- ------------------------------------------------------------------------------------------------------------------
Dividends
Each Series declares dividends on each day the New York Stock Exchange (the 'NYSE') is open for
business of all of its daily net income to shareholders of record. See 'Dividends,
Distributions and Taxes.'
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------
Risk Factors
Investors should consider the special risks inherent in the purchase of Series' shares
resulting from its purchase of the respective State's Municipal Obligations. Certain of the
States have experienced financial difficulties, the recurrence of which could result in
defaults or declines in the market values of various Municipal Obligations in which such Series
invests. If there should be a default or other financial crisis relating to a State or an
agency or municipality thereof, the market value and marketability of outstanding State
Municipal Obligations in a Series' portfolio and the interest income to the Series could be
adversely affected.
Each Series may purchase Municipal Obligations on a when-issued basis which can involve the
risk that the yield available in the market when delivery takes place actually may be higher
than that obtained in the transaction itself. Purchasing Municipal Obligations on a when-issued
basis when a Series is fully or almost fully invested may result in greater potential
fluctuation in the value of such Series' net assets and its net asset value per share.
Since a relatively high percentage of the Series' assets may be invested in the obligations of
a limited number of issuers, due to the Series' classifications as 'non-diversified' investment
companies, the Series' portfolio securities may be more susceptible to any single economic,
political or regulatory occurrence than the portfolio securities of a diversified investment
company. See 'Investment Objective and Policies.'
</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 year ended October 31, 1994 and the
report of independent auditors thereon are included in the Statement of
Additional Information.
<TABLE>
<CAPTION>
CONNECTICUT SERIES NEW JERSEY SERIES
YEARS ENDED OCTOBER 31, YEARS ENDED OCTOBER 31,
-------------------------------------------- ----------------------------------------------
1991`D' 1992 1993 1994 1991`D'`D' 1992 1993 1994
------ ---- ---- ---- --------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset
value,
beginning of
period....... $ 1.0000 $ 0.9994 $ 0.9999 $ 0.9999 $ 1.0000 $ 0.9998 $ 0.9999 $ 0.9999
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income....... 0.0398 0.0223 0.0148 0.0172 0.0316 0.0246 0.0164 0.0175
Net realized
and
unrealized
gain (loss)
on
investments... (0.0006) 0.0005 -- (0.0002) (0.0002) 0.0001 -- (0.0006)
-------------------------------------------------------------------------------------------------------
Total increase
in net asset
value from
investment
operations... 0.0392 0.0228 0.0148 0.0170 0.0314 0.0247 0.0164 0.0169
Distributions
to
shareholders
from net
investment
income....... (0.0398) (0.0223) (0.0148) (0.0172) (0.0316) (0.0246) (0.0164) (0.0175)
-------------------------------------------------------------------------------------------------------
Net asset
value, end of
period....... $ 0.9994 $ 0.9999 $ 0.9999 $ 0.9997 $ 0.9998 $ 0.9999 $ 0.9999 $ 0.9993
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
Total return... 4.10%* 2.25% 1.49% 1.74% 4.27%* 2.49% 1.65% 1.76%
RATIOS/SUPPLEMENTAL
DATA
Net assets, end
of year (in
thousands)... $ 40,078 $ 28,063 $ 27,937 $ 25,763 $ 41,504 $ 27,625 $ 36,473 $ 31,981
RATIOS TO
AVERAGE NET
ASSETS
Expenses,
excluding
distribution
fees, net of
reimbursement.. 0.24%* 0.74% 0.85% 0.78% 0.15%* 0.74% 0.81% 0.73%
Expenses,
including
distribution
fees, net of
reimbursement.. 0.36%* 0.86% 0.97% 0.90% 0.27%* 0.86% 0.93% 0.85%
Expenses,
before
reimbursement
from
manager...... 0.82%* 0.86% 0.97% 0.90% 0.83%* 0.86% 0.93% 0.85%
Net investment
income....... 3.96%* 2.28% 1.47% 1.71% 4.20%* 2.51% 1.63% 1.74%
<CAPTION>
NEW YORK SERIES
YEARS ENDED OCTOBER 31,
----------------------------------------------
1991`D'`D' 1992 1993 1994
--------- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset
value,
beginning of
period....... $ 1.0000 $ 0.9999 $ 0.9996 $ 0.9995
--------- --------- --------- ---------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income....... 0.0303 0.0226 0.0151 0.0179
Net realized
and
unrealized
gain (loss)
on
investments... (0.0001) (0.0003) (0.0001) (0.0002)
--------- --------- --------- ---------
Total increase
in net asset
value from
investment
operations... 0.0302 0.0223 0.0150 0.0177
Distributions
to
shareholders
from net
investment
income....... (0.0303) (0.0226) (0.0151) (0.0179)
--------- --------- --------- ---------
Net asset
value, end of
period....... $ 0.9999 $ 0.9996 $ 0.9995 $ 0.9993
------------------------------------------------
------------------------------------------------
Total return... 4.09%* 2.28% 1.52% 1.81%
RATIOS/SUPPLEME
DATA
Net assets, end
of year (in
thousands)... $ 38,725 $ 39,277 $ 52,187 $ 62,896
RATIOS TO
AVERAGE NET
ASSETS
Expenses,
excluding
distribution
fees, net of
reimbursement.. 0.14%* 0.72% 0.76% 0.66%
Expenses,
including
distribution
fees, net of
reimbursement.. 0.26%* 0.84% 0.88% 0.78%
Expenses,
before
reimbursement
from
manager...... 0.83%* 0.84% 0.88% 0.78%
Net investment
income....... 4.00%* 2.24% 1.50% 1.79%
</TABLE>
`D' From November 6, 1990 (Commencement of Operations) to October 31, 1991.
`D'`D' From February 1, 1991 (Commencement of Operations) to October 31, 1991.
* Annualized.
6
<PAGE>
- --------------------------------------------------------------------------------
YIELD
The chart below shows the current and effective yields of each Series (except
the Ohio Series, Pennsylvania Series and Texas Series which had not commenced
operations as of the date of this Prospectus), calculated in accordance with
rules of the SEC, and the average portfolio maturity for the seven-day periods
ended October 31, 1994 and January 31, 1995.
<TABLE>
<CAPTION>
CONNECTICUT NEW JERSEY NEW YORK
SERIES SERIES SERIES
------------------- ------------------- -------------------
10/31/94 1/31/95 10/31/94 1/31/95 10/31/94 1/31/95
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Current Yield............................ 2.17% 2.47% 2.22% 2.33% 2.26% 2.65%
Effective Yield.......................... 2.19% 2.46% 2.24% 2.33% 2.29% 2.65%
Average Portfolio Maturity............... 60 days 32 days 28 days 22 days 34 days 16 days
</TABLE>
From time to time, the Fund advertises each Series' current and effective
yields. Both yield figures are based on historical earnings and are not intended
to indicate future performance. The 'current yield' of a Series refers to the
income generated by an investment in the Series 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 a Series is assumed to be
reinvested. The 'effective yield' is slightly higher than the 'current yield'
because of the compounding effect of this assumed reinvestment. To the extent a
Series has invested in Taxable Investments (as defined below under 'Investment
Objective and Policies -- Management Policies') during the period for which
yield is quoted, the advertisement will indicate that the yield and effective
yield for such Series reflects income earned from Taxable Investments and that
the yields quoted are higher than the yields that would have been achieved had
the Series invested only in Municipal Obligations, as defined below. The
Statement of Additional Information describes in more detail the methods used to
calculate the yields of the Series.
Performance data for the Series 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 (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 Fund's investment objective is the maximization of current income exempt
from Federal and, where applicable, State income taxes for residents of the
States of Connecticut, New Jersey, New
7
<PAGE>
- --------------------------------------------------------------------------------
York, Ohio, Pennsylvania and Texas* (and such other states as the Fund's
Trustees in the future may determine), consistent with the preservation of
capital and the maintenance of liquidity. Each Series seeks to achieve this
objective by investing primarily in the debt securities of the State after which
it is named, such State's political subdivisions, authorities and corporations,
the interest from which is, in the opinion of bond counsel to the issuer, exempt
from Federal and such State's income taxes (collectively, 'State Municipal
Obligations' or when the context so requires 'Connecticut Municipal
Obligations,' 'New Jersey Municipal Obligations,' 'New York Municipal
Obligations,' 'Ohio Municipal Obligations,' 'Pennsylvania Municipal Obligations'
or 'Texas Municipal Obligations'). To the extent acceptable State Municipal
Obligations are at any time unavailable for investment by a Series, such Series
will invest, for temporary defensive purposes, primarily in Municipal
Obligations (as defined below). Obligations in which the Series invest may not
earn as high a level of current income as long-term or lower quality obligations
which generally have less liquidity, greater market risk and more fluctuation in
market value. The Fund's investment objective as to each Series cannot be
changed without approval by the holders of a majority (as defined in the Act) of
such Series' outstanding voting shares. There can be no assurance that the
Series' investment objective will be achieved. When used herein, the term
'State' refers to the State after which a Series is named. Each of the
Connecticut Series, New Jersey Series, New York Series, Ohio Series,
Pennsylvania Series and Texas Series is non-diversified for purposes of the Act.
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 the value
of each Series' net assets (except when maintaining a temporary defensive
position) in Municipal Obligations. At least 65% of the value of each Series'
net assets will be invested in State Municipal Obligations,
- ------------
* The State of Texas currently has no State income tax. See 'Dividends,
Distributions and Taxes.'
8
<PAGE>
- --------------------------------------------------------------------------------
as defined above, and the remainder may be invested in securities that are not
State Municipal Obligations and, therefore, may be subject to State income
taxes. See 'Risk Factors -- Investing in State Municipal Obligations' below, and
'Dividends, Distributions and Taxes.'
Each Series 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 a Series' securities pursuant to Rule 2a-7 under the Act, certain
requirements of which are summarized as follows. In accordance with Rule 2a-7,
each Series 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 Board of 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 NRSROs (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 Board of Trustees.
The NRSROs currently rating investments of the type the Series may purchase
are Moody's Investors Service, Inc. ('Moody's'), Standard & Poor's Ratings Group
('S&P') and Fitch Investors Service, Inc. ('Fitch') 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 each Series will be able to maintain
a stable net asset value of $1.00 per share.
Each Series may invest more than 25% of the value of its total 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.
Each Series also may invest more than 25% of the value of its total 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 shareholders. Each Series may invest without limitation in such Municipal
Obligations if Mitchell Hutchins determines that their purchase is consistent
with the Fund's investment objective.
Each Series may purchase floating and variable rate demand obligations,
which are tax exempt obligations ordinarily having 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 Series to invest fluctuating
amounts, which may change daily without penalty, pursuant to direct arrangements
between the Series, as lender, and the borrower. The interest rates on these
obligations fluctuate from time to time.
9
<PAGE>
- --------------------------------------------------------------------------------
Frequently, such obligations are secured by letters of credit or other credit
support arrangements provided by banks. Use of letters of credit or other credit
support arrangements do 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 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 Series' right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. Each obligation purchased by
the Series will meet the quality criteria established for the purchase of
Municipal Obligations. Mitchell Hutchins, on behalf of the Series, considers on
an ongoing basis the creditworthiness of the issuers of the floating and
variable rate demand obligations in the Series' portfolio. No Series will invest
more than 10% of the value of its net assets in securities that are illiquid,
which would include floating or variable rate demand obligations as to which it
cannot exercise the demand feature on not more than seven days' notice if there
is no secondary market available for these obligations. See 'Investment
Restrictions' below.
Each Series 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 Obligation in the proportion
that the purchaser's participation interest bears to the total principal amount
of the Municipal Obligation. These instruments may have fixed, floating or
variable rates of interest, 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 Board of Trustees has 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 Board of Trustees, or the underlying Municipal Obligations
will be permissible investments for the Series. For certain participation
interests, the Series will have the right to demand payment, on not more than
seven days' notice, for all or any part of the Series' participation interest in
the Municipal Obligation, 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 Obligation, as needed to provide liquidity to meet
redemptions, or to maintain a high quality investment portfolio. No Series will
invest more than 10% of the value of its net assets in securities that are
illiquid, which would include participation interests that do not have the
demand feature described above. See 'Investment Restrictions' below. Under
normal market conditions, no Series will invest more than 25% of its total
assets in participation interests or other securities issued by or purchased
from banks.
Each Series may acquire stand-by commitments with respect to Municipal
Obligations held in its portfolio. Under a stand-by commitment, the Series
obligates a broker, dealer or bank to repurchase at such Series' 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. Each Series will acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. The Fund anticipates that stand-by commitments will be
available from brokers, dealers and banks without the payment of any direct or
indirect consideration. The Series may pay for stand-by commitments if such
action is
10
<PAGE>
- --------------------------------------------------------------------------------
deemed necessary, thus increasing to a degree the cost of the underlying
Municipal Obligation and similarly decreasing such security's yield to
investors. The New Jersey Series may acquire stand-by commitments to the extent
consistent with the requirements for a 'qualified investment fund' under the New
Jersey gross income tax.
Each Series may purchase tender option bonds. A tender option bond is a
Municipal Obligation (generally held pursuant to a custodial arrangement) having
a relatively long maturity and bearing interest at a fixed rate substantially
higher than prevailing short-term tax exempt rates, that has been coupled with
the agreement of a third party, such as a bank, broker-dealer or other financial
institution, pursuant to which such institution grants the security holders the
option, at periodic intervals, to tender their securities to the institution and
receive the face value thereof. As consideration for providing the option, the
financial institution receives periodic fees equal to the difference between the
Municipal Obligation's fixed coupon rate and the rate, as determined by a
remarketing or similar agent at or near the commencement of such period, that
would cause the securities, coupled with the tender option, to trade at par on
the date of such determination. Thus, after payment of this fee, the security
holder effectively holds a demand obligation that bears interest at the
prevailing short-term tax exempt rate. Mitchell Hutchins, on behalf of the Fund,
will consider on an ongoing basis the creditworthiness of the issuer of the
underlying Municipal Obligation, of any custodian and of the third party
provider of the tender option. In certain instances and for certain tender
option bonds, the option may be terminable in the event of a default in payment
of principal or interest on the underlying Municipal Obligations and for other
reasons. The Fund will consider as illiquid securities tender option bonds as to
which it cannot exercise the tender feature on not more than seven days' notice
if there is no secondary market available for these obligations. See 'Investment
Restrictions' below.
Each Series may invest, for other than temporary defensive purposes, in
taxable short-term investments ('Taxable Investments') in an amount not to
exceed 20% of the Series' net assets. Each Series also may invest without
limitation in Taxable Investments for temporary defensive purposes. Taxable
Investments consist of: notes of issuers having, at the time of purchase, a
quality rating within the two highest grades of Moody's, S&P or Fitch;
obligations of the U.S. Government, its agencies or instrumentalities;
commercial paper rated at least P-1 by Moody's or A-1 by S&P or F-1 by Fitch;
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. Under normal market conditions, the Fund
anticipates that not more than 5% of the value of each Series' total assets will
be invested in any one category of Taxable Investments. Dividends paid by the
Series that are attributable to interest earned by such Series from Taxable
Investments will be taxable to its investors. If a Series purchases Taxable
Investments, it will value them using the amortized cost method and comply with
the provisions of Rule 2a-7 relating to purchases of taxable instruments. To the
extent a Series 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 to which reference hereby is made.
11
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
The policies described in this paragraph summarize certain important investment
restrictions of each Series which cannot be changed as to a Series without
approval by the holders of a majority (as defined in the Act) of such Series'
outstanding voting shares. All of the Series' investment restrictions are set
forth in the Statement of Additional Information. Each Series may (i) borrow
money from banks, but only for temporary or emergency (not leveraging) purposes,
in an amount up to 15% of the value of its 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 Series' total assets, such Series will not make any
additional investments; (ii) pledge, hypothecate, mortgage or otherwise encumber
its assets, but only to secure borrowings for temporary or emergency purposes;
(iii) invest up to 25% of its total assets in the securities of issuers in any
single industry, provided that there is no such limitation on investments in
Municipal Obligations and, for temporary defensive purposes, obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities; and
(iv) invest up to 10% of its net assets in securities that are illiquid, which
includes repurchase agreements providing for settlement in more than seven days
after notice and could include municipal lease/purchase agreements,
participation interests that are not subject to the demand feature described
above, and floating and variable rate demand obligations and tender option bonds
as to which the Series cannot exercise the related demand feature described
above and as to which there is no secondary market.
RISK FACTORS -- INVESTING IN STATE MUNICIPAL OBLIGATIONS
Investors should consider carefully the special risks inherent in the purchase
of a Series' shares resulting from its purchase of the respective State's
Municipal Obligations. Certain of the States have experienced financial
difficulties, the recurrence of which could result in defaults or declines in
the market values of various Municipal Obligations in which such Series invests.
If there should be a default or other financial crisis relating to a State or an
agency or municipality thereof, the market value and marketability of
outstanding State Municipal Obligations in a Series' portfolio and the interest
income to the Series could be adversely affected. You should obtain and review a
copy of the Statement of Additional Information which more fully sets forth
these and other risk factors.
CONNECTICUT SERIES. Connecticut's economy relies in part on activities that
may be adversely affected by cyclical change and recent declines in defense
spending have had an impact on unemployment levels. Although the State recorded
General Fund surpluses in its 1986 and 1987 fiscal years, Connecticut reported
deficits from its General Fund operations for the fiscal years 1988 through
1991. Together with the deficit carried forward from the State's 1990 fiscal
year, the total General Fund deficit for the 1991 fiscal year was $965.7
million. The total deficit was funded by the issuance of General Obligation
Economic Recovery Notes. The State Comptroller's annual reports for the fiscal
years ended June 30, 1992, 1993 and 1994 reflected General Fund operating
surpluses of $110 million, $113.5 million, and $19.7 million, respectively. In
November 1994, the Comptroller estimated that the General Fund would end fiscal
year 1995 with a $20.7 million operating surplus. The Comptroller's monthly
report for the period ended November 30, 1994 estimated the cumulative projected
deficit under GAAP for 1994-95 to be approximately $531 million. As a result of
recurring budgetary problems in the early 1990s, S&P
12
<PAGE>
- --------------------------------------------------------------------------------
downgraded the State's general obligation bonds from AA+ to AA in April 1990
and, in September 1991, to AA-. Moody's and Fitch rate Connecticut's bonds Aa
and AA+, respectively.
NEW JERSEY SERIES. Although New Jersey enjoyed a period of economic growth
with unemployment levels below the national average during the mid-1980s, New
Jersey's economy slowed down well before the onset of the national recession,
which, according to the National Bureau of Economic Research, began in July
1990. Reflecting the economic downturn, New Jersey's unemployment rate rose from
a low of 3.6% in the first quarter of 1989 to a recessionary peak of 9.3% during
1992. Since then, the State's unemployment rate fell to 6.7% during the fourth
quarter of 1993 and averaged 7.1% during the first nine months of 1994. As a
result of New Jersey's recent fiscal weakness, in July 1991, S&P lowered its
rating of the State's AAA general obligation debt to AA+.
NEW YORK SERIES. Risks inherent in the New York Series' investment in New
York Municipal Obligations result from the financial condition of New York State
and certain of its public bodies and municipalities, including New York City.
Beginning in early 1975, New York State, New York City and other State entities
faced serious financial difficulties which jeopardized the credit standing and
impaired the borrowing abilities of such entities and contributed to high
interest rates on, and lower market prices for, debt obligations issued by them.
A recurrence of such financial difficulties or a failure of certain financial
recovery programs could result in defaults or declines in the market values of
various New York Municipal Obligations in which the New York Series may invest.
If there should be a default or other financial crisis relating to New York
State, New York City, a State or City agency, or other State municipality, the
market value and marketability of outstanding New York Municipal Obligations in
the New York Series' portfolio and the interest income to such Series could be
adversely affected. Moreover, the significant slowdown in the New York and
regional economy in the early 1990s added substantial uncertainty to estimates
of New York's tax revenues, which, in part, caused the State to overestimate its
General Fund tax receipts for the 1992 fiscal year by $575 million. The 1992
fiscal year was the fourth consecutive year in which the State incurred a
cash-basis operating deficit in the General Fund and issued deficit notes. The
State's 1993 and 1994 fiscal years, however, were characterized by national and
regional economies that performed better than projected. After reflecting a 1993
year-end deposit to the refund reserve account of $671 million, reported 1993
General Fund receipts were $45 million higher than originally projected in April
1992. The State completed the 1994 fiscal year with an operating surplus in the
General Fund of $914 million. In September 1994, however, the State projected a
General Fund operating deficit of $690 million for the 1995 fiscal year. There
can be no assurance that New York will not face substantial potential budget
gaps in future years. In 1990, S&P and Moody's lowered their ratings of the
State's general obligation debt from AA- to A and from A1 to A, respectively.
In addition, S&P and Moody's lowered their ratings of New York's short-term
notes issued in 1990 from SP-1+ to SP-1 and from MIG-1 to MIG-2, respectively.
In January 1992, Moody's lowered from A to Baa1 its ratings of certain
appropriation-backed debt of New York State and its agencies. The State's
general obligation, state-guaranteed and New York State Local Government
Assistance Corporation bonds continued to be rated A by Moody's. Also in January
1992, S&P lowered from A to A- its ratings of New York State general obligation
bonds and stated that it continued to assess the ratings outlook as negative.
S&P also lowered its ratings of various agency debt, State moral obligations,
contractual obligations, lease purchase obligations
13
<PAGE>
- --------------------------------------------------------------------------------
and State guarantees. In February 1991, Moody's lowered its rating on New York
City's general obligation bonds from A to Baa1. The rating changes reflected the
rating agencies' concerns about the financial condition of New York State and
City, the heavy debt load of the State and City and economic uncertainties in
the region.
OHIO SERIES. Nonmanufacturing industries now employ more than three-fourths
of all payroll employees in Ohio. However, due to the continued importance of
manufacturing industries (including auto-related manufacturing), economic
activity in Ohio tends to be more cyclical than in some other states and in the
nation as a whole. Although Ohio's economy has improved since the 1980-82
national recession, the State experienced an economic slow-down during its
1990-91 fiscal year, consistent with national economic conditions during that
period. For Ohio's 1994 fiscal year, the Ohio Office of Budget and Management
projects positive $106.6 million and $314.6 million ending fund and cash
balances, respectively. Each of the foregoing factors could have an effect on
the market for issuers generally or may have the effect of impairing the ability
of issuers to pay interest on, or repay principal of, Ohio Municipal
Obligations.
PENNSYLVANIA SERIES. Pennsylvania has been historically identified as a
heavy industry state although that reputation has recently changed as the coal,
steel and railroad industries declined. A more diversified economy has developed
as a long-term shift in jobs, investment and workers away from the northeast
part of the nation took place. The major new sources of growth are in the
service sector, including trade, medical and health services, education and
financial institutions. Pennsylvania's population is highly urbanized, with
approximately 50% of the State's total population contained in the metropolitan
areas which include the cities of Philadelphia and Pittsburgh.
The five year period from fiscal 1988 through fiscal 1992 was a period of
slowing revenue growth and accelerating expenditure increases as the economy
slowed. During fiscal 1992 the General Fund recorded a $1.1 billion operating
surplus. This operating surplus was achieved through legislated tax rate
increases and tax base broadening measures enacted in August 1991 and by
controlling expenditures through numerous cost reduction measures implemented
throughout the fiscal year. The fund balance of the General Fund increased by
$611.4 million during the 1993 fiscal year, led by an increase in the unreserved
balance of $576.8 million over the prior fiscal year balance. At June 30, 1993,
the fund balance totalled $698.9 million and the unreserved-undesignated balance
totalled $64.4 million. A continuing recovery of the Commonwealth's financial
condition from the effects of the national economic recession of 1990 and 1991
is demonstrated by this increase in the balance and a return to a positive
unreserved-undesignated balance. The previous positive unreserved-undesignated
balance was recorded in fiscal 1987. The Commonwealth of Pennsylvania maintained
an operating balance on a budgetary basis for fiscal 1994 producing a fiscal
year ending unappropriated surplus of $335.8 million.
TEXAS SERIES. Economically and financially the State of Texas suffered
during the 1980s significant damage from the continued depressed price of oil
and gas and the overbuilding in the real estate market. The decline in oil
prices, particularly since 1986, and the recession that followed have had a
severe effect on the Texas banking and savings and loan industries, resulting in
a number of closings among banks and savings and loans. A recurrence of such
14
<PAGE>
- --------------------------------------------------------------------------------
economic or financial difficulties could result in defaults or declines in the
market values or marketability of various Texas Municipal Obligations in which
the Series may invest, which could adversely affect the interest income to the
Series. In fiscal years 1989, 1990, 1991 and 1992, Texas' General Revenue Fund
ended with cash surpluses of $298 million, $768 million, $712.8 million and
$609.2 million, respectively.
OTHER INVESTMENT CONSIDERATIONS
Municipal Obligations are subject to changes in value based upon the
creditworthiness of the issuer and changes, real or anticipated, in the level of
interest rates.
New issues of Municipal Obligations usually are offered on a when-issued
basis, which means that 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 makes commitments to purchase such Municipal Obligations
for a Series 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 Series
will not accrue income in respect of a when-issued security prior to its stated
delivery date. The value of Municipal Obligations purchased on a when-issued
basis fluctuates both prior to and after delivery. No additional when-issued
commitments will be made for a Series if more than 20% of the value of such
Series' net assets would be so committed.
Purchasing Municipal Obligations on a when-issued basis can involve the
risk that the yield available in the market when the delivery takes place
actually may be higher than that obtained in the transaction itself. A
segregated account of the Fund consisting of cash, cash equivalents or U.S.
Government securities or other high quality liquid debt securities at least
equal at all times 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 a Series is fully or almost fully
invested may result in greater potential fluctuation in the value of such
Series' net assets and its net asset value per share.
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 the Municipal Obligations available for purchase by the Series and thus
reduce the 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 exemption 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 Series 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 type of Municipal Obligation as
taxable, the Fund would treat such security as a permissible Taxable Investment
within the applicable limits set forth herein.
A Series classification as a 'non-diversified' investment company means
that the proportion of its 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
15
<PAGE>
- --------------------------------------------------------------------------------
respect to 75% of its total assets, not more than 5% of such assets in the
securities of a single issuer. However, each Series intends to conduct its
operations so as to qualify as a 'regulated investment company' for purposes of
the Code, which requires the Series generally to invest, with respect to 50% of
its total assets, not more than 5% of such assets in the securities of a single
issuer; as to the remaining 50% of its total assets, the Series is not so
restricted. In no event may a Series invest more than 25% of its total assets in
the securities of any one issuer. Compliance with this requirement is measured
at the close of each quarter of the Fund's taxable year. Since a relatively high
percentage of the Series' assets may be invested in the obligations of a limited
number of issuers, the Series' 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
Board of 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.
INVESTMENT ADVISER AND ADMINISTRATOR
Mitchell Hutchins, 1285 Avenue of the Americas, New York, New York 10019, serves
as the Fund's investment adviser and administrator. Mitchell Hutchins is a
wholly owned subsidiary of PaineWebber, which in turn is wholly owned by PW
Group, a publicly owned financial services holding company. Mitchell Hutchins,
organized in May 1977, is registered as an investment adviser under the
Investment Advisers Act of 1940 and as a broker-dealer under the Securities
Exchange Act of 1934. 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 having aggregate assets of over $22 billion.
As a result of an asset purchase transaction by and among Kidder, Peabody
Group Inc., its parent, General Electric Company, and PW Group, the investment
advisory services provided to the Fund by Kidder Peabody Asset Management, Inc.
('KPAM'), the Fund's predecessor manager and investment adviser, were assumed,
on an interim basis, by Mitchell Hutchins as of January 30, 1995. After the
interim period, and subject to shareholder approval, which is expected to occur
on or about March 31, 1995, PaineWebber will serve as the Fund's investment
adviser and administrator and will engage Mitchell Hutchins as the Fund's
sub-adviser and sub-administrator. During the interim period and thereafter, the
Fund has agreed to pay the same fee for investment advisory and administrative
services that the Fund agreed to pay KPAM for such services. After the interim
period, and subject to shareholder approval, PaineWebber (not the Fund) will pay
Mitchell Hutchins a fee for its sub-advisory and sub-administration services at
an annual rate of 20% of the fee received by PaineWebber from the Fund for
advisory and administration services.
16
<PAGE>
- --------------------------------------------------------------------------------
Mitchell Hutchins manages each Series' portfolio in accordance with the
stated policies of the Fund, makes investment decisions for the Series and
places the purchase and sale orders for portfolio transactions. Mitchell
Hutchins 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.
See 'Management of the Fund' in the Fund's Statement of Additional Information.
Expenses attributable to a particular Series are charged against the assets of
that Series; other expenses of the Fund are allocated among the Series on the
basis determined by the Trustees, including, but not limited to, proportionately
in relation to the net assets of each Series.
For the fiscal year ended October 31, 1994, the Fund paid KPAM, as
compensation for its services as manager and investment adviser, a monthly fee
at the annual rate of .50% of the value of the average daily net assets of the
Connecticut Series, New Jersey Series and New York Series.
From time to time, Mitchell Hutchins in its sole discretion may waive all
or a portion of its fees and/or reimburse all or a portion of the Fund's or a
Series' operating expenses, which would have the effect of lowering the overall
expense ratio of the Fund and/or the affected Series, and increasing the yield
to investors at the time such amounts are waived or reimbursed, as the case may
be. The Fund will not pay Mitchell Hutchins at a later time for any amounts it
may waive nor will the Fund reimburse Mitchell Hutchins for any amounts it may
assume.
PORTFOLIO TRANSACTIONS
Mitchell Hutchins places the orders for the purchase and sale of each Series'
portfolio securities. In doing so, Mitchell Hutchins seeks to obtain the best
combination of price and execution, which involves a number of judgmental
factors. If Mitchell Hutchins believes such price and execution can be obtained
from more than one dealer, it may select a dealer that has furnished it with
research and other services. No brokerage commissions have been paid by the Fund
to date.
Investment decisions for each Series are made independently from those of
any other investment companies or accounts that are managed by Mitchell
Hutchins. If, however, other investment companies or accounts managed by
Mitchell Hutchins are simultaneously engaged in the purchase or sale of the same
security, the transactions are averaged as to price and allocated equitably to
each of them. In some cases, this system might adversely affect the price paid
or received by a Series or the size of the position obtainable for such Series.
See 'Portfolio Transactions' in the Statement of Additional Information.
PURCHASE OF SHARES
GENERAL INFORMATION
PaineWebber, 1285 Avenue of the Americas, New York, New York 10019, is the
distributor of each Series' shares, although shares of the Ohio Series,
Pennsylvania Series and Texas Series are not currently being offered. Shares of
the New York Series may be purchased only by existing shareholders of the New
York Series. Shares must be purchased and maintained through a
17
<PAGE>
- --------------------------------------------------------------------------------
brokerage account at PaineWebber (an 'Account'). Thus, an investor who wishes to
purchase a Series' shares but has no existing Account must establish one. Shares
of Connecticut Series and New Jersey Series are available to new investors
through either the Resource Management (RMA) or Business Services Account (BSA)
programs. RMA and BSA participants may select one of the Series as their
designated portfolio ('Primary Sweep Money Fund'). The RMA program is more fully
described in the brochure, 'Facts about Your PaineWebber Resource Management
Account' and the BSA program is more fully described in the brochure, 'Facts
about Your Business Service Account'. The availability of Series shares to
customers of PaineWebber's correspondent firms varies depending on the
arrangements between PaineWebber and such firms.
Each Series' shares may be purchased 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.
PaineWebber 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 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, Eastern time, for
which payment has been received by PaineWebber will be executed at that time and
the shareholder will receive the dividend declared on that day. Shareholders
whose purchase orders are received after 12:00 noon, Eastern time, or are
received earlier in the same day but payment has not been received by 12:00
noon, Eastern time, will receive the dividend declared on the following day.
An order to purchase shares of a Fund will be executed on the Business Day
on which federal funds become available to the Fund, at the Fund's
next-determined net asset value per share. A 'Business Day' is any day, Monday
through Friday, on which the New York Stock Exchange, Inc. is open for business.
'Federal funds' are funds deposited by a commercial bank in an account at a
Federal Reserve Bank that can be transferred to a similar account of another
bank in one day and thus may be made immediately available to a Fund through its
Custodian.
RMA and BSA participants may change their Primary Sweep Money Fund at any
time by notifying their PaineWebber investment executives or correspondent
firms. However, RMA and BSA participants may not have more than one Primary
Sweep Money Fund at a time.
On any Business Day, a Fund will accept purchase orders and credit shares
to investors' accounts as follows.
PURCHASES WITH FUNDS HELD AT PAINEWEBBER
All deposits to RMA and BSA participants' brokerage accounts and any free credit
cash balances that may arise in such brokerage accounts will be automatically
invested in shares of their Primary Sweep Money Fund, provided that federal
funds are available for the investment. Federal funds normally are available for
cash balances arising from the sale of securities held in a brokerage account on
the Business Day following settlement, but in some cases can take longer.
Purchases of Shares of a Series for shareholders outside the RMA and BSA
programs will have
18
<PAGE>
- --------------------------------------------------------------------------------
federal funds swept automatically into shares daily for settlement the next
business day for balances over $1.00.
PURCHASES BY CHECK
RMA and BSA participants may purchase Fund shares by depositing into their
account checks drawn on a U.S. bank. The PaineWebber brokerage account number
should be included on the check.
As noted above, shares of the participant's Primary Sweep Money Fund will
be purchased when federal funds are available. RMA or BSA participants wishing
to invest amounts deposited in their accounts by check in one of the other Funds
(non 'primary fund') should so instruct their PaineWebber investment executives
or correspondent firms. Federal funds are deemed available to a Fund two
Business Days after deposit of a personal check and one Business Day after
deposit of a cashier's or certified check. PaineWebber may benefit from the
temporary use of the proceeds of personal checks to the extent those funds are
converted to federal funds in fewer than two Business Days.
PURCHASES BY WIRE
Shares of a Series may also be purchased by transfering federal funds by wire to
a PaineWebber brokerage account. Wire transfers should be directed to: Bank of
New York, ABA 021000018, PaineWebber Inc., for RMAs/BSAs A/C 890-0114-088 and
for all other accounts A/C 890-0114-096 OBI=FBO [Account Name]/[Brokerage
Account Number]. The wire must include the investor's name and PaineWebber
brokerage account number. Participants wishing to transfer federal funds into
their accounts should contact their PaineWebber investment executives or
correspondent firms to determine the appropriate wire instructions.
To the extent that the amounts transferred by wire create a cash balance in
an investor's account, that cash balance will be automatically invested in the
investor's Primary Sweep Money Fund, as described above under 'Purchases with
Funds Held at PaineWebber.' Participants wishing to invest amounts transferred
by wire in one of the other Funds should so instruct their PaineWebber
investment executives or correspondent firms.
If PaineWebber receives a notice from an investor's bank of a wire transfer
of federal funds by 12:00 noon, Eastern time, on a Business Day, the automatic
investment will be executed on that Business Day. Otherwise, the automatic
investment will be executed at 12:00 noon, Eastern time, on the next Business
Day. PaineWebber and/or an investor's bank may impose a service charge for wire
transfers.
All shares purchased are entered, confirmed and credited to the
shareholder's Fund account at the net asset value next determined as described
in 'Determination of Net Asset Value.' Shares purchased begin to accrue income
dividends on the day of purchase. The Fund does not issue share certificates.
The Fund reserves the right to reject any purchase order.
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.
19
<PAGE>
- --------------------------------------------------------------------------------
REDEMPTION THROUGH PAINEWEBBER
PaineWebber wires the terms of any redemption request properly received to PFPC,
Inc., the Fund's transfer and dividend disbursing agent. The price at which a
redemption request is executed is the net asset value per share next determined
after proper redemption instructions are received. Payment for redemption
orders, if any, that are received before 12:00 noon, Eastern 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. Payment for
redemption orders, if any, that are received after 12:00 noon, Eastern time,
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. The proceeds of the 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 PFPC,
Inc. at the following address:
PFPC, Inc.
P.O. Box 8950
Wilmington, Delaware 19899
Attn: PaineWebber/Kidder, Peabody
Municipal Money Market Series
Redemption requests received by PFPC, Inc. by mail are processed by PFPC,
Inc., which 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.'
A redemption request is considered to have been received in 'good order' if
the following conditions are satisfied:
(1) the request is in writing, indicates the Series and 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 Fund 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.
20
<PAGE>
- --------------------------------------------------------------------------------
AUTOMATIC REDEMPTIONS
Under the RMA and BSA programs, PaineWebber will redeem Fund shares
automatically to satisfy outstanding 'Debits' and 'Charges.' 'Debits' are
amounts due PaineWebber on settlement date for securities purchases and other
debits in the investor's brokerage account, including margin loans, any federal
funds wires arranged by PaineWebber ($5,000 and over) and fees for such wires
and PaineWebber checks and fees for such checks. 'Charges' are RMA or BSA
checks, Gold and Business MasterCard purchases, cash advances, Bill Payment
Service checks and Automated Clearing House transfers. Shares are redeemed to
cover Debits on the day the Debit is generated. Shares are redeemed to cover RMA
or BSA checks and Gold and Business MasterCard cash advances on the day they are
paid. Shares are redeemed to cover Gold and Business MasterCard purchases at the
end of the MasterCard monthly billing period. Shares are also redeemed to cover
interest due on and credit extended and outstanding under the Bank One Line of
Credit at the end of the MasterCard monthly billing cycle. Securities purchases
are automatically paid for on settlement date unless the shareholder notifies
PaineWebber to the contrary in advance. Fund shares will not be purchased until
all Debits and Charges in a shareholder's RMA or BSA brokerage account are
satisfied. 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.
ORDER OF REDEMPTION
If a shareholder owns shares of more than one Fund, shares of the Primary Fund
are always redeemed first; thereafter, shares held in the other Funds will be
redeemed, if necessary, in the following order: first, any taxable money market
funds; second, any U.S. government funds; third, any national tax-free fund; and
fourth, any state tax-free fund.
ADDITIONAL INFORMATION ON REDEMPTIONS
Shareholders with questions about redemption requirements should consult their
PaineWebber investment executives or correspondent firms. Shareholders who
redeem all their shares will receive cash credits to their brokerage accounts
for dividends earned on those shares to (but not including) the day of
redemption. The redemption price may be more or less than the purchase price,
depending on the market value of the Fund's portfolio; however, each Fund
anticipates that its net asset value per share will normally be $1.00 per share.
See 'Determination of Net Asset Value.'
Because each Fund incurs certain fixed costs in maintaining shareholder
accounts, each Fund reserves the right to establish minimum initial purchase
requirements and to redeem Fund shares in any shareholder account of less than
$500 net asset value. If a Fund elects to do so, it will notify the shareholder
and provide the shareholder with an opportunity to increase the amount invested
to $500 or more within 60 days of the notice. This notice may appear on the
shareholder's account statement. If a shareholder requests redemption of shares
that were purchased recently, a Fund may delay payment until it is assured that
it has received good payment for the purchase of the shares. In the case of
purchases by check, this can take up to 15 days.
21
<PAGE>
- --------------------------------------------------------------------------------
PaineWebber has the right to terminate a brokerage account for any reason.
In such event, all Series shares held in the shareholders brokerage account will
be redeemed and the proceeds sent to the shareholder within seven days.
EXCHANGE PRIVILEGE
Shares of each Series may be exchanged for shares of the other Series currently
offered and certain other funds to the extent such shares are offered for sale
in the shareholder's state of residence.
For a list of the funds for which shares may be exchanged prior to March
31, 1995 and for a description of each of those funds, please see 'Exchange of
Shares' in the Statement of Additional Information. An exchange of shares of a
non-money market fund with other funds' shares will be limited to shares of the
same class or 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 Mitchell Hutchins/Kidder, Peabody Global Equity Fund ('Global Equity
Fund') exchanges his shares for shares of the Fund (a money market fund) and
thereafter wishes to exchange those shares for shares of Mitchell
Hutchins/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
another fund wishes to exchange his shares for shares of Global Equity Fund, he
may receive Class A shares, Class B shares or Class 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 shares of other
funds.
Effective March 31, 1995, shares of each Series may be exchanged only for
shares of the other Series currently offered and the following money market
funds:
PaineWebber/Kidder, Peabody California Tax Exempt Money Fund
PaineWebber/Kidder, Peabody Cash Reserve Fund, Inc.
PaineWebber/Kidder, Peabody Government Money Fund, Inc.
PaineWebber/Kidder, Peabody Premium Account Fund
PaineWebber/Kidder, Peabody Tax Exempt Money Fund, Inc.
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 shares of the fund being
acquired by exchange may legally be sold 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,
Series' shares submitted for exchange will be redeemed at their net asset value
next determined and simultaneously invested in shares of the fund being
acquired. The proceeds of a redemption of Series' 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
22
<PAGE>
- --------------------------------------------------------------------------------
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 PaineWebber 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. PaineWebber reserves the right to reject any exchange request at
any time.
THE DISTRIBUTOR
PaineWebber acts as distributor of each Series' shares pursuant to a
Distribution Agreement.
To reimburse PaineWebber for the services it provides and for the expenses
it bears under the Distribution Agreement, the Fund has adopted the Plan of
Distribution under the Act. The Plan of Distribution provides that the Fund
reimburse PaineWebber its expenses for distribution of each Series' shares at
the annual rate of up to .12% of the Series' average daily net assets. The
expenses which may be reimbursed include compensation to investment executives
and other employees of PaineWebber, 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 will generally include any profit to
PaineWebber. The Fund is not authorized to reimburse PaineWebber for expenses
incurred more than 12 months prior to the date of such reimbursement.
PaineWebber 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 Series' shares and the maintenance of Fund
accounts and account balances, and there will be no reimbursement for the
expenses relative to PaineWebber's overhead. PaineWebber currently intends that
approximately .10% per annum of each Series' daily net assets will be paid to
its investment executives proportionately in respect of Series' share balances
maintained by their respective clients and the balance on other activities. For
the fiscal year ended October 31, 1994, the Connecticut Series, New Jersey
Series and New York Series each reimbursed Kidder, Peabody, the Fund's
predecessor distributor, in an amount equal to .12% of their average daily net
assets.
The Plan of Distribution continues from year to year, provided such
continuance is approved annually by vote of the Board of 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 of Distribution must also be approved by the Board of Trustees in the
manner described above. The Plan of Distribution may be terminated at any time,
without payment of any penalty, by vote of the holders of a majority of the
outstanding voting securities of the Fund, as defined in the Act, or, as to each
Series, by vote of a majority of the Board of Trustees as described above, 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
23
<PAGE>
- --------------------------------------------------------------------------------
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, PaineWebber provides the Fund's Board
of 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 PaineWebber on behalf of the Series 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 October 31, 1994,
Kidder, Peabody, the Fund's predecessor distributor, incurred distribution
expenses with respect to the Connecticut Series, New Jersey Series and New York
Series of $36,446, $49,761 and $85,928, respectively, of which $36,446, $49,761
and $85,928, respectively, were recovered in the form of reimbursements made by
such Series to Kidder, Peabody at the rate provided in the Plan of Distribution.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Each Series declares dividends from its net investment income on each day the
NYSE is open for business. Dividends are payable to shareholders of record as of
12:00 noon, New York time, on the preceding business day. Each Series' earnings
for Saturdays, Sundays and holidays are declared as dividends on the preceding
business day. Dividends are paid monthly. Distributions from net realized
securities gains, if any, are declared and paid once a year, but the Series 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. Distributions and dividends ordinarily are reinvested in
additional shares of the Series from which they were paid. However, a
shareholder may elect to receive dividends and distributions in cash. If a
shareholder redeems all shares in his account at any time during the month, all
dividends to which such shareholder is entitled will be paid to the shareholder
along with the proceeds of the redemption.
FEDERAL TAX TREATMENT
Under the Code, each Series is treated as a separate corporation that qualifies
as a regulated investment company. Dividends paid by a Series from tax exempt
interest are not subject to Federal income tax. Dividends derived from Taxable
Investments, together with distributions from any net realized short-term
securities gains and all or a portion of any gains realized from the sale or
other disposition of certain market discount bonds, if any, paid by a Series are
taxable as ordinary income whether or not reinvested. The Fund anticipates that
substantially all dividends paid by a Series will not be subject to Federal
income tax. Distributions from net realized long-term securities gains of a
Series generally are subject to Federal income tax as long-term capital gains.
No dividend paid by the Series will qualify for the dividends-received deduction
allowable to certain U.S. corporations.
The Connecticut Series, New Jersey Series and New York Series qualified for
the fiscal year ended October 31, 1994 as 'regulated investment companies' under
the Code, and each intends to remain qualified. Such qualification relieves the
Series of any liability for Federal income tax to
24
<PAGE>
- --------------------------------------------------------------------------------
the extent its earnings are distributed in accordance with applicable provisions
of the Code. The Code subjects regulated investment companies to a nondeductible
4% excise tax, measured with respect to certain undistributed amounts of taxable
investment income and capital gains.
Although all or a substantial portion of the dividends paid by each Series
may be excluded by shareholders of the Series from their gross income for
Federal income tax purposes, each Series 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
the determination of an investor's tax on Social Security benefits. If a Series
purchases such securities, the portion of such Series' 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.
Under the Code, interest on indebtedness incurred or continued to purchase
or carry Fund shares which is deemed to relate to exempt-interest dividends is
not deductible. Depending on the circumstances, the Internal Revenue Service
(the 'IRS') may consider Series' shares to have been purchased or carried with
borrowed funds even though the shares are not directly traceable to the borrowed
funds.
Federal regulations generally require the Fund to withhold ('backup
withholding') and remit to the U.S. Treasury 31% of taxable dividends and
distributions from net realized securities gains paid to a shareholder 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 IRS may notify
the Fund 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 or 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 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.
CONNECTICUT SERIES
Dividends paid by the Connecticut Series that qualify as exempt-interest
dividends for Federal income tax purposes are not subject to the Connecticut
personal income tax on individuals, trusts and estates, to the extent that such
dividends are derived from income received by the Series as interest from
Connecticut Municipal Obligations, or as interest from obligations with respect
to which Connecticut is prohibited by Federal law from taxing. Dividends derived
from other sources are taxable by Connecticut except that distributions
qualifying as capital gains dividends for Federal income tax purposes may not be
taxable by Connecticut to the extent derived from Connecticut Municipal
Obligations. In the case of a shareholder subject to the Connecticut income tax
and required to pay the Federal alternative minimum tax, the portion of exempt-
interest dividends paid by the Series that is derived from income received by
the Series as
25
<PAGE>
- --------------------------------------------------------------------------------
interest from Connecticut Municipal Obligations or obligations the interest with
respect to which Connecticut is prohibited by Federal law from taxing and that
is treated as a preference item for purposes of the Federal alternative minimum
tax is not subject to the net Connecticut minimum tax.
Dividends qualifying as exempt-interest dividends for Federal income tax
purposes that are distributed by the Series to entities taxed as corporations
under the Connecticut corporation business tax are not exempt from that tax.
The Connecticut Series' shares are not subject to property taxation by the
State of Connecticut or its political subdivisions.
NEW JERSEY SERIES
The Fund anticipates that substantially all dividends paid by the New Jersey
Series will not be subject to New Jersey gross income tax. In accordance with
the provisions of New Jersey law as currently in effect, distributions paid by a
'qualified investment fund' will not be subject to the New Jersey gross income
tax to the extent the distributions are attributable to income received as
interest or gain from New Jersey Municipal Obligations or direct U.S. Government
obligations or certain other specified obligations. To be classified as a
qualified investment fund, at least 80% of the Series' investments must consist
of such obligations. Distributions by a qualified investment fund that are
attributable to most other sources will be subject to the New Jersey gross
income tax. If the New Jersey Series qualifies as a qualified investment fund,
any gain on the redemption of such Series' shares will not be subject to the New
Jersey gross income tax. To the extent a shareholder of the New Jersey Series is
obligated to pay state or local taxes outside of New Jersey, dividends earned by
such shareholder may represent taxable income.
The shares of the New Jersey Series are not subject to property taxation by
New Jersey or its political subdivisions.
NEW YORK SERIES
The Fund anticipates that a substantial portion of the dividends paid by the New
York Series will not be subject to New York State or New York City income taxes.
To the extent a shareholder of the New York Series is obligated to pay state or
local taxes outside of New York State and New York City, dividends earned by
such shareholder may represent taxable income.
OHIO SERIES
Dividends paid by the Ohio Series to an Ohio resident, or to a corporation
subject to the Ohio Corporation Franchise Tax, are not subject to Ohio state and
local income taxes or the net income basis of the Ohio Corporation Franchise Tax
to the extent such dividends are attributable to income received by the Ohio
Series from Ohio Municipal Obligations and direct obligations of the United
States, certain Federal agencies and certain U.S. territories. Dividends or
distributions paid by the Ohio Series to an Ohio resident, or to a corporation
subject to the Ohio Corporation Franchise Tax, that are attributable to most
other sources are subject to the Ohio state and local income taxes and are
includable in the net income basis of the Ohio Corporation Franchise Tax. Ohio
Series' shares are not subject to property taxation by the State of Ohio or its
political
26
<PAGE>
- --------------------------------------------------------------------------------
subdivisions, except when held by a 'dealer in intangibles' (generally, a person
in the lending or brokerage business), a decedent's estate, an Ohio insurance
company, or a corporation taxed on the net worth basis of the Ohio Corporation
Franchise Tax.
To the extent a shareholder of the Ohio Series is obligated to pay state or
local taxes outside of Ohio, dividends and distributions paid by the Ohio Series
to such shareholder may represent taxable income.
PENNSYLVANIA SERIES
Dividends paid by the Pennsylvania Series will not be subject to the
Pennsylvania personal income tax or to the Philadelphia School District
investment net income tax to the extent the dividends are attributable to
interest received by the Series from its investments in Pennsylvania Municipal
Obligations, U.S. Government obligations or obligations issued by U.S.
possessions. Dividends or distributions paid by the Pennsylvania Series to a
Pennsylvania resident attributable to most other sources may be subject to the
Pennsylvania personal income tax and (for residents of Philadelphia) to the
Philadelphia School District investment net income tax.
Dividends paid by the Pennsylvania Series which are considered 'exempt
interest dividends' for Federal income tax purposes are not subject to the
Pennsylvania Corporate Net Income Tax, but other dividends or distributions paid
by the Pennsylvania Series may be subject to that tax. An additional deduction
from Pennsylvania taxable income is permitted for dividends or distributions
paid by the Pennsylvania Series attributable to interest received by the Series
from its investments in Pennsylvania Municipal Obligations and U.S. Government
obligations to the extent included in Federal taxable income, but such a
deduction is reduced by any interest on indebtedness incurred to carry the
securities and other expenses incurred in the production of such interest
income, including expenses deducted on the Federal income tax return that would
not have been allowed under the Code if the interest were exempt from Federal
income tax. It is the current position of the Pennsylvania Department of Revenue
that Series shares are not considered exempt assets (with a pro rata exclusion
based on the value of the Series attributable to its investments in Pennsylvania
Municipal Obligations and U.S. Government obligations, including obligations
issued by U.S. possessions) for the purpose of determining a corporation's
capital stock value subject to the Pennsylvania Capital Stock/Franchise Tax.
Shares of the Pennsylvania Series are exempt from Pennsylvania county
personal property taxes and (as to residents of Pittsburgh) from personal
property taxes imposed by the City of Pittsburgh and the School District of
Pittsburgh to the extent that the portfolio of the Series consists of
Pennsylvania Municipal Obligations, U.S. Government obligations or obligations
issued by U.S. possessions. This exemption, however, will not apply to the
extent that the Pennsylvania Series' portfolio consists of securities not exempt
from personal property taxes in Pennsylvania.
To the extent that investors are obligated to pay state or local taxes
outside of Pennsylvania, dividends and distributions paid by the Pennsylvania
Series may represent taxable income.
27
<PAGE>
- --------------------------------------------------------------------------------
TEXAS SERIES
All dividends and distributions by the Texas Series to Texas resident
individuals are not currently subject to taxation by Texas. However, Texas has
enacted significant changes to its franchise tax law. These changes include the
imposition of a tax measured by earned surplus, in addition to the traditional
tax on a corporation's capital. The Texas franchise tax on earned surplus is
applicable only to the extent it exceeds the franchise tax on capital. For Texas
franchise tax purposes, earned surplus is computed by reference to Federal
taxable income. Thus, any amounts subject to Federal income tax that are payable
by the Texas Series to corporations doing business in or incorporated in Texas
generally will be included in the earned surplus component of the Texas
franchise tax, to the extent such earned surplus is apportioned to Texas.
Dividends and other distributions not subject to Federal income tax generally
will be excluded from the calculation of the earned surplus component.
Both the capital tax and earned surplus tax components of the Texas
franchise tax are computed by reference to the portion of the corporation's
capital or earned surplus based on the corporation's gross receipts derived from
Texas sources. To the extent dividend and interest payments are made by a
non-Texas entity, such dividends and payments are considered to be non-Texas
sourced receipts for franchise tax purposes.
Dividends and distributions by the Texas Series to corporations doing
business in or incorporated in Texas will be considered non-Texas sourced 'gross
receipts' for both components of the Texas franchise tax. Other distributions
from the Texas Series to corporations doing business in or incorporated in Texas
(such as the proceeds resulting from net gain upon the sale of Series bonds) may
be allocable to Texas as Texas sourced gross receipts for the earned surplus
component of the franchise tax if: (1) the activities of the recipient
corporation do not have a sufficient unitary connection with that corporation's
other activities conducted within the State giving rise to the underlying sale
of such assets; and (2) the recipient corporation has its commercial domicile in
Texas.
The shares of the Texas Series are not subject to property taxation by
Texas or its political subdivisions.
- ----------------------------------------------------------
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 daily as of 12:00 noon, 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 a Series' shares have been
received, when there is not sufficient trading in or changes in the value of the
Series' portfolio securities to materially affect such Series' net asset value
per share or when the NYSE is not open for trading.
The determination of each Series' net asset value per share is made by
subtracting from the value of the assets of such Series the amount of its
liabilities and dividing the remainder by the number of outstanding shares of
such Series. Expenses and fees of the Fund, including Mitchell
28
<PAGE>
- --------------------------------------------------------------------------------
Hutchins' fee, are accrued daily and taken into account for the purpose of
determining net asset value.
Each Series attempts to maintain a net asset value of $1.00 per share for
purchases and redemptions, although there can be no assurance that each Series
will always be able to do so. In order to effectuate this policy, a Series 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 Series held by a shareholder. The Fund determines the value of
each Series' 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.
CUSTODIAN, AND TRANSFER, DIVIDEND DISBURSING AND RECORDKEEPING AGENT
PFPC, Inc., a subsidiary of PNC Bank, National Association, whose principal
address is 400 Bellevue Parkway, Wilmington, Delaware 19809, serves as the
Fund's transfer, dividend disbursing and recordkeeping agent. Investors
Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri 64105,
serves as the Fund's custodian.
ADDITIONAL INFORMATION ABOUT THE FUND
The Fund was organized as a Massachusetts business trust on September 14, 1990.
The Fund is a 'Series Fund,' which is a mutual fund divided into separate
portfolios or series. The Connecticut Series commenced operations on November 6,
1990 and the New Jersey Series and the New York Series both commenced operations
on February 1, 1991. The Ohio Series, Pennsylvania Series and Texas Series had
not commenced operations prior to the date of this Prospectus. The Board of
Trustees may issue an unlimited number of full and fractional shares of
beneficial interest with $.001 par value per share. Each share has one vote.
Shares have no preemptive or conversion rights and are fully paid and
non-assessable by the Fund. As described under 'Shares of the Fund' in the
Statement of Additional Information, the Fund ordinarily does not hold
shareholder meetings; however, meetings of shareholders may be called by the
Board of 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.
Each Series of the Fund is treated as a separate entity for certain matters
under the Act, and for other purposes, and a shareholder of one Series is not a
shareholder of any other Series. For certain matters Fund shareholders vote
together as a group; as to others they vote separately by Series. Rule 18f-2
under the Act provides that any matter required to be submitted, under the
provisions of the Act or applicable state law or otherwise, to the holders of
the outstanding voting securities of an investment company, such as the Fund,
will not be deemed to have been effectively acted upon unless approved by the
holders of a majority of the outstanding shares of each series affected by such
matter. Rule 18f-2 further provides that a series shall be deemed to be affected
by a matter unless it is clear that the interests of each series in the matter
are identical or that the matter does not affect any interest of such series.
However, the Rule exempts the
29
<PAGE>
- --------------------------------------------------------------------------------
selection of independent accountants and the election of Trustees from the
separate voting requirements of the Rule.
To date, six Series of shares have been authorized. All consideration
received by the Fund for shares of one of the Series and all assets in which
such consideration is invested belong to that Series (subject only to the rights
of creditors of the Fund) and will be subject to the liabilities related
thereto. The income attributable to, and the expenses of, a Series are treated
separately from those of the other Series.
In the interest of economy and convenience, certificates representing the
Series' shares are not physically issued. PFPC, Inc., the Fund's transfer,
dividend disbursing and recordkeeping agent, maintains a record of each
shareholder's ownership. Each shareholder receives confirmation of orders from
PaineWebber. Each Series' shares and any dividends paid by the Series are
reflected in statements from PaineWebber.
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 or employee 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.
30
<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 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 16
- ---------------------------------------------
Portfolio Transactions 17
- ---------------------------------------------
Purchase of Shares 17
- ---------------------------------------------
Redemption of Shares 19
- ---------------------------------------------
Exchange Privilege 22
- ---------------------------------------------
The Distributor 23
- ---------------------------------------------
Dividends, Distributions and Taxes 24
- ---------------------------------------------
Determination of Net Asset Value 28
- ---------------------------------------------
Custodian, and Transfer, Dividend
Disbursing and Recordkeeping Agent 29
- ---------------------------------------------
Additional Information About the Fund 29
- ---------------------------------------------
</TABLE>
<TABLE>
<S> <C>
PaineWebber/
Kidder,
Peabody
Municipal
Money
Market
Series
Prospectus
February 28, 1995
</TABLE>
<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 NEW YORK MUNICIPAL MONEY FUND
(a series of PaineWebber Managed Municipal Trust)
PAINEWEBBER/KIDDER, PEABODY MUNICIPAL MONEY
MARKET SERIES - NEW YORK SERIES
(a series of PaineWebber/Kidder, Peabody
Municipal Money Market Series)
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 New York Municipal Money Fund ("PW
Fund"), a series of PaineWebber Managed Municipal Trust, would acquire the
assets of PaineWebber/Kidder, Peabody Municipal Money Market Series - New York
Series ("PW/KP Fund"), a series of PaineWebber/Kidder, Peabody Municipal Money
Market Series, 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 Annual Report to Shareholders of PW Fund for the fiscal year ended
June 30, 1995, previously filed on EDGAR, Accession Number:
0000889812-95-000459
(3) The Annual Report to Shareholders of PW/KP Fund for the fiscal year ended
October 31, 1994.
(4) The Semi-Annual Report to Shareholders of PW/KP Fund for the six months
ended April 30, 1995, previously filed on EDGAR, Accession Number
0000950117-95-000250.
(5) Pro Forma Financial Statements for PW Fund for the fiscal year ended
June 30, 1995 and for PW/KP Fund for the twelve months ended on that date.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the prospectus/proxy statement dated
______ ___ , 1995 relating to the above-referenced transaction. A copy of this
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 ______ ___,
1995.
<PAGE>
Statement of Additional Information February 28, 1995
- --------------------------------------------------------------------------------
PaineWebber/Kidder, Peabody Municipal Money Market Series
1285 Avenue of the Americas New York, New York 10019 1-800-762-1000
PaineWebber/Kidder, Peabody Municipal Money Market Series (the 'Fund') is an
open-end, management investment company. Its investment objective is
maximization of current income exempt from Federal and, where applicable, State
income taxes consistent with the preservation of capital and the maintenance of
liquidity. The Fund permits investors to invest in any of six separate
portfolios (each, a 'Series'): the Connecticut Series, New Jersey Series, New
York Series, Ohio Series, Pennsylvania Series and Texas Series, although shares
of the Ohio Series, Pennsylvania Series and Texas Series are not currently being
offered. Moreover, shares of the New York Series are offered only to existing
shareholders of the New York Series. Each Series seeks to achieve the Fund's
investment objective by investing primarily in short-term Municipal Obligations
issued by issuers in the State after which it is named ('State Municipal
Obligations') and believed to be exempt from Federal and, where applicable, that
State's income taxes. Each of the Connecticut Series, New Jersey Series, New
York Series, Ohio Series, Pennsylvania Series and Texas Series is
non-diversified for purposes of the Investment Company Act of 1940, as amended
(the 'Act').
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 February 28, 1995.
- --------------------------------------------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Mitchell Hutchins Asset Management Inc.
DISTRIBUTOR
PaineWebber 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 at any time, or at specified intervals not
exceeding 397 days, in each case upon not more than 30 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 holders
thereof. 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 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.
Municipal lease obligations or installment purchase contract obligations
(collectively, 'lease obligations') have special risks not ordinarily associated
with Municipal Obligations. Although
2
<PAGE>
- --------------------------------------------------------------------------------
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' lease obligations are secured by the leased property, disposition
of the property in the event of foreclosure might prove difficult. Each Series
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 ('NRSRO') (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 Mitchell
Hutchins Asset Management Inc. ('Mitchell Hutchins'), the Fund's investment
adviser and administrator, in determining the liquidity of municipal lease
obligations. In addition, no Series will invest 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.
The Fund will not purchase tender option bonds unless (a) the demand
feature applicable thereto is exercisable by the Fund within 397 days of the
date of such purchase upon no more than 30 days' notice and thereafter is
exercisable by the Fund no less frequently than annually upon no more than 30
days' notice and (b) at the time of such purchase, Mitchell Hutchins reasonably
expects, (i) based upon its assessment of current and historical interest rate
trends, that prevailing short-term tax exempt rates will not exceed the stated
interest rate on the underlying Municipal Obligations at the time of the next
tender fee adjustment, and (ii) that the circumstances which might entitle the
grantor of a tender option to terminate the tender option would not occur prior
to the time of the next tender opportunity. At the time of each tender
opportunity, the Fund will exercise the tender option with respect to any tender
option bonds unless Mitchell Hutchins reasonably expects, (x) based on its
assessment of current and historical interest rate trends, that short-term tax
exempt rates will not exceed the stated interest rate on the underlying
Municipal Obligations at the time of the next tender fee adjustment, and (y)
that the circumstances which might entitle the grantor of a tender option to
terminate the tender option would not occur prior to the time of the next tender
opportunity. The Fund will exercise the tender feature with respect to tender
option bonds, or otherwise dispose of its tender option bonds, prior to the time
the tender option is scheduled to expire pursuant to the terms of the agreement
under which the tender option is granted. The Fund otherwise will comply with
the provisions of Rule 2a-7 under the Act in connection with the purchase of
tender option bonds, including, without limitation, the requisite determination
by the Trustees that the tender option bonds in question meet the quality
standards described in Rule 2a-7, which, in the case of a tender option bond
subject to a conditional demand feature, would include a determination that the
security has received both the required short-term and long-term high quality
rating or is
3
<PAGE>
- --------------------------------------------------------------------------------
determined to be of comparable quality. In the event of a default of the
Municipal Obligation underlying a tender option bond, or the termination of the
tender option agreement, the Fund would look to the maturity date of the
underlying security for purposes of compliance with Rule 2a-7 and, if its
remaining maturity was greater than 397 days, the Fund would sell the security
as soon as would be practicable. The Fund will purchase tender option bonds only
when it is satisfied that the custodial and tender option arrangements,
including the fee payment arrangements, will not adversely affect the tax exempt
status of the underlying Municipal Obligations and that payment of any tender
fees will not have the effect of creating taxable income for the Fund. Based on
the tender option bond arrangement, the Fund expects to be able to value the
tender option bond at par; however, the value of the instrument will be
monitored to assure that it is valued at fair value.
RATINGS OF MUNICIPAL OBLIGATIONS
If, subsequent to its purchase by a Series, (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) Mitchell Hutchins 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 Series 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 Mitchell Hutchins becoming aware of the new rating and the
Fund's Trustees are subsequently notified of Mitchell Hutchins' actions.
To the extent that the ratings given by Moody's Investors Service, Inc.
('Moody's'), Standard & Poor's Ratings Group ('S&P') or Fitch Investors Service,
Inc. ('Fitch') 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, S&P and Fitch 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 may be an
initial criterion for selection of portfolio securities, Mitchell Hutchins also
will evaluate these securities.
TAXABLE INVESTMENTS
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities include 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,
4
<PAGE>
- --------------------------------------------------------------------------------
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 interest
rates.
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 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 or other
recognized financial institutions, and requires that additional securities be
deposited with it if the value of the securities purchased should decrease below
resale price. Mitchell Hutchins considers 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. Mitchell Hutchins considers on an ongoing basis the
creditworthiness of the institutions with which the Fund enters into repurchase
agreements.
5
<PAGE>
- --------------------------------------------------------------------------------
RISK FACTORS -- INVESTING IN STATE MUNICIPAL OBLIGATIONS
Investors should review the information in the Appendix hereto, which provides a
brief summary of special investment considerations relating to investing in
State Municipal Obligations.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies which
apply to each Series. These restrictions cannot be changed, as to a Series,
without approval by the holders of a majority of the outstanding voting shares
of such Series. For purposes of the Act, 'majority' means the lesser of (i) 67%
of such Series' outstanding voting shares present at a meeting if the holders of
more than 50% of the outstanding voting shares of such Series are present in
person or by proxy, or (ii) more than 50% of such Series' outstanding voting
shares. No Series may:
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 15% of the Series' 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 Series'
total assets, the Series will not make any additional investments.
3. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except 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 Series from investing in Municipal Obligations
secured by real estate or interests therein.
6. Sell securities short or purchase securities on margin.
7. Enter into repurchase agreements providing for settlement in more
than seven days after notice or purchase securities which are illiquid
(which securities could include municipal lease/purchase agreements,
participation interests that are not subject to the demand feature
described in the Fund's Prospectus and floating and variable rate demand
obligations as to which the Series cannot exercise the demand feature
described in the Fund's Prospectus on less than seven days' notice and as
to which there is no secondary market), if, in the aggregate, more than 10%
of the Series' net assets would be so invested.
8. Underwrite securities of other issuers, except that the Series 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.
6
<PAGE>
- --------------------------------------------------------------------------------
11. Invest more than 25% of such Series' 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,
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
For purposes of Investment Restriction No. 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.
The Fund may make commitments more restrictive than the restrictions listed
above so as to permit the sale of Series shares in certain states. Should the
Fund determine that a commitment is no longer in the best interests of a Series
and its shareholders, the Fund reserves the right to revoke the commitment by
terminating the sale of such Series' shares in the state involved.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
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.
David J. Beaubien, 60, 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. Mr. Beaubien is a director or trustee of 12
other investment companies for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
William W. Hewitt, Jr., 66, 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 Investment Quality Bond Fund, The Guardian Park Ave. Fund,
The Guardian Stock Fund, Inc., The Guardian Tax-Exempt Fund and Guardian U.S.
Government Trust. Mr. Hewitt is a director or trustee of 12 other investment
companies for which Mitchell Hutchins or PaineWebber serves as investment
adviser.
Thomas R. Jordan, 66, 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. Mr. Jordan is a director or trustee
of 12 other investment companies for which Mitchell Hutchins or PaineWebber
serves as investment adviser.
7
<PAGE>
- --------------------------------------------------------------------------------
Carl W. Schafer, 59, Trustee. President of the Atlantic Foundation, a
charitable foundation supporting mainly oceanographic exploration and research.
Director of International Agritech Resources, Inc., an agribusiness investment
and consulting firm, Ardic Exploration and Development Ltd. and Hidden Lake Gold
Mines Ltd., gold mining companies, Electronic Clearing House, Inc., a financial
transactions processing company, Wainoco Oil Corporation and BioTechniques
Laboratories Inc., an agricultural biotechnology company. Prior to January 1993,
chairman of the Investment Advisory Committee of Howard Hughes Medical Institute
and director of Ecova Corporation, a toxic waste treatment firm. Prior to April
1990, principal of Rockefeller and Company, manager of investments. Mr. Schafer
is a director or trustee of 12 other investment companies for which Mitchell
Hutchins or PaineWebber serves as investment adviser.
Frank P.L. Minard, 49, President. Mr. Minard is chairman of Mitchell
Hutchins, chairman of the board of Mitchell Hutchins Institutional Investors
Inc. and a director of PaineWebber Incorporated ('PaineWebber'). Prior to 1993,
Mr. Minard was managing director of Oppenheimer Capital in New York and Director
of Oppenheimer Capital Ltd. in London. Mr. Minard is an officer of 12 other
investment companies for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
Ann E. Moran, 37, Vice President and Assistant Treasurer. Ms. Moran is a
vice president of Mitchell Hutchins. Ms. Moran is also a vice president and
assistant treasurer of 39 other investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.
Dianne E. O'Donnell, 42, Vice President and Secretary. Ms. O'Donnell is a
senior vice president and senior associate general counsel of Mitchell Hutchins.
Ms. O'Donnell is also a vice president and secretary of 39 other investment
companies for which Mitchelll Hutchins or PaineWebber serves as investment
advisers.
Victoria E. Schonfeld, 44, Vice President. Ms. Schonfeld is a managing
director and general counsel of Mitchell Hutchins. From April 1990 to May 1994
she was a partner in the law firm of Arnold & Porter. Prior to April 1990, she
was a partner in the law firm of Shereff, Friedman, Hoffman & Goodman. Ms.
Schonfeld is also a vice president and assistant secretary of 39 other
investment companies for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
Paul H. Schubert, 32, Vice President and Assistant Treasurer. Mr. Schubert
is a vice president of Mitchell Hutchins. From August 1992 to August 1994, he
was a vice president at BlackRock Financial Management L.P. Prior to August
1992, he was an audit manager with Ernst & Young LLP. Mr. Schubert is also a
vice president and assistant treasurer of 39 other investment companies for
which Mitchell Hutchins or PaineWebber serves as investment adviser.
Gregory W. Serbe, 49, Vice President. Mr. Serbe is a managing director of
Mitchell Hutchins. Mr. Serbe is also a vice president of 8 other investment
companies for which Mitchell Hutchins or PaineWebber serves as investment
adviser.
Martha J. Slezak, 32, Vice President and Assistant Treasurer. Ms. Slezak is
a vice president of Mitchell Hutchins. From September 1991 to April 1992, she
was a fundraising director for a U.S. Senate campaign. Prior to September 1991,
she was a tax manager with Arthur Andersen & Co. Ms. Slezak is also a vice
president and assistant treasurer of 39 other investment companies for which
Mitchell Hutchins or PaineWebber serves as investment adviser.
8
<PAGE>
- --------------------------------------------------------------------------------
Julian F. Sluyters, 34, Vice President and Treasurer. Mr. Sluyters is a
senior vice president and the director of the mutual fund finance division of
Mitchell Hutchins. Prior to 1991, he was an audit senior manager with Ernst &
Young LLP. Mr. Sluyters is also a vice president and treasurer of 39 other
investment companies for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
Gregory K. Todd, 38, Vice President and Assistant Secretary. Mr. Todd is a
first vice president and associate general counsel of Mitchell Hutchins. Prior
to 1993, he was a partner with the law firm of Shereff, Friedman, Hoffman &
Goodman. Mr. Todd is also a vice president and assistant secretary of 39 other
investment companies for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
Certain of the officers of the Fund are directors and/or trustees and
officers of other mutual funds managed by Mitchell Hutchins. The address of each
of the non-interested Trustees is: Mr. Beaubien, Montague Industrial Park, 101
Industrial Road, Box 746, 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 each of the officers is 1285 Avenue of the Americas, New
York, New York 10019.
By virtue of the responsibilities assumed by Mitchell Hutchins under the
Investment Advisory and Administration Agreement, the Fund requires no executive
employees other than its officers, each of whom is employed by either
PaineWebber or Mitchell Hutchins and none of whom devotes full time to the
affairs of the Fund. Trustees and officers, as a group, owned less than 1% of
each Series' outstanding shares as of February 1, 1995. No officer, director or
employee of Mitchell Hutchins 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 Mitchell Hutchins 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. The amount of compensation paid
by the Fund to each Trustee for the fiscal year ended October 31, 1994, and the
aggregate amount of compensation paid to each such Trustee for the year ended
December 31, 1994 by all other funds in the complex for which such person is a
Board member were as follows:
<TABLE>
<CAPTION>
(3) (5)
(2) PENSION OR (4) TOTAL COMPENSATION
(1) AGGREGATE RETIREMENT BENEFITS ESTIMATED ANNUAL FROM FUND AND
NAME OF BOARD COMPENSATION FROM ACCRUED AS PART OF BENEFITS UPON FUND COMPLEX PAID
MEMBER FUND* FUND'S EXPENSES RETIREMENT TO BOARD MEMBER
- ----------------------------- ----------------- ------------------- ---------------- -----------------
<S> <C> <C> <C> <C>
David J. Beaubien $ 3,250 None None $80,700
William W. Hewitt, Jr. $ 2,875 None None $74,425
Thomas R. Jordan $ 3,250 None None $83,125
Carl W. Schafer $ 3,499 None None $84,575
</TABLE>
- ------------
* Amount does not include reimbursed expenses for attending Board meetings,
which amounted to approximately $2,408 for all Trustees as a group.
9
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Mitchell Hutchins, 1285 Avenue of the Americas, New York, New York 10019, the
Fund's investment adviser and administrator, is a wholly owned subsidiary of
PaineWebber. PaineWebber, the Fund's distributor, is wholly owned by Paine
Webber Group Inc. ('PW Group'), a publicly-owned financial services holding
company.
As a result of an asset purchase transaction by and among Kidder, Peabody
Group Inc. ('Kidder, Peabody'), its parent, General Electric Company, and PW
Group, the investment advisory services provided to the Fund by Kidder Peabody
Asset Management, Inc. ('KPAM'), the Fund's predecessor manager and investment
adviser, were assumed, on an interim basis, by Mitchell Hutchins as of January
30, 1995. After the interim period and subject to shareholder approval, which is
expected to occur on or about March 31, 1995, PaineWebber will serve as the
Fund's investment adviser and administrator and will engage Mitchell Hutchins as
the Fund's sub-adviser and sub-administrator. During the interim period and
thereafter, the Fund has agreed to pay the same fee for investment advisory and
administrative services that the Fund agreed to pay KPAM for such services.
After the interim period and subject to shareholder approval, PaineWebber (not
the Fund) will pay Mitchell Hutchins a fee for its sub-advisory and
sub-administration services at an annual rate of 20% of the fee received by
PaineWebber from the Fund for advisory and administration services.
Mitchell Hutchins has agreed that if, in any fiscal year, the aggregate
expenses of a Series (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 such Series, Mitchell Hutchins will reimburse
the Series for such excess expense. This expense reimbursement obligation is not
limited to the amount of Mitchell Hutchins' fee. Such expense reimbursement, if
any, will be estimated, reconciled and paid on a monthly basis. The most
stringent state expense limitations applicable to the Fund presently requires
reimbursement of expenses in any year that such expenses exceed 2 1/2% of the
first $30 million of the average value of a Series' net assets, 2% of the next
$70 million and 1 1/2% of the remaining net assets of the Series. During the
fiscal year ended October 31, 1994, the Series' expenses did not exceed such
limitations.
Subject to the supervision and direction of the Fund's Trustees, Mitchell
Hutchins manages each Series' portfolio in accordance with the stated policies
of the Fund. Mitchell Hutchins 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 PaineWebber, for research information for the Fund. Mitchell
Hutchins makes investment decisions for the Fund and places the purchase and
sale orders for portfolio transactions. In addition, Mitchell Hutchins 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, and filings with the SEC and state Blue Sky
authorities, is responsible for the calculation of the net asset value of shares
and generally assists in all aspects of the Fund's operations. Mitchell Hutchins
bears all expenses in connection with the performance of its services.
10
<PAGE>
- --------------------------------------------------------------------------------
Expenses incurred in the operation of the Fund, including, but not limited
to, organizational costs, taxes, interest, brokerage fees and commissions,
compensation paid to PaineWebber under the Fund's Plan of Distribution pursuant
to Rule 12b-1 (the 'Plan of Distribution'), fees of Trustees who are not
officers, directors, stockholders or employees of Mitchell Hutchins or
PaineWebber, SEC fees and related expenses, state Blue Sky qualification fees,
charges of the custodian and transfer, dividend disbursing and recordkeeping
agents, charges and expenses of any outside service used for pricing each
Series' 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. Expenses attributable to a particular
Series are charged against the assets of that Series; other expenses of the Fund
are allocated among the Series on the basis determined by the Board of Trustees,
including, but not limited to, proportionately in relation to the net assets of
each Series.
As to each Series, the Investment Advisory and Administration Agreement
continues automatically for successive annual periods provided continuance is
approved at least annually by (i) the Fund's Board of Trustees or (ii) vote of
the holders of a majority, as defined in the Act, of such Series' outstanding
voting securities, 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 Mitchell Hutchins, 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
approve the Investment Advisory and Administration Agreement at a meeting held
on December 16, 1994. As to each Series, the Investment Advisory and
Administration Agreement is terminable without penalty, on not more than 60
days' nor less than 30 days' notice, by the Fund's Board of Trustees, by vote of
the holders of a majority of such Series' shares, or by Mitchell Hutchins. The
Investment Advisory and Administration Agreement will terminate automatically,
as to the relevant Series, in the event of its assignment (as defined in the
Act).
As compensation for Mitchell Hutchins' services rendered to the Fund, each
Series pays a fee, computed daily and paid monthly, at an annual rate of .50% of
such Series' average daily net assets. For the fiscal year ended October 31,
1992, the Connecticut Series, New Jersey Series and New York Series paid fees of
$322,541, $292,381 and $340,925, respectively, to KPAM, the Fund's predecessor
manager and investment adviser. For the fiscal year ended October 31, 1993, the
Connecticut Series, New Jersey Series and New York Series paid fees of $312,881,
$349,798 and $454,180, respectively, to KPAM. For the fiscal year ended October
31, 1994, the Connecticut Series, New Jersey Series and New York Series paid
fees of $151,858, $207,338 and $358,032, respectively, to KPAM.
Mitchell Hutchins 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 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.
11
<PAGE>
- --------------------------------------------------------------------------------
CUSTODIAN, AND TRANSFER, DIVIDEND DISBURSING AND RECORDKEEPING AGENT
Investors Fiduciary Trust Company ('IFTC'), 127 West 10th Street, Kansas City,
Missouri 64105, serves as the Fund's custodian. As custodian, IFTC maintains
custody of the Fund's portfolio securities. PFPC, Inc., a subsidiary of PNC
Bank, National Association, whose principal address is 400 Bellevue Parkway,
Wilmington, Delaware 19809, is the Fund's transfer, dividend disbursing and
recordkeeping agent. As transfer agent, PFPC, Inc. 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.
DISTRIBUTOR
PaineWebber, 1285 Avenue of the Americas, New York, New York 10019, is the
distributor of the Fund's shares and is acting on a best efforts basis.
The Trustees believe that the Series' expenditures under the Fund's Plan of
Distribution benefit the Series and their shareholders by providing better
shareholder services. For the fiscal year ended October 31, 1994, Kidder,
Peabody, the Fund's predecessor distributor, received $36,446, $49,761 and
$85,928 from the Connecticut Series, New Jersey Series and New York Series,
respectively, of which $17,040, $23,155 and $38,716, respectively, was spent on
payments to Investment Executives and $19,406, $26,606 and $47,212,
respectively, was spent on overhead-related expenses.
INDEPENDENT AUDITORS
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.
LEGAL COUNSEL
Stroock & Stroock & Lavan, 7 Hanover Square, New York, New York 10004-2696, is
counsel for the Fund.
PRINCIPAL SHAREHOLDERS
With respect to the Connecticut Series, to the knowledge of the Fund, Daniel J.
Brickman, c/o Mitchell Hutchins Asset Management Inc., New York, New York 10019,
owned 5.3% of the Series' outstanding shares of beneficial interest as of
February 3, 1995.
With respect to the New Jersey Series, to the knowledge of the Fund, Gina
Ricciardi c/o Mitchell Hutchins Asset Management, Inc., New York, New York
10019, and Andrew Okun, c/o Mitchell Hutchins Asset Management Inc., New York,
New York 10019, owned 5.6% and 6.5%, respectively, of the Series' outstanding
shares of beneficial interest as of February 3, 1995.
With respect to the New York Series, to the knowledge of the Fund, Ralph
Saltzman, Design Tex Fabrics Inc., c/o Mitchell Hutchins Asset Management Inc.,
New York, New York 10019, owned 6.8% of the Series' outstanding shares of
beneficial interest as of February 3, 1995.
12
<PAGE>
- --------------------------------------------------------------------------------
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
ordinarily are executed at a price between the bid and asked price. No brokerage
commissions have been paid by any Series to date.
Transactions are allocated to various dealers by Mitchell Hutchins 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
Mitchell Hutchins 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 Mitchell Hutchins, and Mitchell Hutchins' fee is not reduced as a
consequence of the receipt of any such supplemental information. Such
information may be useful to Mitchell Hutchins in serving both the Fund and
other clients and, conversely, supplemental information obtained by the
placement of business of its other clients may be useful to Mitchell Hutchins in
carrying out its obligations to the Fund.
Investment decisions for a Series are made independently from those of any
other investment companies or accounts that are managed by Mitchell Hutchins.
If, however, other investment companies or accounts managed by Mitchell Hutchins
are simultaneously engaged in the purchase or sale of the same security, the
transactions are averaged as to price and allocated equitably to each. In some
cases, this system might adversely affect the price paid or received by the
Series or the size of the position obtainable for, or disposable by, the Series.
No portfolio transactions are executed through PaineWebber. PaineWebber
engages in and acts as a dealer in or an underwriter of Municipal Obligations
and Taxable Investments. PaineWebber's activities may have some effect on the
market for such securities, and PaineWebber may be competing in the marketplace
with the Fund in the purchase and sale of such securities.
SHARES OF THE FUND
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of one or more series 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 of a
Series represents an equal proportionate interest in such Series with each other
share of such Series. Upon liquidation of a Series, shareholders are entitled to
share pro rata in
13
<PAGE>
- --------------------------------------------------------------------------------
the net assets of such Series available for distribution to shareholders. Shares
have no preemptive or conversion rights. Shares are fully paid and
non-assessable by the Fund.
A Series' shareholders are entitled to a full vote for each share of a
Series held (and proportionate, fractional votes for fractional shares held).
The Trustees themselves have the power to alter the number of the Trustees, to
fill vacancies in their own number and appoint their own successors, provided
that always at least a majority of the Trustees have been elected by the
shareholders of the Fund. A Trustee may be removed with or without cause by
action of the Trustees or the shareholders. 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 or as the Trustees may consider desirable.
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
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, 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 Series. 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 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 or employee is entitled to be indemnified
against all liability in connection with the affairs of the Fund.
REDEMPTION 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
14
<PAGE>
- --------------------------------------------------------------------------------
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.
EXCHANGE OF SHARES
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 Series' shares because it is unable
to invest amounts effectively in accordance with its investment objective,
policies and restrictions.
Shares of the Fund may be exchanged for shares of the Series currently
offered and the following funds to the extent such shares are offered for sale
in the shareholder's state of residence.
PaineWebber/Kidder, Peabody California Tax Exempt Money Fund
PaineWebber/Kidder, Peabody Cash Reserve Fund, Inc.
PaineWebber/Kidder, Peabody Government Money Fund, Inc.
PaineWebber/Kidder, Peabody Premium Account Fund
PaineWebber/Kidder, Peabody Tax Exempt Money Fund, Inc.
In addition, until March 31, 1995, shares of the Fund may be exchanged for
shares of the following additional funds to the extent such shares are offered
for sale in the shareholder's state of residence.
Mitchell Hutchins/Kidder, Peabody Adjustable Rate Government Fund
Mitchell Hutchins/Kidder, Peabody Asset Allocation Fund
Mitchell Hutchins/Kidder, Peabody Emerging Markets Equity Fund
Mitchell Hutchins/Kidder, Peabody Equity Income Fund, Inc.
Mitchell Hutchins/Kidder, Peabody Global Equity Fund
Mitchell Hutchins/Kidder, Peabody Global Fixed Income Fund
Mitchell Hutchins/Kidder, Peabody Government Income Fund, Inc.
Mitchell Hutchins/Kidder, Peabody Intermediate Fixed Income Fund
Mitchell Hutchins/Kidder, Peabody Municipal Bond Fund
Mitchell Hutchins/Kidder, Peabody Small Cap Growth Fund
DETERMINATION OF NET ASSET VALUE
Net asset value will not be computed on a day in which no orders to purchase,
sell, exchange or redeem Fund shares have been received or on days on which the
NYSE is not open for trading. The NYSE is currently closed on the following
holidays (as observed): New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. 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. A Series' net asset
value is computed by dividing the value of such Series' total assets less
liabilities by the total number of shares outstanding. Each Series' expenses and
fees, including Mitchell Hutchins' fee and fees pursuant
15
<PAGE>
- --------------------------------------------------------------------------------
to the Plan of Distribution, are accrued daily and taken into account for the
purpose of determining the net asset value of each Series' shares. 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 valuation of each Series' portfolio securities is based upon 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 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 upon available indications of
value. In such review, market quotations and market equivalents are obtained
from an independent pricing service (the 'Service') approved by the Board of
Trustees. The Service values the Series' 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 a Series' net asset
value based upon 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 will also 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 market equivalents,
or reducing the number of the Series' outstanding shares. Any reduction of
outstanding shares will be effected by having each shareholder proportionately
contribute to the relevant Series' 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.
DETERMINATION OF CURRENT AND EFFECTIVE YIELDS
The Fund provides current and effective yield quotations on each Series' 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.
16
<PAGE>
- --------------------------------------------------------------------------------
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 calendar day 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 seven-day return with all dividends reinvested in additional
shares of the Fund.
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 'Management of the Fund' above. Current
and effective yield information is useful in reviewing the Fund's performance,
but because current and effective yields fluctuate such information under
certain conditions 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 each Series' price per
share is determined.
Historical and comparative yield information may be presented by the Fund.
ADDITIONAL INFORMATION ABOUT THE FUND
The Prospectus and this Statement of Additional Information do not contain all
the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the SEC under the Securities Act
of 1933 and the Act, to which reference is hereby made.
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, Mitchell Hutchins 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. Mitchell Hutchins, 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, S&P and Fitch.
17
<PAGE>
- --------------------------------------------------------------------------------
RATINGS 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.
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.
18
<PAGE>
- --------------------------------------------------------------------------------
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 and 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.
-- 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,
19
<PAGE>
- --------------------------------------------------------------------------------
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).
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+.
A-2. Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
RATINGS BY FITCH
MUNICIPAL BONDS
The ratings represent Fitch's assessment of the issuer's ability to meet the
obligations of a specific debt issue or class of debt. The ratings take into
consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
20
<PAGE>
- --------------------------------------------------------------------------------
AAA. Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA. Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
Plus (+) and minus ( - ) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the AAA category covering 13-36 months.
SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of up to three years, including commercial paper,
certificates of deposit, medium-term notes, and municipal and investment notes.
Although the credit analysis is similar to Fitch's bond rating analysis,
the short-term rating places greater emphasis than bond ratings on the existence
of liquidity necessary to meet the issuer's obligations in a timely manner.
F-1+. Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely payment.
F-1. Very Strong Credit Qualify. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2. Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.
21
<PAGE>
Kidder, Peabody Municipal Money Market Series -- Connecticut Series
- --------------------------------------------------------------------------------
Schedule of Investments as of October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE % OF NET
AMOUNT (NOTE 2a) ASSETS
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
TAX EXEMPT INVESTMENTS -- 101.1%
Branford Connecticut General Obligation Bds 3.17%, 4/13/95................ $ 1,100,000 $ 1,098,790 4.3%
Bristol Connecticut, Bond Anticipation Note, 3.69%, 5/18/95............... 850,000 850,844 3.3
Connecticut Dev. Auth. Series 85 (Conn Light & Power) Variable Rate Demand
Note, 3.40%(a).......................................................... 2,000,000 2,000,000 7.8
Connecticut State General Obligation Economic Recovery Notes Series B,
Variable Rate Demand Note, 3.35%, (LOC Industrial Bank of Japan)(a)..... 2,800,000 2,800,000 10.8
Connecticut Dev. Auth., (Shelton Inn), Variable Rate Demand Note
3.60%(a)................................................................ 300,000 300,000 1.1
Connecticut State General Obligation Note Series A, 5.25% 12/15/94........ 505,000 506,203 2.0
Connecticut Health Education Facility (Windham Hosp., Series B), General
Obligation Note, 3.00%, 11/10/94 (LOC Banque Paribas)................... 550,000 550,000 2.1
Connecticut Health Education Facility (Yale Univ. Series M), General
Obligation Note, 3.05%, 12/6/94......................................... 1,300,000 1,300,000 5.0
Connecticut Health Education Facility (Yale Univ. Series O), General
Obligation Note, 3.05%, 12/6/94......................................... 1,100,000 1,100,000 4.3
Connecticut Health Education Facility (Charlotte Hosp. Series B), Variable
Rate Demand Note, 3.40%, (LOC Mitsubishi Bank)(a)....................... 1,500,000 1,500,000 5.8
Connecticut Housing Authority, Morg. Fin. Prog. Series 1990C, General
Obligation Bond, 3.00%, 11/3/94......................................... 1,000,000 1,000,000 3.9
Connecticut Special Obligation Series 1 Loc IBJ, Variable Rate Demand
Note, 3.45%, (LOC Industrial Bank of Japan)(a).......................... 1,940,000 1,940,000 7.5
Connecticut State Development Authority, Exeter Energy, Variable Rate
Demand Note, 3.45%, (LOC Sanwa Bank)(a)................................. 300,000 300,000 1.1
Connecticut Development Authority Health Care Corp for Independent Living
(Series 1990) Variable Rate Demand Note, 3.35%, (LOC Credit Commercial
of France)(a)........................................................... 1,500,000 1,500,000 5.8
Connecticut Development Authority, Shw Inc., Variable Rate Demand Note,
3.40%, (LOC Bayerishce Vereinsbank)(a).................................. 2,300,000 2,300,000 8.9
Connecticut Clean Water Fund Bonds, General Obligation, 10.00%, 1/1/95.... 400,000 404,564 1.6
Darien, Connecticut Bond Anticipation Note, 3.75%, 6/20/95................ 1,100,000 1,100,298 4.3
Easton, Connecticut Bond Anticipation Note, 3.57%, 6/14/95................ 700,000 700,285 2.7
Enfield, Connecticut General Obligation Note, 6.70%, 6/15/95.............. 150,000 152,894 0.6
New Britain, Connecticut Bond Anticipation Note, 2.42%, 2/8/95............ 1,100,000 1,100,057 4.3
Puerto Rico, Commonwealth Variable Rate Demand Note, 2.85%, (LOC Union
Bank of Switzerland)(a)................................................. 1,300,000 1,300,000 5.0
Stamford, Connecticut General Obligation Note, 3.07%, 3/22/95............. 1,000,000 1,000,186 3.9
Westport, Connecticut Bond Anticipation Note, 3.52%, 6/14/95.............. 1,255,000 1,255,138 4.9
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $26,058,005)...................................... 26,059,259 101.1
OTHER ASSETS LESS LIABILITIES............................................. (295,987) (1.1)
----------- -------------
NET ASSETS................................................................ $25,763,272 100.0%
----------- -------------
----------- -------------
</TABLE>
See Notes to Financial Statements.
22
<PAGE>
Kidder, Peabody Municipal Money Market Series -- Connecticut Series
- --------------------------------------------------------------------------------
Schedule of Investments as of October 31, 1994
- --------------------------------------------------------------------------------
Summary of Combined Ratings (Unaudited)
<TABLE>
<CAPTION>
MOODY'S or STANDARD & POOR'S % OF VALUE
- --------------- ----------------- -----------------
<S> <C> <C> <C>
M1G-1(b) SP1(b) 47.8%
P1(c) A1+ & A1(c) 12.1
Not Rated(d) Not Rated(d) 40.1
------
100.0%
------
------
</TABLE>
Notes to Schedule of Investments:
(a) Securities payable on demand. The interest rate, which will change
periodically, is based upon bank prime rates or an index of market
interest rates.
(b) M1G-1 and SP1 are the highest ratings assigned to variable notes and
municipal notes by Moody's and Standard & Poor's, respectively.
(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 Trustees to
be of comparable quality to those rated securities in which
the Fund may invest.
See Notes to Financial Statements.
23
<PAGE>
Kidder, Peabody Municipal Money Market Series -- New Jersey Series
- --------------------------------------------------------------------------------
Schedule of Investments as of October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE % OF NET
AMOUNT (NOTE 2a) ASSETS
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
TAX EXEMPT INVESTMENTS -- 100.4%
Burlington Cty. Bond Anticipation Notes, 3.00%, 11/04/94......................... $1,000,000 $ 1,000,020 3.1%
Camden Cty. Bond Anticipation Notes, 3.25%, 2/16/95.............................. 700,000 699,840 2.2
Cape May Cty. Mun. Util. Dist., Mandatory Tender Bonds, 2.80%, 11/30/94.......... 1,000,000 1,000,000 3.1
Edison General Obligation Bonds, 7.10%, 1/01/95, (AMBAC Insured)(b).............. 800,000 805,342 2.5
Essex Cnty., Imp. Auth., Variable Rate Demand Notes, Pooled Gov't Loan Proj.,
Ser. 85, 3.25%, (LOC Banco Santander)(a)....................................... 600,000 600,000 1.9
Essex Cnty., Imp. Auth., Variable Rate Demand Notes, Pooled Gov't Loan Proj.,
Ser. 86, 3.25%, (LOC Banco Santander)(a)....................................... 500,000 500,000 1.6
Milburn Bond Anticipation Notes, 3.02%, 11/15/94................................. 1,000,000 1,000,045 3.1
Monmouth Cnty., Imp. Auth. Rev., Variable Rate Demand Notes, 3.25%, (LOC Union
Bank of Switzerland)(a)........................................................ 1,600,000 1,600,000 5.0
New Jersey Econ. Dev. Auth., (Chambers Cogeneration Proj.), 2.75%, 11/03/94, (LOC
Swiss Bank).................................................................... 1,000,000 1,000,000 3.1
New Jersey Econ. Dev. Auth., (Chambers Cogeneration Proj.), 3.35%, 8/01/94, (LOC
Swiss Bank).................................................................... 1,000,000 1,000,000 3.1
New Jersey Econ. Dev. Auth., (Church & Dwight Co. Proj.), Variable Rate Demand
Notes, Ser. 1991, 3.20%, (LOC Bank of Nova Scotia)(a).......................... 300,000 300,000 0.9
New Jersey Econ. Dev. Auth., (Composite Issue), Variable Rate Demand Notes, Ser.
87D, 3.50%, (LOC National Westminster Bank)(a)................................. 500,000 500,000 1.6
New Jersey Econ. Dev. Auth., (Composite Issue), Variable Rate Demand Notes, Ser.
87G, 3.50%, (LOC National Westminster Bank)(a)................................. 700,000 700,000 2.2
New Jersey Econ. Dev. Auth., (Curtis Wright Flight Systems), Variable Rate Demand
Notes, 3.25%, (LOC Bank of Nova Scotia)(a)..................................... 1,500,000 1,500,000 4.7
New Jersey Econ. Dev. Auth., 400 International Drive Partners, Variable Rate
Demand Notes, 3.20%, (LOC Morgan Guaranty)(a).................................. 1,900,000 1,900,000 5.9
New Jersey Econ. Dev. Auth., 400 International Drive Partners, Variable Rate
Demand Notes, 3.35%, (LOC Morgan Guaranty)(a).................................. 1,000,000 1,000,000 3.1
New Jersey Econ. Dev. Auth., Keystone 1992 Proj., 2.75%, 11/03/94, (LOC Union
Bank of Switzerland)........................................................... 1,500,000 1,500,000 4.7
New Jersey Econ. Dev. Auth., Keystone 1992 Proj., 3.25%, 11/10/94, (LOC Union
Bank of Switzerland)........................................................... 1,700,000 1,700,000 5.3
New Jersey Econ. Dev. Auth., (W.Y. Plastic Product Corp.), Variable Rate Demand
Notes, 3.50%, (LOC National Westminster Bank)(a)............................... 600,000 600,000 1.9
New Jersey Econ. Dev. Auth., Variable Rate Demand Notes, Series 88A, 3.50% (LOC
National Westminster Bank)(a).................................................. 550,000 550,000 1.7
New Jersey Econ. Dev. Auth., Variable Rate Demand Notes, 3.30% (LOC Banque
Paribas)(a).................................................................... 1,000,000 1,000,000 3.1
New Jersey Sport & Expo. Auth., State Contract Bds., Variable Rate Demand Notes,
Ser. 1992C, 3.25%, (MBIA Insured)(a)(b)........................................ 1,000,000 1,000,000 3.1
Port Auth. of New York/New Jersey, Tax Exempt Commercial Paper, 2.75%,
11/03/94....................................................................... 1,000,000 1,000,000 3.1
Port Auth. of New York/New Jersey, Tax Exempt Commercial Paper, 3.20%,
11/08/94....................................................................... 450,000 450,000 1.4
</TABLE>
See Notes to Financial Statements.
24
<PAGE>
Kidder, Peabody Municipal Money Market Series -- New Jersey Series
- --------------------------------------------------------------------------------
Schedule of Investments as of October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE % OF NET
AMOUNT (NOTE 2a) ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Port Auth. of New York/New Jersey, Tax Exempt Commercial Paper, 3.10%,
11/08/94....................................................................... $1,500,000 $ 1,500,000 4.7%
Princeton Borough, General Obligation Bonds, 3.75%, 4/14/95...................... 1,452,000 1,453,579 4.6
Puerto Rico Commonwealth, 9.375%, 7/01/05........................................ 1,100,000 1,183,533 3.7
Puerto Rico Ind. Med Auth., (International American University of Puerto Rico)
2.90%, 12/06/94, (LOC Bank of Tokyo)........................................... 1,500,000 1,500,000 4.7
Puerto Rico Tourist (International American University of Puerto Rico) 2.90%,
12/06/94, (LOC Banque Paribas)................................................. 1,200,000 1,200,000 3.8
Somerset Cty., Bond Anticipation Notes, 6.50%, 11/01/94.......................... 1,050,000 1,050,000 3.3
Sussex Cty., (Utility Auth. Wastewater Nov), General Obligation Bonds, 4/01/95,
(AMBAC Insured)(b)............................................................. 125,000 126,003 0.4
Union Cty. Pollution Control Fin. Auth., Variable Rate Demand Notes, (Exxon),
Ser. 1994, 2.50%(a)............................................................ 1,200,000 1,200,000 3.8
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $32,118,362)............................................. 32,118,362 100.4
LIABILITIES LESS OTHER ASSETS.................................................... (137,356) (0.4)
----------- -----
NET ASSETS....................................................................... $31,981,006 100.0%
----------- -----
----------- -----
</TABLE>
Summary of Combined Ratings (Unaudited)
<TABLE>
<CAPTION>
MOODY'S or STANDARD & POOR'S % OF VALUE
- --------------- ----------------- -----------------
<S> <C> <C> <C>
M1G1-1(c) SP1(c) 59.6%
P1(d) A1+ & A1(d) 17.2
Not Rated(e) Not Rated(e) 20.8
Aaa, Aa AAA, AA 2.4
-----
100.0%
-----
-----
</TABLE>
Notes to Schedule of Investments:
(a) Securities payable on demand. 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) M1G-1 and SP1 are the highest ratings assigned to variable notes and
municipal notes by Moody's and Standard & Poor's, respectively.
(d) P1 and A1 are the highest ratings assigned tax-exempt commercial paper by
Moody's and Standard & Poor's, respectively.
(e) Securities which, while not rated, are determined by the Fund's Trustees to
be of comparable quality to those rated securities in which the
Fund may invest.
See Notes to Financial Statements.
25
<PAGE>
Kidder, Peabody Municipal Money Market Series -- New York Series
- --------------------------------------------------------------------------------
Schedule of Investments as of October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE % OF NET
AMOUNT (NOTE 2a) ASSETS
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
TAX EXEMPT INVESTMENTS -- 98.1%
Battery Park City Authority, Special Obligation Pre-Refunded Bonds, 7.25%,
11/01/94 @ 103 (MBIA Insured)(b)............................................... $2,000,000 $ 2,060,206 3.3%
Franklin County, Industrial Development Authority, Variable Rate Demand N (KES
Chateaugay Project), Series 1991A, 3.20%, (LOC Bank of Tokyo)(a)............... 1,000,000 1,000,000 1.6
Metropolitan Transportation Authority, Commuter Facilities, Variable Rate Demand
Notes, Series 1991, 3.20%, (LOC Morgan Guaranty)(a)............................ 3,300,000 3,300,000 5.2
Monroe County, Industrial Development Authority, Variable Rate Demand Notes,
(Granite Building Association) 3.15%, (LOC Chemical Bank)(a)................... 950,000 950,000 1.5
Nassau County, Industrial Development Authority, Variable Rate Demand Notes,
Civic Facilities, (Cold Spring Harbor Laboratory), 3.20%, (LOC Morgan
Guaranty)(a)................................................................... 3,000,000 3,000,000 4.7
Nassau County, Industrial Development Authority, Variable Rate Demand Notes,
Civic Facilities, (Cold Spring Harbor Laboratory), Series 1993, 3.20%, (Morgan
Guaranty)(a)................................................................... 1,000,000 1,000,000 1.6
New York City, Housing Development Community, Variable Rate Demand Notes,
Columbus Gardens Project), Series 93A, 3.35%, (LOC Citibank)(a)................ 600,000 600,000 0.9
New York City, Industrial Development Authority, Variable Rate Demand Notes,
(Fieldhouse Associates-JFK Project), 3.20%, (LOC Banque Indosuez)(a)........... 1,000,000 1,000,000 1.6
New York City, Industrial Development Authority, Variable Rate Demand Notes,
(LaGuardia Associates Project), 3.20%, (LOC Banque Indosuez)(a)................ 1,500,000 1,500,000 2.4
New York City, Industrial Development Authority, Variable Rate Demand Notes,
(Strohiem Romann Inc.), 3.25%, (LOC West Deutsche Landesbanke)(a).............. 1,500,000 1,500,000 2.4
New York City, Municipal Water Finance Authority, Water & Sewer Bond Anticipation
Notes, 3.75%, 12/15/94......................................................... 3,000,000 3,003,180 4.7
New York City, Variable Rate Demand Notes, Subseries A-9, 3.75%, (LOC Industrial
Bank of Japan)(a).............................................................. 1,800,000 1,800,000 2.9
New York City, Variable Rate Demand Notes, Series H, Subseries H-6, 3.40%, (MBIA
Insured)(a)(b)................................................................. 1,000,000 1,000,000 1.6
New York State Dormitory Authority, Variable Rate Demand Notes, (Cornell
University), Series 1990B, 3.20% (LOC Morgan Guaranty)(a)...................... 1,000,000 1,000,000 1.6
New York State Energy Research & Development Authority, Pollution Control
Revenue, Variable Rate Demand Notes, (Central Hudson Gas & Electric), Series
1985A, 3.25%, (LOC Bankers Trust)(a)........................................... 1,000,000 1,000,000 1.6
New York State Energy Research & Development Authority, Variable Rate Demand
Notes, (Lilco Project), Series 93B, 2.85%, (LOC Toronto Dominion Bank)(a)...... 1,100,000 1,100,000 1.7
New York State Energy Research & Development Authority, (Lilco Project), Series
A, 3.00%, 3/01/95, (LOC Deutshe Bank).......................................... 4,000,000 4,000,000 6.4
New York State Energy Research & Development Authority, Variable Rate Demand
Notes, (Niagara Mohawk Corp.), Series 1987A, 3.20%, (LOC Toronto Dominion
Bank)(a)....................................................................... 1,400,000 1,400,000 2.2
New York State Energy Research & Development Authority, (NYSEG), Series C, 2.95%,
12/07/94, (LOC Morgan Guaranty)................................................ 2,000,000 2,000,000 3.2
</TABLE>
See Notes to Financial Statements.
26
<PAGE>
Kidder, Peabody Municipal Money Market Series -- New York Series
- --------------------------------------------------------------------------------
Schedule of Investments as of October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE % OF NET
AMOUNT (NOTE 2a) ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New York State Housing Finance Authority, Variable Rate Demand Notes, (Resident
Housing), Series 1988A, 3.40%, (AMBAC Insured)(a)(b)........................... $1,950,000 $ 1,950,000 3.1%
New York State Housing Finance Authority, Variable Rate Demand Notes, (Normandie
Court Housing), Series 1991A, 3.35%, (LOC Societe General)(a).................. 1,500,000 1,500,000 2.4
New York State Local Government Assistance Corp., Variable Rate Demand Notes,
Series A, 3.15%, (LOC Swiss Bank, Credit Suisse)(a)............................ 4,000,000 4,000,000 6.4
New York State Local Government Assistance Corp., Variable Rate Demand Notes,
3.15%, (LOC Swiss Bank, Credit Suisse)(a)...................................... 1,000,000 1,000,000 1.6
New York State Medical Care Facilities Finance Agency, Pre-Refunded Bonds, Series
1985B, 9.75%, 1/15/95 @ 102 (Federal Housing Administration Insured)........... 3,000,000 3,097,497 4.9
New York State Tax Exempt Commercial Paper, Series P, 2.70%, 11/28/94............ 2,300,000 2,300,000 3.7
New York State Tax Exempt Commercial Paper, Series P, 2.90%, 11/09/94............ 1,000,000 1,000,000 1.6
North Hempstead, Variable Rate Demand Notes, (Solid Waste Management), Series
1993A, 3.10%, (LOC National Westminister Bank)(a).............................. 1,900,000 1,900,000 3.0
Oyster Bay, Bond Anticipation Notes, 3.00%, 11/18/94............................. 2,000,000 1,999,758 3.2
Port Authority of New York/New Jersey, Tax Exempt Commercial Paper, 2.75%,
11/03/94....................................................................... 2,000,000 2,000,000 3.2
Port Authority of New York/New Jersey, Tax Exempt Commercial Paper, 3.00%,
11/09/94....................................................................... 1,630,000 1,630,000 2.6
Puerto Rico Government Development Bank, Variable Rate Demand Notes, 3.10%, (LOC
Credit Suisse/Sumitomo Bank)(a)................................................ 500,000 500,000 0.8
Suffolk County, Industrial Development Authority, Variable Rate Demand Notes,
(Nissequogue Cogen.), 3.25%, (LOC Toronto Dominion Bank)(a).................... 1,500,000 1,500,000 2.4
Syracuse Bond Anticipation Notes, 3.25%, 3/03/95................................. 3,000,000 3,003,399 4.7
Triborough Bridge & Tunnel Authority, Pre-Refunded Obligation Bonds, 9.00%,
7/01/95 @ 102.................................................................. 2,000,000 2,109,758 3.4
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $61,703,600)............................................. 61,703,798 98.1
OTHER ASSETS LESS LIABILITIES.................................................... 1,192,253 1.9
----------- ----------
NET ASSETS....................................................................... $62,896,051 100.0%
----------- ----------
----------- ----------
</TABLE>
Summary of Combined Ratings (Unaudited)
<TABLE>
<CAPTION>
MOODY'S or STANDARD & POOR'S % OF VALUE
- --------------- ----------------- -----------------
<S> <C> <C> <C>
M1G1-1(c) SP1(c) 53.3%
P1(d) A1+ & A1(d) 25.2
Not Rated(e) Not Rated(e) 9.7
Aaa, Aa AAA, AA 11.8
-----
100.0%
-----
-----
</TABLE>
Notes to Schedule of Investments:
(a) Securities payable on demand. 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) M1G-1 and SP1 are the highest ratings assigned to variable notes and
municipal notes by Moody's and Standard & Poor's, respectively.
(d) P1 and A1 are the highest ratings assigned tax-exempt commercial paper by
Moody's and Standard & Poor's, respectively.
(e) Securities which, while not rated, are determined by the Fund's Trustees to
be of comparable quality to those rated securities in which the Fund may
invest.
See Notes to Financial Statements.
27
<PAGE>
Kidder, Peabody Municipal Money Market Series
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities as of October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONNECTICUT NEW JERSEY NEW YORK
SERIES SERIES SERIES
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Investments, at value (Note 2a).......................................... $26,059,259 $32,118,362 $61,703,798
Cash..................................................................... -- -- 684,275
Interest receivable...................................................... 180,104 231,705 575,616
Prepaid expenses (Note 2e)............................................... 9,258 11,153 11,246
-------------------------------------------
TOTAL ASSETS................................... 26,248,621 32,361,220 62,974,935
-------------------------------------------
LIABILITIES
Payables:
Due to custodian.................................................... 445,381 331,553 --
Investment advisory (Note 3)........................................ 11,011 15,695 28,918
Distribution fees (Note 3).......................................... 2,736 3,884 7,173
Dividends........................................................... 1,575 1,943 3,940
Accrued expenses......................................................... 24,646 27,139 38,853
-------------------------------------------
TOTAL LIABILITIES.............................. 485,349 380,214 78,884
-------------------------------------------
NET ASSETS
At value................................................................. $25,763,272 $31,981,006 $62,896,051
-------------------------------------------
-------------------------------------------
Outstanding shares of beneficial interest, ($.001 par value) (Note 4).... 25,770,924 32,002,527 62,940,628
-------------------------------------------
-------------------------------------------
NET ASSET VALUES
Offering, and redemption prices per share................................ $ 1.00 $ 1.00 $ 1.00
-------------------------------------------
-------------------------------------------
Net assets were comprised of:
Aggregate paid-in-capital........................................... $25,770,924 $32,002,527 $62,940,628
Net unrealized gain on investments.................................. 1,254 -- 198
Accumulated net realized capital losses............................. (8,906) (21,521) (44,775)
Undistributed net investment income................................. -- -- --
-------------------------------------------
Net assets............................................................... $25,763,272 $31,981,006 $62,896,051
-------------------------------------------
-------------------------------------------
</TABLE>
See Notes to Financial Statements.
28
<PAGE>
Kidder, Peabody Municipal Money Market Series
- --------------------------------------------------------------------------------
Statements of Operations for the Year Ended October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONNECTICUT NEW JERSEY NEW YORK
SERIES SERIES SERIES
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income (net of $216,236, $183,400, and $349,653, amortization of
premiums, respectively -- Note 2b).......................................... $ 791,213 $1,072,714 $1,839,287
-----------------------------------------
EXPENSES
Investment advisory (Note 3).................................................. 151,858 207,338 358,032
Distribution (Note 3)......................................................... 36,446 49,761 85,928
Pricing....................................................................... 22,800 22,800 22,800
Shareholder servicing......................................................... 13,320 17,264 22,120
Prospectus and shareholders' reports.......................................... 12,055 17,640 24,339
Professional.................................................................. 9,390 10,700 8,770
Custodian..................................................................... 8,115 9,348 11,070
Amortization of organization expenses (Note 2e)............................... 7,559 7,541 7,541
Federal and state registration................................................ 4,084 4,278 7,871
Trustees' fees and expenses (Note 3).......................................... 3,681 3,650 3,531
Miscellaneous................................................................. 2,441 3,419 4,527
-----------------------------------------
TOTAL EXPENSES...................................... 271,749 353,739 556,529
-----------------------------------------
NET INVESTMENT INCOME......................................................... 519,464 718,975 1,282,758
REALIZED LOSS ON INVESTMENTS (NOTE 2B)........................................ (4,008) (18,801) (20,824)
CHANGE IN UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 2)...................... 724 (140) (67)
-----------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.......................... $ 516,180 $ 700,034 $1,261,867
-----------------------------------------
-----------------------------------------
</TABLE>
See Notes to Financial Statements.
29
<PAGE>
Kidder, Peabody Municipal Money Market Series
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONNECTICUT SERIES NEW JERSEY SERIES NEW YORK SERIES
---------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1993 1994 1993 1994 1993 1994
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income............... $ 476,005 $ 519,464 $ 614,398 $ 718,975 $ 775,740 $ 1,282,758
Net realized gain (loss) on
investments (Note 2b)............. 67 (4,008) (1,299) (18,801) (6,332) (20,824)
Change in unrealized gain (loss) on
investments (Note 2).............. (498) 724 140 (140) 265 (67)
---------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS............. 475,574 516,180 613,239 700,034 769,673 1,261,867
DISTRIBUTIONS TO SHAREHOLDERS FROM
(NOTES 2C & D)
Net investment income............... (476,005) (519,464) (614,398) (718,975) (775,740) (1,282,758)
INCREASE (DECREASE) IN NET ASSETS
FROM
Net capital share transactions (Note
4)................................ (125,448) (2,170,701) 8,849,772 (4,473,284) 12,915,779 10,730,298
---------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.......... (125,879) (2,173,985) 8,848,613 (4,492,225) 12,909,712 10,709,407
NET ASSETS
Beginning of year................... 28,063,136 27,937,257 27,624,618 36,473,231 39,276,932 52,186,644
---------------------------------------------------------------------------------
End of year......................... $27,937,257 $25,763,272 $36,473,231 $31,981,006 $52,186,644 $62,896,051
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
30
<PAGE>
Kidder, Peabody Municipal Money Market Series
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONNECTICUT SERIES NEW JERSEY SERIES
-----------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------------
1991`D' 1992 1993 1994 1991`D'`D' 1992 1993 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------
Net asset value,
beginning of period.... $1.0000 $0.9994 $0.9999 $0.9999 $1.0000 $0.9998 $0.9999 $0.9999
-----------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... 0.0398 0.0223 0.0148 0.0172 0.0316 0.0246 0.0164 0.0175
Net realized and
unrealized gain (loss)
on investments......... (0.0006) 0.0005 -- (0.0002) (0.0002) (0.0001) -- (0.0006)
-----------------------------------------------------------------------------
Total increase in net
asset value from
investment operations.. 0.0392 0.0228 0.0148 0.0170 0.0314 0.0247 0.0164 0.0169
Distributions to
shareholders from net
investment income...... (0.0398) (0.0223) (0.0148) (0.0172) (0.0316) (0.0246) (0.0164) (0.0175)
-----------------------------------------------------------------------------
Net asset value, end of
period................. $0.9994 $0.9999 $0.9999 $0.9997 $0.9998 $0.9999 $0.9999 $0.9993
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Total return............. 4.10%* 2.25% 1.49% 1.74% 4.27%* 2.49% 1.65% 1.76%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(in thousands)......... $40,078 $28,063 $27,937 $25,763 $41,504 $27,625 $36,473 $31,981
RATIOS TO AVERAGE NET
ASSETS
Expenses, excluding
distribution fees, net
of reimbursement....... 0.24%* 0.74% 0.85% 0.78% 0.15%* 0.74% 0.81% 0.73%
Expenses, including
distribution fees, net
of reimbursement....... 0.36%* 0.86% 0.97% 0.90% 0.27%* 0.86% 0.93% 0.85%
Expenses, before
reimbursement from
manager................ 0.82%* 0.86% 0.97% 0.90% 0.83%* 0.86% 0.93% 0.85%
Net investment income.... 3.96%* 2.28% 1.47% 1.71% 4.20%* 2.51% 1.63% 1.74%
</TABLE>
<TABLE>
<CAPTION>
NEW YORK SERIES
--------------------------------------
1991`D'`D' 1992 1993 1994
<S> <C> <C> <C> <C>
--------------------------------------
Net asset value,
beginning of period.... $1.0000 $0.9999 $0.9996 $0.9995
--------------------------------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... 0.0303 0.0226 0.0151 0.0179
Net realized and
unrealized gain (loss)
on investments......... (0.0001) (0.0003) (0.0001) (0.0002)
--------------------------------------
Total increase in net
asset value from
investment operations.. 0.0302 0.0223 0.0150 0.0177
Distributions to
shareholders from net
investment income...... (0.0303) (0.0226) (0.0151) (0.0179)
--------------------------------------
Net asset value, end of
period................. $0.9999 $0.9996 $0.9995 $0.9993
--------------------------------------
--------------------------------------
Total return............. 4.09%* 2.28% 1.52% 1.81%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(in thousands)......... $38,725 $39,277 $52,187 $62,896
RATIOS TO AVERAGE NET
ASSETS
Expenses, excluding
distribution fees, net
of reimbursement....... 0.14%* 0.72% 0.76% 0.66%
Expenses, including
distribution fees, net
of reimbursement....... 0.26%* 0.84% 0.88% 0.78%
Expenses, before
reimbursement from
manager................ 0.83%* 0.84% 0.88% 0.78%
Net investment income.... 4.00%* 2.24% 1.50% 1.79%
</TABLE>
`D' From November 6, 1990 (Commencement of Operations) to October 31, 1991.
`D'`D' From February 1, 1991 (Commencement of Operations) to October 31, 1991.
* Annualized.
See Notes to Financial Statements.
31
<PAGE>
Kidder, Peabody Municipal Money Market Series
- --------------------------------------------------------------------------------
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 investment adviser and manager.
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 for each series; 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) Securities 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 on the last business day of
each month. 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.
At October 31, 1994, for book purposes, the Connecticut Series, the New
Jersey Series, and the New York Series had net capital loss carryforwards of
$8,906, $21,521, and $44,775, respectively.
At October 31, 1994, for Federal income tax purposes, the cost of investments
was substantially the same as the cost for financial reporting purposes (see
Schedule of Investments). For the Connecticut Series, the New Jersey Series and
the New York Series net unrealized appreciation, based on cost, for Federal
income tax purposes, aggregated $1,254, -0- and $198, respectively, all of which
related to appreciated securities.
(d) It is the policy of the Fund 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 tax liability.
(e) Organization costs are being amortized on a straight-line basis over a
five-year period. Prepaid registration fees are charged to income as the related
shares are issued.
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 each series of the Fund for such
services are accrued daily and paid monthly at the annual rate of 1/2 of 1% of
the net assets of each series of the Fund, determined as of the close of each
business day. Total annual expenses of each series of the Fund, exclusive of
taxes, interest, and 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 limits prescribed by any state in which each series
of the Fund's shares are offered for sale, and KPAM will reimburse each series
of the Fund for any expenses in excess of such limits. No expense reimbursement
was required for the year ended October 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 annual rate of .12% of
the net assets of each series of the Fund, determined as of the close of each
business day.
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 for each series. At October 31, 1994, paid-in-capital
amounted to $25,770,924
32
<PAGE>
Kidder, Peabody Municipal Money Market Series
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
for the Connecticut Series, $32,002,527 for the New Jersey Series and
$62,940,628 for the New York Series. Transactions in shares and dollars were as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
YEAR YEAR
ENDED ENDED
CONNECTICUT SERIES OCTOBER 31, 1993 OCTOBER 31, 1994
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold................. 107,004,794 83,745,065
Shares issued to
shareholders in connection
with the reinvestment of
dividends................. 464,144 502,403
Shares redeemed............. (107,594,386) (86,418,169)
-----------------------------------
NET DECREASE........... (125,448) (2,170,701)
-----------------------------------
-----------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
YEAR YEAR
ENDED ENDED
NEW JERSEY SERIES OCTOBER 31, 1993 OCTOBER 31, 1994
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold................. 159,550,756 186,667,852
Shares issued to
shareholders in connection
with the reinvestment of
dividends................. 599,779 701,364
Shares redeemed............. (151,300,763) (191,842,500)
-----------------------------------
NET INCREASE
(DECREASE)........... 8,849,772 (4,473,284)
-----------------------------------
-----------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
YEAR YEAR
ENDED ENDED
NEW YORK SERIES OCTOBER 31, 1993 OCTOBER 31, 1994
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold................. 244,922,956 300,275,419
Shares issued to
shareholders in connection
with the reinvestment of
dividends................. 748,193 1,248,214
Shares redeemed............. (232,755,370) (290,793,335)
-----------------------------------
NET INCREASE........... 12,915,779 10,730,298
-----------------------------------
-----------------------------------
</TABLE>
5. The Fund's investment strategy is to invest in obligations of the specific
states in each series and their municipalities. Payment of the principal and
interest of such securities depends upon the revenue generated by the
municipality or by the property financed by the securities. 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.
6. Under an agreement dated as of October 17, 1994, General Electric Company has
agreed to sell to PaineWebber Group, Inc. certain assets of Kidder Group and its
subsidiaries, including certain assets of Kidder and KPAM. The consummation of
this transaction, which is subject to a number of conditions and cannot be
assured, will result in the deemed assignment and automatic termination of the
agreements pursuant to which Kidder serves as the principal underwriter of the
Fund's shares and KPAM serves as the Fund's manager and investment adviser.
Continuation of the Fund's relationship with Kidder and KPAM or their successors
following the consummation of 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,
continuation of the Fund's 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 Trustees will take such action as it
determines to be appropriate and in the best interests of the Fund and its
shareholders.
33
<PAGE>
Kidder, Peabody Municipal Money Market Series
- --------------------------------------------------------------------------------
Report of Independent Auditors
- --------------------------------------------------------------------------------
The Trustees and Shareholders,
Kidder, Peabody Municipal Money Market Series
(Consisting of the Connecticut, New Jersey and
New York Series):
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of the Connecticut Series, the New Jersey Series
and the New York Series of Kidder, Peabody Municipal Money Market Series (the
'Fund'), as of October 31, 1994, the related statements of operations for the
year then ended and of changes in net assets 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 the 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 the securities owned as of
October 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 the Connecticut
Series, the New Jersey Series and the New York Series of Kidder, Peabody
Municipal Money Market Series at October 31, 1994, the results of their
operations, changes in their net assets and the financial highlights for each of
the respectively stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
New York, New York
November 30, 1994
34
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX
RISK FACTORS -- INVESTING IN STATE MUNICIPAL OBLIGATIONS
The following information supplements and should be read in conjunction with the
information set forth in the Fund's Prospectus under 'Investment Objective and
Policies -- Risk Factors -- Investing in State Municipal 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 relevant State 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.
<TABLE>
<S> <C>
Connecticut Series........................................................................................ A-1
New Jersey Series......................................................................................... A-3
New York Series........................................................................................... A-5
Ohio Series............................................................................................... A-16
Pennsylvania Series....................................................................................... A-21
Texas Series.............................................................................................. A-25
</TABLE>
CONNECTICUT SERIES
Connecticut's economy is diverse, with manufacturing, services and trade
accounting for approximately 70% of total non-agricultural employment. The
State's manufacturing industry is diversified, but from 1970 to 1993
manufacturing employment declined 33.5%, while non-manufacturing related
employment increased 63.3% to a level almost four times manufacturing
employment. Defense-related business plays an important role in the Connecticut
economy, and economic activity has been affected by the volume of defense
contracts awarded to Connecticut firms. In the past 10 years, Connecticut ranked
from sixth to twelfth among all states in total defense contract awards
receiving 2.5% of all such contracts in 1993. In recent years the Federal
government has reduced the amount of defense-related spending and the largest
defense-related employers in the State have announced substantial labor force
reductions. The effect of such future reductions on the Connecticut economy
suggests that the defense sector is not as promising as it once was.
Connecticut has a high level of personal income. According to Bureau of
Economic Analysis figures, personal income of State residents for calendar year
1993 was $91.6 billion, a 2.9% increase over the previous year. On a per capita
basis, personal income in the State increased 20.7% from 1988 to 1993 and 9.9%
from 1990 to 1993, compared with national increases of 25.1% and 11.3%,
respectively. As of January 1994, the rate of unemployment (on a seasonably
adjusted basis) in the State was 6.6%.
While the State's General Fund ended fiscal 1985, 1986 and 1987 with
operating surpluses of approximately $365.5 million, $250.1 million and $365.2
million, respectively, the State recorded operating deficits of $115.6 million,
$28 million, $259.5 million and $808.5 million for fiscal 1988, 1989, 1990 and
1991, respectively. Together with the deficit carried forward from fiscal
1989-90, the total deficit for the fiscal year 1990-91 was $965.7 million. The
total deficit amount was funded by the issuance of General Obligation Economic
Recovery Notes. The Comptroller's
A-1
<PAGE>
- --------------------------------------------------------------------------------
annual report for the fiscal year ended June 30, 1992 reflected a General Fund
operating surplus of $110.2 million, which surplus was used to retire $110.1
million of the State's Economic Recovery Notes. The Comptroller's annual report
for the fiscal year ended June 30, 1993 reflected a General Fund operating
surplus of $113.5 million. The Comptroller's annual report for the fiscal year
ended June 30, 1994 reflected a General Fund operating surplus of $19.7 million.
The unappropriated surplus in the General Fund is deemed to be appropriated for
debt service for the fiscal year ending June 30, 1995.
Since 1988, the Comptroller's annual report has reported results on the
basis of both the modified cash basis required by State law and the modified
accrual basis used for GAAP financial reporting. The Comptroller's monthly
report for the period ended September 30, 1994 stated that on a GAAP basis the
cumulative deficit was $531 million for fiscal 1994-95. The modified cash basis
of accounting used for statutory financial reporting and the modified accrual
basis used for GAAP financial reporting are different and, as a result, often
produce varying financial results, primarily because of differences in the
recognition of revenues and expenditures.
The budget adopted and modified by the General Assembly for fiscal 1994-95
projected General Fund expenditures of $8.57 billion and estimated General Fund
revenues of $8.57 billion. The Comptroller's monthly report of November 1, 1994
(for the three months ended September 30, 1994) reflected a surplus for 1994-95
of $20.7 million.
The State finances its operations primarily through the General Fund. All
tax and most non-tax revenues of the State, except for motor fuels taxes and
other transportation related taxes, fees and revenues, are paid into, and
substantially all expenditures pursuant to legislative appropriations are made
out of, the General Fund. The State derives over 70% of its revenues from taxes.
Miscellaneous fees, receipts, transfers and Federal grants account for most of
the other State revenue. The Sales and Use Taxes, the corporation business tax
and the recently enacted broad based personal income tax are the major revenue
raising taxes.
On November 3, 1992, Connecticut voters approved a constitutional amendment
which requires a balanced budget for each year and imposes a cap on the growth
of expenditures. The General Assembly is required by the constitutional
amendment to adopt by three-fifths vote certain spending cap definitions. The
statutory spending cap limits the growth of expenditures to either (1) the
rolling five-year average annual growth in personal income, or (2) the increase
in the consumer price index for urban consumers during the preceding 12 month
period, whichever is greater. Expenditures for the payment of bonds, notes and
other evidences of indebtedness are excluded from the constitutional and
statutory definitions of general budget expenditures. To preclude shifting
expenditures out of the General Fund to other funds, the spending cap applies to
all appropriated funds combined. For fiscal 1994-95, permitted growth in capped
expenditures is 4.49%. The adopted Budget for fiscal 1994-95 is approximately
$53.4 million below the spending cap.
The State has no constitutional or other organic limit on its power to
issue obligations or incur indebtedness other than that it may only borrow for
public purposes. There are no reported court decisions relating to State bonded
indebtedness other than two cases validating the legislative determination of
the public purpose for improving employment opportunities and related
activities. The State Constitution has never contained provisions requiring
submission of the questions of incurring indebtedness to a public referendum.
Therefore, the authorization and
A-2
<PAGE>
- --------------------------------------------------------------------------------
issuance of State debt, including the purpose, amount and nature thereof, the
method and manner of the incurrence of such debt, the maturity and terms of
repayment thereof, and other related matters are statutory.
The General Assembly has empowered, pursuant to bond acts in effect, the
State Bond Commission to authorize general obligation bonds in the amount of
$10.180 billion. As of November 1, 1994, the State Bond Commission had
authorized $8.432 billion in such bonds and the balance of $1.748 billion was
available for authorization. From such total authorizations of $8.432 billion,
bonds in the aggregate of $7.190 billion have been issued and the balance of
$1.242 billion remained authorized but unissued as of November 1, 1994.
The two major revenue raising taxes are the sales and use taxes and the
corporation business tax. Motor fuel taxes and other transportation related
taxes are paid into a Special Transportation Fund while all other tax revenues
are carried in the General Fund.
General obligations bonds issued by Connecticut municipalities are payable
primarily from ad valorem taxes on property subject to taxation by the
municipality. Certain Connecticut municipalities have experienced severe fiscal
difficulties and have reported operating and accumulated deficits in recent
years. The most notable of these was the City of Bridgeport.
NEW JERSEY SERIES
New Jersey's economic base is diversified, consisting of a variety of
manufacturing, construction and service industries, supplemented by rural areas
with selective commercial agriculture. New Jersey's principal manufacturing
industries produce chemicals, pharmaceuticals, electrical goods, machinery,
fabricated metals, food processing, instrumentations, plastics and printing.
Other economic activities include insurance, tourism, petroleum refining and
truck farming.
While New Jersey's economy continued to expand during the late 1980s, the
level of growth has slowed considerably after 1987. Initially, this slowdown was
an expected response to the State's tight labor market and the decrease in the
number of persons entering the labor force. Late in the decade, a decline in
construction demand and in the rate of growth in consumer spending as well as
continued softness in the State's manufacturing sector set the stage for
recession in New Jersey. By the beginning of the national recession in July 1990
(according to the National Bureau of Economic Research), construction activity
had already been declining in New Jersey for nearly two years. As the rapid
acceleration of real estate prices forced many would-be homeowners out of the
market and high non-residential vacancy rates reduced new commitments for
offices and commercial facilities, construction employment began to decline;
also growth had tapered off markedly in the service sectors and the long-term
downward trend of factory employment had accelerated, partly because of a
leveling off of industrial demand nationally. The onset of recession caused an
acceleration of New Jersey's job losses in construction and manufacturing, as
well as an employment downturn in such previously growing sectors as wholesale
trade, retail trade, finance, utilities and trucking and warehousing. The net
effect was a decline in the State's total nonfarm wage and salary employment
from a peak of 3,706,400 in March 1989 to a low of 3,445,000 in March 1992. This
loss has been followed by an employment gain of 118,700 from March 1992 to
September 1994. As a result of the State's recent fiscal weakness and because of
concerns about how the State proposes to finance its 1992 budget, S&P, in July
1991, lowered the State's general obligation bond rating from AAA to AA+.
A-3
<PAGE>
- --------------------------------------------------------------------------------
Reflecting the downturn, the rate of unemployment in the State rose from a
low of 3.6% during the first quarter of 1989 to a recessionary peak of 9.3%
during 1992. Since then, the unemployment rate fell to 6.7% during the fourth
quarter of 1993. The jobless rate averaged 7.1% during the first nine months of
1994. In the first nine months of 1994, relative to the same period a year ago,
job growth took place in services (3.5%) and construction (5.7%), more moderate
growth took place in trade (1.9%), transportation and utilities (1.2%) and
finance/insurance/real estate (1.4%), while manufacturing and government
declined (by 1.5% and 0.1%, respectively). The net result was a 1.6% increase in
average employment during the first nine months of 1994 compared to the first
nine months of 1993.
The fiscal year ending June 30, 1995 Appropriations Act forecasts Sales and
Use Tax collections for fiscal year 1995 of $3.980 billion, a 5.3% increase from
unaudited revenue for Fiscal Year 1994. Unaudited revenue for fiscal year 1994
for the Sales and Use Tax of $3.778 billion represents a 3.5% increase from
actual receipts for fiscal year 1993.
The fiscal year 1995 Appropriations Act forecasts Gross Income Tax
collections for Fiscal Year 1995 of $4.582 billion, a 2.4% increase from
unaudited revenue for fiscal year 1994. Included in the fiscal year 1995 Gross
Income Tax forecast is a 5% reduction of personal income tax rates effective
January 1, 1994 and a further 10% reduction of personal income tax rates
effective January 1, 1995. The fiscal year 1995 Gross Income Tax estimates a
$549 million reduction related to these tax cuts. Unaudited revenue for fiscal
year 1994 for the Gross Income Tax of $4.475 billion represents a 2.9% increase
from actual receipts for fiscal year 1993.
The fiscal year 1995 Appropriations Act forecasts Corporation Business Tax
collections for fiscal year 1995 of $915 million, a 14% decrease from unaudited
revenue for fiscal year 1994. Included in the Corporation Business Tax forecast
is a reduction in the Corporation Business Tax rate from 9.375% to 9.0% of net
New Jersey income. Unaudited revenue for fiscal year 1994 for the Corporation
Business Tax of $1.063 billion, represents a 10.6% increase from actual receipts
for fiscal year 1993.
The fiscal year 1995 Appropriations Act forecasts Other Miscellaneous Taxes
Fees and Revenues collections for fiscal year 1995 of $1.338 billion, represents
a 15.6% decrease from unaudited revenue for fiscal year 1994 for Other
Miscellaneous Taxes, Fees and Revenues. Included in the Other Miscellaneous
Taxes Fees and Revenues forecast is a decline of $426 million in the Public
Utility Gross receipts and Franchise tax in accordance with the collection date
changes that were legislated in 1991.
In connection with the current fiscal year 1995 budget, certain unions and
individual plaintiffs have filed a lawsuit concerning the funding of certain
retirement systems.
Should revenues be less than the amount anticipated in the budget for a
fiscal year, the Governor may, pursuant to statutory authority, prevent any
expenditure under any appropriation. There are additional means by which the
Governor may ensure that the State is operated efficiently and does not incur a
deficit. No supplemental appropriation may be enacted after adoption of an
appropriations act except where there are sufficient revenues on hand or
anticipated, as certified by the Governor, to meet such appropriation. In the
past when actual revenues have been less than the amount anticipated in the
budget, the Governor has exercised her plenary powers leading to, among other
actions, implementation of a hiring freeze for all State departments and the
discontinuation of programs for which appropriations were budgeted but not yet
spent.
A-4
<PAGE>
- --------------------------------------------------------------------------------
The State appropriated approximately $15.492 billion and $15.291 billion
for fiscal 1994 and 1995, respectively. Of the $15.291 billion appropriated in
fiscal year 1995 from the General Fund, the Property Tax Relief Fund, the Casino
Control Fund, the Casino Revenue Fund and the Gubernatorial Elections Fund,
$5.782 billion (37.8%) is appropriated for State aid to local governments,
$3.762 billion (24.6%) is appropriated for grants-in-aid (payments to
individuals or public or private agencies for benefits to which a recipient is
entitled by law or for the provision of services on behalf of the State), $5.203
billion (34.0%) for direct State services, $103.5 million (0.7%) for debt
service on State general obligation bonds and $440.6 million (2.9%) for capital
construction.
Should tax revenues be less than the amount anticipated in the Budget for a
fiscal year, the Governor may, pursuant to statutory authority, prevent any
expenditure under any appropriation. The appropriations for fiscal year 1994 are
unaudited and for fiscal year 1995 are revised estimates, as of November 7,
1994, from the amounts contained in the fiscal year 1995 Appropriations Act.
The State has made appropriations for principal and interest payments for
general obligation bonds for fiscal years 1991 through 1994 in the amounts of
$388.5 million, $410.6 million, $444.3 million and $119.9 million, respectively.
For fiscal year 1995, $103.5 million has been appropriated for principal and
interest payments for general obligation bonds. As of June 30, 1994, the
outstanding general obligation bonded indebtedness of the State was
approximately $3.6 billion.
NEW YORK SERIES
The financial condition of New York State (the 'State') and certain of its
public bodies (the 'Agencies') and municipalities, particularly New York City
(the 'City'), could affect the market values and marketability of New York
Municipal Obligations which may be held by the Fund.
A national recession commenced in mid-1990. The downturn continued through
the remainder of the 1990-91 fiscal year, and was followed by a period of weak
economic growth during the 1991 calendar year. For the calendar year 1992, the
national economy continued to recover, although at a rate below all post-war
recoveries. The recession was more severe in the State than in other parts of
the nation, owing to a significant retrenchment in the financial services
industry, cutbacks in defense spending, and an overbuilt real estate market. The
State economy remained in recession until 1993, when employment growth resumed.
Since early 1993, the State has gained approximately 100,000 jobs. The State's
economic forecast calls for employment to increase in 1994 and 1995. Employment
growth will moderate in 1995 when the pace of national economic growth is
projected to slacken and entire industries adjust to changing markets and the
State's economy absorbs the full impact of these developments. Personal income
is estimated to increase by 5.3% in 1994, and a more moderate rate in 1995.
The State's budget for the 1994-95 fiscal year was enacted by the
Legislature on June 7, 1994, more than two months after the start of the fiscal
year. Prior to adoption of the budget, the Legislature enacted appropriations
for disbursements considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt service. The State
Financial Plan for 1994-95 fiscal year was formulated on June 16, 1994 and is
based on the State's budget as enacted by the Legislature and signed into law by
the Governor.
A-5
<PAGE>
- --------------------------------------------------------------------------------
The State Financial Plan is based upon forecasts of national and State
economic activity. Economic forecasts have frequently failed to predict
accurately the timing and magnitude of changes in the national and the State
economies. Many uncertainties exist in forecasts of both the national and State
economies, including consumer attitudes toward spending, Federal financial and
monetary policies, the availability of credit and the condition of the world
economy, which could have an adverse effect on the State. There can be no
assurance that the State economy will not experience worse-than-predicted
results in the 1994-95 fiscal year, with corresponding material and adverse
effects on the State's projections of receipts and disbursements.
The State issued its first update to the GAAP-basis Financial Plan for the
State's 1994-95 fiscal year on September 1, 1994. In the September GAAP-basis
update, the Division of the Budget projected a General Fund Operating deficit of
$690 million. The prior projection of the 1994-95 GAAP-basis State Financial
Plan, issued in February 1994 as part of the 1994-95 Executive Budget (the
'February 1994 Projection'), projected an operating surplus in the General Fund
of $7 million.
In the February 1994 projection, General Fund operating results over the
1993-94 and 1994-95 fiscal year projection period were anticipated to reduce the
accumulated deficit by $256 million. The impact of the reported results for the
State's 1993-94 fiscal year and the revised projection on the accumulated
deficit is substantially the same. Combining the $914 million operating surplus
for the State's 1993-94 fiscal year with the projected $690 million operating
deficit for the 1994-95 fiscal year results in an anticipated $224 million
reduction in the accumulated deficit.
Total revenues in the General Fund are projected at $32.825 billion,
consisting of $30.783 billion in tax revenues and $2.042 billion in
miscellaneous revenue. Personal income tax revenue is projected to reach $17.712
billion, or nearly 58% of total tax revenue. User taxes and fees are projected
to total $6.561 billion, or nearly 21% of total taxes. Business taxes are
projected at $5.442 billion, or 18%, while revenue from other taxes is projected
at $1.068 billion or 3% of total tax revenue. Total expenditures in the General
Fund are projected at $33.633 billion, including $23.778 billion for grants to
local governments, $8.033 billion for State operations, $1.807 billion for
general State charges, and $15 million for debt service. Compared to the
projections made in February, expenditures for grants to local governments are
substantially increased, while expenditures for state operations are reduced.
There can be no assurance that the State will not face substantial
potential budget gaps in future years resulting from a significant disparity
between tax revenues projected from a lower recurring receipts base and the
spending required to maintain State programs at current levels. To address any
potential budgetary imbalance, the State may need to take significant actions to
align recurring receipts and disbursements in future fiscal years.
In 1990, S&P and Moody's lowered their rating of the State's general
obligation debt from AA- to A and from A-1 to A, respectively. In addition, S&P
and Moody's lowered their ratings of the short-term notes from SP-1+ to SP-1 and
from MIG-1 to MIG-2, respectively. In January 1992, Moody's lowered from A to
Baa1 its ratings of certain appropriation-backed debt of New York State and its
agencies. The State's general obligation, state-guaranteed and New York State
Local Government Assistance Corporation bonds continued to be rated A by
Moody's. Also in January 1992, S&P lowered from A to A- its ratings of New York
State general obligation bonds and stated that it continued to assess the
ratings outlook as negative. S&P also lowered its ratings
A-6
<PAGE>
- --------------------------------------------------------------------------------
of various agency debt, moral obligations, contractual obligations, lease
purchase obligations and State guarantees. In February 1991, Moody's lowered its
rating on the City's general obligation bonds from A to Baa1. The rating changes
reflect the rating agencies' concerns about the financial condition of New York
State and City, the heavy debt load of the State and City and economic
uncertainties in the region.
(1) THE STATE, AGENCIES AND OTHER MUNICIPALITIES. During the mid-1970s,
some of the Agencies and municipalities (in particular, the City) faced
extraordinary financial difficulties, which affected the State's own financial
condition. These events, including a default on short-term notes issued by the
New York State Urban Development Corporation ('UDC') in February 1975, which
default was cured shortly thereafter, and a continuation of the financial
difficulties of the City, created substantial investor resistance to securities
issued by the State and by some of its municipalities and Agencies. For a time,
in late 1975 and early 1976, these difficulties resulted in a virtual closing of
public credit markets for State and many State related securities.
In response to the financial problems confronting it, the State developed
and implemented programs for its 1977 fiscal year that included the adoption of
a balanced budget on a cash basis (a deficit of $92 million that actually
resulted was financed by issuing notes that were paid during the first quarter
of the State's 1978 fiscal year). In addition, legislation was enacted limiting
the occurrence of additional so-called 'moral obligation' and certain other
Agency debt, which legislation does not, however, apply to obligations of The
Municipal Assistance Corporation for the City of New York ('MAC'), a corporation
created to provide financing assistance to the City.
STATE FINANCIAL RESULTS. New York State's financial operations have
improved during recent fiscal years. During the period 1989-90 through 1991-92,
the State incurred General Fund operating deficits that were closed with
receipts from the issuance of tax and revenue anticipation notes ('TRANs').
First, the national recession, and then the lingering economic slowdown in the
New York and regional economy, resulted in repeated shortfalls in receipts and
three budget deficits. For its 1992-93 and 1993-94 fiscal years, the State
recorded balanced budgets on a cash basis, with substantial fund balances in
each year as described below.
On July 29, 1994, the Office of the State Comptroller issued the General
Purpose Financial Statements of the State of New York for the 1993-94 fiscal
year. The Statements were prepared on GAAP-basis and were independently audited
in accordance with generally accepted auditing standards. The State's Combined
Balance Sheet as of March 31, 1994 showed an accumulated surplus in its combined
governmental funds of $370 million, reflecting liabilities of $13.219 billion
and assets of $13.589 billion. This accumulated Governmental Funds surplus
includes a $1.637 billion accumulated deficit in the General Fund, as well as
accumulated surpluses in the Special Revenue and Debt Service fund types and a
$622 million accumulated deficit in the Capital Projects Fund type.
The State completed its 1993-94 fiscal year with a combined Governmental
Funds operating surplus of $1.051 billion, which included an operating surplus
in the General Fund of $914 million, in the Special Revenue Funds of $149
million and in the Debt Service Funds of $23 million, and an operating deficit
in the Capital Projects Funds of $35 million. The following table updates Table
6 of the Annual Information Statement.
The State reported a General Fund operating surplus of $914 million for the
1993-94 fiscal year, as compared to an operating surplus of $2.065 billion for
the prior fiscal year. The 1993-94
A-7
<PAGE>
- --------------------------------------------------------------------------------
fiscal year surplus reflects several major factors, including the cash basis
surplus recorded in 1993-94, the use of $671 million of the 1992-93 surplus to
fund operating expenses in 1993-94, net proceeds of $575 million in bonds issued
by the Local Government Assistance Corporation, and the accumulation of $265
million balance in the Contingency Reserve Fund. Revenues increased $543 million
(1.7%) over prior fiscal year revenues with the largest increase occurring in
personal income taxes. Expenditures increased $1.659 billion (5.6%) over the
prior fiscal year, with the largest increase occurring in State aid for social
services programs.
The State ended its 1993-94 fiscal year with a balance of $1.140 billion in
the tax refund reserve account, $265 million in its Contingency Reserve Fund and
$134 million in its tax stabilization reserve fund. These fund balances were
primarily the result of an improving national economy, State employment growth,
tax collections that exceeded earlier projections and disbursements that were
below expectations. Deposits to the personal income tax refund reserve have the
effect of reducing reported personal income tax receipts in the fiscal year when
made and withdrawals from such reserve increase receipts in the fiscal year when
made. The balance in the tax reserve account will be used to pay taxpayer
refunds, rather than drawing from 1994-95 receipts.
Of the $l.140 billion deposited in the tax refund reserve account, $1.026
billion was available for budgetary planning purposes in the 1994-95 fiscal
year. The remaining $114 million will be redeposited in the tax refund reserve
account at the end of the State's 1994-95 fiscal year to continue the process of
restructuring the State's cash flow as part of the New York Local Government
Assistance Corporation ('LGAC') program. The balance in the contingency reserve
fund will be used to meet the cost of litigation facing the State. The tax
stabilization reserve fund may be used only in the event of an unanticipated
General Fund cash-basis deficit during the 1994-95 fiscal year.
Before the deposit of $1.140 billion in the tax refund reserve account,
General Fund receipts in 1993-94 exceeded those originally projected when the
State Financial Plan for the year was formulated on April 16, 1993 by $1.002
billion. Greater-than-expected receipts in the personal income tax, the bank
tax, the corporation franchise tax and the estate tax accounted for most of this
variance, and more than offset weaker-than-projected collections from the sales
and use tax and miscellaneous receipts. Collections from individual taxes were
affected by various factors including changes in Federal business laws,
sustained profitability of banks, strong performance of securities firms, and
higher-than-expected consumption of tobacco products following price cuts.
The higher receipts resulted, in part, because the New York economy
performed better than forecasted. Employment growth started in the first quarter
of the State's 1993-94 year, and although this lagged the national economic
recovery, the growth in New York began earlier than forecasted. The New York
economy exhibited signs of strength in the service sector, in construction, and
in trade. Long Island, and the Mid-Hudson Valley continued to lag the rest of
the State in economic growth. Approximately 100,000 jobs are believed to have
been added during the 1993-94 fiscal year.
Disbursements and transfer from the General Fund were $303 million below
the level projected in April 1993, an amount that would have been $423 million
had the State not accelerated the payment of Medicaid billings, which in the
April 1993 State Financial Plan were planned to be deferred into the 1994-95
fiscal year. Compared to the estimates included in the
A-8
<PAGE>
- --------------------------------------------------------------------------------
State Financial Plan formulated in April 1993, disbursements were lower for
Medicaid, capital projects, and debt service (due to refundings). In addition,
$114 million of school and payments were funded from the proceeds of LGAC bonds.
Disbursements were higher-than-expected for general support for public schools.
The State also made the first of six required payments to the State of Delaware
related to the settlement of Delaware's litigation against the State regarding
the disposition of abandoned property receipts.
During the 1993-94 fiscal year, the State also established and funded a
Contingency Reserve Fund ('CRF') as a way to assist the State in financing the
cost of litigation affecting the State. The CRF was initially funded with a
transfer of $100 million attributable to the positive margin recorded in the
1992-93 fiscal year. In addition, the State augmented this initial deposit with
$132 million on debt service savings attributable to the refinancing of State
and public authority bonds during 1993-94. A year-end transfer of $36 million
was also made to the CRF, which, after a disbursement for authorized fund
purposes, brought the CRF balance at the end of 1993-94 to $265 million. This
amount was $165 million higher than the amount originally targeted for this
reserve fund.
For its 1992-93 fiscal year the State had a balanced budget on a cash basis
with a positive margin of $671 million in the General Fund that was deposited in
the refund reserve account.
After reflecting a 1992-93 year-end deposit to the refund reserve account
of $671 million, reported 1992-93 General Fund receipts were $45 million higher
than originally projected in April 1992. If not for that year-end transaction,
which had the effect of reducing 1992-93 receipts by $671 million and making
those receipts available in 1993-94, General Fund receipts would have been $716
million higher than originally projected.
The favorable performance was primarily attributable to personal income tax
collections that were more than $700 million higher than originally projected
(before reflecting the refund reserve transaction). The withholding and
estimated payment components of the personal income tax exceeded original
estimates by more than $800 million combined, reflecting both stronger economic
activity, particularly at year's end, and the tax-induced one-time acceleration
of income into 1992. Modest shortfalls were experienced in other components of
the income tax.
There were large, but largely offsetting, variances in other categories.
Significantly higher-than-projected business tax collections and the receipt of
unbudgeted payments from the Medical Malpractice Insurance Association and the
New York Racing Association approximately offset the loss of an anticipated $200
million Federal reimbursement, the loss of certain budgeted hospital
differential revenue as a result of unfavorable court decisions, and shortfalls
in certain miscellaneous revenue sources.
Disbursements and transfers to other funds totaled $30.829 billion, an
increase of $45 million above projections in April 1992. After adjusting for the
impact of a $150 million payment from the Medical Malpractice Insurance
Association to health insurers made pursuant to legislation passed in January
1993, actual disbursements were $105 million lower than projected. This
reduction primarily reflected higher-than-anticipated costs for educational
programs, as offset by lower costs in virtually all other categories of
spending, including Medicaid, local health programs, agency operations, fringe
benefits, capital projects and debt service.
During its 1989-90, 1990-91 and 1991-92 fiscal years, the State incurred
cash-basis operating deficits in the General Fund of $775 million, $1.081
billion and $575 million, respectively, prior to
A-9
<PAGE>
- --------------------------------------------------------------------------------
the issuance of short-term tax and revenue anticipation notes ('TRANs'), owing
to lower-than-projected receipts.
GOVERNMENTAL FUNDS. The major operating fund of the State is the General
Fund. It receives all State income that is not required by law to be deposited
in another fund. General Fund receipts, including transfers from other funds,
totalled $32.299 billion in the 1993-94 fiscal year. General Fund receipts in
the State's 1994-95 fiscal year are estimated in the State Financial Plan at
$34.321 billion. Including transfers to other funds, total General Fund
disbursements in the 1993-94 fiscal year were $31.897 billion, and are estimated
to total $34.248 billion in the State's 1994-95 fiscal year.
The Special Revenue Funds account for State receipts from specific sources
that are legally restricted in use to specified purposes and include all moneys
received from the Federal government. Total receipts in Special Revenue Funds
are projected at $24.598 billion for the State's 1994-95 fiscal year. Federal
grants are projected to account for 75% of receipts in Special Revenue Funds in
the State's 1994-95 fiscal year. Disbursements from Special Revenue Funds are
projected to be $24.982 billion for the State's 1994-95 fiscal year.
The Capital Projects Funds are used to finance the acquisition and
construction of major capital facilities and to aid local government units and
Agencies in financing capital constructions. Federal grants for capital
projects, largely highway-related, are projected to account for 33% of the
$3.233 billion in total projected receipts in Capital Projects Funds in the
State's 1994-95 fiscal year. Total disbursements for capital projects are
projected to be $3.730 billion during the State's 1994-95 fiscal year. Of total
disbursements from Capital Projects Funds, approximately 54% is for various
transportation purposes, including highways and mass transportation facilities;
4% is for programs of the Department of Correctional Services and other public
protection activities; 13% is for environmental and recreational programs; 5% is
for educational programs; 16% is for health and mental hygiene facilities; and
5% is for housing and economic development programs. The balance is for the
maintenance of State office facilities and various other capital programs.
The Debt Service Funds serve to fulfill State debt service on long-term
general obligation State debt and other State lease/purchase and contractual
obligation financing commitments. Total receipts in Debt Service Funds are
projected to reach $2.318 billion in the 1994-95 fiscal year. Total
disbursements from Debt Service Funds for debt service, lease-purchase and
contractual-obligation financing commitments are projected to be $2.246 billion
during the State's 1994-95 fiscal year.
STATE BORROWING PLAN. The State issued $850 million in TRANs on May 4, 1993
to fund its day-to-day operations and certain local assistance payments to its
municipalities and school districts. These TRANs matured on December 31, 1993.
The State anticipates that its 1994-95 borrowings for capital purposes will
consist of approximately $374 million in general obligation bonds (including
$140 million for the purpose of redeeming outstanding bond anticipation notes)
and $140 million in new commercial paper issuances. The Legislature has
authorized the issuance of up to $69 million in certificates of participation
for real property and equipment acquisitions during the State's 1994-95 fiscal
year. The projections of the State regarding its borrowings for the 1994-95
fiscal year may change if actual receipts fall short of State projections or if
other circumstances require.
A-10
<PAGE>
- --------------------------------------------------------------------------------
In addition, the use of New York Local Government Assistance Corporation
('LGAC') bond proceeds to make payments to local governmental units, otherwise
made by the State, reduces the State's future liabilities. The LGAC is
authorized to provide net proceeds of $315 million during the 1994-95 fiscal
year
STATE AGENCIES. The fiscal stability of the State is related, at least in
part, to the fiscal stability of its localities and various of its Agencies.
Various Agencies have issued bonds secured, in part, by nonbinding statutory
provisions for State appropriations to maintain various debt service reserve
funds established for such bonds (commonly referred to as 'moral obligation'
provisions).
At September 30, 1993, there were 18 Agencies that had outstanding debt of
$100 million or more. The aggregate outstanding debt, including refunding bonds,
of these 18 Agencies, was $63.5 billion as of September 30, 1993. As of March
31, 1994, aggregate Agency debt outstanding as State-supported debt was $21.1
billion and as State-related was $29.4 billion. Debt service on the outstanding
Agency obligations normally is paid out of revenues generated by the Agencies'
projects or programs, but in recent years the State has provided special
financial assistance, in some cases on a recurring basis, to certain Agencies
for operating and other expenses and for debt service pursuant to moral
obligation indebtedness provisions or otherwise. Additional assistance is
expected to continue to be required in future years.
Several Agencies have experienced financial difficulties in the past.
Certain Agencies continue to experience financial difficulties requiring
financial assistance from the State. Failure of the State to appropriate
necessary amounts or to take other action to permit certain Agencies to meet
their obligations could result in a default by one or more of such Agencies. If
a default were to occur, it would likely have a significant effect on the
marketability of obligations of the State and the Agencies. These Agencies are
discussed below.
The New York State Housing Finance Agency ('HFA') provides financing for
multifamily housing, State University construction, hospital and nursing home
development and other programs. In general, HFA depends upon mortgagors in the
housing programs it finances to generate sufficient funds from rental income,
subsidies and other payments to meet their respective mortgage repayment
obligations to HFA, which provide the principal source of funds for the payment
of debt service on HFA bonds, as well as to meet operating and maintenance costs
of the projects financed. From January 1, 1976 through March 31, 1987, the State
was called upon to appropriate a total of $162.8 million to make up deficiencies
in the debt service reserve funds of HFA pursuant to moral obligation
provisions. The State has not been called upon to make such payments since the
1987 fiscal year and no payments are anticipated during the 1993-94 fiscal year.
UDC has experienced, and expects to continue to experience, financial
difficulties with the housing programs it had undertaken prior to 1975, because
a substantial number of these housing program mortgagors are unable to make full
payments on their mortgage loans. Through a subsidiary, UDC is currently
attempting to increase its rate of collection by accelerating its program of
foreclosures and by entering into settlement agreements. UDC has been, and will
remain, dependent upon the State for appropriations to meet its operating
expenses. The State also has appropriated money to assist in the curing of a
default by UDC on notes which did not contain the State's moral obligation
provision.
A-11
<PAGE>
- --------------------------------------------------------------------------------
The Metropolitan Transportation Authority (the 'MTA') oversees New York
City's subway and bus lines by its affiliates, the New York City Transit
Authority and the Manhattan and Bronx Surface Transit Operating Authority
(collectively, the 'TA'). Through MTA's subsidiaries, the Long Island Rail Road
Company, the Metro-North Commuter Railroad Company and the Metropolitan Suburban
Bus Authority, the MTA operates certain commuter rail and bus lines in the New
York metropolitan area. In addition, the Staten Island Rapid Transit Authority,
an MTA subsidiary, operates a rapid transit line on Staten Island. Through its
affiliated agency, the Triborough Bridge and Tunnel Authority (the 'TBTA'), the
MTA operates certain toll bridges and tunnels. Because fare revenues are not
sufficient to finance the mass transit portion of these operations, the MTA has
depended and will continue to depend for operating support upon a system of
State, local government and TBTA support and, to the extent available, Federal
operating assistance, including loans, grants and operating subsidies.
The TA and the commuter railroads, which are on a calendar fiscal year,
ended 1993 with their budgets balanced on a cash basis. The TA had a closing
cash balance of approximately $39 million. Over the past several years the State
has enacted several taxes -- including a surcharge on the profits of banks,
insurance corporations and general business corporations doing business in the
12-county region (the 'Metropolitan Transportation Region') served by the MTA
and a special .25% regional sales and use tax -- that provide additional
revenues for mass transit purposes, including assistance to the MTA. The
surcharge, which expires in November 1995, yielded $533 million in calendar year
1993, of which the MTA was entitled to receive approximately 90%, or
approximately $480 million.
For 1994, the TA projects that it will end the year with $77.6 million cash
surplus. For the 1994-95 State fiscal year, total State assistance to the MTA is
estimated at $1.3 billion.
A subway fire on December 28, 1990, and a subway derailment on August 28,
1991, each of which caused fatalities and many injuries, have given rise to
substantial claims for damages against both the TA and the City.
In 1981, the State Legislature authorized procedures for the adoption,
approval and amendment of a five-year plan for the capital program designed to
upgrade the performance of the MTA's transportation systems and to supplement,
replace and rehabilitate facilities and equipment, and also granted certain
additional bonding authorization therefor.
On April 5, 1993, the Legislature approved, and the Governor subsequently
signed into law, legislation authorizing a five-year $9.56 billion capital plan
for the MTA for 1992-1996. The MTA has submitted a 1992-1996 Capital Program
based on this legislation for the approval of the MTA Capital Program Review
Board (the 'CPRB'), as State law requires. On July 1, 1993, the CPRB indicated
that it was withholding approval pending the resolution of certain related
issues. If approved, the 1992-1996 Capital Program would succeed two previous
five-year capital programs of the periods covering 1982-1986 and 1987-1991. The
1987-1991 Capital Program totalled approximately $8.0 billion, including $6.2
billion for TA capital projects.
The 1992-1996 Capital Program would supersede a one-year program adopted in
1992. State budget legislation for the 1992-93 fiscal year had required the MTA
to submit a one-year capital program for 1992 instead of a five-year program.
The one-year program, which contained $1.635 billion of projects for transit and
commuter facilities combined, was approved by the CPRB in May 1992, but the
five-year program for 1992-1996, required to be submitted subsequently by the
A-12
<PAGE>
- --------------------------------------------------------------------------------
MTA as an amendment to the one-year plan, was disapproved without prejudice by
the CPRB in December 1992.
The cities, towns, villages and school districts of the State are political
subdivisions of the State with the powers granted by the State Constitution and
statutes. As the sovereign, the State retains broad powers and responsibilities
with respect to the government, finances and welfare of these political
subdivisions, especially in education and social services. In recent years the
State has been called upon to provide added financial assistance to certain
localities.
OTHER LOCALITIES. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the State's 1993-94 fiscal year and thereafter. The potential impact on the
State of such actions by localities is not included in the projections of the
State receipts and disbursements in the State's 1992-93 and 1993-94 fiscal
years.
Municipalities and school districts have engaged in substantial short-term
and long-term borrowings. In 1992, the total indebtedness of all localities in
the State was approximately $15.7 billion. A small portion (approximately $71.6
million) of this indebtedness represented borrowing to finance budgetary
deficits and was issued pursuant to enabling State legislation. State law
requires the Comptroller to review and make recommendations concerning the
budgets of those local government units other than the City authorized by State
law to finance deficits during the period of probable usefulness authorized for
such indebtedness. Seventeen localities had outstanding indebtedness for deficit
financing at the close of their fiscal 1992.
Certain proposed Federal expenditure reductions would reduce, or in some
cases eliminate Federal funding of some local programs and accordingly might
impose substantial increased expenditure requirements on affected localities. If
the State, the City or any of the Agencies were to suffer serious financial
difficulties jeopardizing their respective access to the public credit markets,
the marketability of notes and bonds issued by localities within the State could
be adversely affected. Localities also face anticipated and potential problems
resulting from certain pending litigation, judicial decisions and long-range
economic trends. The longer-range problems of declining city population,
increasing expenditures and other economic trends could adversely affect
localities and require increasing State assistance in the future.
Because of significant fiscal difficulties experienced from time to time by
the City of Yonkers ('Yonkers'), a Financial Control Board (the 'Yonkers'
Board') was created by the State in 1984 to oversee Yonkers' fiscal affairs.
Future actions taken by the Governor or the State Legislature to assist Yonkers
could result in the allocation of State resources in amounts that cannot yet be
determined.
Certain litigation pending against the State or its officers or employees
could have a substantial or long-term adverse effect on State finances. Final
adverse decisions in such cases could require extraordinary appropriations or
expenditure reductions or both, and might have a material, adverse effect upon
the financial condition of the State and various of its Agencies and municipal
subdivisions.
(2) NEW YORK CITY. In the mid-1970s, the City had large accumulated past
deficits and until recently was not able to generate sufficient tax and other
ongoing revenues to cover expenses in each fiscal year. However, the City's
operating results for the fiscal year ended June 30, 1994 were balanced in
accordance with GAAP, the twelfth consecutive year in which the City achieved
A-13
<PAGE>
- --------------------------------------------------------------------------------
balanced operating results in accordance with GAAP. The City's ability to
maintain balanced operating results in future years is subject to numerous
contingencies and future developments.
The City's economy, whose rate of growth slowed substantially over the past
three years, is currently in recession. During the 1990 and 1991 fiscal years,
as a result of the slowing economy, the City has experienced significant
shortfalls in almost all of its major tax sources and increases in social
services costs, and has been required to take actions to close substantial
budget gaps in order to maintain balanced budgets in accordance with the
Financial Plan. Since the stock market crash, the City's tax revenues have been
below expected levels, and the revised local employment data available since
January 1989 have confirmed that the City's economy has been severely affected
by the stock market crash, and that the impact of layoffs in the finance,
insurance and real estate sectors is greater than had been believed earlier.
In 1975, the City became unable to market its securities and entered a
period of extraordinary financial difficulties. In response to this crisis, the
State created MAC to provide financing assistance to the City. The State also
enacted the New York State Financial Emergency Act for the City of New York (the
'Emergency Act') which, among other things, created the Financial Control Board
(the 'Control Board') to oversee the City's financial affairs and facilitate its
return to the public credit markets. The State also established the Office of
the State Deputy Comptroller ('OSDC') to assist the Control Board in exercising
its powers and responsibilities. On June 30, 1986, the Control Board's powers of
approval over the City Financial Plan were suspended pursuant to the Emergency
Act. However, the Control Board, MAC and OSDC continue to exercise various
monitoring functions relating to the City's financial condition. The City
prepares and operates under a four-year financial plan which is submitted
annually to the Control Board for review and which the City periodically
updates.
The City's independently audited operating results for each of its fiscal
years from 1981 through 1993 show a General Fund surplus reported in accordance
with GAAP. The City has eliminated the cumulative deficit in its net General
Fund position. In addition, the City's financial statements for the 1993 fiscal
year received an unqualified opinion from the City's independent auditors, the
eleventh consecutive year the City has received such an opinion.
In August 1993, the City adopted and submitted to the Control Board for its
review a four-year Financial Plan covering fiscal years 1994 through 1997 (the
'Financial Plan'). The Financial Plan was based on the City's fiscal year 1994
expense budget adopted June 14, 1993 as well as certain changes incorporated
subsequent to the budget adoption process. On November 23, 1993, the City
adopted and submitted to the Control Board for its review a first-quarter
modification to the Financial Plan (the 'November Modification') incorporating
various re-estimates of revenues and expenditures. For fiscal year 1994, the
November Modification includes additional resources stemming primarily from the
City Comptroller's fiscal year 1993 annual audit, savings from a reduction in
prior years' accrued expenditures, and higher State and Federal aid resulting
from claims by the City for reimbursement of various social services costs.
These resources were used to fund new needs in the November Modification
including higher costs in the uniformed agencies, at the Board of Education (the
'BoE') and for certain social services, the unlikelihood of the sale of the
Off-Track Betting Corporation (the 'OTB'), and lower estimates of miscellaneous
and other revenues. After taking these adjustments into account, the November
Modification projects a balanced budget for fiscal year 1994, based upon
revenues of $31.585 billion. For fiscal years 1995, 1996 and 1997, the November
Modification projects budget gaps of
A-14
<PAGE>
- --------------------------------------------------------------------------------
$1.730 billion, $2.513 billion and $2.699 billion, respectively. These gaps are
higher by about $450 million in fiscal year 1995 and by about $700 million in
each of fiscal years 1996 and 1997 than in the Financial Plan, primarily on
account of the nonrecurring value of the fiscal year 1994 revenue adjustments,
the loss of certain one-time resources funding BoE fiscal year 1994 spending
needs, and the reclassification of anticipated State aid from the baseline
revenue estimates to the gap-closing program. To offset these larger gaps, the
November Modification relies on additional City, State and other actions.
On December 1, 1993, a three-member panel appointed by the Mayor to address
City structural budget imbalance released a report setting forth its findings
and recommendations. In its report, the panel noted that budget imbalance is
likely to be greater than the City now projects by $255 million in fiscal year
1995, rising to nearly $1.5 billion in fiscal year 1997. The report provided a
number of options that the City should consider in addressing the structural
balance issue such as severe cuts in City-funded personnel levels, increases in
residential property taxes and the sales tax, and the imposition of bridge tolls
and solid waste collection fees. The report also noted that additional State
actions will be required in many instances to allow the City to cut its budget
without grave damage to basic services.
On December 21, 1993, OSDC issued a report reviewing the November
Modification. The report noted that while the outlook for fiscal year 1994 has
improved since August, it will be necessary for the City to manage its budget
aggressively in order to stay on course for budget balance this year. For fiscal
years 1995 through 1997, the report expressed concern that the gaps identified
by the City in the November Modification are the largest as a percentage of
City-fund revenues that the City has faced at this point in the fiscal year
since budget balance in accordance with GAAP was first achieved in fiscal year
1981.
On December 21, 1993, the staff of the Control Board issued its report on
the November Modification. The report states that the plan is now more realistic
in terms of the gaps it portrays and the solutions it offers. However, the
solutions are mostly limited to fiscal year 1994 while the gap for fiscal year
1995 has been increased by $450 million. Beginning in fiscal year 1995, budget
gaps average over $2 billion annually. Therefore, the staff recommends that
prompt action to replace many current-year one-shots with recurring savings is
critical.
On February 2, 1994, the Mayor presented to the City Council and the
Control Board a mid-year modification to the Financial Plan (the 'February
Modification'). The February Modification projects a balanced budget for fiscal
year 1994, based upon revenues of $31.735 billion, including a general reserve
of $81 million. For fiscal years 1995, 1996 and 1997, the February Modification
projects budget gaps of $2.261 billion, $3.167 billion and $3.253 billion,
respectively, and assumes no wage and salary increases beyond the expiration of
current labor agreements which expire in fiscal years 1995 and 1996. These gaps
have grown since November by about $530 million in fiscal year 1995, and $650
million and $550 million in fiscal years 1996 and 1997, respectively, owing in
large part to lower estimates of real property tax revenues. To close the budget
gap projected for fiscal year 1995, the February Modification includes a
gap-closing program that consists of the following major elements: (i) an agency
program of $1.048 billion; (ii) fringe benefit and pension savings of $400
million; (iii) an intergovernmental aid package of $400 million; (iv) a
workforce reduction program of $144 million; and (v) the assumption of a $234
million surplus roll from fiscal year 1994. Implementation of many of the
gap-closing initiatives requires the cooperation of the municipal labor unions,
the City Council and the State and
A-15
<PAGE>
- --------------------------------------------------------------------------------
Federal governments. The February Modification also includes a tax reduction
program, with most of the financial impact affecting the later years of the Plan
period.
The City requires certain amounts of financing for seasonal and capital
spending purposes. The City issued $1.75 billion of notes for seasonal financing
purposes during the 1994 fiscal year. The City's capital financing program
projects long-term financing requirements of approximately $17 billion for the
City's fiscal years 1995 through 1998 for the construction and rehabilitation of
the City's infrastructure and other fixed assets. The major capital requirement
include expenditures for the City's water supply system, and waste disposal
systems, roads, bridges, mass transit, schools and housing. In addition, the
City and the Municipal Water Finance Authority issued about $1.8 billion in
refunding bonds in the 1994 fiscal year.
(3) STATE ECONOMIC TRENDS. Over the long term, the State and the City also
face serious potential economic problems. The City accounts for approximately
41% of the State's population and personal income, and the City's financial
health affects the State in numerous ways. The State has long been one of the
wealthiest states in the nation. For decades, however, the State economy has
grown more slowly than that of the nation as a whole, resulting in the gradual
erosion of its relative economic affluence. The causes of this relative decline
are varied and complex, in many cases involving national and international
developments beyond the State's control.
Part of the reason for the long-term relative decline in the State's
economy has been attributed to the combined State and local tax burden, which is
among the highest in the United States. The existence of this tax burden limits
the State's ability to impose higher taxes in the event of future financial
difficulties. Recently, the State has been relatively successful in bringing the
rate of growth in the public sector in the State into line with the slower
expansion in the private economy.
The burdens of State and local taxation, in combination with many other
causes of regional economic dislocation, may have contributed to the decision of
businesses and individuals to relocate outside, or not locate within, the State.
In 1987, the State enacted a major personal income tax reduction and reform
program and also reduced the tax rate on corporation income. In addition, the
State has provided various tax incentives to encourage business relocation and
expansion. The State, however, in its 1989-90, 1990-91 and 1991-92 fiscal years
substantially increased taxes and fees to help close projected budget gaps in
those years, and in 1990-91, 1991-92, 1992-93 and 1993-94 delayed and
restructured the remainder of the personal income tax reduction program
originally enacted in 1987.
OHIO SERIES
STATE ECONOMY AND BUDGET. Nonmanufacturing industries now employ more than
three-fourths of all payroll workers in the State of Ohio. However, due to the
continued importance of manufacturing industries (including auto-related
manufacturing), economic activity in Ohio, as in many other industrially
developed states, tends to be more cyclical than in some other states and in the
nation as a whole. Agriculture also is an important segment of the Ohio economy.
The financial condition of the State has fluctuated in a pattern related to
national economic conditions, with periods of prolonged stringency
characterizing fiscal years 1980 through 1983. Additionally, the 1980-82
recession brought with it a substantial increase in bankruptcies and
foreclosures. While the State's economy has improved since 1983, the State
experienced an
A-16
<PAGE>
- --------------------------------------------------------------------------------
economic slowdown in 1990-91, consistent with the national economic conditions
during that period.
The State constitution imposes a duty on the Ohio General Assembly to
'provide for raising revenue, sufficient to defray the expenses of the state,
for each year, and also a sufficient sum to pay the principal and interest as
they become due on the state debt.' The State is effectively precluded by law
from ending a fiscal year or a biennium in a 'deficit' position. State borrowing
to meet casual deficits or failures in revenues or to meet expenses not
otherwise provided for is limited by the constitution to $750,000.
The State carries out most of its operations through the General Revenue
Fund ('GRF') which receives general State revenues not otherwise dedicated
pursuant to certain constitutional and statutory claims on State revenues. The
GRF sources consist primarily of personal income and sales-use taxes. The GRF
ending (June 30) fund balance is reduced during less-favorable national economic
periods and then increases during more favorable economic periods.
The Office of Budget and Management ('OBM') projects positive $106.6
million and $314.6 million ending fund and cash balances, respectively, for the
GRF for fiscal year 1994. In addition, as of May 31, 1994 the Budget
Stabilization Fund ('BSF') had a cash balance of $21.0 million.
The GFR appropriations bill for the biennium ending June 30, 1995 was
passed on June 30, 1993 and promptly signed, with selective vetoes, by the
Governor. The Act provides for total GRF biennial expenditures of approximately
$30.7 billion, an increase over those for the 1992-93 fiscal biennium.
Authorized expenditures in fiscal year 1994 are 9.2% higher than in fiscal year
1993 (taking into account fiscal year 1993 expenditure reductions), and for
fiscal year 1995 are 6.6% higher than in fiscal year 1994. Pursuant to April
1994 legislation, the OBM Director is to make a partial payment to the BSF after
the end of fiscal year 1994 of any GRF fund balance in excess of $300 million.
State statutory provisions permit the adjustment of payment schedules and
the use of the Total Operating Fund ('TOF') to manage temporary GRF cash flow
deficiencies. The State has not undertaken external revenue anticipation
borrowing.
TOF includes the consolidated total cash balances, revenues, disbursements
and transfers of the GRF and several other specified funds. TOF cash balance at
May 31, 1994 was $2.984 billion. These cash balances are consolidated only for
the purpose of meeting cash flow requirements and, except for the GRF, a
positive cash balance must be maintained for each discrete fund included in the
TOF. The GRF is permitted to incur a temporary cash deficiency by drawing upon
the available consolidated cash balance in the TOF. The amount of that permitted
GRF cash deficiency at any time is limited to 10% of GRF revenues for the
then-preceding fiscal year. As projected by OBM for the fiscal year ending June
30, 1993, cash flow deficiencies occurred in August 1992 through May 1993, with
the highest deficiency being $768.6 million in December 1992. In addition, GRF
cash flow deficiencies have occurred in six months of fiscal year 1994.
STATE DEBT. The Ohio Constitution prohibits the incurrence or assumption of
debt by the State without a popular vote except to (i) cover causal deficits or
failures in revenues limited in amount to $750,000 and (ii) repel invasion,
suppress insurrection or defend the State in war.
At various times from 1921, the voters of Ohio, by thirteen specific
constitutional amendments, authorized the incurrence of up to $4.664 billion in
State debt to which taxes or excises were pledged for payment. As of June 1994,
excluding Highway Obligations Bonds
A-17
<PAGE>
- --------------------------------------------------------------------------------
discussed below, and the recently authorized parks, recreation and natural
resources bonds, approximately $3.235 billion had been issued, of which $2.514
billion had been retired and approximately $712.6 million (all evidenced by
bonds) remained outstanding. The only such debt still authorized to be incurred
is a portion of the Highway Obligations Bonds and Coal Development Bonds as well
as State general obligations bonds for local government infrastructure projects,
described below and recently authorized general obligation park bonds.
The total voted authorization of State debt includes authorization for $500
million in Highway Obligations to be outstanding at any one time, with no more
than $100 million to be issued in any one calendar year. As Highway Obligations
are retired, additional Highway Obligations may be issued so long as the
principal amount outstanding does not exceed $500 million. As of June 16, 1994,
approximately $1.545 billion in Highway Obligations had been issued and $446.3
million were outstanding.
A 1985 constitutional amendment authorized up to $100 million in State full
faith and credit obligations for coal research and development to be outstanding
at any one time. In addition, the General Assembly has authorized the issuance
of an additional $35 million of Coal Development Bonds. As of June 16, 1994, $80
million of Coal Development Bonds were issued, of which $43.1 million were
outstanding.
A 1987 State constitutional amendment authorizes the issuance of $1.2
billion of State full faith and credit obligations for infrastructure
improvements of which no more than $120 million may be issued in any calendar
year. As of June 1, 1994, approximately $720.0 million of such obligations were
issued, of which $645.2 million were outstanding.
A constitutional amendment, adopted in November 1990, authorizes greater
State and political subdivision participation in the provision of housing for
individuals and families. This supplements the previously constitutionally
authorized loans-for-lenders and other housing assistance programs, financed in
part with State Revenue Bonds. The amendment authorizes the General Assembly to
provide for State assistance for housing in a variety of manners. The General
Assembly could authorize State borrowing for the purpose, and the issuance of
State obligations secured by a pledge of all or a portion of State revenues or
receipts, although the obligations may not be supported by the State's full
faith and credit.
A constitutional amendment approved by the voters in November 1993
authorizes $200.0 million in state general obligation bonds to be outstanding
for parks, recreation and natural resource purposes (no more than $50.0 million
to be issued in any one fiscal year). The General Assembly in the general
capital appropriations act for the 1995-96 capital appropriations biennium
authorized the Commissioners of the Sinking Fund to issue $100.0 million of such
obligations.
In addition, an initiative petition currently is being circulated calling
for submission at the November 1994 general election of a constitutional
amendment adding express exclusions from sales or other excise taxes upon food.
The amendment's full effect is not yet determinable, but estimates of resulting
reduced annual State-level revenues range from $60 million to $68.5 million. In
OBM's judgment, if approved, the amendment would not have a materially negative
effect on State finances and appropriations for the remainder of the current
biennium.
In addition, the State constitution authorizes the issuance, for certain
purposes, of State obligations not secured by a pledge of taxes or excises to
pay principal and interest. Such special
A-18
<PAGE>
- --------------------------------------------------------------------------------
obligations include bonds and notes issued by, among others, the Ohio Public
Facilities Commission ('OPFC') and the Ohio Building Authority ('OBA'). As of
June 16, 1994, the OPFC had issued $3.272 billion for higher education
facilities, approximately $2.026 billion of which were outstanding, and $917.5
million for mental health facilities, approximately $463.3 million of which were
outstanding and $145.0 million for parks and recreation facilities,
approximately $86.5 million of which were outstanding.
Only a portion of State capital needs can be met by direct GRF
appropriations; therefore, additional State borrowing for capital purposes has
been and will be required. Under present constitutional limitations, most of
that borrowing will be primarily by lease-rental supported obligations such as
those issued by OPFC and OBA.
The general capital appropriations act for the 1995-96 capital
appropriations biennium authorizes additional borrowing. It authorizes issuance
by OPFC of obligations, in addition to those previously authorized by the
General Assembly, in the amounts of $679.2 million for higher education capital
facilities projects (a substantial number of which are renovations of equipment
and improvements to existing facilities), $77.5 million for mental health and
retardation facilities projects, and $30.0 million for parks and recreation
facilities. It also authorized the OBA to issue obligations, in addition to
those previously authorized by the General Assembly, in the amounts of $221.0
million for Department of Rehabilitation Correction Facilities, $48.0 million
for Department of Youth Services facilities, $230.3 million for Department of
Administrative Services facilities, $42.5 million for Ohio Arts Facilities
Commission facilities, $11.2 million for Department of Public Safety and other
miscellaneous capital improvements facilities and $43.95 million for Ohio
Department of Transportation facilities. In addition, the Treasurer of State was
authorized to issue obligations in addition to those previously authorized by
the General Assembly, in the amounts of $70.0 million for the Department of
Education and, $240.0 million ($120 million for calendar year 1995 and $120
million for calendar year 1996) for the Public Works Commission.
The Commissioners of the Sinking Fund presently have authorization to issue
an additional $70 million of Coal Development Bonds and $118.17 million of
Highway Obligation Bonds.
A November 1986 act (the 'Rail Act') authorizes the Ohio High-Speed Rail
Authority (the 'Rail Authority') to issue obligations to finance the cost of
inter-city high-speed rail service projects within the State, either directly or
by loans to other entities. The Tax Reform Act of 1986 included a special
transition provision (which expired October 1, 1990) exempting up to $2 billion
of State obligations from certain of its provisions. The Rail Authority has
considered financing plan options and the general possibility of issuing bonds
or notes. The Rail Act prohibits, without express approval by joint resolution
of the General Assembly, the collapse of any escrow of financing proceeds for
any purpose other than payment of the original financing, the substitution of
any other security, and the application of any proceeds to loans or grants. The
Rail Act authorizes the Rail Authority, but only with subsequent General
Assembly action, to pledge the faith and credit of the State but not the State's
power to levy and collect taxes (except ad valorem property taxes if
subsequently authorized by the General Assembly) to secure debt service on any
post-escrow obligations and, provided it obtains the annual consent of the State
Controlling Board, to pledge to and use for the payment of debt service on any
such obligations all excises, fees, fines and forfeitures and other revenues
(except highway receipts) of the State after provision for the payment of
certain other State obligations.
A-19
<PAGE>
- --------------------------------------------------------------------------------
Notwithstanding the constitutional provisions prohibiting the incurrence of
certain debt without popular vote, the State and State agencies have issued
revenue bonds that are payable from net revenues of revenue-producing facilities
or categories of facilities, which revenue bonds are not 'debt' within the
meaning of such constitutional provisions. Investment in such bonds carries the
risk that the issuing agency or the specific revenue source may not provide
sufficient funds to service the debt incurred.
The State is a party to various legal proceedings seeking damages or
injunctive relief and generally incidental to its operations. In particular,
litigation contesting the Ohio system of school funding is pending in two county
common pleas courts.
S&P rates certain of the State's general obligation bonds AA and Moody's
rates the State's general obligation bonds Aa.
STATE EMPLOYEES AND RETIREMENT SYSTEMS. The State has established five
public retirement systems to provide retirement, disability retirement and
survivor benefits. Three cover both State and local employees, one State
employees only and one local government employees only. The Public Employees
Retirement System ('PERS'), the largest of the five, covers both State and local
public employees. The State Teachers Retirement System ('STRS') and School
Employees Retirement System ('SERS') primarily cover school district employees
and public higher education employees. The Highway Patrol Retirement System
('HPRS') covers State troopers and the Police and Fire Pension and Disability
System ('PFPDS') covers local safety forces.
As of the most recent year reported by the particular system, the unfunded
accrued liabilities of STRS and SERS were $8.264 billion and $2.592 billion,
respectively, and the unfunded accrued liabilities of PERS, HPRS amd PFPDS was
$5.374 billion, $72.8 million and $840.2 million, respectively.
STATE MUNICIPALITIES. Ohio has a mixture of urban and rural population,
with approximately three-quarters urban. There are approximately 943
incorporated cities and villages (populations under 5,000) in the State; six
cities have populations of over 100,000. A 1979 Act established procedures for
identifying and assisting those few cities and villages experiencing defined
'fiscal emergencies.'
A commission composed of State and local officials, and private sector
members experienced in business and finance appointed by the Governor, is to
monitor the fiscal affairs of a municipality facing substantial financial
problems. That act requires the municipality to develop, subject to approval and
monitoring by its commission, a financial plan to eliminate deficits and cure
any defaults and otherwise remedy fiscal emergency conditions, and to take other
actions required under its financial plan. It also provides enhanced protection
for the municipality's bonds and notes and, subject to the act's stated
standards and controls, permits the State to purchase limited amounts of the
municipality's short-term obligations (used only once, in 1980).
In the fifteen years that the act has been in effect, it has been applied
to 11 cities and to 12 villages. The situations in nine cities and nine villages
have been resolved and their commissions terminated. Only the cities of East
Cleveland and Nelsonville and three of the villages remain under the procedure.
SUMMARY. Many factors affect or could affect the financial condition of the
State and other issuers of debt obligations, many of which are not within the
control of the State or such issuers.
A-20
<PAGE>
- --------------------------------------------------------------------------------
There can be no assurance that such factors and the resulting impact on State
and local governmental finances will not affect adversely the market value of
Ohio Municipal Obligations held in the portfolio of the Fund or the ability of
the respective obligors to make required payments on such obligations.
PENNSYLVANIA SERIES
GENERAL. Pennsylvania historically has been identified as a heavy industry
state, although that reputation has changed with the decline of the coal, steel
and railroad industries and the resulting diversification of Pennsylvania's
industrial composition. The major new sources of growth are in the service
sector, including trade, medical and health services, education and financial
institutions. By 1985, manufacturing had fallen behind both the services sector
and the trade sector as the largest single source of employment in Pennsylvania.
REVENUES AND EXPENDITURES. Pennsylvania utilizes the fund method of
accounting. The General Fund, the State's largest and principal operating fund,
receives all tax receipts, revenues, Federal grants and reimbursements that are
not specified by law to be deposited elsewhere. Debt service on all obligations,
except those issued for highway purposes or for the benefit of other special
revenue funds, is payable from the General Fund.
General revenues in the General Fund include all tax receipts, license and
fee payments, fines, penalties, interest and other revenues not specified to be
deposited elsewhere or not restricted to a specific program or expenditure.
Tax revenues constituted over 98% of General Fund revenues in fiscal 1993.
The major tax sources for the General Fund are the sales tax, which accounted
for $4.83 billion or 33.0% of revenues accruing to the General Fund in fiscal
1993; the personal income tax, which accounted for $4.79 billion or 32.7% of
revenues accruing to the General Fund; and corporate taxes, which accounted for
$2.33 billion or 16.0% of tax revenues. The primary expenditures of the General
Fund are for education ($6.4 billion from Commonwealth funds in fiscal 1994) and
for public health and welfare ($12.7 billion in fiscal 1994).
GOVERNMENTAL FUND TYPES: FINANCIAL CONDITION/RESULTS OF OPERATIONS (GAAP
BASIS). From fiscal 1984 through fiscal 1989, the Commonwealth reported a
positive unreserved-undesignated fund balance for its Governmental Fund Types at
the fiscal year end. Reduced revenue growth and increased expenses contributed
to negative unreserved-undesignated fund balances of the Governmental Fund Types
at the end of the 1990 and 1991 fiscal years, largely due to operating deficits
in the General Fund and State Lottery Fund during those fiscal years. Actions
taken during fiscal year 1992 to bring the General Fund budget back into
balance, including tax increases and expenditure restraints, resulted in a $1.1
billion improvement to the unreserved-undesignated fund deficit for combined
Governmental Fund Types and a return to a positive fund balance. At the end of
fiscal 1993, the total fund balance and other credits for the total Governmental
Fund Types was $1.960 billion, an increase of $732.1 million from the balance at
the end of fiscal year 1992. During fiscal 1993, total assets increased by
$1.297 billion to $7.1 billion, while liabilities increased $564.6 million to
$5.137 billion.
GENERAL FUND: FINANCIAL CONDITION/RESULTS OF OPERATIONS. FIVE YEAR OVERVIEW
(GAAP BASIS). The five-year period from fiscal 1989 through fiscal 1993 was
marked by public health and welfare costs growing at a rate double the growth
rate for all state expenditures. Rising
A-21
<PAGE>
- --------------------------------------------------------------------------------
caseloads, increased utilization of services and rising prices joined to produce
the rapid rise of public health and welfare costs at a time when a national
recession caused tax revenues to stagnate and even decline. During the period
from fiscal 1989 through fiscal 1993, public health and welfare costs rose by an
average annual rate of 10.9% while tax revenues were growing at an average
annual rate of 5.5%. Consequently, spending on other budget programs was
restrained to a growth rate below 5.0% and sources of revenues other than taxes
became larger components of fund revenues. Those sources included transfers from
other funds and hospital and nursing home pooling of contributions to use as
federal matching funds.
FISCAL 1992 FINANCIAL RESULTS (GAAP BASIS). During fiscal 1992 the General
Fund recorded a $1.1 billion operating surplus through tax rate increases and
tax base broadening measures enacted in August 1991 and by controlling
expenditures through numerous cost reduction measures implemented throughout the
fiscal year. As a result of the fiscal 1992 operating surplus, the fund balance
increased to $87.5 million and the unreserved-undesignated deficit dropped to
$138.6 million from its fiscal 1991 level of $1.146 billion.
FISCAL 1993 FINANCIAL RESULTS (BUDGETARY BASIS). The 1993 fiscal year
closed with revenues higher than anticipated and expenditures about as
projected, resulting in an ending unappropriated balance surplus of $242.3
million. Cash revenues were $41.5 million above the budget estimate and totaled
$14.633 billion, representing less than a 1% increase over revenue for the 1992
fiscal year. A reduction in the personal income tax rate in July 1992 and
revenues from retroactive corporate tax increases received in fiscal 1992 were
responsible for the low rate of revenue growth.
Appropriations less lapses totaled an estimated $13.870 billion,
representing a 1.1% increase over those during fiscal 1992. The low growth in
spending was a consequence of a low rate of revenue growth, significant one-time
expenses during fiscal 1992, increased tax refund reserves to cushion against
adverse decisions on pending litigations, and the receipt of federal funds for
expenditures previously paid out of Commonwealth funds.
By state statute, 10% of the budgetary basis unappropriated surplus at the
end of a fiscal year is to be transferred to the Tax Stabilization Reserve Fund.
The transfer for the fiscal 1993 balance is expected to be $24.2 million. The
remaining unappropriated surplus of $218.0 million will be carried forward into
the 1994 fiscal year.
FISCAL 1994 BUDGET (BUDGETARY BASIS). The enacted 1994 fiscal year budget
provides for $14.999 billion of appropriations of Commonwealth funds. The
largest increase in appropriations is for the Department of Public Welfare ($235
million) to meet the increasing costs of medical care and rising caseloads.
Other large increases include $196 million to education (which includes $129
million to increase state educational subsidies for the most needy school
districts) and $104 million for correctional institutions (to pay operating
costs and lease payments for five new prisons and to expand the capacity of two
existing facilities).
The continuing rise in medical assistance costs cannot be met from the
resources provided by a much slower growing tax revenue base. Consequently,
program and financial changes must be implemented to keep costs within budget
limits. For fiscal 1994, the Commonwealth plans to save $247 million by
receiving federal reimbursement for hospital services provided to state general
assistance recipients. Prior to this time, those costs were fully paid by the
Commonwealth. In addition, the Commonwealth will continue to use pooled
financing for medical assistance costs using intergovernmental transfers in
place of voluntary contributions as was
A-22
<PAGE>
- --------------------------------------------------------------------------------
done in earlier fiscal years. Through the pooled financing, additional federal
reimbursements may be drawn to support the medical assistance program. The
pooled financing is anticipated to replace $68 million of Commonwealth funds in
the 1994 fiscal year budget.
The budget estimates revenue growth of 3.7% over fiscal 1993 actual
revenues. The revenue estimate is based on an expectation of continued economic
recovery, but at a slow rate. Sales tax receipts are projected to rise 4.4% over
1993 receipts while personal income tax receipts are projected to increase by
3.3%, a rate that is low because of the tax rate reduction in July 1992.
PROPOSED FISCAL 1995 BUDGET. For the fiscal year beginning July 1, 1994,
the Governor has proposed a budget containing a 4.1% increase in appropriations
over the actual and proposed supplemental appropriations for fiscal 1994. Total
appropriations recommended amount to $15.665 billion. The budget is balanced by
drawing down on a projected $267 million unappropriated surplus for fiscal 1994.
The fastest growing portion of the budget continues to be medical assistance,
which is proposed to receive $264 million, or 42.4%, of the proposed net
increase in spending. Other program areas budgeted to receive major increases
are education ($165 million) and corrections ($126 million). The proposed budget
recommends a tightening of eligibility criteria for state-financed welfare
benefits as a cost reduction measure.
The Governor's proposal also includes a recommended reduction in the
corporate net income tax rate from 12.25% to 9.99% over a three year period. The
corporate tax cut and a proposed increase in poverty exemption for the personal
income tax are estimated to cost $124.7 million in fiscal 1995. The recommended
budget includes Commonwealth revenue growth of 4.7% without including the effect
of the proposed tax reduction. The revenue estimate is based on the expectation
of a continued slow national economy recovery and continued economic growth of
the Pennsylvania economy at a rate slightly below the national rate. Total
estimated Commonwealth revenue, adjusted for refunds and the proposed tax
reduction, is $15.400 billion.
COMMONWEALTH DEBT. The current Constitutional provisions pertaining to
Pennsylvania debt permit the issuance of the following types of debt: (i) debt
to suppress insurrection or rehabilitate areas affected by disaster, (ii)
electorate approved debt, (iii) debt for capital projects subject to an
aggregate debt limit of 1.75 times the annual average tax revenues of the
preceding five fiscal years (this debt need not be approved by the electorate)
and (iv) tax anticipation notes payable in the fiscal year of issuance. All debt
except tax anticipation notes must be amortized in substantial and regular
amounts.
All outstanding general obligation bonds of Pennsylvania are rated AA- by
S&P and Fitch and A1 by Moody's. Outstanding general obligation debt totaled
$5.039 billion on June 30, 1993.
Pennsylvania engages in short-term borrowing to fund expenses within a
fiscal year through the sale of tax anticipation notes which must mature within
the fiscal year of issuance. The principal amount issued, when added to that
outstanding, may not exceed in the aggregate 20% of the revenues estimated to
accrue to the appropriate fund in the fiscal year. The State is not permitted to
fund deficits between fiscal years with any form of debt. All year-end deficit
balances must be funded within the succeeding fiscal year's budget. Pennsylvania
issued a total of $400 million of tax anticipation notes for the account of the
General Fund in fiscal 1994, all of which matured on June 30, 1994.
A-23
<PAGE>
- --------------------------------------------------------------------------------
Pending the issuance of bonds, Pennsylvania may issue bond anticipation
notes subject to the applicable statutory and Constitutional limitations
generally imposed on bonds. The term of such borrowings may not exceed three
years.
STATE-RELATED OBLIGATIONS. Certain state-created agencies have statutory
authorization to incur debt for which no legislation providing for state
appropriations to pay debt service thereon is required. The debt of these
agencies is supported by assets of or revenues derived from the various projects
financed; it is not an obligation of the State. Some of these agencies, however,
are indirectly dependent on State appropriations. State-related agencies and
their outstanding debt as of December 31, 1993 include the Delaware River Joint
Toll Bridge Commission ($57.4 million), the Delaware River Port Authority
($239.4 million), the Pennsylvania Economic Development Financing Authority
($380.8 million), the Pennsylvania Energy Development Authority ($163.7
million), the Pennsylvania Higher Education Assistance Agency ($1.159 billion),
the Pennsylvania Higher Education Facilities Authority ($1.806 billion), the
State Public School Building Authority ($306.4 million), the Pennsylvania
Turnpike Commission ($1.153 billion), the Pennsylvania Industrial Development
Authority ($256.4 million) and the Pennsylvania Infrastructure Investment
Authority ($192.5 million). In addition, the Governor is statutorily required to
place in the budget of the Commonwealth an amount sufficient to make up any
deficiency in the capital reserve fund created for, or to avoid default on,
bonds issued by the Pennsylvania Housing Finance Agency ($2.066 billion of
revenue bonds and notes outstanding as of December 31, 1993), and an amount of
funds sufficient to alleviate any deficiency that may arise in the debt service
reserve fund for bonds issued by The Hospitals and Higher Education Facilities
Authority of Philadelphia. The budget as finally adopted by the legislation may
or may not include the amounts requested by the Governor.
LOCAL GOVERNMENT DEBT. Local government in Pennsylvania consists of
numerous individual units. Each unit is distinct and independent of other local
units, although they may overlap geographically.
There is extensive general legislation applying to local government. For
example, the Local Government Unit Debt Act provides for uniform debt limits for
local government units, including municipalities and school districts, and
prescribes methods of incurring, evidencing, securing and collecting debt. Under
the Local Government Unit Debt Act, the ability of Pennsylvania municipalities
and school districts to engage in general obligation borrowing without electoral
approval is generally limited by their recent revenue collection experience.
Generally, such subdivisions can levy real property taxes unlimited as to the
rate or amount to pay debt service on general obligation borrowings.
Municipalities may also issue revenue obligations without limit and without
affecting their general obligation borrowing capacity if the obligations are
projected to be paid solely from project revenues.
Municipal authorities and industrial development authorities are also
widespread in Pennsylvania. An authority is organized by a municipality acting
singly or jointly with another municipality and is governed by a Board appointed
by the governing unit of the creating municipality or municipalities. Typically,
authorities are established to acquire, own and lease or operate one or more
projects and to borrow money and issue revenue bonds to finance them.
A-24
<PAGE>
- --------------------------------------------------------------------------------
TEXAS SERIES
GENERAL. Beginning in late 1982, the decline of the State's oil and gas
industry, the devaluation of the Mexican peso and the generally soft national
economy combined to cause a significant reduction in the rate of growth of State
revenues. During late 1985 and early 1986, the price of oil fell dramatically
worldwide, which had a ripple effect causing other sectors of the State's
economy, such as real estate, to decline. As a result of an increase in
nonperforming loans in the energy and real estate sectors, major Texas bank
holding companies, individual banks and savings and loans experienced losses or
sharp downturns in profitabilities and several sought Federal assistance from
the FDIC.
As a further result of the drastic drop in the price of oil, the subsequent
loss of jobs and the overbuilding in the real estate markets, the State
experienced deficits for fiscal years ended August 31, 1986 and 1987 of $230
million and $744 million, respectively. The deficits occurred despite actions to
trim the 1987 biennial budget by $582 million and increasing taxes by $761
million. However, as a result of the budget trimming and increasing taxes and
the improving Texas economy, the State finished fiscal years 1988, 1989, 1990,
1991, 1992 and 1993 with surpluses in the General Revenue Fund of $114 million,
$298 million, $768 million, $712.8 million, $609.2 million and $1.624 billion,
respectively.
The Texas economy bottomed out at the end of 1986 and moved into recovery.
Based upon information gathered by the Texas Employment Commission and the
Bureau of Labor Statistics, the State has more than doubled the jobs that it
lost during the 1986-87 recession. In December 1990, the Texas jobless rate was
6.6%. The unemployment rate, however, began to increase in 1991 and by December
1992 was 7.6%. This increase appears to be merely temporary since by August 1993
the unemployment rate had again declined to 6.8%.
Manufacturing employment added about 50,000 jobs in 1987, 1988 and 1989 but
has experienced a contraction of about 21,400 jobs since late 1990. The slowdown
of consumer demand at the national level resulted in the job losses, which were
more pronounced nationwide. Total employment in Texas continued to expand in the
midst of the nation's 1990-91 recession. Over the 12-month period ending in
April 1992 Texas gained 89,300 jobs, an increase of 1.2%. Over the 12-month
period ending in June 1993 Texas gained 151,400 jobs, an increase of 2.1%. Most
of the new jobs have been in services, with health, business and other
miscellaneous sectors adding approximately 142,100 jobs from June 1992 to June
1993. During the 12-month period ended March 1994, the non-farm employment in
Texas increased by 3.4%.
STATE DEBT. Except as specifically authorized, the Texas Constitution
generally prohibits the creation of debt by or on behalf of the State, with two
exceptions: (i) debt created to supply casual deficiencies in revenues which
does not exceed in the aggregate, at any one time, $200,000 and (ii) debt to
repel invasion, suppress insurrection, defend the State in war or pay existing
debt. In addition, the State Constitution prohibits the Legislature from lending
the credit of the State to or in aid of any person, including municipalities, or
pledging the credit of the State in any manner for the payment of the
liabilities of any individual, association of individuals, corporation or
municipality. The limitations of the State Constitution do not prohibit the
issuance of revenue bonds. Furthermore, obligations which are payable from funds
expected to be available during the current budget period, such as tax and
revenue anticipation notes issued by the State Treasurer, do not constitute
'debt' within the meaning of the Texas Constitution. The State may issue tax and
revenue anticipation notes solely to coordinate the State's cash flow
A-25
<PAGE>
- --------------------------------------------------------------------------------
within a fiscal year and must mature and be paid in full during the biennium in
which the notes were issued.
At various times, State voters, by constitutional amendment, have
authorized the issuance of debt by the State, including general obligation
indebtedness for which the full faith and credit and the taxing power of the
State may be pledged. The total amount of general obligation bonds that have
been authorized by the voters is in excess of $8.28 billion. As of November 30,
1992, the general obligation and other constitutionally authorized indebtedness
of the State outstanding totaled $2.8 billion. Much of the outstanding bonded
indebtedness of the State is designed to be eventually self-supporting, even
though the full faith and credit of the State is pledged for its payment.
State of Texas general obligation bonds currently are rated Aa by Moody's
and AA by S&P.
REVENUE SOURCES AND TAX COLLECTION. Historically, the primary sources of
the State's revenues have been sales taxes, mineral severance taxes and Federal
grants. Due to the collapse of oil and gas prices and the resulting enactment by
recent State Legislatures of new tax measures, including those increasing the
rates of existing taxes and expanding the tax base for certain taxes, there has
been a reordering in the relative importance of the State's taxes in terms of
their contribution to the State's revenue in any year. Federal grants are the
State's largest revenue source, accounting for approximately 29.2% of total
revenue during fiscal year 1993. Sales taxes are the State's second largest
source of tax revenue, accounting for approximately 27% of the State's total
revenue during fiscal 1993. Licenses, fees and permits, the State's third
largest revenue source, accounted for 6.0% of the total revenue in fiscal year
1993. Interest and investment income is now the State's fourth largest revenue
source, accounting for approximately 5.9% of total revenue during fiscal year
1993, followed closely by the motor fuels tax with 5.8%. The remainder of the
State's revenues are derived primarily from other excise taxes. The State has no
personal or corporate income tax, although the State does impose a corporate
franchise tax based on the greater of a corporation's capital or net earned
surplus. The franchise tax is based upon net income apportionable to the State,
and thus works very much like a corporate income tax. It is likely to become a
substantially larger source of revenues in future years.
Total net revenues and opening balances for fiscal years 1988, 1989, 1990,
1991, 1992 and 1993 amounted to approximately $20.471 billion, $21.657 billion,
$23.622 billion, $26.190 billion, $29.647 billion and $33.795 billion,
respectively, which tax collections for the same periods amounted to $12.364
billion, $12.905 billion, $14.922 billion, $15.849 billion and $17.011 billion,
respectively.
The 73rd State Legislative Session convened in January 1993 and before
adjourning passed a budget for the 1994-95 biennium. The 1994-95 budget provides
for appropriations totalling $38.8 billion from general revenue related funds
and $70.1 billion from all fund sources. The 1994-95 biennium budget increases
general revenue funding by 10.6%, while funding from all funds increased by
11.4%. Funding for education has been increased to $1.4 billion, or 5.8%, while
health and human services increased $4.3 billion, or 22.5%.
LIMITATIONS ON TAXING POWERS. The State Constitution prohibits the State
from levying ad valorem taxes on property for general revenue purposes.
A-26
<PAGE>
- --------------------------------------------------------------------------------
The State Constitution also limits the rate of growth of appropriations
from tax revenues not dedicated by the Constitution during any biennium to the
estimated rate of growth for the State's economy. The Legislature may avoid the
constitutional limitation if it finds, by a majority vote of both houses, that
an emergency exists. The State Constitution authorizes the Legislature to
provide by law for the implementation of this restriction, and the Legislature,
pursuant to such authorization, has defined the estimated rate of growth in the
State's economy to mean the estimated increase in State personal income.
PETROLEUM PRODUCTION AND MINING. The Texas economy and the oil and gas
industry have been intricately linked since the discovery of the Spindletop
Field in southeast Texas in 1901. Dramatic increases in the price of oil in
1973-74 and 1979-81 propelled Texas into a leadership position in national
economic growth. This situation, however, has changed rapidly for Texas in the
past decade. The Texas economy reeled in 1982-83 and again in 1986 as the price
of West Texas Intermediate declined over 50% from $30 per barrel in November
1985 to under $12 per barrel in July 1986. During the oil-patch recession of
1986-87, Texas lost over 230,000 jobs as the decline in the energy industry
rippled through the rest of the economy. But since 1987, a general economic
rebound led by manufacturing, service and government has resulted in the gain of
over 746,000 jobs by April 1992.
FINANCIAL INSTITUTIONS. The decline in oil prices, particularly since
January 1986, and the recession that followed have had a severe effect on the
banking and savings and loans industries in Texas. In most cases, major Texas
bank holding companies, individual banks and savings and loans have experienced
losses or sharp downturns in profitability due to the increase in non-performing
loans in the energy and real estate sectors. The financial difficulties also
have led to a number of closings among banks and savings and loans. Texas bank
failures peaked in 1989, reaching 133 or two-thirds of all bank closings in the
nation. Texas bank failures declined to 103 in 1990, 31 in 1991 and 29 in 1992,
of which 20 were subsidiaries of a single bank holding company. Only 10 banks
failed in 1993, through the middle of November.
Some signs of recovery are now appearing. Texas bank profits in 1991 and
1992 were $1.1 billion, and $1.9 billion, respectively, substantially more than
the $651 million gain in 1990, which was the first annualized profit since 1985.
Also, total loans grew for the first time since 1985, to a level of $76.3
billion in 1992. Total deposits, total equity capital, and total assets also
rose. Most loan growth was in consumer real estate, as the total for business
lending continued to decline slowly. Mortgage refinancing has contributed to a
9.0% increase in total loans for the first half of 1993. Most of the serious
loan and foreclosed asset problems appear to have been 'written down' or
adequately reserved. Nonperforming loans for Texas banks decreased from $5.2
billion in December 1989 to $2.1 billion in December 1991, and have decreased
further to $130 million in December 1992.
Many Texas banks and banking organizations have consolidated to take
advantage of economies of scale. As of the end of 1991, Texas had 1,133 banks.
Some of the remaining multibank holding companies have yet to consolidate
affiliated banks into a single institution for various strategic reasons and
Texas has not yet seen much consolidation of smaller organizations outside the
major metropolitan areas.
The condition of Texas' thrifts, however, remains a serious problem. No
industry has been more severely affected by the decline in Texas real estate
values than the savings and loan industry. At the end of 1992, assets of private
sector Texas savings associations total $47.6 billion,
A-27
<PAGE>
- --------------------------------------------------------------------------------
down from the industry high in 1988 of $112.4 billion in assets. However, in
terms of profits, after a nearly flat year in 1991, the State's thrifts posted a
record of $705 million profit for 1992, the second highest in the nation.
PROPERTY VALUES AND TAXES. Various State laws place limits upon the amounts
of tax that can be levied upon the property subject to ad valorem taxes within
various taxing units, such as cities, counties and the districts which have ad
valorem taxing powers (including without limitation school and hospital
districts). Similarly, the amounts of sales and use taxes which can be levied
and the types of property and services to which sales and use taxes apply are
subject to legal restrictions.
Given the importance of energy-related industries to the Texas economy, and
over-building in many residential and commercial real estate markets, property
values throughout the State have experienced little, if any, appreciation, since
late 1985. In some areas property values have, in fact, declined. Because ad
valorem taxes are computed upon the appraised property valuations, and property
appraisals are required to be conducted only every four years, it may be several
years before the full impact of such declines in property values will be
reflected in tax collections. Conversely, if the energy industry should
experience an upturn or property values otherwise rebound, there may be a
similar lag-time before such a rise in property values results in increased ad
valorem tax collections. Areas whose tax bases include substantial oil and gas
producing properties are especially adversely affected by this.
The total value of taxable property in the State amounted to approximately
$632 billion in 1990, according to records maintained by the State Property Tax
Board derived from school district data in the State. This total included
approximately $250.6 billion of single-family residences, approximately $26.4
billion of multi-family residences, approximately $225.7 billion of commercial
and industrial property, and $44.0 billion for utilities. Property tax values in
1990 remained virtually unchanged.
In addition to any decline in property values and its anticipated effect on
the amount of taxes levied, the actual collectibility of such taxes may be
expected to decline. The security for any general obligation bond depends in
part on the ability of the taxing authority to collect delinquent taxes on a
timely basis through lawsuits and subsequent foreclosures in an amount
sufficient to service the debt. The taxing authority's right to collect taxes or
enforce the lien through suits and foreclosure are subject to various
bankruptcy, reorganization, and other such proceedings. Such proceedings are
often lengthy and result in the collection of taxes at a significantly later
date.
LITIGATION. In 1986, a group of school districts in the State with
relatively low ad valorem tax bases filed suit challenging the constitutionality
of Texas' system of financing public education. In June 1987, a final judgment
was entered by the District Court in Edgewood v. Kirby, holding that the Texas
School Financing System (implemented in conjunction with local school district
boundaries that contain unequal taxable property wealth for the financing of
public education) is 'unconstitutional and unenforceable' under the Texas
Constitution. On October 2, 1989, the Texas Supreme Court ruled that the State's
school financing system violates the State constitutional requirement that the
State Legislature 'establish and make suitable provision for the support and
maintenance of an efficient system of public free schools.' The Texas Supreme
Court did not instruct the Legislature as to the specifics of the legislation it
should enact or order the Legislature to raise taxes.
A-28
<PAGE>
- --------------------------------------------------------------------------------
After four special sessions, the Legislature passed a comprehensive school
reform bill (Senate Bill 1) in June 1990. In September 1990 a State District
judge ruled that the school finance section of Senate Bill 1 was
unconstitutional because it continued current inequities in the system and
ordered the state to devise a new system by September 1, 1991. The State
appealed the ruling and the Texas Supreme Court ruled in January 1991 to enforce
the injunction against State funding disbursements until April 1, 1991.
On April 15, 1991 a new school finance reform bill (Senate Bill 351) was
enacted. Under Senate Bill 351, local districts are entitled to a minimum local
property tax rate plus a guaranteed basic State allotment per pupil. The funding
mechanism is predicated upon tax base consolidation and created 188 new taxing
units known as County Education Districts (CED's), drawn largely along county
lines. Within each taxing unit, school districts share the revenue raised by the
minimum local property tax. Local school districts can raise additional monies
and enrich programs by levying additional amounts.
Several school districts challenged the constitutionality of Senate Bill
351 in June 1991. In August 1991, the State District Court held that the
creation of the CED's did not violate the Texas Constitution. In November 1991
the case was appealed to the Texas Supreme Court. The appeal was based upon
(among others) the claim that the creation of CED's amounted to a State property
tax in contravention of the State constitution. On January 30, 1992 (the day
before property tax payments for 1991 could be paid without becoming delinquent
and incurring penalties) the Texas Supreme Court reversed the decision of the
State District Court. While the Texas Supreme Court concluded that the CEDs and
the taxes they levy are unconstitutional, the Court allowed the Legislature
until June 1, 1993 to develop a new plan to be put in place by September 1993.
In the interim, the CED's can continue to collect and distribute the school
district property taxes for the 1991 and 1992 years, notwithstanding the fact
that the levy has been declared unconstitutional by the Texas Supreme Court. The
matter is now up to the Legislature to address, either at a special session
called by the Governor in 1992 or in the regularly scheduled 1993 legislative
session.
TEXAS CREDIT-ENHANCED REVENUE BONDS. Due to the overall economic downturn
in the State, a number of financial institutions in the State of Texas have been
weakened over the past several years. A number of revenue bonds, when issued,
had their ratings enhanced by various means, including letters of credit and
other guaranties issued by Texas banks and/or savings institutions. To the
extent that the financial institutions' ability to make such payments is
diminished, the risk of delay or default under such bonds would be
correspondingly increased.
In addition, the downturn in the Texas economy has caused a number of real
estate developers to default on loans from banks and savings and loans. Bond
issues used to fund developer loans could be affected by such defaults.
A-29
<PAGE>
<TABLE>
<S> <C>
- --------------------------------------------------------
Contents
- --------------------------------------------------------
Investment Objective and Policies 2
- --------------------------------------------------------
Management of the Fund 7
- --------------------------------------------------------
Principal Shareholders 12
- --------------------------------------------------------
Portfolio Transactions 13
- --------------------------------------------------------
Shares of the Fund 13
- --------------------------------------------------------
Redemption of Shares 14
- --------------------------------------------------------
Exchange of Shares 15
- --------------------------------------------------------
Determination of Net Asset Value 15
- --------------------------------------------------------
Determination of Current and Effective
Yields 16
- --------------------------------------------------------
Additional Information About the Fund 17
- --------------------------------------------------------
Ratings of Securities 17
- --------------------------------------------------------
Financial Statements 22
- --------------------------------------------------------
Appendix A-1
- --------------------------------------------------------
</TABLE>
PaineWebber/
Kidder,
Peabody
Municipal
Money
Market
Series
Statement of
Additional
Information
February 28, 1995
STATEMENT OF DIFFERENCES
<TABLE>
<S> <C>
The dagger footnote symbol shall be expressed as.......... 'D'
The double dagger footnote symbol shall be expressed as... 'D''D'
The service mark symbol shall be expressed as............. 'sm'
</TABLE>
<PAGE>
Statement of Additional Information February 28, 1995
- --------------------------------------------------------------------------------
PaineWebber/Kidder, Peabody Municipal Money Market Series
1285 Avenue of the Americas New York, New York 10019 1-800-762-1000
PaineWebber/Kidder, Peabody Municipal Money Market Series (the 'Fund') is an
open-end, management investment company. Its investment objective is
maximization of current income exempt from Federal and, where applicable, State
income taxes consistent with the preservation of capital and the maintenance of
liquidity. The Fund permits investors to invest in any of six separate
portfolios (each, a 'Series'): the Connecticut Series, New Jersey Series, New
York Series, Ohio Series, Pennsylvania Series and Texas Series, although shares
of the Ohio Series, Pennsylvania Series and Texas Series are not currently being
offered. Moreover, shares of the New York Series are offered only to existing
shareholders of the New York Series. Each Series seeks to achieve the Fund's
investment objective by investing primarily in short-term Municipal Obligations
issued by issuers in the State after which it is named ('State Municipal
Obligations') and believed to be exempt from Federal and, where applicable, that
State's income taxes. Each of the Connecticut Series, New Jersey Series, New
York Series, Ohio Series, Pennsylvania Series and Texas Series is
non-diversified for purposes of the Investment Company Act of 1940, as amended
(the 'Act').
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 February 28, 1995.
- --------------------------------------------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Mitchell Hutchins Asset Management Inc.
DISTRIBUTOR
PaineWebber 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 at any time, or at specified intervals not
exceeding 397 days, in each case upon not more than 30 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 holders
thereof. 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 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.
Municipal lease obligations or installment purchase contract obligations
(collectively, 'lease obligations') have special risks not ordinarily associated
with Municipal Obligations. Although
2
<PAGE>
- --------------------------------------------------------------------------------
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' lease obligations are secured by the leased property, disposition
of the property in the event of foreclosure might prove difficult. Each Series
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 ('NRSRO') (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 Mitchell
Hutchins Asset Management Inc. ('Mitchell Hutchins'), the Fund's investment
adviser and administrator, in determining the liquidity of municipal lease
obligations. In addition, no Series will invest 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.
The Fund will not purchase tender option bonds unless (a) the demand
feature applicable thereto is exercisable by the Fund within 397 days of the
date of such purchase upon no more than 30 days' notice and thereafter is
exercisable by the Fund no less frequently than annually upon no more than 30
days' notice and (b) at the time of such purchase, Mitchell Hutchins reasonably
expects, (i) based upon its assessment of current and historical interest rate
trends, that prevailing short-term tax exempt rates will not exceed the stated
interest rate on the underlying Municipal Obligations at the time of the next
tender fee adjustment, and (ii) that the circumstances which might entitle the
grantor of a tender option to terminate the tender option would not occur prior
to the time of the next tender opportunity. At the time of each tender
opportunity, the Fund will exercise the tender option with respect to any tender
option bonds unless Mitchell Hutchins reasonably expects, (x) based on its
assessment of current and historical interest rate trends, that short-term tax
exempt rates will not exceed the stated interest rate on the underlying
Municipal Obligations at the time of the next tender fee adjustment, and (y)
that the circumstances which might entitle the grantor of a tender option to
terminate the tender option would not occur prior to the time of the next tender
opportunity. The Fund will exercise the tender feature with respect to tender
option bonds, or otherwise dispose of its tender option bonds, prior to the time
the tender option is scheduled to expire pursuant to the terms of the agreement
under which the tender option is granted. The Fund otherwise will comply with
the provisions of Rule 2a-7 under the Act in connection with the purchase of
tender option bonds, including, without limitation, the requisite determination
by the Trustees that the tender option bonds in question meet the quality
standards described in Rule 2a-7, which, in the case of a tender option bond
subject to a conditional demand feature, would include a determination that the
security has received both the required short-term and long-term high quality
rating or is
3
<PAGE>
- --------------------------------------------------------------------------------
determined to be of comparable quality. In the event of a default of the
Municipal Obligation underlying a tender option bond, or the termination of the
tender option agreement, the Fund would look to the maturity date of the
underlying security for purposes of compliance with Rule 2a-7 and, if its
remaining maturity was greater than 397 days, the Fund would sell the security
as soon as would be practicable. The Fund will purchase tender option bonds only
when it is satisfied that the custodial and tender option arrangements,
including the fee payment arrangements, will not adversely affect the tax exempt
status of the underlying Municipal Obligations and that payment of any tender
fees will not have the effect of creating taxable income for the Fund. Based on
the tender option bond arrangement, the Fund expects to be able to value the
tender option bond at par; however, the value of the instrument will be
monitored to assure that it is valued at fair value.
RATINGS OF MUNICIPAL OBLIGATIONS
If, subsequent to its purchase by a Series, (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) Mitchell Hutchins 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 Series 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 Mitchell Hutchins becoming aware of the new rating and the
Fund's Trustees are subsequently notified of Mitchell Hutchins' actions.
To the extent that the ratings given by Moody's Investors Service, Inc.
('Moody's'), Standard & Poor's Ratings Group ('S&P') or Fitch Investors Service,
Inc. ('Fitch') 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, S&P and Fitch 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 may be an
initial criterion for selection of portfolio securities, Mitchell Hutchins also
will evaluate these securities.
TAXABLE INVESTMENTS
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities include 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,
4
<PAGE>
- --------------------------------------------------------------------------------
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 interest
rates.
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 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 or other
recognized financial institutions, and requires that additional securities be
deposited with it if the value of the securities purchased should decrease below
resale price. Mitchell Hutchins considers 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. Mitchell Hutchins considers on an ongoing basis the
creditworthiness of the institutions with which the Fund enters into repurchase
agreements.
5
<PAGE>
- --------------------------------------------------------------------------------
RISK FACTORS -- INVESTING IN STATE MUNICIPAL OBLIGATIONS
Investors should review the information in the Appendix hereto, which provides a
brief summary of special investment considerations relating to investing in
State Municipal Obligations.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies which
apply to each Series. These restrictions cannot be changed, as to a Series,
without approval by the holders of a majority of the outstanding voting shares
of such Series. For purposes of the Act, 'majority' means the lesser of (i) 67%
of such Series' outstanding voting shares present at a meeting if the holders of
more than 50% of the outstanding voting shares of such Series are present in
person or by proxy, or (ii) more than 50% of such Series' outstanding voting
shares. No Series may:
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 15% of the Series' 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 Series'
total assets, the Series will not make any additional investments.
3. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except 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 Series from investing in Municipal Obligations
secured by real estate or interests therein.
6. Sell securities short or purchase securities on margin.
7. Enter into repurchase agreements providing for settlement in more
than seven days after notice or purchase securities which are illiquid
(which securities could include municipal lease/purchase agreements,
participation interests that are not subject to the demand feature
described in the Fund's Prospectus and floating and variable rate demand
obligations as to which the Series cannot exercise the demand feature
described in the Fund's Prospectus on less than seven days' notice and as
to which there is no secondary market), if, in the aggregate, more than 10%
of the Series' net assets would be so invested.
8. Underwrite securities of other issuers, except that the Series 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.
6
<PAGE>
- --------------------------------------------------------------------------------
11. Invest more than 25% of such Series' 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,
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
For purposes of Investment Restriction No. 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.
The Fund may make commitments more restrictive than the restrictions listed
above so as to permit the sale of Series shares in certain states. Should the
Fund determine that a commitment is no longer in the best interests of a Series
and its shareholders, the Fund reserves the right to revoke the commitment by
terminating the sale of such Series' shares in the state involved.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
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.
David J. Beaubien, 60, 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. Mr. Beaubien is a director or trustee of 12
other investment companies for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
William W. Hewitt, Jr., 66, 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 Investment Quality Bond Fund, The Guardian Park Ave. Fund,
The Guardian Stock Fund, Inc., The Guardian Tax-Exempt Fund and Guardian U.S.
Government Trust. Mr. Hewitt is a director or trustee of 12 other investment
companies for which Mitchell Hutchins or PaineWebber serves as investment
adviser.
Thomas R. Jordan, 66, 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. Mr. Jordan is a director or trustee
of 12 other investment companies for which Mitchell Hutchins or PaineWebber
serves as investment adviser.
7
<PAGE>
- --------------------------------------------------------------------------------
Carl W. Schafer, 59, Trustee. President of the Atlantic Foundation, a
charitable foundation supporting mainly oceanographic exploration and research.
Director of International Agritech Resources, Inc., an agribusiness investment
and consulting firm, Ardic Exploration and Development Ltd. and Hidden Lake Gold
Mines Ltd., gold mining companies, Electronic Clearing House, Inc., a financial
transactions processing company, Wainoco Oil Corporation and BioTechniques
Laboratories Inc., an agricultural biotechnology company. Prior to January 1993,
chairman of the Investment Advisory Committee of Howard Hughes Medical Institute
and director of Ecova Corporation, a toxic waste treatment firm. Prior to April
1990, principal of Rockefeller and Company, manager of investments. Mr. Schafer
is a director or trustee of 12 other investment companies for which Mitchell
Hutchins or PaineWebber serves as investment adviser.
Frank P.L. Minard, 49, President. Mr. Minard is chairman of Mitchell
Hutchins, chairman of the board of Mitchell Hutchins Institutional Investors
Inc. and a director of PaineWebber Incorporated ('PaineWebber'). Prior to 1993,
Mr. Minard was managing director of Oppenheimer Capital in New York and Director
of Oppenheimer Capital Ltd. in London. Mr. Minard is an officer of 12 other
investment companies for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
Ann E. Moran, 37, Vice President and Assistant Treasurer. Ms. Moran is a
vice president of Mitchell Hutchins. Ms. Moran is also a vice president and
assistant treasurer of 39 other investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.
Dianne E. O'Donnell, 42, Vice President and Secretary. Ms. O'Donnell is a
senior vice president and senior associate general counsel of Mitchell Hutchins.
Ms. O'Donnell is also a vice president and secretary of 39 other investment
companies for which Mitchelll Hutchins or PaineWebber serves as investment
advisers.
Victoria E. Schonfeld, 44, Vice President. Ms. Schonfeld is a managing
director and general counsel of Mitchell Hutchins. From April 1990 to May 1994
she was a partner in the law firm of Arnold & Porter. Prior to April 1990, she
was a partner in the law firm of Shereff, Friedman, Hoffman & Goodman. Ms.
Schonfeld is also a vice president and assistant secretary of 39 other
investment companies for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
Paul H. Schubert, 32, Vice President and Assistant Treasurer. Mr. Schubert
is a vice president of Mitchell Hutchins. From August 1992 to August 1994, he
was a vice president at BlackRock Financial Management L.P. Prior to August
1992, he was an audit manager with Ernst & Young LLP. Mr. Schubert is also a
vice president and assistant treasurer of 39 other investment companies for
which Mitchell Hutchins or PaineWebber serves as investment adviser.
Gregory W. Serbe, 49, Vice President. Mr. Serbe is a managing director of
Mitchell Hutchins. Mr. Serbe is also a vice president of 8 other investment
companies for which Mitchell Hutchins or PaineWebber serves as investment
adviser.
Martha J. Slezak, 32, Vice President and Assistant Treasurer. Ms. Slezak is
a vice president of Mitchell Hutchins. From September 1991 to April 1992, she
was a fundraising director for a U.S. Senate campaign. Prior to September 1991,
she was a tax manager with Arthur Andersen & Co. Ms. Slezak is also a vice
president and assistant treasurer of 39 other investment companies for which
Mitchell Hutchins or PaineWebber serves as investment adviser.
8
<PAGE>
- --------------------------------------------------------------------------------
Julian F. Sluyters, 34, Vice President and Treasurer. Mr. Sluyters is a
senior vice president and the director of the mutual fund finance division of
Mitchell Hutchins. Prior to 1991, he was an audit senior manager with Ernst &
Young LLP. Mr. Sluyters is also a vice president and treasurer of 39 other
investment companies for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
Gregory K. Todd, 38, Vice President and Assistant Secretary. Mr. Todd is a
first vice president and associate general counsel of Mitchell Hutchins. Prior
to 1993, he was a partner with the law firm of Shereff, Friedman, Hoffman &
Goodman. Mr. Todd is also a vice president and assistant secretary of 39 other
investment companies for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
Certain of the officers of the Fund are directors and/or trustees and
officers of other mutual funds managed by Mitchell Hutchins. The address of each
of the non-interested Trustees is: Mr. Beaubien, Montague Industrial Park, 101
Industrial Road, Box 746, 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 each of the officers is 1285 Avenue of the Americas, New
York, New York 10019.
By virtue of the responsibilities assumed by Mitchell Hutchins under the
Investment Advisory and Administration Agreement, the Fund requires no executive
employees other than its officers, each of whom is employed by either
PaineWebber or Mitchell Hutchins and none of whom devotes full time to the
affairs of the Fund. Trustees and officers, as a group, owned less than 1% of
each Series' outstanding shares as of February 1, 1995. No officer, director or
employee of Mitchell Hutchins 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 Mitchell Hutchins 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. The amount of compensation paid
by the Fund to each Trustee for the fiscal year ended October 31, 1994, and the
aggregate amount of compensation paid to each such Trustee for the year ended
December 31, 1994 by all other funds in the complex for which such person is a
Board member were as follows:
<TABLE>
<CAPTION>
(3) (5)
(2) PENSION OR (4) TOTAL COMPENSATION
(1) AGGREGATE RETIREMENT BENEFITS ESTIMATED ANNUAL FROM FUND AND
NAME OF BOARD COMPENSATION FROM ACCRUED AS PART OF BENEFITS UPON FUND COMPLEX PAID
MEMBER FUND* FUND'S EXPENSES RETIREMENT TO BOARD MEMBER
- ----------------------------- ----------------- ------------------- ---------------- -----------------
<S> <C> <C> <C> <C>
David J. Beaubien $ 3,250 None None $80,700
William W. Hewitt, Jr. $ 2,875 None None $74,425
Thomas R. Jordan $ 3,250 None None $83,125
Carl W. Schafer $ 3,499 None None $84,575
</TABLE>
- ------------
* Amount does not include reimbursed expenses for attending Board meetings,
which amounted to approximately $2,408 for all Trustees as a group.
9
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Mitchell Hutchins, 1285 Avenue of the Americas, New York, New York 10019, the
Fund's investment adviser and administrator, is a wholly owned subsidiary of
PaineWebber. PaineWebber, the Fund's distributor, is wholly owned by Paine
Webber Group Inc. ('PW Group'), a publicly-owned financial services holding
company.
As a result of an asset purchase transaction by and among Kidder, Peabody
Group Inc. ('Kidder, Peabody'), its parent, General Electric Company, and PW
Group, the investment advisory services provided to the Fund by Kidder Peabody
Asset Management, Inc. ('KPAM'), the Fund's predecessor manager and investment
adviser, were assumed, on an interim basis, by Mitchell Hutchins as of January
30, 1995. After the interim period and subject to shareholder approval, which is
expected to occur on or about March 31, 1995, PaineWebber will serve as the
Fund's investment adviser and administrator and will engage Mitchell Hutchins as
the Fund's sub-adviser and sub-administrator. During the interim period and
thereafter, the Fund has agreed to pay the same fee for investment advisory and
administrative services that the Fund agreed to pay KPAM for such services.
After the interim period and subject to shareholder approval, PaineWebber (not
the Fund) will pay Mitchell Hutchins a fee for its sub-advisory and
sub-administration services at an annual rate of 20% of the fee received by
PaineWebber from the Fund for advisory and administration services.
Mitchell Hutchins has agreed that if, in any fiscal year, the aggregate
expenses of a Series (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 such Series, Mitchell Hutchins will reimburse
the Series for such excess expense. This expense reimbursement obligation is not
limited to the amount of Mitchell Hutchins' fee. Such expense reimbursement, if
any, will be estimated, reconciled and paid on a monthly basis. The most
stringent state expense limitations applicable to the Fund presently requires
reimbursement of expenses in any year that such expenses exceed 2 1/2% of the
first $30 million of the average value of a Series' net assets, 2% of the next
$70 million and 1 1/2% of the remaining net assets of the Series. During the
fiscal year ended October 31, 1994, the Series' expenses did not exceed such
limitations.
Subject to the supervision and direction of the Fund's Trustees, Mitchell
Hutchins manages each Series' portfolio in accordance with the stated policies
of the Fund. Mitchell Hutchins 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 PaineWebber, for research information for the Fund. Mitchell
Hutchins makes investment decisions for the Fund and places the purchase and
sale orders for portfolio transactions. In addition, Mitchell Hutchins 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, and filings with the SEC and state Blue Sky
authorities, is responsible for the calculation of the net asset value of shares
and generally assists in all aspects of the Fund's operations. Mitchell Hutchins
bears all expenses in connection with the performance of its services.
10
<PAGE>
- --------------------------------------------------------------------------------
Expenses incurred in the operation of the Fund, including, but not limited
to, organizational costs, taxes, interest, brokerage fees and commissions,
compensation paid to PaineWebber under the Fund's Plan of Distribution pursuant
to Rule 12b-1 (the 'Plan of Distribution'), fees of Trustees who are not
officers, directors, stockholders or employees of Mitchell Hutchins or
PaineWebber, SEC fees and related expenses, state Blue Sky qualification fees,
charges of the custodian and transfer, dividend disbursing and recordkeeping
agents, charges and expenses of any outside service used for pricing each
Series' 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. Expenses attributable to a particular
Series are charged against the assets of that Series; other expenses of the Fund
are allocated among the Series on the basis determined by the Board of Trustees,
including, but not limited to, proportionately in relation to the net assets of
each Series.
As to each Series, the Investment Advisory and Administration Agreement
continues automatically for successive annual periods provided continuance is
approved at least annually by (i) the Fund's Board of Trustees or (ii) vote of
the holders of a majority, as defined in the Act, of such Series' outstanding
voting securities, 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 Mitchell Hutchins, 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
approve the Investment Advisory and Administration Agreement at a meeting held
on December 16, 1994. As to each Series, the Investment Advisory and
Administration Agreement is terminable without penalty, on not more than 60
days' nor less than 30 days' notice, by the Fund's Board of Trustees, by vote of
the holders of a majority of such Series' shares, or by Mitchell Hutchins. The
Investment Advisory and Administration Agreement will terminate automatically,
as to the relevant Series, in the event of its assignment (as defined in the
Act).
As compensation for Mitchell Hutchins' services rendered to the Fund, each
Series pays a fee, computed daily and paid monthly, at an annual rate of .50% of
such Series' average daily net assets. For the fiscal year ended October 31,
1992, the Connecticut Series, New Jersey Series and New York Series paid fees of
$322,541, $292,381 and $340,925, respectively, to KPAM, the Fund's predecessor
manager and investment adviser. For the fiscal year ended October 31, 1993, the
Connecticut Series, New Jersey Series and New York Series paid fees of $312,881,
$349,798 and $454,180, respectively, to KPAM. For the fiscal year ended October
31, 1994, the Connecticut Series, New Jersey Series and New York Series paid
fees of $151,858, $207,338 and $358,032, respectively, to KPAM.
Mitchell Hutchins 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 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.
11
<PAGE>
- --------------------------------------------------------------------------------
CUSTODIAN, AND TRANSFER, DIVIDEND DISBURSING AND RECORDKEEPING AGENT
Investors Fiduciary Trust Company ('IFTC'), 127 West 10th Street, Kansas City,
Missouri 64105, serves as the Fund's custodian. As custodian, IFTC maintains
custody of the Fund's portfolio securities. PFPC, Inc., a subsidiary of PNC
Bank, National Association, whose principal address is 400 Bellevue Parkway,
Wilmington, Delaware 19809, is the Fund's transfer, dividend disbursing and
recordkeeping agent. As transfer agent, PFPC, Inc. 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.
DISTRIBUTOR
PaineWebber, 1285 Avenue of the Americas, New York, New York 10019, is the
distributor of the Fund's shares and is acting on a best efforts basis.
The Trustees believe that the Series' expenditures under the Fund's Plan of
Distribution benefit the Series and their shareholders by providing better
shareholder services. For the fiscal year ended October 31, 1994, Kidder,
Peabody, the Fund's predecessor distributor, received $36,446, $49,761 and
$85,928 from the Connecticut Series, New Jersey Series and New York Series,
respectively, of which $17,040, $23,155 and $38,716, respectively, was spent on
payments to Investment Executives and $19,406, $26,606 and $47,212,
respectively, was spent on overhead-related expenses.
INDEPENDENT AUDITORS
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.
LEGAL COUNSEL
Stroock & Stroock & Lavan, 7 Hanover Square, New York, New York 10004-2696, is
counsel for the Fund.
PRINCIPAL SHAREHOLDERS
With respect to the Connecticut Series, to the knowledge of the Fund, Daniel J.
Brickman, c/o Mitchell Hutchins Asset Management Inc., New York, New York 10019,
owned 5.3% of the Series' outstanding shares of beneficial interest as of
February 3, 1995.
With respect to the New Jersey Series, to the knowledge of the Fund, Gina
Ricciardi c/o Mitchell Hutchins Asset Management, Inc., New York, New York
10019, and Andrew Okun, c/o Mitchell Hutchins Asset Management Inc., New York,
New York 10019, owned 5.6% and 6.5%, respectively, of the Series' outstanding
shares of beneficial interest as of February 3, 1995.
With respect to the New York Series, to the knowledge of the Fund, Ralph
Saltzman, Design Tex Fabrics Inc., c/o Mitchell Hutchins Asset Management Inc.,
New York, New York 10019, owned 6.8% of the Series' outstanding shares of
beneficial interest as of February 3, 1995.
12
<PAGE>
- --------------------------------------------------------------------------------
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
ordinarily are executed at a price between the bid and asked price. No brokerage
commissions have been paid by any Series to date.
Transactions are allocated to various dealers by Mitchell Hutchins 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
Mitchell Hutchins 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 Mitchell Hutchins, and Mitchell Hutchins' fee is not reduced as a
consequence of the receipt of any such supplemental information. Such
information may be useful to Mitchell Hutchins in serving both the Fund and
other clients and, conversely, supplemental information obtained by the
placement of business of its other clients may be useful to Mitchell Hutchins in
carrying out its obligations to the Fund.
Investment decisions for a Series are made independently from those of any
other investment companies or accounts that are managed by Mitchell Hutchins.
If, however, other investment companies or accounts managed by Mitchell Hutchins
are simultaneously engaged in the purchase or sale of the same security, the
transactions are averaged as to price and allocated equitably to each. In some
cases, this system might adversely affect the price paid or received by the
Series or the size of the position obtainable for, or disposable by, the Series.
No portfolio transactions are executed through PaineWebber. PaineWebber
engages in and acts as a dealer in or an underwriter of Municipal Obligations
and Taxable Investments. PaineWebber's activities may have some effect on the
market for such securities, and PaineWebber may be competing in the marketplace
with the Fund in the purchase and sale of such securities.
SHARES OF THE FUND
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of one or more series 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 of a
Series represents an equal proportionate interest in such Series with each other
share of such Series. Upon liquidation of a Series, shareholders are entitled to
share pro rata in
13
<PAGE>
- --------------------------------------------------------------------------------
the net assets of such Series available for distribution to shareholders. Shares
have no preemptive or conversion rights. Shares are fully paid and
non-assessable by the Fund.
A Series' shareholders are entitled to a full vote for each share of a
Series held (and proportionate, fractional votes for fractional shares held).
The Trustees themselves have the power to alter the number of the Trustees, to
fill vacancies in their own number and appoint their own successors, provided
that always at least a majority of the Trustees have been elected by the
shareholders of the Fund. A Trustee may be removed with or without cause by
action of the Trustees or the shareholders. 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 or as the Trustees may consider desirable.
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
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, 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 Series. 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 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 or employee is entitled to be indemnified
against all liability in connection with the affairs of the Fund.
REDEMPTION 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
14
<PAGE>
- --------------------------------------------------------------------------------
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.
EXCHANGE OF SHARES
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 Series' shares because it is unable
to invest amounts effectively in accordance with its investment objective,
policies and restrictions.
Shares of the Fund may be exchanged for shares of the Series currently
offered and the following funds to the extent such shares are offered for sale
in the shareholder's state of residence.
PaineWebber/Kidder, Peabody California Tax Exempt Money Fund
PaineWebber/Kidder, Peabody Cash Reserve Fund, Inc.
PaineWebber/Kidder, Peabody Government Money Fund, Inc.
PaineWebber/Kidder, Peabody Premium Account Fund
PaineWebber/Kidder, Peabody Tax Exempt Money Fund, Inc.
In addition, until March 31, 1995, shares of the Fund may be exchanged for
shares of the following additional funds to the extent such shares are offered
for sale in the shareholder's state of residence.
Mitchell Hutchins/Kidder, Peabody Adjustable Rate Government Fund
Mitchell Hutchins/Kidder, Peabody Asset Allocation Fund
Mitchell Hutchins/Kidder, Peabody Emerging Markets Equity Fund
Mitchell Hutchins/Kidder, Peabody Equity Income Fund, Inc.
Mitchell Hutchins/Kidder, Peabody Global Equity Fund
Mitchell Hutchins/Kidder, Peabody Global Fixed Income Fund
Mitchell Hutchins/Kidder, Peabody Government Income Fund, Inc.
Mitchell Hutchins/Kidder, Peabody Intermediate Fixed Income Fund
Mitchell Hutchins/Kidder, Peabody Municipal Bond Fund
Mitchell Hutchins/Kidder, Peabody Small Cap Growth Fund
DETERMINATION OF NET ASSET VALUE
Net asset value will not be computed on a day in which no orders to purchase,
sell, exchange or redeem Fund shares have been received or on days on which the
NYSE is not open for trading. The NYSE is currently closed on the following
holidays (as observed): New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. 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. A Series' net asset
value is computed by dividing the value of such Series' total assets less
liabilities by the total number of shares outstanding. Each Series' expenses and
fees, including Mitchell Hutchins' fee and fees pursuant
15
<PAGE>
- --------------------------------------------------------------------------------
to the Plan of Distribution, are accrued daily and taken into account for the
purpose of determining the net asset value of each Series' shares. 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 valuation of each Series' portfolio securities is based upon 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 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 upon available indications of
value. In such review, market quotations and market equivalents are obtained
from an independent pricing service (the 'Service') approved by the Board of
Trustees. The Service values the Series' 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 a Series' net asset
value based upon 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 will also 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 market equivalents,
or reducing the number of the Series' outstanding shares. Any reduction of
outstanding shares will be effected by having each shareholder proportionately
contribute to the relevant Series' 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.
DETERMINATION OF CURRENT AND EFFECTIVE YIELDS
The Fund provides current and effective yield quotations on each Series' 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.
16
<PAGE>
- --------------------------------------------------------------------------------
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 calendar day 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 seven-day return with all dividends reinvested in additional
shares of the Fund.
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 'Management of the Fund' above. Current
and effective yield information is useful in reviewing the Fund's performance,
but because current and effective yields fluctuate such information under
certain conditions 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 each Series' price per
share is determined.
Historical and comparative yield information may be presented by the Fund.
ADDITIONAL INFORMATION ABOUT THE FUND
The Prospectus and this Statement of Additional Information do not contain all
the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the SEC under the Securities Act
of 1933 and the Act, to which reference is hereby made.
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, Mitchell Hutchins 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. Mitchell Hutchins, 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, S&P and Fitch.
17
<PAGE>
- --------------------------------------------------------------------------------
RATINGS 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.
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.
18
<PAGE>
- --------------------------------------------------------------------------------
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 and 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.
-- 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,
19
<PAGE>
- --------------------------------------------------------------------------------
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).
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+.
A-2. Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
RATINGS BY FITCH
MUNICIPAL BONDS
The ratings represent Fitch's assessment of the issuer's ability to meet the
obligations of a specific debt issue or class of debt. The ratings take into
consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
20
<PAGE>
- --------------------------------------------------------------------------------
AAA. Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA. Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
Plus (+) and minus ( - ) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the AAA category covering 13-36 months.
SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of up to three years, including commercial paper,
certificates of deposit, medium-term notes, and municipal and investment notes.
Although the credit analysis is similar to Fitch's bond rating analysis,
the short-term rating places greater emphasis than bond ratings on the existence
of liquidity necessary to meet the issuer's obligations in a timely manner.
F-1+. Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely payment.
F-1. Very Strong Credit Qualify. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2. Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.
21
<PAGE>
Kidder, Peabody Municipal Money Market Series -- Connecticut Series
- --------------------------------------------------------------------------------
Schedule of Investments as of October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE % OF NET
AMOUNT (NOTE 2a) ASSETS
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
TAX EXEMPT INVESTMENTS -- 101.1%
Branford Connecticut General Obligation Bds 3.17%, 4/13/95................ $ 1,100,000 $ 1,098,790 4.3%
Bristol Connecticut, Bond Anticipation Note, 3.69%, 5/18/95............... 850,000 850,844 3.3
Connecticut Dev. Auth. Series 85 (Conn Light & Power) Variable Rate Demand
Note, 3.40%(a).......................................................... 2,000,000 2,000,000 7.8
Connecticut State General Obligation Economic Recovery Notes Series B,
Variable Rate Demand Note, 3.35%, (LOC Industrial Bank of Japan)(a)..... 2,800,000 2,800,000 10.8
Connecticut Dev. Auth., (Shelton Inn), Variable Rate Demand Note
3.60%(a)................................................................ 300,000 300,000 1.1
Connecticut State General Obligation Note Series A, 5.25% 12/15/94........ 505,000 506,203 2.0
Connecticut Health Education Facility (Windham Hosp., Series B), General
Obligation Note, 3.00%, 11/10/94 (LOC Banque Paribas)................... 550,000 550,000 2.1
Connecticut Health Education Facility (Yale Univ. Series M), General
Obligation Note, 3.05%, 12/6/94......................................... 1,300,000 1,300,000 5.0
Connecticut Health Education Facility (Yale Univ. Series O), General
Obligation Note, 3.05%, 12/6/94......................................... 1,100,000 1,100,000 4.3
Connecticut Health Education Facility (Charlotte Hosp. Series B), Variable
Rate Demand Note, 3.40%, (LOC Mitsubishi Bank)(a)....................... 1,500,000 1,500,000 5.8
Connecticut Housing Authority, Morg. Fin. Prog. Series 1990C, General
Obligation Bond, 3.00%, 11/3/94......................................... 1,000,000 1,000,000 3.9
Connecticut Special Obligation Series 1 Loc IBJ, Variable Rate Demand
Note, 3.45%, (LOC Industrial Bank of Japan)(a).......................... 1,940,000 1,940,000 7.5
Connecticut State Development Authority, Exeter Energy, Variable Rate
Demand Note, 3.45%, (LOC Sanwa Bank)(a)................................. 300,000 300,000 1.1
Connecticut Development Authority Health Care Corp for Independent Living
(Series 1990) Variable Rate Demand Note, 3.35%, (LOC Credit Commercial
of France)(a)........................................................... 1,500,000 1,500,000 5.8
Connecticut Development Authority, Shw Inc., Variable Rate Demand Note,
3.40%, (LOC Bayerishce Vereinsbank)(a).................................. 2,300,000 2,300,000 8.9
Connecticut Clean Water Fund Bonds, General Obligation, 10.00%, 1/1/95.... 400,000 404,564 1.6
Darien, Connecticut Bond Anticipation Note, 3.75%, 6/20/95................ 1,100,000 1,100,298 4.3
Easton, Connecticut Bond Anticipation Note, 3.57%, 6/14/95................ 700,000 700,285 2.7
Enfield, Connecticut General Obligation Note, 6.70%, 6/15/95.............. 150,000 152,894 0.6
New Britain, Connecticut Bond Anticipation Note, 2.42%, 2/8/95............ 1,100,000 1,100,057 4.3
Puerto Rico, Commonwealth Variable Rate Demand Note, 2.85%, (LOC Union
Bank of Switzerland)(a)................................................. 1,300,000 1,300,000 5.0
Stamford, Connecticut General Obligation Note, 3.07%, 3/22/95............. 1,000,000 1,000,186 3.9
Westport, Connecticut Bond Anticipation Note, 3.52%, 6/14/95.............. 1,255,000 1,255,138 4.9
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $26,058,005)...................................... 26,059,259 101.1
OTHER ASSETS LESS LIABILITIES............................................. (295,987) (1.1)
----------- -------------
NET ASSETS................................................................ $25,763,272 100.0%
----------- -------------
----------- -------------
</TABLE>
See Notes to Financial Statements.
22
<PAGE>
Kidder, Peabody Municipal Money Market Series -- Connecticut Series
- --------------------------------------------------------------------------------
Schedule of Investments as of October 31, 1994
- --------------------------------------------------------------------------------
Summary of Combined Ratings (Unaudited)
<TABLE>
<CAPTION>
MOODY'S or STANDARD & POOR'S % OF VALUE
- --------------- ----------------- -----------------
<S> <C> <C> <C>
M1G-1(b) SP1(b) 47.8%
P1(c) A1+ & A1(c) 12.1
Not Rated(d) Not Rated(d) 40.1
------
100.0%
------
------
</TABLE>
Notes to Schedule of Investments:
(a) Securities payable on demand. The interest rate, which will change
periodically, is based upon bank prime rates or an index of market
interest rates.
(b) M1G-1 and SP1 are the highest ratings assigned to variable notes and
municipal notes by Moody's and Standard & Poor's, respectively.
(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 Trustees to
be of comparable quality to those rated securities in which
the Fund may invest.
See Notes to Financial Statements.
23
<PAGE>
Kidder, Peabody Municipal Money Market Series -- New Jersey Series
- --------------------------------------------------------------------------------
Schedule of Investments as of October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE % OF NET
AMOUNT (NOTE 2a) ASSETS
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
TAX EXEMPT INVESTMENTS -- 100.4%
Burlington Cty. Bond Anticipation Notes, 3.00%, 11/04/94......................... $1,000,000 $ 1,000,020 3.1%
Camden Cty. Bond Anticipation Notes, 3.25%, 2/16/95.............................. 700,000 699,840 2.2
Cape May Cty. Mun. Util. Dist., Mandatory Tender Bonds, 2.80%, 11/30/94.......... 1,000,000 1,000,000 3.1
Edison General Obligation Bonds, 7.10%, 1/01/95, (AMBAC Insured)(b).............. 800,000 805,342 2.5
Essex Cnty., Imp. Auth., Variable Rate Demand Notes, Pooled Gov't Loan Proj.,
Ser. 85, 3.25%, (LOC Banco Santander)(a)....................................... 600,000 600,000 1.9
Essex Cnty., Imp. Auth., Variable Rate Demand Notes, Pooled Gov't Loan Proj.,
Ser. 86, 3.25%, (LOC Banco Santander)(a)....................................... 500,000 500,000 1.6
Milburn Bond Anticipation Notes, 3.02%, 11/15/94................................. 1,000,000 1,000,045 3.1
Monmouth Cnty., Imp. Auth. Rev., Variable Rate Demand Notes, 3.25%, (LOC Union
Bank of Switzerland)(a)........................................................ 1,600,000 1,600,000 5.0
New Jersey Econ. Dev. Auth., (Chambers Cogeneration Proj.), 2.75%, 11/03/94, (LOC
Swiss Bank).................................................................... 1,000,000 1,000,000 3.1
New Jersey Econ. Dev. Auth., (Chambers Cogeneration Proj.), 3.35%, 8/01/94, (LOC
Swiss Bank).................................................................... 1,000,000 1,000,000 3.1
New Jersey Econ. Dev. Auth., (Church & Dwight Co. Proj.), Variable Rate Demand
Notes, Ser. 1991, 3.20%, (LOC Bank of Nova Scotia)(a).......................... 300,000 300,000 0.9
New Jersey Econ. Dev. Auth., (Composite Issue), Variable Rate Demand Notes, Ser.
87D, 3.50%, (LOC National Westminster Bank)(a)................................. 500,000 500,000 1.6
New Jersey Econ. Dev. Auth., (Composite Issue), Variable Rate Demand Notes, Ser.
87G, 3.50%, (LOC National Westminster Bank)(a)................................. 700,000 700,000 2.2
New Jersey Econ. Dev. Auth., (Curtis Wright Flight Systems), Variable Rate Demand
Notes, 3.25%, (LOC Bank of Nova Scotia)(a)..................................... 1,500,000 1,500,000 4.7
New Jersey Econ. Dev. Auth., 400 International Drive Partners, Variable Rate
Demand Notes, 3.20%, (LOC Morgan Guaranty)(a).................................. 1,900,000 1,900,000 5.9
New Jersey Econ. Dev. Auth., 400 International Drive Partners, Variable Rate
Demand Notes, 3.35%, (LOC Morgan Guaranty)(a).................................. 1,000,000 1,000,000 3.1
New Jersey Econ. Dev. Auth., Keystone 1992 Proj., 2.75%, 11/03/94, (LOC Union
Bank of Switzerland)........................................................... 1,500,000 1,500,000 4.7
New Jersey Econ. Dev. Auth., Keystone 1992 Proj., 3.25%, 11/10/94, (LOC Union
Bank of Switzerland)........................................................... 1,700,000 1,700,000 5.3
New Jersey Econ. Dev. Auth., (W.Y. Plastic Product Corp.), Variable Rate Demand
Notes, 3.50%, (LOC National Westminster Bank)(a)............................... 600,000 600,000 1.9
New Jersey Econ. Dev. Auth., Variable Rate Demand Notes, Series 88A, 3.50% (LOC
National Westminster Bank)(a).................................................. 550,000 550,000 1.7
New Jersey Econ. Dev. Auth., Variable Rate Demand Notes, 3.30% (LOC Banque
Paribas)(a).................................................................... 1,000,000 1,000,000 3.1
New Jersey Sport & Expo. Auth., State Contract Bds., Variable Rate Demand Notes,
Ser. 1992C, 3.25%, (MBIA Insured)(a)(b)........................................ 1,000,000 1,000,000 3.1
Port Auth. of New York/New Jersey, Tax Exempt Commercial Paper, 2.75%,
11/03/94....................................................................... 1,000,000 1,000,000 3.1
Port Auth. of New York/New Jersey, Tax Exempt Commercial Paper, 3.20%,
11/08/94....................................................................... 450,000 450,000 1.4
</TABLE>
See Notes to Financial Statements.
24
<PAGE>
Kidder, Peabody Municipal Money Market Series -- New Jersey Series
- --------------------------------------------------------------------------------
Schedule of Investments as of October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE % OF NET
AMOUNT (NOTE 2a) ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Port Auth. of New York/New Jersey, Tax Exempt Commercial Paper, 3.10%,
11/08/94....................................................................... $1,500,000 $ 1,500,000 4.7%
Princeton Borough, General Obligation Bonds, 3.75%, 4/14/95...................... 1,452,000 1,453,579 4.6
Puerto Rico Commonwealth, 9.375%, 7/01/05........................................ 1,100,000 1,183,533 3.7
Puerto Rico Ind. Med Auth., (International American University of Puerto Rico)
2.90%, 12/06/94, (LOC Bank of Tokyo)........................................... 1,500,000 1,500,000 4.7
Puerto Rico Tourist (International American University of Puerto Rico) 2.90%,
12/06/94, (LOC Banque Paribas)................................................. 1,200,000 1,200,000 3.8
Somerset Cty., Bond Anticipation Notes, 6.50%, 11/01/94.......................... 1,050,000 1,050,000 3.3
Sussex Cty., (Utility Auth. Wastewater Nov), General Obligation Bonds, 4/01/95,
(AMBAC Insured)(b)............................................................. 125,000 126,003 0.4
Union Cty. Pollution Control Fin. Auth., Variable Rate Demand Notes, (Exxon),
Ser. 1994, 2.50%(a)............................................................ 1,200,000 1,200,000 3.8
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $32,118,362)............................................. 32,118,362 100.4
LIABILITIES LESS OTHER ASSETS.................................................... (137,356) (0.4)
----------- -----
NET ASSETS....................................................................... $31,981,006 100.0%
----------- -----
----------- -----
</TABLE>
Summary of Combined Ratings (Unaudited)
<TABLE>
<CAPTION>
MOODY'S or STANDARD & POOR'S % OF VALUE
- --------------- ----------------- -----------------
<S> <C> <C> <C>
M1G1-1(c) SP1(c) 59.6%
P1(d) A1+ & A1(d) 17.2
Not Rated(e) Not Rated(e) 20.8
Aaa, Aa AAA, AA 2.4
-----
100.0%
-----
-----
</TABLE>
Notes to Schedule of Investments:
(a) Securities payable on demand. 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) M1G-1 and SP1 are the highest ratings assigned to variable notes and
municipal notes by Moody's and Standard & Poor's, respectively.
(d) P1 and A1 are the highest ratings assigned tax-exempt commercial paper by
Moody's and Standard & Poor's, respectively.
(e) Securities which, while not rated, are determined by the Fund's Trustees to
be of comparable quality to those rated securities in which the
Fund may invest.
See Notes to Financial Statements.
25
<PAGE>
Kidder, Peabody Municipal Money Market Series -- New York Series
- --------------------------------------------------------------------------------
Schedule of Investments as of October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE % OF NET
AMOUNT (NOTE 2a) ASSETS
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
TAX EXEMPT INVESTMENTS -- 98.1%
Battery Park City Authority, Special Obligation Pre-Refunded Bonds, 7.25%,
11/01/94 @ 103 (MBIA Insured)(b)............................................... $2,000,000 $ 2,060,206 3.3%
Franklin County, Industrial Development Authority, Variable Rate Demand N (KES
Chateaugay Project), Series 1991A, 3.20%, (LOC Bank of Tokyo)(a)............... 1,000,000 1,000,000 1.6
Metropolitan Transportation Authority, Commuter Facilities, Variable Rate Demand
Notes, Series 1991, 3.20%, (LOC Morgan Guaranty)(a)............................ 3,300,000 3,300,000 5.2
Monroe County, Industrial Development Authority, Variable Rate Demand Notes,
(Granite Building Association) 3.15%, (LOC Chemical Bank)(a)................... 950,000 950,000 1.5
Nassau County, Industrial Development Authority, Variable Rate Demand Notes,
Civic Facilities, (Cold Spring Harbor Laboratory), 3.20%, (LOC Morgan
Guaranty)(a)................................................................... 3,000,000 3,000,000 4.7
Nassau County, Industrial Development Authority, Variable Rate Demand Notes,
Civic Facilities, (Cold Spring Harbor Laboratory), Series 1993, 3.20%, (Morgan
Guaranty)(a)................................................................... 1,000,000 1,000,000 1.6
New York City, Housing Development Community, Variable Rate Demand Notes,
Columbus Gardens Project), Series 93A, 3.35%, (LOC Citibank)(a)................ 600,000 600,000 0.9
New York City, Industrial Development Authority, Variable Rate Demand Notes,
(Fieldhouse Associates-JFK Project), 3.20%, (LOC Banque Indosuez)(a)........... 1,000,000 1,000,000 1.6
New York City, Industrial Development Authority, Variable Rate Demand Notes,
(LaGuardia Associates Project), 3.20%, (LOC Banque Indosuez)(a)................ 1,500,000 1,500,000 2.4
New York City, Industrial Development Authority, Variable Rate Demand Notes,
(Strohiem Romann Inc.), 3.25%, (LOC West Deutsche Landesbanke)(a).............. 1,500,000 1,500,000 2.4
New York City, Municipal Water Finance Authority, Water & Sewer Bond Anticipation
Notes, 3.75%, 12/15/94......................................................... 3,000,000 3,003,180 4.7
New York City, Variable Rate Demand Notes, Subseries A-9, 3.75%, (LOC Industrial
Bank of Japan)(a).............................................................. 1,800,000 1,800,000 2.9
New York City, Variable Rate Demand Notes, Series H, Subseries H-6, 3.40%, (MBIA
Insured)(a)(b)................................................................. 1,000,000 1,000,000 1.6
New York State Dormitory Authority, Variable Rate Demand Notes, (Cornell
University), Series 1990B, 3.20% (LOC Morgan Guaranty)(a)...................... 1,000,000 1,000,000 1.6
New York State Energy Research & Development Authority, Pollution Control
Revenue, Variable Rate Demand Notes, (Central Hudson Gas & Electric), Series
1985A, 3.25%, (LOC Bankers Trust)(a)........................................... 1,000,000 1,000,000 1.6
New York State Energy Research & Development Authority, Variable Rate Demand
Notes, (Lilco Project), Series 93B, 2.85%, (LOC Toronto Dominion Bank)(a)...... 1,100,000 1,100,000 1.7
New York State Energy Research & Development Authority, (Lilco Project), Series
A, 3.00%, 3/01/95, (LOC Deutshe Bank).......................................... 4,000,000 4,000,000 6.4
New York State Energy Research & Development Authority, Variable Rate Demand
Notes, (Niagara Mohawk Corp.), Series 1987A, 3.20%, (LOC Toronto Dominion
Bank)(a)....................................................................... 1,400,000 1,400,000 2.2
New York State Energy Research & Development Authority, (NYSEG), Series C, 2.95%,
12/07/94, (LOC Morgan Guaranty)................................................ 2,000,000 2,000,000 3.2
</TABLE>
See Notes to Financial Statements.
26
<PAGE>
Kidder, Peabody Municipal Money Market Series -- New York Series
- --------------------------------------------------------------------------------
Schedule of Investments as of October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE % OF NET
AMOUNT (NOTE 2a) ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New York State Housing Finance Authority, Variable Rate Demand Notes, (Resident
Housing), Series 1988A, 3.40%, (AMBAC Insured)(a)(b)........................... $1,950,000 $ 1,950,000 3.1%
New York State Housing Finance Authority, Variable Rate Demand Notes, (Normandie
Court Housing), Series 1991A, 3.35%, (LOC Societe General)(a).................. 1,500,000 1,500,000 2.4
New York State Local Government Assistance Corp., Variable Rate Demand Notes,
Series A, 3.15%, (LOC Swiss Bank, Credit Suisse)(a)............................ 4,000,000 4,000,000 6.4
New York State Local Government Assistance Corp., Variable Rate Demand Notes,
3.15%, (LOC Swiss Bank, Credit Suisse)(a)...................................... 1,000,000 1,000,000 1.6
New York State Medical Care Facilities Finance Agency, Pre-Refunded Bonds, Series
1985B, 9.75%, 1/15/95 @ 102 (Federal Housing Administration Insured)........... 3,000,000 3,097,497 4.9
New York State Tax Exempt Commercial Paper, Series P, 2.70%, 11/28/94............ 2,300,000 2,300,000 3.7
New York State Tax Exempt Commercial Paper, Series P, 2.90%, 11/09/94............ 1,000,000 1,000,000 1.6
North Hempstead, Variable Rate Demand Notes, (Solid Waste Management), Series
1993A, 3.10%, (LOC National Westminister Bank)(a).............................. 1,900,000 1,900,000 3.0
Oyster Bay, Bond Anticipation Notes, 3.00%, 11/18/94............................. 2,000,000 1,999,758 3.2
Port Authority of New York/New Jersey, Tax Exempt Commercial Paper, 2.75%,
11/03/94....................................................................... 2,000,000 2,000,000 3.2
Port Authority of New York/New Jersey, Tax Exempt Commercial Paper, 3.00%,
11/09/94....................................................................... 1,630,000 1,630,000 2.6
Puerto Rico Government Development Bank, Variable Rate Demand Notes, 3.10%, (LOC
Credit Suisse/Sumitomo Bank)(a)................................................ 500,000 500,000 0.8
Suffolk County, Industrial Development Authority, Variable Rate Demand Notes,
(Nissequogue Cogen.), 3.25%, (LOC Toronto Dominion Bank)(a).................... 1,500,000 1,500,000 2.4
Syracuse Bond Anticipation Notes, 3.25%, 3/03/95................................. 3,000,000 3,003,399 4.7
Triborough Bridge & Tunnel Authority, Pre-Refunded Obligation Bonds, 9.00%,
7/01/95 @ 102.................................................................. 2,000,000 2,109,758 3.4
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $61,703,600)............................................. 61,703,798 98.1
OTHER ASSETS LESS LIABILITIES.................................................... 1,192,253 1.9
----------- ----------
NET ASSETS....................................................................... $62,896,051 100.0%
----------- ----------
----------- ----------
</TABLE>
Summary of Combined Ratings (Unaudited)
<TABLE>
<CAPTION>
MOODY'S or STANDARD & POOR'S % OF VALUE
- --------------- ----------------- -----------------
<S> <C> <C> <C>
M1G1-1(c) SP1(c) 53.3%
P1(d) A1+ & A1(d) 25.2
Not Rated(e) Not Rated(e) 9.7
Aaa, Aa AAA, AA 11.8
-----
100.0%
-----
-----
</TABLE>
Notes to Schedule of Investments:
(a) Securities payable on demand. 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) M1G-1 and SP1 are the highest ratings assigned to variable notes and
municipal notes by Moody's and Standard & Poor's, respectively.
(d) P1 and A1 are the highest ratings assigned tax-exempt commercial paper by
Moody's and Standard & Poor's, respectively.
(e) Securities which, while not rated, are determined by the Fund's Trustees to
be of comparable quality to those rated securities in which the Fund may
invest.
See Notes to Financial Statements.
27
<PAGE>
Kidder, Peabody Municipal Money Market Series
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities as of October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONNECTICUT NEW JERSEY NEW YORK
SERIES SERIES SERIES
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Investments, at value (Note 2a).......................................... $26,059,259 $32,118,362 $61,703,798
Cash..................................................................... -- -- 684,275
Interest receivable...................................................... 180,104 231,705 575,616
Prepaid expenses (Note 2e)............................................... 9,258 11,153 11,246
-------------------------------------------
TOTAL ASSETS................................... 26,248,621 32,361,220 62,974,935
-------------------------------------------
LIABILITIES
Payables:
Due to custodian.................................................... 445,381 331,553 --
Investment advisory (Note 3)........................................ 11,011 15,695 28,918
Distribution fees (Note 3).......................................... 2,736 3,884 7,173
Dividends........................................................... 1,575 1,943 3,940
Accrued expenses......................................................... 24,646 27,139 38,853
-------------------------------------------
TOTAL LIABILITIES.............................. 485,349 380,214 78,884
-------------------------------------------
NET ASSETS
At value................................................................. $25,763,272 $31,981,006 $62,896,051
-------------------------------------------
-------------------------------------------
Outstanding shares of beneficial interest, ($.001 par value) (Note 4).... 25,770,924 32,002,527 62,940,628
-------------------------------------------
-------------------------------------------
NET ASSET VALUES
Offering, and redemption prices per share................................ $ 1.00 $ 1.00 $ 1.00
-------------------------------------------
-------------------------------------------
Net assets were comprised of:
Aggregate paid-in-capital........................................... $25,770,924 $32,002,527 $62,940,628
Net unrealized gain on investments.................................. 1,254 -- 198
Accumulated net realized capital losses............................. (8,906) (21,521) (44,775)
Undistributed net investment income................................. -- -- --
-------------------------------------------
Net assets............................................................... $25,763,272 $31,981,006 $62,896,051
-------------------------------------------
-------------------------------------------
</TABLE>
See Notes to Financial Statements.
28
<PAGE>
Kidder, Peabody Municipal Money Market Series
- --------------------------------------------------------------------------------
Statements of Operations for the Year Ended October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONNECTICUT NEW JERSEY NEW YORK
SERIES SERIES SERIES
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income (net of $216,236, $183,400, and $349,653, amortization of
premiums, respectively -- Note 2b).......................................... $ 791,213 $1,072,714 $1,839,287
-----------------------------------------
EXPENSES
Investment advisory (Note 3).................................................. 151,858 207,338 358,032
Distribution (Note 3)......................................................... 36,446 49,761 85,928
Pricing....................................................................... 22,800 22,800 22,800
Shareholder servicing......................................................... 13,320 17,264 22,120
Prospectus and shareholders' reports.......................................... 12,055 17,640 24,339
Professional.................................................................. 9,390 10,700 8,770
Custodian..................................................................... 8,115 9,348 11,070
Amortization of organization expenses (Note 2e)............................... 7,559 7,541 7,541
Federal and state registration................................................ 4,084 4,278 7,871
Trustees' fees and expenses (Note 3).......................................... 3,681 3,650 3,531
Miscellaneous................................................................. 2,441 3,419 4,527
-----------------------------------------
TOTAL EXPENSES...................................... 271,749 353,739 556,529
-----------------------------------------
NET INVESTMENT INCOME......................................................... 519,464 718,975 1,282,758
REALIZED LOSS ON INVESTMENTS (NOTE 2B)........................................ (4,008) (18,801) (20,824)
CHANGE IN UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 2)...................... 724 (140) (67)
-----------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.......................... $ 516,180 $ 700,034 $1,261,867
-----------------------------------------
-----------------------------------------
</TABLE>
See Notes to Financial Statements.
29
<PAGE>
Kidder, Peabody Municipal Money Market Series
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONNECTICUT SERIES NEW JERSEY SERIES NEW YORK SERIES
---------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1993 1994 1993 1994 1993 1994
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income............... $ 476,005 $ 519,464 $ 614,398 $ 718,975 $ 775,740 $ 1,282,758
Net realized gain (loss) on
investments (Note 2b)............. 67 (4,008) (1,299) (18,801) (6,332) (20,824)
Change in unrealized gain (loss) on
investments (Note 2).............. (498) 724 140 (140) 265 (67)
---------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS............. 475,574 516,180 613,239 700,034 769,673 1,261,867
DISTRIBUTIONS TO SHAREHOLDERS FROM
(NOTES 2C & D)
Net investment income............... (476,005) (519,464) (614,398) (718,975) (775,740) (1,282,758)
INCREASE (DECREASE) IN NET ASSETS
FROM
Net capital share transactions (Note
4)................................ (125,448) (2,170,701) 8,849,772 (4,473,284) 12,915,779 10,730,298
---------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.......... (125,879) (2,173,985) 8,848,613 (4,492,225) 12,909,712 10,709,407
NET ASSETS
Beginning of year................... 28,063,136 27,937,257 27,624,618 36,473,231 39,276,932 52,186,644
---------------------------------------------------------------------------------
End of year......................... $27,937,257 $25,763,272 $36,473,231 $31,981,006 $52,186,644 $62,896,051
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
30
<PAGE>
Kidder, Peabody Municipal Money Market Series
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONNECTICUT SERIES NEW JERSEY SERIES
-----------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------------
1991`D' 1992 1993 1994 1991`D'`D' 1992 1993 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------
Net asset value,
beginning of period.... $1.0000 $0.9994 $0.9999 $0.9999 $1.0000 $0.9998 $0.9999 $0.9999
-----------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... 0.0398 0.0223 0.0148 0.0172 0.0316 0.0246 0.0164 0.0175
Net realized and
unrealized gain (loss)
on investments......... (0.0006) 0.0005 -- (0.0002) (0.0002) (0.0001) -- (0.0006)
-----------------------------------------------------------------------------
Total increase in net
asset value from
investment operations.. 0.0392 0.0228 0.0148 0.0170 0.0314 0.0247 0.0164 0.0169
Distributions to
shareholders from net
investment income...... (0.0398) (0.0223) (0.0148) (0.0172) (0.0316) (0.0246) (0.0164) (0.0175)
-----------------------------------------------------------------------------
Net asset value, end of
period................. $0.9994 $0.9999 $0.9999 $0.9997 $0.9998 $0.9999 $0.9999 $0.9993
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Total return............. 4.10%* 2.25% 1.49% 1.74% 4.27%* 2.49% 1.65% 1.76%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(in thousands)......... $40,078 $28,063 $27,937 $25,763 $41,504 $27,625 $36,473 $31,981
RATIOS TO AVERAGE NET
ASSETS
Expenses, excluding
distribution fees, net
of reimbursement....... 0.24%* 0.74% 0.85% 0.78% 0.15%* 0.74% 0.81% 0.73%
Expenses, including
distribution fees, net
of reimbursement....... 0.36%* 0.86% 0.97% 0.90% 0.27%* 0.86% 0.93% 0.85%
Expenses, before
reimbursement from
manager................ 0.82%* 0.86% 0.97% 0.90% 0.83%* 0.86% 0.93% 0.85%
Net investment income.... 3.96%* 2.28% 1.47% 1.71% 4.20%* 2.51% 1.63% 1.74%
</TABLE>
<TABLE>
<CAPTION>
NEW YORK SERIES
--------------------------------------
1991`D'`D' 1992 1993 1994
<S> <C> <C> <C> <C>
--------------------------------------
Net asset value,
beginning of period.... $1.0000 $0.9999 $0.9996 $0.9995
--------------------------------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... 0.0303 0.0226 0.0151 0.0179
Net realized and
unrealized gain (loss)
on investments......... (0.0001) (0.0003) (0.0001) (0.0002)
--------------------------------------
Total increase in net
asset value from
investment operations.. 0.0302 0.0223 0.0150 0.0177
Distributions to
shareholders from net
investment income...... (0.0303) (0.0226) (0.0151) (0.0179)
--------------------------------------
Net asset value, end of
period................. $0.9999 $0.9996 $0.9995 $0.9993
--------------------------------------
--------------------------------------
Total return............. 4.09%* 2.28% 1.52% 1.81%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(in thousands)......... $38,725 $39,277 $52,187 $62,896
RATIOS TO AVERAGE NET
ASSETS
Expenses, excluding
distribution fees, net
of reimbursement....... 0.14%* 0.72% 0.76% 0.66%
Expenses, including
distribution fees, net
of reimbursement....... 0.26%* 0.84% 0.88% 0.78%
Expenses, before
reimbursement from
manager................ 0.83%* 0.84% 0.88% 0.78%
Net investment income.... 4.00%* 2.24% 1.50% 1.79%
</TABLE>
`D' From November 6, 1990 (Commencement of Operations) to October 31, 1991.
`D'`D' From February 1, 1991 (Commencement of Operations) to October 31, 1991.
* Annualized.
See Notes to Financial Statements.
31
<PAGE>
Kidder, Peabody Municipal Money Market Series
- --------------------------------------------------------------------------------
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 investment adviser and manager.
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 for each series; 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) Securities 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 on the last business day of
each month. 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.
At October 31, 1994, for book purposes, the Connecticut Series, the New
Jersey Series, and the New York Series had net capital loss carryforwards of
$8,906, $21,521, and $44,775, respectively.
At October 31, 1994, for Federal income tax purposes, the cost of investments
was substantially the same as the cost for financial reporting purposes (see
Schedule of Investments). For the Connecticut Series, the New Jersey Series and
the New York Series net unrealized appreciation, based on cost, for Federal
income tax purposes, aggregated $1,254, -0- and $198, respectively, all of which
related to appreciated securities.
(d) It is the policy of the Fund 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 tax liability.
(e) Organization costs are being amortized on a straight-line basis over a
five-year period. Prepaid registration fees are charged to income as the related
shares are issued.
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 each series of the Fund for such
services are accrued daily and paid monthly at the annual rate of 1/2 of 1% of
the net assets of each series of the Fund, determined as of the close of each
business day. Total annual expenses of each series of the Fund, exclusive of
taxes, interest, and 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 limits prescribed by any state in which each series
of the Fund's shares are offered for sale, and KPAM will reimburse each series
of the Fund for any expenses in excess of such limits. No expense reimbursement
was required for the year ended October 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 annual rate of .12% of
the net assets of each series of the Fund, determined as of the close of each
business day.
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 for each series. At October 31, 1994, paid-in-capital
amounted to $25,770,924
32
<PAGE>
Kidder, Peabody Municipal Money Market Series
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
for the Connecticut Series, $32,002,527 for the New Jersey Series and
$62,940,628 for the New York Series. Transactions in shares and dollars were as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
YEAR YEAR
ENDED ENDED
CONNECTICUT SERIES OCTOBER 31, 1993 OCTOBER 31, 1994
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold................. 107,004,794 83,745,065
Shares issued to
shareholders in connection
with the reinvestment of
dividends................. 464,144 502,403
Shares redeemed............. (107,594,386) (86,418,169)
-----------------------------------
NET DECREASE........... (125,448) (2,170,701)
-----------------------------------
-----------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
YEAR YEAR
ENDED ENDED
NEW JERSEY SERIES OCTOBER 31, 1993 OCTOBER 31, 1994
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold................. 159,550,756 186,667,852
Shares issued to
shareholders in connection
with the reinvestment of
dividends................. 599,779 701,364
Shares redeemed............. (151,300,763) (191,842,500)
-----------------------------------
NET INCREASE
(DECREASE)........... 8,849,772 (4,473,284)
-----------------------------------
-----------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
YEAR YEAR
ENDED ENDED
NEW YORK SERIES OCTOBER 31, 1993 OCTOBER 31, 1994
- -----------------------------------------------------------------
<S> <C> <C>
Shares sold................. 244,922,956 300,275,419
Shares issued to
shareholders in connection
with the reinvestment of
dividends................. 748,193 1,248,214
Shares redeemed............. (232,755,370) (290,793,335)
-----------------------------------
NET INCREASE........... 12,915,779 10,730,298
-----------------------------------
-----------------------------------
</TABLE>
5. The Fund's investment strategy is to invest in obligations of the specific
states in each series and their municipalities. Payment of the principal and
interest of such securities depends upon the revenue generated by the
municipality or by the property financed by the securities. 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.
6. Under an agreement dated as of October 17, 1994, General Electric Company has
agreed to sell to PaineWebber Group, Inc. certain assets of Kidder Group and its
subsidiaries, including certain assets of Kidder and KPAM. The consummation of
this transaction, which is subject to a number of conditions and cannot be
assured, will result in the deemed assignment and automatic termination of the
agreements pursuant to which Kidder serves as the principal underwriter of the
Fund's shares and KPAM serves as the Fund's manager and investment adviser.
Continuation of the Fund's relationship with Kidder and KPAM or their successors
following the consummation of 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,
continuation of the Fund's 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 Trustees will take such action as it
determines to be appropriate and in the best interests of the Fund and its
shareholders.
33
<PAGE>
Kidder, Peabody Municipal Money Market Series
- --------------------------------------------------------------------------------
Report of Independent Auditors
- --------------------------------------------------------------------------------
The Trustees and Shareholders,
Kidder, Peabody Municipal Money Market Series
(Consisting of the Connecticut, New Jersey and
New York Series):
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of the Connecticut Series, the New Jersey Series
and the New York Series of Kidder, Peabody Municipal Money Market Series (the
'Fund'), as of October 31, 1994, the related statements of operations for the
year then ended and of changes in net assets 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 the 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 the securities owned as of
October 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 the Connecticut
Series, the New Jersey Series and the New York Series of Kidder, Peabody
Municipal Money Market Series at October 31, 1994, the results of their
operations, changes in their net assets and the financial highlights for each of
the respectively stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
New York, New York
November 30, 1994
34
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX
RISK FACTORS -- INVESTING IN STATE MUNICIPAL OBLIGATIONS
The following information supplements and should be read in conjunction with the
information set forth in the Fund's Prospectus under 'Investment Objective and
Policies -- Risk Factors -- Investing in State Municipal 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 relevant State 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.
<TABLE>
<S> <C>
Connecticut Series........................................................................................ A-1
New Jersey Series......................................................................................... A-3
New York Series........................................................................................... A-5
Ohio Series............................................................................................... A-16
Pennsylvania Series....................................................................................... A-21
Texas Series.............................................................................................. A-25
</TABLE>
CONNECTICUT SERIES
Connecticut's economy is diverse, with manufacturing, services and trade
accounting for approximately 70% of total non-agricultural employment. The
State's manufacturing industry is diversified, but from 1970 to 1993
manufacturing employment declined 33.5%, while non-manufacturing related
employment increased 63.3% to a level almost four times manufacturing
employment. Defense-related business plays an important role in the Connecticut
economy, and economic activity has been affected by the volume of defense
contracts awarded to Connecticut firms. In the past 10 years, Connecticut ranked
from sixth to twelfth among all states in total defense contract awards
receiving 2.5% of all such contracts in 1993. In recent years the Federal
government has reduced the amount of defense-related spending and the largest
defense-related employers in the State have announced substantial labor force
reductions. The effect of such future reductions on the Connecticut economy
suggests that the defense sector is not as promising as it once was.
Connecticut has a high level of personal income. According to Bureau of
Economic Analysis figures, personal income of State residents for calendar year
1993 was $91.6 billion, a 2.9% increase over the previous year. On a per capita
basis, personal income in the State increased 20.7% from 1988 to 1993 and 9.9%
from 1990 to 1993, compared with national increases of 25.1% and 11.3%,
respectively. As of January 1994, the rate of unemployment (on a seasonably
adjusted basis) in the State was 6.6%.
While the State's General Fund ended fiscal 1985, 1986 and 1987 with
operating surpluses of approximately $365.5 million, $250.1 million and $365.2
million, respectively, the State recorded operating deficits of $115.6 million,
$28 million, $259.5 million and $808.5 million for fiscal 1988, 1989, 1990 and
1991, respectively. Together with the deficit carried forward from fiscal
1989-90, the total deficit for the fiscal year 1990-91 was $965.7 million. The
total deficit amount was funded by the issuance of General Obligation Economic
Recovery Notes. The Comptroller's
A-1
<PAGE>
- --------------------------------------------------------------------------------
annual report for the fiscal year ended June 30, 1992 reflected a General Fund
operating surplus of $110.2 million, which surplus was used to retire $110.1
million of the State's Economic Recovery Notes. The Comptroller's annual report
for the fiscal year ended June 30, 1993 reflected a General Fund operating
surplus of $113.5 million. The Comptroller's annual report for the fiscal year
ended June 30, 1994 reflected a General Fund operating surplus of $19.7 million.
The unappropriated surplus in the General Fund is deemed to be appropriated for
debt service for the fiscal year ending June 30, 1995.
Since 1988, the Comptroller's annual report has reported results on the
basis of both the modified cash basis required by State law and the modified
accrual basis used for GAAP financial reporting. The Comptroller's monthly
report for the period ended September 30, 1994 stated that on a GAAP basis the
cumulative deficit was $531 million for fiscal 1994-95. The modified cash basis
of accounting used for statutory financial reporting and the modified accrual
basis used for GAAP financial reporting are different and, as a result, often
produce varying financial results, primarily because of differences in the
recognition of revenues and expenditures.
The budget adopted and modified by the General Assembly for fiscal 1994-95
projected General Fund expenditures of $8.57 billion and estimated General Fund
revenues of $8.57 billion. The Comptroller's monthly report of November 1, 1994
(for the three months ended September 30, 1994) reflected a surplus for 1994-95
of $20.7 million.
The State finances its operations primarily through the General Fund. All
tax and most non-tax revenues of the State, except for motor fuels taxes and
other transportation related taxes, fees and revenues, are paid into, and
substantially all expenditures pursuant to legislative appropriations are made
out of, the General Fund. The State derives over 70% of its revenues from taxes.
Miscellaneous fees, receipts, transfers and Federal grants account for most of
the other State revenue. The Sales and Use Taxes, the corporation business tax
and the recently enacted broad based personal income tax are the major revenue
raising taxes.
On November 3, 1992, Connecticut voters approved a constitutional amendment
which requires a balanced budget for each year and imposes a cap on the growth
of expenditures. The General Assembly is required by the constitutional
amendment to adopt by three-fifths vote certain spending cap definitions. The
statutory spending cap limits the growth of expenditures to either (1) the
rolling five-year average annual growth in personal income, or (2) the increase
in the consumer price index for urban consumers during the preceding 12 month
period, whichever is greater. Expenditures for the payment of bonds, notes and
other evidences of indebtedness are excluded from the constitutional and
statutory definitions of general budget expenditures. To preclude shifting
expenditures out of the General Fund to other funds, the spending cap applies to
all appropriated funds combined. For fiscal 1994-95, permitted growth in capped
expenditures is 4.49%. The adopted Budget for fiscal 1994-95 is approximately
$53.4 million below the spending cap.
The State has no constitutional or other organic limit on its power to
issue obligations or incur indebtedness other than that it may only borrow for
public purposes. There are no reported court decisions relating to State bonded
indebtedness other than two cases validating the legislative determination of
the public purpose for improving employment opportunities and related
activities. The State Constitution has never contained provisions requiring
submission of the questions of incurring indebtedness to a public referendum.
Therefore, the authorization and
A-2
<PAGE>
- --------------------------------------------------------------------------------
issuance of State debt, including the purpose, amount and nature thereof, the
method and manner of the incurrence of such debt, the maturity and terms of
repayment thereof, and other related matters are statutory.
The General Assembly has empowered, pursuant to bond acts in effect, the
State Bond Commission to authorize general obligation bonds in the amount of
$10.180 billion. As of November 1, 1994, the State Bond Commission had
authorized $8.432 billion in such bonds and the balance of $1.748 billion was
available for authorization. From such total authorizations of $8.432 billion,
bonds in the aggregate of $7.190 billion have been issued and the balance of
$1.242 billion remained authorized but unissued as of November 1, 1994.
The two major revenue raising taxes are the sales and use taxes and the
corporation business tax. Motor fuel taxes and other transportation related
taxes are paid into a Special Transportation Fund while all other tax revenues
are carried in the General Fund.
General obligations bonds issued by Connecticut municipalities are payable
primarily from ad valorem taxes on property subject to taxation by the
municipality. Certain Connecticut municipalities have experienced severe fiscal
difficulties and have reported operating and accumulated deficits in recent
years. The most notable of these was the City of Bridgeport.
NEW JERSEY SERIES
New Jersey's economic base is diversified, consisting of a variety of
manufacturing, construction and service industries, supplemented by rural areas
with selective commercial agriculture. New Jersey's principal manufacturing
industries produce chemicals, pharmaceuticals, electrical goods, machinery,
fabricated metals, food processing, instrumentations, plastics and printing.
Other economic activities include insurance, tourism, petroleum refining and
truck farming.
While New Jersey's economy continued to expand during the late 1980s, the
level of growth has slowed considerably after 1987. Initially, this slowdown was
an expected response to the State's tight labor market and the decrease in the
number of persons entering the labor force. Late in the decade, a decline in
construction demand and in the rate of growth in consumer spending as well as
continued softness in the State's manufacturing sector set the stage for
recession in New Jersey. By the beginning of the national recession in July 1990
(according to the National Bureau of Economic Research), construction activity
had already been declining in New Jersey for nearly two years. As the rapid
acceleration of real estate prices forced many would-be homeowners out of the
market and high non-residential vacancy rates reduced new commitments for
offices and commercial facilities, construction employment began to decline;
also growth had tapered off markedly in the service sectors and the long-term
downward trend of factory employment had accelerated, partly because of a
leveling off of industrial demand nationally. The onset of recession caused an
acceleration of New Jersey's job losses in construction and manufacturing, as
well as an employment downturn in such previously growing sectors as wholesale
trade, retail trade, finance, utilities and trucking and warehousing. The net
effect was a decline in the State's total nonfarm wage and salary employment
from a peak of 3,706,400 in March 1989 to a low of 3,445,000 in March 1992. This
loss has been followed by an employment gain of 118,700 from March 1992 to
September 1994. As a result of the State's recent fiscal weakness and because of
concerns about how the State proposes to finance its 1992 budget, S&P, in July
1991, lowered the State's general obligation bond rating from AAA to AA+.
A-3
<PAGE>
- --------------------------------------------------------------------------------
Reflecting the downturn, the rate of unemployment in the State rose from a
low of 3.6% during the first quarter of 1989 to a recessionary peak of 9.3%
during 1992. Since then, the unemployment rate fell to 6.7% during the fourth
quarter of 1993. The jobless rate averaged 7.1% during the first nine months of
1994. In the first nine months of 1994, relative to the same period a year ago,
job growth took place in services (3.5%) and construction (5.7%), more moderate
growth took place in trade (1.9%), transportation and utilities (1.2%) and
finance/insurance/real estate (1.4%), while manufacturing and government
declined (by 1.5% and 0.1%, respectively). The net result was a 1.6% increase in
average employment during the first nine months of 1994 compared to the first
nine months of 1993.
The fiscal year ending June 30, 1995 Appropriations Act forecasts Sales and
Use Tax collections for fiscal year 1995 of $3.980 billion, a 5.3% increase from
unaudited revenue for Fiscal Year 1994. Unaudited revenue for fiscal year 1994
for the Sales and Use Tax of $3.778 billion represents a 3.5% increase from
actual receipts for fiscal year 1993.
The fiscal year 1995 Appropriations Act forecasts Gross Income Tax
collections for Fiscal Year 1995 of $4.582 billion, a 2.4% increase from
unaudited revenue for fiscal year 1994. Included in the fiscal year 1995 Gross
Income Tax forecast is a 5% reduction of personal income tax rates effective
January 1, 1994 and a further 10% reduction of personal income tax rates
effective January 1, 1995. The fiscal year 1995 Gross Income Tax estimates a
$549 million reduction related to these tax cuts. Unaudited revenue for fiscal
year 1994 for the Gross Income Tax of $4.475 billion represents a 2.9% increase
from actual receipts for fiscal year 1993.
The fiscal year 1995 Appropriations Act forecasts Corporation Business Tax
collections for fiscal year 1995 of $915 million, a 14% decrease from unaudited
revenue for fiscal year 1994. Included in the Corporation Business Tax forecast
is a reduction in the Corporation Business Tax rate from 9.375% to 9.0% of net
New Jersey income. Unaudited revenue for fiscal year 1994 for the Corporation
Business Tax of $1.063 billion, represents a 10.6% increase from actual receipts
for fiscal year 1993.
The fiscal year 1995 Appropriations Act forecasts Other Miscellaneous Taxes
Fees and Revenues collections for fiscal year 1995 of $1.338 billion, represents
a 15.6% decrease from unaudited revenue for fiscal year 1994 for Other
Miscellaneous Taxes, Fees and Revenues. Included in the Other Miscellaneous
Taxes Fees and Revenues forecast is a decline of $426 million in the Public
Utility Gross receipts and Franchise tax in accordance with the collection date
changes that were legislated in 1991.
In connection with the current fiscal year 1995 budget, certain unions and
individual plaintiffs have filed a lawsuit concerning the funding of certain
retirement systems.
Should revenues be less than the amount anticipated in the budget for a
fiscal year, the Governor may, pursuant to statutory authority, prevent any
expenditure under any appropriation. There are additional means by which the
Governor may ensure that the State is operated efficiently and does not incur a
deficit. No supplemental appropriation may be enacted after adoption of an
appropriations act except where there are sufficient revenues on hand or
anticipated, as certified by the Governor, to meet such appropriation. In the
past when actual revenues have been less than the amount anticipated in the
budget, the Governor has exercised her plenary powers leading to, among other
actions, implementation of a hiring freeze for all State departments and the
discontinuation of programs for which appropriations were budgeted but not yet
spent.
A-4
<PAGE>
- --------------------------------------------------------------------------------
The State appropriated approximately $15.492 billion and $15.291 billion
for fiscal 1994 and 1995, respectively. Of the $15.291 billion appropriated in
fiscal year 1995 from the General Fund, the Property Tax Relief Fund, the Casino
Control Fund, the Casino Revenue Fund and the Gubernatorial Elections Fund,
$5.782 billion (37.8%) is appropriated for State aid to local governments,
$3.762 billion (24.6%) is appropriated for grants-in-aid (payments to
individuals or public or private agencies for benefits to which a recipient is
entitled by law or for the provision of services on behalf of the State), $5.203
billion (34.0%) for direct State services, $103.5 million (0.7%) for debt
service on State general obligation bonds and $440.6 million (2.9%) for capital
construction.
Should tax revenues be less than the amount anticipated in the Budget for a
fiscal year, the Governor may, pursuant to statutory authority, prevent any
expenditure under any appropriation. The appropriations for fiscal year 1994 are
unaudited and for fiscal year 1995 are revised estimates, as of November 7,
1994, from the amounts contained in the fiscal year 1995 Appropriations Act.
The State has made appropriations for principal and interest payments for
general obligation bonds for fiscal years 1991 through 1994 in the amounts of
$388.5 million, $410.6 million, $444.3 million and $119.9 million, respectively.
For fiscal year 1995, $103.5 million has been appropriated for principal and
interest payments for general obligation bonds. As of June 30, 1994, the
outstanding general obligation bonded indebtedness of the State was
approximately $3.6 billion.
NEW YORK SERIES
The financial condition of New York State (the 'State') and certain of its
public bodies (the 'Agencies') and municipalities, particularly New York City
(the 'City'), could affect the market values and marketability of New York
Municipal Obligations which may be held by the Fund.
A national recession commenced in mid-1990. The downturn continued through
the remainder of the 1990-91 fiscal year, and was followed by a period of weak
economic growth during the 1991 calendar year. For the calendar year 1992, the
national economy continued to recover, although at a rate below all post-war
recoveries. The recession was more severe in the State than in other parts of
the nation, owing to a significant retrenchment in the financial services
industry, cutbacks in defense spending, and an overbuilt real estate market. The
State economy remained in recession until 1993, when employment growth resumed.
Since early 1993, the State has gained approximately 100,000 jobs. The State's
economic forecast calls for employment to increase in 1994 and 1995. Employment
growth will moderate in 1995 when the pace of national economic growth is
projected to slacken and entire industries adjust to changing markets and the
State's economy absorbs the full impact of these developments. Personal income
is estimated to increase by 5.3% in 1994, and a more moderate rate in 1995.
The State's budget for the 1994-95 fiscal year was enacted by the
Legislature on June 7, 1994, more than two months after the start of the fiscal
year. Prior to adoption of the budget, the Legislature enacted appropriations
for disbursements considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt service. The State
Financial Plan for 1994-95 fiscal year was formulated on June 16, 1994 and is
based on the State's budget as enacted by the Legislature and signed into law by
the Governor.
A-5
<PAGE>
- --------------------------------------------------------------------------------
The State Financial Plan is based upon forecasts of national and State
economic activity. Economic forecasts have frequently failed to predict
accurately the timing and magnitude of changes in the national and the State
economies. Many uncertainties exist in forecasts of both the national and State
economies, including consumer attitudes toward spending, Federal financial and
monetary policies, the availability of credit and the condition of the world
economy, which could have an adverse effect on the State. There can be no
assurance that the State economy will not experience worse-than-predicted
results in the 1994-95 fiscal year, with corresponding material and adverse
effects on the State's projections of receipts and disbursements.
The State issued its first update to the GAAP-basis Financial Plan for the
State's 1994-95 fiscal year on September 1, 1994. In the September GAAP-basis
update, the Division of the Budget projected a General Fund Operating deficit of
$690 million. The prior projection of the 1994-95 GAAP-basis State Financial
Plan, issued in February 1994 as part of the 1994-95 Executive Budget (the
'February 1994 Projection'), projected an operating surplus in the General Fund
of $7 million.
In the February 1994 projection, General Fund operating results over the
1993-94 and 1994-95 fiscal year projection period were anticipated to reduce the
accumulated deficit by $256 million. The impact of the reported results for the
State's 1993-94 fiscal year and the revised projection on the accumulated
deficit is substantially the same. Combining the $914 million operating surplus
for the State's 1993-94 fiscal year with the projected $690 million operating
deficit for the 1994-95 fiscal year results in an anticipated $224 million
reduction in the accumulated deficit.
Total revenues in the General Fund are projected at $32.825 billion,
consisting of $30.783 billion in tax revenues and $2.042 billion in
miscellaneous revenue. Personal income tax revenue is projected to reach $17.712
billion, or nearly 58% of total tax revenue. User taxes and fees are projected
to total $6.561 billion, or nearly 21% of total taxes. Business taxes are
projected at $5.442 billion, or 18%, while revenue from other taxes is projected
at $1.068 billion or 3% of total tax revenue. Total expenditures in the General
Fund are projected at $33.633 billion, including $23.778 billion for grants to
local governments, $8.033 billion for State operations, $1.807 billion for
general State charges, and $15 million for debt service. Compared to the
projections made in February, expenditures for grants to local governments are
substantially increased, while expenditures for state operations are reduced.
There can be no assurance that the State will not face substantial
potential budget gaps in future years resulting from a significant disparity
between tax revenues projected from a lower recurring receipts base and the
spending required to maintain State programs at current levels. To address any
potential budgetary imbalance, the State may need to take significant actions to
align recurring receipts and disbursements in future fiscal years.
In 1990, S&P and Moody's lowered their rating of the State's general
obligation debt from AA- to A and from A-1 to A, respectively. In addition, S&P
and Moody's lowered their ratings of the short-term notes from SP-1+ to SP-1 and
from MIG-1 to MIG-2, respectively. In January 1992, Moody's lowered from A to
Baa1 its ratings of certain appropriation-backed debt of New York State and its
agencies. The State's general obligation, state-guaranteed and New York State
Local Government Assistance Corporation bonds continued to be rated A by
Moody's. Also in January 1992, S&P lowered from A to A- its ratings of New York
State general obligation bonds and stated that it continued to assess the
ratings outlook as negative. S&P also lowered its ratings
A-6
<PAGE>
- --------------------------------------------------------------------------------
of various agency debt, moral obligations, contractual obligations, lease
purchase obligations and State guarantees. In February 1991, Moody's lowered its
rating on the City's general obligation bonds from A to Baa1. The rating changes
reflect the rating agencies' concerns about the financial condition of New York
State and City, the heavy debt load of the State and City and economic
uncertainties in the region.
(1) THE STATE, AGENCIES AND OTHER MUNICIPALITIES. During the mid-1970s,
some of the Agencies and municipalities (in particular, the City) faced
extraordinary financial difficulties, which affected the State's own financial
condition. These events, including a default on short-term notes issued by the
New York State Urban Development Corporation ('UDC') in February 1975, which
default was cured shortly thereafter, and a continuation of the financial
difficulties of the City, created substantial investor resistance to securities
issued by the State and by some of its municipalities and Agencies. For a time,
in late 1975 and early 1976, these difficulties resulted in a virtual closing of
public credit markets for State and many State related securities.
In response to the financial problems confronting it, the State developed
and implemented programs for its 1977 fiscal year that included the adoption of
a balanced budget on a cash basis (a deficit of $92 million that actually
resulted was financed by issuing notes that were paid during the first quarter
of the State's 1978 fiscal year). In addition, legislation was enacted limiting
the occurrence of additional so-called 'moral obligation' and certain other
Agency debt, which legislation does not, however, apply to obligations of The
Municipal Assistance Corporation for the City of New York ('MAC'), a corporation
created to provide financing assistance to the City.
STATE FINANCIAL RESULTS. New York State's financial operations have
improved during recent fiscal years. During the period 1989-90 through 1991-92,
the State incurred General Fund operating deficits that were closed with
receipts from the issuance of tax and revenue anticipation notes ('TRANs').
First, the national recession, and then the lingering economic slowdown in the
New York and regional economy, resulted in repeated shortfalls in receipts and
three budget deficits. For its 1992-93 and 1993-94 fiscal years, the State
recorded balanced budgets on a cash basis, with substantial fund balances in
each year as described below.
On July 29, 1994, the Office of the State Comptroller issued the General
Purpose Financial Statements of the State of New York for the 1993-94 fiscal
year. The Statements were prepared on GAAP-basis and were independently audited
in accordance with generally accepted auditing standards. The State's Combined
Balance Sheet as of March 31, 1994 showed an accumulated surplus in its combined
governmental funds of $370 million, reflecting liabilities of $13.219 billion
and assets of $13.589 billion. This accumulated Governmental Funds surplus
includes a $1.637 billion accumulated deficit in the General Fund, as well as
accumulated surpluses in the Special Revenue and Debt Service fund types and a
$622 million accumulated deficit in the Capital Projects Fund type.
The State completed its 1993-94 fiscal year with a combined Governmental
Funds operating surplus of $1.051 billion, which included an operating surplus
in the General Fund of $914 million, in the Special Revenue Funds of $149
million and in the Debt Service Funds of $23 million, and an operating deficit
in the Capital Projects Funds of $35 million. The following table updates Table
6 of the Annual Information Statement.
The State reported a General Fund operating surplus of $914 million for the
1993-94 fiscal year, as compared to an operating surplus of $2.065 billion for
the prior fiscal year. The 1993-94
A-7
<PAGE>
- --------------------------------------------------------------------------------
fiscal year surplus reflects several major factors, including the cash basis
surplus recorded in 1993-94, the use of $671 million of the 1992-93 surplus to
fund operating expenses in 1993-94, net proceeds of $575 million in bonds issued
by the Local Government Assistance Corporation, and the accumulation of $265
million balance in the Contingency Reserve Fund. Revenues increased $543 million
(1.7%) over prior fiscal year revenues with the largest increase occurring in
personal income taxes. Expenditures increased $1.659 billion (5.6%) over the
prior fiscal year, with the largest increase occurring in State aid for social
services programs.
The State ended its 1993-94 fiscal year with a balance of $1.140 billion in
the tax refund reserve account, $265 million in its Contingency Reserve Fund and
$134 million in its tax stabilization reserve fund. These fund balances were
primarily the result of an improving national economy, State employment growth,
tax collections that exceeded earlier projections and disbursements that were
below expectations. Deposits to the personal income tax refund reserve have the
effect of reducing reported personal income tax receipts in the fiscal year when
made and withdrawals from such reserve increase receipts in the fiscal year when
made. The balance in the tax reserve account will be used to pay taxpayer
refunds, rather than drawing from 1994-95 receipts.
Of the $l.140 billion deposited in the tax refund reserve account, $1.026
billion was available for budgetary planning purposes in the 1994-95 fiscal
year. The remaining $114 million will be redeposited in the tax refund reserve
account at the end of the State's 1994-95 fiscal year to continue the process of
restructuring the State's cash flow as part of the New York Local Government
Assistance Corporation ('LGAC') program. The balance in the contingency reserve
fund will be used to meet the cost of litigation facing the State. The tax
stabilization reserve fund may be used only in the event of an unanticipated
General Fund cash-basis deficit during the 1994-95 fiscal year.
Before the deposit of $1.140 billion in the tax refund reserve account,
General Fund receipts in 1993-94 exceeded those originally projected when the
State Financial Plan for the year was formulated on April 16, 1993 by $1.002
billion. Greater-than-expected receipts in the personal income tax, the bank
tax, the corporation franchise tax and the estate tax accounted for most of this
variance, and more than offset weaker-than-projected collections from the sales
and use tax and miscellaneous receipts. Collections from individual taxes were
affected by various factors including changes in Federal business laws,
sustained profitability of banks, strong performance of securities firms, and
higher-than-expected consumption of tobacco products following price cuts.
The higher receipts resulted, in part, because the New York economy
performed better than forecasted. Employment growth started in the first quarter
of the State's 1993-94 year, and although this lagged the national economic
recovery, the growth in New York began earlier than forecasted. The New York
economy exhibited signs of strength in the service sector, in construction, and
in trade. Long Island, and the Mid-Hudson Valley continued to lag the rest of
the State in economic growth. Approximately 100,000 jobs are believed to have
been added during the 1993-94 fiscal year.
Disbursements and transfer from the General Fund were $303 million below
the level projected in April 1993, an amount that would have been $423 million
had the State not accelerated the payment of Medicaid billings, which in the
April 1993 State Financial Plan were planned to be deferred into the 1994-95
fiscal year. Compared to the estimates included in the
A-8
<PAGE>
- --------------------------------------------------------------------------------
State Financial Plan formulated in April 1993, disbursements were lower for
Medicaid, capital projects, and debt service (due to refundings). In addition,
$114 million of school and payments were funded from the proceeds of LGAC bonds.
Disbursements were higher-than-expected for general support for public schools.
The State also made the first of six required payments to the State of Delaware
related to the settlement of Delaware's litigation against the State regarding
the disposition of abandoned property receipts.
During the 1993-94 fiscal year, the State also established and funded a
Contingency Reserve Fund ('CRF') as a way to assist the State in financing the
cost of litigation affecting the State. The CRF was initially funded with a
transfer of $100 million attributable to the positive margin recorded in the
1992-93 fiscal year. In addition, the State augmented this initial deposit with
$132 million on debt service savings attributable to the refinancing of State
and public authority bonds during 1993-94. A year-end transfer of $36 million
was also made to the CRF, which, after a disbursement for authorized fund
purposes, brought the CRF balance at the end of 1993-94 to $265 million. This
amount was $165 million higher than the amount originally targeted for this
reserve fund.
For its 1992-93 fiscal year the State had a balanced budget on a cash basis
with a positive margin of $671 million in the General Fund that was deposited in
the refund reserve account.
After reflecting a 1992-93 year-end deposit to the refund reserve account
of $671 million, reported 1992-93 General Fund receipts were $45 million higher
than originally projected in April 1992. If not for that year-end transaction,
which had the effect of reducing 1992-93 receipts by $671 million and making
those receipts available in 1993-94, General Fund receipts would have been $716
million higher than originally projected.
The favorable performance was primarily attributable to personal income tax
collections that were more than $700 million higher than originally projected
(before reflecting the refund reserve transaction). The withholding and
estimated payment components of the personal income tax exceeded original
estimates by more than $800 million combined, reflecting both stronger economic
activity, particularly at year's end, and the tax-induced one-time acceleration
of income into 1992. Modest shortfalls were experienced in other components of
the income tax.
There were large, but largely offsetting, variances in other categories.
Significantly higher-than-projected business tax collections and the receipt of
unbudgeted payments from the Medical Malpractice Insurance Association and the
New York Racing Association approximately offset the loss of an anticipated $200
million Federal reimbursement, the loss of certain budgeted hospital
differential revenue as a result of unfavorable court decisions, and shortfalls
in certain miscellaneous revenue sources.
Disbursements and transfers to other funds totaled $30.829 billion, an
increase of $45 million above projections in April 1992. After adjusting for the
impact of a $150 million payment from the Medical Malpractice Insurance
Association to health insurers made pursuant to legislation passed in January
1993, actual disbursements were $105 million lower than projected. This
reduction primarily reflected higher-than-anticipated costs for educational
programs, as offset by lower costs in virtually all other categories of
spending, including Medicaid, local health programs, agency operations, fringe
benefits, capital projects and debt service.
During its 1989-90, 1990-91 and 1991-92 fiscal years, the State incurred
cash-basis operating deficits in the General Fund of $775 million, $1.081
billion and $575 million, respectively, prior to
A-9
<PAGE>
- --------------------------------------------------------------------------------
the issuance of short-term tax and revenue anticipation notes ('TRANs'), owing
to lower-than-projected receipts.
GOVERNMENTAL FUNDS. The major operating fund of the State is the General
Fund. It receives all State income that is not required by law to be deposited
in another fund. General Fund receipts, including transfers from other funds,
totalled $32.299 billion in the 1993-94 fiscal year. General Fund receipts in
the State's 1994-95 fiscal year are estimated in the State Financial Plan at
$34.321 billion. Including transfers to other funds, total General Fund
disbursements in the 1993-94 fiscal year were $31.897 billion, and are estimated
to total $34.248 billion in the State's 1994-95 fiscal year.
The Special Revenue Funds account for State receipts from specific sources
that are legally restricted in use to specified purposes and include all moneys
received from the Federal government. Total receipts in Special Revenue Funds
are projected at $24.598 billion for the State's 1994-95 fiscal year. Federal
grants are projected to account for 75% of receipts in Special Revenue Funds in
the State's 1994-95 fiscal year. Disbursements from Special Revenue Funds are
projected to be $24.982 billion for the State's 1994-95 fiscal year.
The Capital Projects Funds are used to finance the acquisition and
construction of major capital facilities and to aid local government units and
Agencies in financing capital constructions. Federal grants for capital
projects, largely highway-related, are projected to account for 33% of the
$3.233 billion in total projected receipts in Capital Projects Funds in the
State's 1994-95 fiscal year. Total disbursements for capital projects are
projected to be $3.730 billion during the State's 1994-95 fiscal year. Of total
disbursements from Capital Projects Funds, approximately 54% is for various
transportation purposes, including highways and mass transportation facilities;
4% is for programs of the Department of Correctional Services and other public
protection activities; 13% is for environmental and recreational programs; 5% is
for educational programs; 16% is for health and mental hygiene facilities; and
5% is for housing and economic development programs. The balance is for the
maintenance of State office facilities and various other capital programs.
The Debt Service Funds serve to fulfill State debt service on long-term
general obligation State debt and other State lease/purchase and contractual
obligation financing commitments. Total receipts in Debt Service Funds are
projected to reach $2.318 billion in the 1994-95 fiscal year. Total
disbursements from Debt Service Funds for debt service, lease-purchase and
contractual-obligation financing commitments are projected to be $2.246 billion
during the State's 1994-95 fiscal year.
STATE BORROWING PLAN. The State issued $850 million in TRANs on May 4, 1993
to fund its day-to-day operations and certain local assistance payments to its
municipalities and school districts. These TRANs matured on December 31, 1993.
The State anticipates that its 1994-95 borrowings for capital purposes will
consist of approximately $374 million in general obligation bonds (including
$140 million for the purpose of redeeming outstanding bond anticipation notes)
and $140 million in new commercial paper issuances. The Legislature has
authorized the issuance of up to $69 million in certificates of participation
for real property and equipment acquisitions during the State's 1994-95 fiscal
year. The projections of the State regarding its borrowings for the 1994-95
fiscal year may change if actual receipts fall short of State projections or if
other circumstances require.
A-10
<PAGE>
- --------------------------------------------------------------------------------
In addition, the use of New York Local Government Assistance Corporation
('LGAC') bond proceeds to make payments to local governmental units, otherwise
made by the State, reduces the State's future liabilities. The LGAC is
authorized to provide net proceeds of $315 million during the 1994-95 fiscal
year
STATE AGENCIES. The fiscal stability of the State is related, at least in
part, to the fiscal stability of its localities and various of its Agencies.
Various Agencies have issued bonds secured, in part, by nonbinding statutory
provisions for State appropriations to maintain various debt service reserve
funds established for such bonds (commonly referred to as 'moral obligation'
provisions).
At September 30, 1993, there were 18 Agencies that had outstanding debt of
$100 million or more. The aggregate outstanding debt, including refunding bonds,
of these 18 Agencies, was $63.5 billion as of September 30, 1993. As of March
31, 1994, aggregate Agency debt outstanding as State-supported debt was $21.1
billion and as State-related was $29.4 billion. Debt service on the outstanding
Agency obligations normally is paid out of revenues generated by the Agencies'
projects or programs, but in recent years the State has provided special
financial assistance, in some cases on a recurring basis, to certain Agencies
for operating and other expenses and for debt service pursuant to moral
obligation indebtedness provisions or otherwise. Additional assistance is
expected to continue to be required in future years.
Several Agencies have experienced financial difficulties in the past.
Certain Agencies continue to experience financial difficulties requiring
financial assistance from the State. Failure of the State to appropriate
necessary amounts or to take other action to permit certain Agencies to meet
their obligations could result in a default by one or more of such Agencies. If
a default were to occur, it would likely have a significant effect on the
marketability of obligations of the State and the Agencies. These Agencies are
discussed below.
The New York State Housing Finance Agency ('HFA') provides financing for
multifamily housing, State University construction, hospital and nursing home
development and other programs. In general, HFA depends upon mortgagors in the
housing programs it finances to generate sufficient funds from rental income,
subsidies and other payments to meet their respective mortgage repayment
obligations to HFA, which provide the principal source of funds for the payment
of debt service on HFA bonds, as well as to meet operating and maintenance costs
of the projects financed. From January 1, 1976 through March 31, 1987, the State
was called upon to appropriate a total of $162.8 million to make up deficiencies
in the debt service reserve funds of HFA pursuant to moral obligation
provisions. The State has not been called upon to make such payments since the
1987 fiscal year and no payments are anticipated during the 1993-94 fiscal year.
UDC has experienced, and expects to continue to experience, financial
difficulties with the housing programs it had undertaken prior to 1975, because
a substantial number of these housing program mortgagors are unable to make full
payments on their mortgage loans. Through a subsidiary, UDC is currently
attempting to increase its rate of collection by accelerating its program of
foreclosures and by entering into settlement agreements. UDC has been, and will
remain, dependent upon the State for appropriations to meet its operating
expenses. The State also has appropriated money to assist in the curing of a
default by UDC on notes which did not contain the State's moral obligation
provision.
A-11
<PAGE>
- --------------------------------------------------------------------------------
The Metropolitan Transportation Authority (the 'MTA') oversees New York
City's subway and bus lines by its affiliates, the New York City Transit
Authority and the Manhattan and Bronx Surface Transit Operating Authority
(collectively, the 'TA'). Through MTA's subsidiaries, the Long Island Rail Road
Company, the Metro-North Commuter Railroad Company and the Metropolitan Suburban
Bus Authority, the MTA operates certain commuter rail and bus lines in the New
York metropolitan area. In addition, the Staten Island Rapid Transit Authority,
an MTA subsidiary, operates a rapid transit line on Staten Island. Through its
affiliated agency, the Triborough Bridge and Tunnel Authority (the 'TBTA'), the
MTA operates certain toll bridges and tunnels. Because fare revenues are not
sufficient to finance the mass transit portion of these operations, the MTA has
depended and will continue to depend for operating support upon a system of
State, local government and TBTA support and, to the extent available, Federal
operating assistance, including loans, grants and operating subsidies.
The TA and the commuter railroads, which are on a calendar fiscal year,
ended 1993 with their budgets balanced on a cash basis. The TA had a closing
cash balance of approximately $39 million. Over the past several years the State
has enacted several taxes -- including a surcharge on the profits of banks,
insurance corporations and general business corporations doing business in the
12-county region (the 'Metropolitan Transportation Region') served by the MTA
and a special .25% regional sales and use tax -- that provide additional
revenues for mass transit purposes, including assistance to the MTA. The
surcharge, which expires in November 1995, yielded $533 million in calendar year
1993, of which the MTA was entitled to receive approximately 90%, or
approximately $480 million.
For 1994, the TA projects that it will end the year with $77.6 million cash
surplus. For the 1994-95 State fiscal year, total State assistance to the MTA is
estimated at $1.3 billion.
A subway fire on December 28, 1990, and a subway derailment on August 28,
1991, each of which caused fatalities and many injuries, have given rise to
substantial claims for damages against both the TA and the City.
In 1981, the State Legislature authorized procedures for the adoption,
approval and amendment of a five-year plan for the capital program designed to
upgrade the performance of the MTA's transportation systems and to supplement,
replace and rehabilitate facilities and equipment, and also granted certain
additional bonding authorization therefor.
On April 5, 1993, the Legislature approved, and the Governor subsequently
signed into law, legislation authorizing a five-year $9.56 billion capital plan
for the MTA for 1992-1996. The MTA has submitted a 1992-1996 Capital Program
based on this legislation for the approval of the MTA Capital Program Review
Board (the 'CPRB'), as State law requires. On July 1, 1993, the CPRB indicated
that it was withholding approval pending the resolution of certain related
issues. If approved, the 1992-1996 Capital Program would succeed two previous
five-year capital programs of the periods covering 1982-1986 and 1987-1991. The
1987-1991 Capital Program totalled approximately $8.0 billion, including $6.2
billion for TA capital projects.
The 1992-1996 Capital Program would supersede a one-year program adopted in
1992. State budget legislation for the 1992-93 fiscal year had required the MTA
to submit a one-year capital program for 1992 instead of a five-year program.
The one-year program, which contained $1.635 billion of projects for transit and
commuter facilities combined, was approved by the CPRB in May 1992, but the
five-year program for 1992-1996, required to be submitted subsequently by the
A-12
<PAGE>
- --------------------------------------------------------------------------------
MTA as an amendment to the one-year plan, was disapproved without prejudice by
the CPRB in December 1992.
The cities, towns, villages and school districts of the State are political
subdivisions of the State with the powers granted by the State Constitution and
statutes. As the sovereign, the State retains broad powers and responsibilities
with respect to the government, finances and welfare of these political
subdivisions, especially in education and social services. In recent years the
State has been called upon to provide added financial assistance to certain
localities.
OTHER LOCALITIES. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the State's 1993-94 fiscal year and thereafter. The potential impact on the
State of such actions by localities is not included in the projections of the
State receipts and disbursements in the State's 1992-93 and 1993-94 fiscal
years.
Municipalities and school districts have engaged in substantial short-term
and long-term borrowings. In 1992, the total indebtedness of all localities in
the State was approximately $15.7 billion. A small portion (approximately $71.6
million) of this indebtedness represented borrowing to finance budgetary
deficits and was issued pursuant to enabling State legislation. State law
requires the Comptroller to review and make recommendations concerning the
budgets of those local government units other than the City authorized by State
law to finance deficits during the period of probable usefulness authorized for
such indebtedness. Seventeen localities had outstanding indebtedness for deficit
financing at the close of their fiscal 1992.
Certain proposed Federal expenditure reductions would reduce, or in some
cases eliminate Federal funding of some local programs and accordingly might
impose substantial increased expenditure requirements on affected localities. If
the State, the City or any of the Agencies were to suffer serious financial
difficulties jeopardizing their respective access to the public credit markets,
the marketability of notes and bonds issued by localities within the State could
be adversely affected. Localities also face anticipated and potential problems
resulting from certain pending litigation, judicial decisions and long-range
economic trends. The longer-range problems of declining city population,
increasing expenditures and other economic trends could adversely affect
localities and require increasing State assistance in the future.
Because of significant fiscal difficulties experienced from time to time by
the City of Yonkers ('Yonkers'), a Financial Control Board (the 'Yonkers'
Board') was created by the State in 1984 to oversee Yonkers' fiscal affairs.
Future actions taken by the Governor or the State Legislature to assist Yonkers
could result in the allocation of State resources in amounts that cannot yet be
determined.
Certain litigation pending against the State or its officers or employees
could have a substantial or long-term adverse effect on State finances. Final
adverse decisions in such cases could require extraordinary appropriations or
expenditure reductions or both, and might have a material, adverse effect upon
the financial condition of the State and various of its Agencies and municipal
subdivisions.
(2) NEW YORK CITY. In the mid-1970s, the City had large accumulated past
deficits and until recently was not able to generate sufficient tax and other
ongoing revenues to cover expenses in each fiscal year. However, the City's
operating results for the fiscal year ended June 30, 1994 were balanced in
accordance with GAAP, the twelfth consecutive year in which the City achieved
A-13
<PAGE>
- --------------------------------------------------------------------------------
balanced operating results in accordance with GAAP. The City's ability to
maintain balanced operating results in future years is subject to numerous
contingencies and future developments.
The City's economy, whose rate of growth slowed substantially over the past
three years, is currently in recession. During the 1990 and 1991 fiscal years,
as a result of the slowing economy, the City has experienced significant
shortfalls in almost all of its major tax sources and increases in social
services costs, and has been required to take actions to close substantial
budget gaps in order to maintain balanced budgets in accordance with the
Financial Plan. Since the stock market crash, the City's tax revenues have been
below expected levels, and the revised local employment data available since
January 1989 have confirmed that the City's economy has been severely affected
by the stock market crash, and that the impact of layoffs in the finance,
insurance and real estate sectors is greater than had been believed earlier.
In 1975, the City became unable to market its securities and entered a
period of extraordinary financial difficulties. In response to this crisis, the
State created MAC to provide financing assistance to the City. The State also
enacted the New York State Financial Emergency Act for the City of New York (the
'Emergency Act') which, among other things, created the Financial Control Board
(the 'Control Board') to oversee the City's financial affairs and facilitate its
return to the public credit markets. The State also established the Office of
the State Deputy Comptroller ('OSDC') to assist the Control Board in exercising
its powers and responsibilities. On June 30, 1986, the Control Board's powers of
approval over the City Financial Plan were suspended pursuant to the Emergency
Act. However, the Control Board, MAC and OSDC continue to exercise various
monitoring functions relating to the City's financial condition. The City
prepares and operates under a four-year financial plan which is submitted
annually to the Control Board for review and which the City periodically
updates.
The City's independently audited operating results for each of its fiscal
years from 1981 through 1993 show a General Fund surplus reported in accordance
with GAAP. The City has eliminated the cumulative deficit in its net General
Fund position. In addition, the City's financial statements for the 1993 fiscal
year received an unqualified opinion from the City's independent auditors, the
eleventh consecutive year the City has received such an opinion.
In August 1993, the City adopted and submitted to the Control Board for its
review a four-year Financial Plan covering fiscal years 1994 through 1997 (the
'Financial Plan'). The Financial Plan was based on the City's fiscal year 1994
expense budget adopted June 14, 1993 as well as certain changes incorporated
subsequent to the budget adoption process. On November 23, 1993, the City
adopted and submitted to the Control Board for its review a first-quarter
modification to the Financial Plan (the 'November Modification') incorporating
various re-estimates of revenues and expenditures. For fiscal year 1994, the
November Modification includes additional resources stemming primarily from the
City Comptroller's fiscal year 1993 annual audit, savings from a reduction in
prior years' accrued expenditures, and higher State and Federal aid resulting
from claims by the City for reimbursement of various social services costs.
These resources were used to fund new needs in the November Modification
including higher costs in the uniformed agencies, at the Board of Education (the
'BoE') and for certain social services, the unlikelihood of the sale of the
Off-Track Betting Corporation (the 'OTB'), and lower estimates of miscellaneous
and other revenues. After taking these adjustments into account, the November
Modification projects a balanced budget for fiscal year 1994, based upon
revenues of $31.585 billion. For fiscal years 1995, 1996 and 1997, the November
Modification projects budget gaps of
A-14
<PAGE>
- --------------------------------------------------------------------------------
$1.730 billion, $2.513 billion and $2.699 billion, respectively. These gaps are
higher by about $450 million in fiscal year 1995 and by about $700 million in
each of fiscal years 1996 and 1997 than in the Financial Plan, primarily on
account of the nonrecurring value of the fiscal year 1994 revenue adjustments,
the loss of certain one-time resources funding BoE fiscal year 1994 spending
needs, and the reclassification of anticipated State aid from the baseline
revenue estimates to the gap-closing program. To offset these larger gaps, the
November Modification relies on additional City, State and other actions.
On December 1, 1993, a three-member panel appointed by the Mayor to address
City structural budget imbalance released a report setting forth its findings
and recommendations. In its report, the panel noted that budget imbalance is
likely to be greater than the City now projects by $255 million in fiscal year
1995, rising to nearly $1.5 billion in fiscal year 1997. The report provided a
number of options that the City should consider in addressing the structural
balance issue such as severe cuts in City-funded personnel levels, increases in
residential property taxes and the sales tax, and the imposition of bridge tolls
and solid waste collection fees. The report also noted that additional State
actions will be required in many instances to allow the City to cut its budget
without grave damage to basic services.
On December 21, 1993, OSDC issued a report reviewing the November
Modification. The report noted that while the outlook for fiscal year 1994 has
improved since August, it will be necessary for the City to manage its budget
aggressively in order to stay on course for budget balance this year. For fiscal
years 1995 through 1997, the report expressed concern that the gaps identified
by the City in the November Modification are the largest as a percentage of
City-fund revenues that the City has faced at this point in the fiscal year
since budget balance in accordance with GAAP was first achieved in fiscal year
1981.
On December 21, 1993, the staff of the Control Board issued its report on
the November Modification. The report states that the plan is now more realistic
in terms of the gaps it portrays and the solutions it offers. However, the
solutions are mostly limited to fiscal year 1994 while the gap for fiscal year
1995 has been increased by $450 million. Beginning in fiscal year 1995, budget
gaps average over $2 billion annually. Therefore, the staff recommends that
prompt action to replace many current-year one-shots with recurring savings is
critical.
On February 2, 1994, the Mayor presented to the City Council and the
Control Board a mid-year modification to the Financial Plan (the 'February
Modification'). The February Modification projects a balanced budget for fiscal
year 1994, based upon revenues of $31.735 billion, including a general reserve
of $81 million. For fiscal years 1995, 1996 and 1997, the February Modification
projects budget gaps of $2.261 billion, $3.167 billion and $3.253 billion,
respectively, and assumes no wage and salary increases beyond the expiration of
current labor agreements which expire in fiscal years 1995 and 1996. These gaps
have grown since November by about $530 million in fiscal year 1995, and $650
million and $550 million in fiscal years 1996 and 1997, respectively, owing in
large part to lower estimates of real property tax revenues. To close the budget
gap projected for fiscal year 1995, the February Modification includes a
gap-closing program that consists of the following major elements: (i) an agency
program of $1.048 billion; (ii) fringe benefit and pension savings of $400
million; (iii) an intergovernmental aid package of $400 million; (iv) a
workforce reduction program of $144 million; and (v) the assumption of a $234
million surplus roll from fiscal year 1994. Implementation of many of the
gap-closing initiatives requires the cooperation of the municipal labor unions,
the City Council and the State and
A-15
<PAGE>
- --------------------------------------------------------------------------------
Federal governments. The February Modification also includes a tax reduction
program, with most of the financial impact affecting the later years of the Plan
period.
The City requires certain amounts of financing for seasonal and capital
spending purposes. The City issued $1.75 billion of notes for seasonal financing
purposes during the 1994 fiscal year. The City's capital financing program
projects long-term financing requirements of approximately $17 billion for the
City's fiscal years 1995 through 1998 for the construction and rehabilitation of
the City's infrastructure and other fixed assets. The major capital requirement
include expenditures for the City's water supply system, and waste disposal
systems, roads, bridges, mass transit, schools and housing. In addition, the
City and the Municipal Water Finance Authority issued about $1.8 billion in
refunding bonds in the 1994 fiscal year.
(3) STATE ECONOMIC TRENDS. Over the long term, the State and the City also
face serious potential economic problems. The City accounts for approximately
41% of the State's population and personal income, and the City's financial
health affects the State in numerous ways. The State has long been one of the
wealthiest states in the nation. For decades, however, the State economy has
grown more slowly than that of the nation as a whole, resulting in the gradual
erosion of its relative economic affluence. The causes of this relative decline
are varied and complex, in many cases involving national and international
developments beyond the State's control.
Part of the reason for the long-term relative decline in the State's
economy has been attributed to the combined State and local tax burden, which is
among the highest in the United States. The existence of this tax burden limits
the State's ability to impose higher taxes in the event of future financial
difficulties. Recently, the State has been relatively successful in bringing the
rate of growth in the public sector in the State into line with the slower
expansion in the private economy.
The burdens of State and local taxation, in combination with many other
causes of regional economic dislocation, may have contributed to the decision of
businesses and individuals to relocate outside, or not locate within, the State.
In 1987, the State enacted a major personal income tax reduction and reform
program and also reduced the tax rate on corporation income. In addition, the
State has provided various tax incentives to encourage business relocation and
expansion. The State, however, in its 1989-90, 1990-91 and 1991-92 fiscal years
substantially increased taxes and fees to help close projected budget gaps in
those years, and in 1990-91, 1991-92, 1992-93 and 1993-94 delayed and
restructured the remainder of the personal income tax reduction program
originally enacted in 1987.
OHIO SERIES
STATE ECONOMY AND BUDGET. Nonmanufacturing industries now employ more than
three-fourths of all payroll workers in the State of Ohio. However, due to the
continued importance of manufacturing industries (including auto-related
manufacturing), economic activity in Ohio, as in many other industrially
developed states, tends to be more cyclical than in some other states and in the
nation as a whole. Agriculture also is an important segment of the Ohio economy.
The financial condition of the State has fluctuated in a pattern related to
national economic conditions, with periods of prolonged stringency
characterizing fiscal years 1980 through 1983. Additionally, the 1980-82
recession brought with it a substantial increase in bankruptcies and
foreclosures. While the State's economy has improved since 1983, the State
experienced an
A-16
<PAGE>
- --------------------------------------------------------------------------------
economic slowdown in 1990-91, consistent with the national economic conditions
during that period.
The State constitution imposes a duty on the Ohio General Assembly to
'provide for raising revenue, sufficient to defray the expenses of the state,
for each year, and also a sufficient sum to pay the principal and interest as
they become due on the state debt.' The State is effectively precluded by law
from ending a fiscal year or a biennium in a 'deficit' position. State borrowing
to meet casual deficits or failures in revenues or to meet expenses not
otherwise provided for is limited by the constitution to $750,000.
The State carries out most of its operations through the General Revenue
Fund ('GRF') which receives general State revenues not otherwise dedicated
pursuant to certain constitutional and statutory claims on State revenues. The
GRF sources consist primarily of personal income and sales-use taxes. The GRF
ending (June 30) fund balance is reduced during less-favorable national economic
periods and then increases during more favorable economic periods.
The Office of Budget and Management ('OBM') projects positive $106.6
million and $314.6 million ending fund and cash balances, respectively, for the
GRF for fiscal year 1994. In addition, as of May 31, 1994 the Budget
Stabilization Fund ('BSF') had a cash balance of $21.0 million.
The GFR appropriations bill for the biennium ending June 30, 1995 was
passed on June 30, 1993 and promptly signed, with selective vetoes, by the
Governor. The Act provides for total GRF biennial expenditures of approximately
$30.7 billion, an increase over those for the 1992-93 fiscal biennium.
Authorized expenditures in fiscal year 1994 are 9.2% higher than in fiscal year
1993 (taking into account fiscal year 1993 expenditure reductions), and for
fiscal year 1995 are 6.6% higher than in fiscal year 1994. Pursuant to April
1994 legislation, the OBM Director is to make a partial payment to the BSF after
the end of fiscal year 1994 of any GRF fund balance in excess of $300 million.
State statutory provisions permit the adjustment of payment schedules and
the use of the Total Operating Fund ('TOF') to manage temporary GRF cash flow
deficiencies. The State has not undertaken external revenue anticipation
borrowing.
TOF includes the consolidated total cash balances, revenues, disbursements
and transfers of the GRF and several other specified funds. TOF cash balance at
May 31, 1994 was $2.984 billion. These cash balances are consolidated only for
the purpose of meeting cash flow requirements and, except for the GRF, a
positive cash balance must be maintained for each discrete fund included in the
TOF. The GRF is permitted to incur a temporary cash deficiency by drawing upon
the available consolidated cash balance in the TOF. The amount of that permitted
GRF cash deficiency at any time is limited to 10% of GRF revenues for the
then-preceding fiscal year. As projected by OBM for the fiscal year ending June
30, 1993, cash flow deficiencies occurred in August 1992 through May 1993, with
the highest deficiency being $768.6 million in December 1992. In addition, GRF
cash flow deficiencies have occurred in six months of fiscal year 1994.
STATE DEBT. The Ohio Constitution prohibits the incurrence or assumption of
debt by the State without a popular vote except to (i) cover causal deficits or
failures in revenues limited in amount to $750,000 and (ii) repel invasion,
suppress insurrection or defend the State in war.
At various times from 1921, the voters of Ohio, by thirteen specific
constitutional amendments, authorized the incurrence of up to $4.664 billion in
State debt to which taxes or excises were pledged for payment. As of June 1994,
excluding Highway Obligations Bonds
A-17
<PAGE>
- --------------------------------------------------------------------------------
discussed below, and the recently authorized parks, recreation and natural
resources bonds, approximately $3.235 billion had been issued, of which $2.514
billion had been retired and approximately $712.6 million (all evidenced by
bonds) remained outstanding. The only such debt still authorized to be incurred
is a portion of the Highway Obligations Bonds and Coal Development Bonds as well
as State general obligations bonds for local government infrastructure projects,
described below and recently authorized general obligation park bonds.
The total voted authorization of State debt includes authorization for $500
million in Highway Obligations to be outstanding at any one time, with no more
than $100 million to be issued in any one calendar year. As Highway Obligations
are retired, additional Highway Obligations may be issued so long as the
principal amount outstanding does not exceed $500 million. As of June 16, 1994,
approximately $1.545 billion in Highway Obligations had been issued and $446.3
million were outstanding.
A 1985 constitutional amendment authorized up to $100 million in State full
faith and credit obligations for coal research and development to be outstanding
at any one time. In addition, the General Assembly has authorized the issuance
of an additional $35 million of Coal Development Bonds. As of June 16, 1994, $80
million of Coal Development Bonds were issued, of which $43.1 million were
outstanding.
A 1987 State constitutional amendment authorizes the issuance of $1.2
billion of State full faith and credit obligations for infrastructure
improvements of which no more than $120 million may be issued in any calendar
year. As of June 1, 1994, approximately $720.0 million of such obligations were
issued, of which $645.2 million were outstanding.
A constitutional amendment, adopted in November 1990, authorizes greater
State and political subdivision participation in the provision of housing for
individuals and families. This supplements the previously constitutionally
authorized loans-for-lenders and other housing assistance programs, financed in
part with State Revenue Bonds. The amendment authorizes the General Assembly to
provide for State assistance for housing in a variety of manners. The General
Assembly could authorize State borrowing for the purpose, and the issuance of
State obligations secured by a pledge of all or a portion of State revenues or
receipts, although the obligations may not be supported by the State's full
faith and credit.
A constitutional amendment approved by the voters in November 1993
authorizes $200.0 million in state general obligation bonds to be outstanding
for parks, recreation and natural resource purposes (no more than $50.0 million
to be issued in any one fiscal year). The General Assembly in the general
capital appropriations act for the 1995-96 capital appropriations biennium
authorized the Commissioners of the Sinking Fund to issue $100.0 million of such
obligations.
In addition, an initiative petition currently is being circulated calling
for submission at the November 1994 general election of a constitutional
amendment adding express exclusions from sales or other excise taxes upon food.
The amendment's full effect is not yet determinable, but estimates of resulting
reduced annual State-level revenues range from $60 million to $68.5 million. In
OBM's judgment, if approved, the amendment would not have a materially negative
effect on State finances and appropriations for the remainder of the current
biennium.
In addition, the State constitution authorizes the issuance, for certain
purposes, of State obligations not secured by a pledge of taxes or excises to
pay principal and interest. Such special
A-18
<PAGE>
- --------------------------------------------------------------------------------
obligations include bonds and notes issued by, among others, the Ohio Public
Facilities Commission ('OPFC') and the Ohio Building Authority ('OBA'). As of
June 16, 1994, the OPFC had issued $3.272 billion for higher education
facilities, approximately $2.026 billion of which were outstanding, and $917.5
million for mental health facilities, approximately $463.3 million of which were
outstanding and $145.0 million for parks and recreation facilities,
approximately $86.5 million of which were outstanding.
Only a portion of State capital needs can be met by direct GRF
appropriations; therefore, additional State borrowing for capital purposes has
been and will be required. Under present constitutional limitations, most of
that borrowing will be primarily by lease-rental supported obligations such as
those issued by OPFC and OBA.
The general capital appropriations act for the 1995-96 capital
appropriations biennium authorizes additional borrowing. It authorizes issuance
by OPFC of obligations, in addition to those previously authorized by the
General Assembly, in the amounts of $679.2 million for higher education capital
facilities projects (a substantial number of which are renovations of equipment
and improvements to existing facilities), $77.5 million for mental health and
retardation facilities projects, and $30.0 million for parks and recreation
facilities. It also authorized the OBA to issue obligations, in addition to
those previously authorized by the General Assembly, in the amounts of $221.0
million for Department of Rehabilitation Correction Facilities, $48.0 million
for Department of Youth Services facilities, $230.3 million for Department of
Administrative Services facilities, $42.5 million for Ohio Arts Facilities
Commission facilities, $11.2 million for Department of Public Safety and other
miscellaneous capital improvements facilities and $43.95 million for Ohio
Department of Transportation facilities. In addition, the Treasurer of State was
authorized to issue obligations in addition to those previously authorized by
the General Assembly, in the amounts of $70.0 million for the Department of
Education and, $240.0 million ($120 million for calendar year 1995 and $120
million for calendar year 1996) for the Public Works Commission.
The Commissioners of the Sinking Fund presently have authorization to issue
an additional $70 million of Coal Development Bonds and $118.17 million of
Highway Obligation Bonds.
A November 1986 act (the 'Rail Act') authorizes the Ohio High-Speed Rail
Authority (the 'Rail Authority') to issue obligations to finance the cost of
inter-city high-speed rail service projects within the State, either directly or
by loans to other entities. The Tax Reform Act of 1986 included a special
transition provision (which expired October 1, 1990) exempting up to $2 billion
of State obligations from certain of its provisions. The Rail Authority has
considered financing plan options and the general possibility of issuing bonds
or notes. The Rail Act prohibits, without express approval by joint resolution
of the General Assembly, the collapse of any escrow of financing proceeds for
any purpose other than payment of the original financing, the substitution of
any other security, and the application of any proceeds to loans or grants. The
Rail Act authorizes the Rail Authority, but only with subsequent General
Assembly action, to pledge the faith and credit of the State but not the State's
power to levy and collect taxes (except ad valorem property taxes if
subsequently authorized by the General Assembly) to secure debt service on any
post-escrow obligations and, provided it obtains the annual consent of the State
Controlling Board, to pledge to and use for the payment of debt service on any
such obligations all excises, fees, fines and forfeitures and other revenues
(except highway receipts) of the State after provision for the payment of
certain other State obligations.
A-19
<PAGE>
- --------------------------------------------------------------------------------
Notwithstanding the constitutional provisions prohibiting the incurrence of
certain debt without popular vote, the State and State agencies have issued
revenue bonds that are payable from net revenues of revenue-producing facilities
or categories of facilities, which revenue bonds are not 'debt' within the
meaning of such constitutional provisions. Investment in such bonds carries the
risk that the issuing agency or the specific revenue source may not provide
sufficient funds to service the debt incurred.
The State is a party to various legal proceedings seeking damages or
injunctive relief and generally incidental to its operations. In particular,
litigation contesting the Ohio system of school funding is pending in two county
common pleas courts.
S&P rates certain of the State's general obligation bonds AA and Moody's
rates the State's general obligation bonds Aa.
STATE EMPLOYEES AND RETIREMENT SYSTEMS. The State has established five
public retirement systems to provide retirement, disability retirement and
survivor benefits. Three cover both State and local employees, one State
employees only and one local government employees only. The Public Employees
Retirement System ('PERS'), the largest of the five, covers both State and local
public employees. The State Teachers Retirement System ('STRS') and School
Employees Retirement System ('SERS') primarily cover school district employees
and public higher education employees. The Highway Patrol Retirement System
('HPRS') covers State troopers and the Police and Fire Pension and Disability
System ('PFPDS') covers local safety forces.
As of the most recent year reported by the particular system, the unfunded
accrued liabilities of STRS and SERS were $8.264 billion and $2.592 billion,
respectively, and the unfunded accrued liabilities of PERS, HPRS amd PFPDS was
$5.374 billion, $72.8 million and $840.2 million, respectively.
STATE MUNICIPALITIES. Ohio has a mixture of urban and rural population,
with approximately three-quarters urban. There are approximately 943
incorporated cities and villages (populations under 5,000) in the State; six
cities have populations of over 100,000. A 1979 Act established procedures for
identifying and assisting those few cities and villages experiencing defined
'fiscal emergencies.'
A commission composed of State and local officials, and private sector
members experienced in business and finance appointed by the Governor, is to
monitor the fiscal affairs of a municipality facing substantial financial
problems. That act requires the municipality to develop, subject to approval and
monitoring by its commission, a financial plan to eliminate deficits and cure
any defaults and otherwise remedy fiscal emergency conditions, and to take other
actions required under its financial plan. It also provides enhanced protection
for the municipality's bonds and notes and, subject to the act's stated
standards and controls, permits the State to purchase limited amounts of the
municipality's short-term obligations (used only once, in 1980).
In the fifteen years that the act has been in effect, it has been applied
to 11 cities and to 12 villages. The situations in nine cities and nine villages
have been resolved and their commissions terminated. Only the cities of East
Cleveland and Nelsonville and three of the villages remain under the procedure.
SUMMARY. Many factors affect or could affect the financial condition of the
State and other issuers of debt obligations, many of which are not within the
control of the State or such issuers.
A-20
<PAGE>
- --------------------------------------------------------------------------------
There can be no assurance that such factors and the resulting impact on State
and local governmental finances will not affect adversely the market value of
Ohio Municipal Obligations held in the portfolio of the Fund or the ability of
the respective obligors to make required payments on such obligations.
PENNSYLVANIA SERIES
GENERAL. Pennsylvania historically has been identified as a heavy industry
state, although that reputation has changed with the decline of the coal, steel
and railroad industries and the resulting diversification of Pennsylvania's
industrial composition. The major new sources of growth are in the service
sector, including trade, medical and health services, education and financial
institutions. By 1985, manufacturing had fallen behind both the services sector
and the trade sector as the largest single source of employment in Pennsylvania.
REVENUES AND EXPENDITURES. Pennsylvania utilizes the fund method of
accounting. The General Fund, the State's largest and principal operating fund,
receives all tax receipts, revenues, Federal grants and reimbursements that are
not specified by law to be deposited elsewhere. Debt service on all obligations,
except those issued for highway purposes or for the benefit of other special
revenue funds, is payable from the General Fund.
General revenues in the General Fund include all tax receipts, license and
fee payments, fines, penalties, interest and other revenues not specified to be
deposited elsewhere or not restricted to a specific program or expenditure.
Tax revenues constituted over 98% of General Fund revenues in fiscal 1993.
The major tax sources for the General Fund are the sales tax, which accounted
for $4.83 billion or 33.0% of revenues accruing to the General Fund in fiscal
1993; the personal income tax, which accounted for $4.79 billion or 32.7% of
revenues accruing to the General Fund; and corporate taxes, which accounted for
$2.33 billion or 16.0% of tax revenues. The primary expenditures of the General
Fund are for education ($6.4 billion from Commonwealth funds in fiscal 1994) and
for public health and welfare ($12.7 billion in fiscal 1994).
GOVERNMENTAL FUND TYPES: FINANCIAL CONDITION/RESULTS OF OPERATIONS (GAAP
BASIS). From fiscal 1984 through fiscal 1989, the Commonwealth reported a
positive unreserved-undesignated fund balance for its Governmental Fund Types at
the fiscal year end. Reduced revenue growth and increased expenses contributed
to negative unreserved-undesignated fund balances of the Governmental Fund Types
at the end of the 1990 and 1991 fiscal years, largely due to operating deficits
in the General Fund and State Lottery Fund during those fiscal years. Actions
taken during fiscal year 1992 to bring the General Fund budget back into
balance, including tax increases and expenditure restraints, resulted in a $1.1
billion improvement to the unreserved-undesignated fund deficit for combined
Governmental Fund Types and a return to a positive fund balance. At the end of
fiscal 1993, the total fund balance and other credits for the total Governmental
Fund Types was $1.960 billion, an increase of $732.1 million from the balance at
the end of fiscal year 1992. During fiscal 1993, total assets increased by
$1.297 billion to $7.1 billion, while liabilities increased $564.6 million to
$5.137 billion.
GENERAL FUND: FINANCIAL CONDITION/RESULTS OF OPERATIONS. FIVE YEAR OVERVIEW
(GAAP BASIS). The five-year period from fiscal 1989 through fiscal 1993 was
marked by public health and welfare costs growing at a rate double the growth
rate for all state expenditures. Rising
A-21
<PAGE>
- --------------------------------------------------------------------------------
caseloads, increased utilization of services and rising prices joined to produce
the rapid rise of public health and welfare costs at a time when a national
recession caused tax revenues to stagnate and even decline. During the period
from fiscal 1989 through fiscal 1993, public health and welfare costs rose by an
average annual rate of 10.9% while tax revenues were growing at an average
annual rate of 5.5%. Consequently, spending on other budget programs was
restrained to a growth rate below 5.0% and sources of revenues other than taxes
became larger components of fund revenues. Those sources included transfers from
other funds and hospital and nursing home pooling of contributions to use as
federal matching funds.
FISCAL 1992 FINANCIAL RESULTS (GAAP BASIS). During fiscal 1992 the General
Fund recorded a $1.1 billion operating surplus through tax rate increases and
tax base broadening measures enacted in August 1991 and by controlling
expenditures through numerous cost reduction measures implemented throughout the
fiscal year. As a result of the fiscal 1992 operating surplus, the fund balance
increased to $87.5 million and the unreserved-undesignated deficit dropped to
$138.6 million from its fiscal 1991 level of $1.146 billion.
FISCAL 1993 FINANCIAL RESULTS (BUDGETARY BASIS). The 1993 fiscal year
closed with revenues higher than anticipated and expenditures about as
projected, resulting in an ending unappropriated balance surplus of $242.3
million. Cash revenues were $41.5 million above the budget estimate and totaled
$14.633 billion, representing less than a 1% increase over revenue for the 1992
fiscal year. A reduction in the personal income tax rate in July 1992 and
revenues from retroactive corporate tax increases received in fiscal 1992 were
responsible for the low rate of revenue growth.
Appropriations less lapses totaled an estimated $13.870 billion,
representing a 1.1% increase over those during fiscal 1992. The low growth in
spending was a consequence of a low rate of revenue growth, significant one-time
expenses during fiscal 1992, increased tax refund reserves to cushion against
adverse decisions on pending litigations, and the receipt of federal funds for
expenditures previously paid out of Commonwealth funds.
By state statute, 10% of the budgetary basis unappropriated surplus at the
end of a fiscal year is to be transferred to the Tax Stabilization Reserve Fund.
The transfer for the fiscal 1993 balance is expected to be $24.2 million. The
remaining unappropriated surplus of $218.0 million will be carried forward into
the 1994 fiscal year.
FISCAL 1994 BUDGET (BUDGETARY BASIS). The enacted 1994 fiscal year budget
provides for $14.999 billion of appropriations of Commonwealth funds. The
largest increase in appropriations is for the Department of Public Welfare ($235
million) to meet the increasing costs of medical care and rising caseloads.
Other large increases include $196 million to education (which includes $129
million to increase state educational subsidies for the most needy school
districts) and $104 million for correctional institutions (to pay operating
costs and lease payments for five new prisons and to expand the capacity of two
existing facilities).
The continuing rise in medical assistance costs cannot be met from the
resources provided by a much slower growing tax revenue base. Consequently,
program and financial changes must be implemented to keep costs within budget
limits. For fiscal 1994, the Commonwealth plans to save $247 million by
receiving federal reimbursement for hospital services provided to state general
assistance recipients. Prior to this time, those costs were fully paid by the
Commonwealth. In addition, the Commonwealth will continue to use pooled
financing for medical assistance costs using intergovernmental transfers in
place of voluntary contributions as was
A-22
<PAGE>
- --------------------------------------------------------------------------------
done in earlier fiscal years. Through the pooled financing, additional federal
reimbursements may be drawn to support the medical assistance program. The
pooled financing is anticipated to replace $68 million of Commonwealth funds in
the 1994 fiscal year budget.
The budget estimates revenue growth of 3.7% over fiscal 1993 actual
revenues. The revenue estimate is based on an expectation of continued economic
recovery, but at a slow rate. Sales tax receipts are projected to rise 4.4% over
1993 receipts while personal income tax receipts are projected to increase by
3.3%, a rate that is low because of the tax rate reduction in July 1992.
PROPOSED FISCAL 1995 BUDGET. For the fiscal year beginning July 1, 1994,
the Governor has proposed a budget containing a 4.1% increase in appropriations
over the actual and proposed supplemental appropriations for fiscal 1994. Total
appropriations recommended amount to $15.665 billion. The budget is balanced by
drawing down on a projected $267 million unappropriated surplus for fiscal 1994.
The fastest growing portion of the budget continues to be medical assistance,
which is proposed to receive $264 million, or 42.4%, of the proposed net
increase in spending. Other program areas budgeted to receive major increases
are education ($165 million) and corrections ($126 million). The proposed budget
recommends a tightening of eligibility criteria for state-financed welfare
benefits as a cost reduction measure.
The Governor's proposal also includes a recommended reduction in the
corporate net income tax rate from 12.25% to 9.99% over a three year period. The
corporate tax cut and a proposed increase in poverty exemption for the personal
income tax are estimated to cost $124.7 million in fiscal 1995. The recommended
budget includes Commonwealth revenue growth of 4.7% without including the effect
of the proposed tax reduction. The revenue estimate is based on the expectation
of a continued slow national economy recovery and continued economic growth of
the Pennsylvania economy at a rate slightly below the national rate. Total
estimated Commonwealth revenue, adjusted for refunds and the proposed tax
reduction, is $15.400 billion.
COMMONWEALTH DEBT. The current Constitutional provisions pertaining to
Pennsylvania debt permit the issuance of the following types of debt: (i) debt
to suppress insurrection or rehabilitate areas affected by disaster, (ii)
electorate approved debt, (iii) debt for capital projects subject to an
aggregate debt limit of 1.75 times the annual average tax revenues of the
preceding five fiscal years (this debt need not be approved by the electorate)
and (iv) tax anticipation notes payable in the fiscal year of issuance. All debt
except tax anticipation notes must be amortized in substantial and regular
amounts.
All outstanding general obligation bonds of Pennsylvania are rated AA- by
S&P and Fitch and A1 by Moody's. Outstanding general obligation debt totaled
$5.039 billion on June 30, 1993.
Pennsylvania engages in short-term borrowing to fund expenses within a
fiscal year through the sale of tax anticipation notes which must mature within
the fiscal year of issuance. The principal amount issued, when added to that
outstanding, may not exceed in the aggregate 20% of the revenues estimated to
accrue to the appropriate fund in the fiscal year. The State is not permitted to
fund deficits between fiscal years with any form of debt. All year-end deficit
balances must be funded within the succeeding fiscal year's budget. Pennsylvania
issued a total of $400 million of tax anticipation notes for the account of the
General Fund in fiscal 1994, all of which matured on June 30, 1994.
A-23
<PAGE>
- --------------------------------------------------------------------------------
Pending the issuance of bonds, Pennsylvania may issue bond anticipation
notes subject to the applicable statutory and Constitutional limitations
generally imposed on bonds. The term of such borrowings may not exceed three
years.
STATE-RELATED OBLIGATIONS. Certain state-created agencies have statutory
authorization to incur debt for which no legislation providing for state
appropriations to pay debt service thereon is required. The debt of these
agencies is supported by assets of or revenues derived from the various projects
financed; it is not an obligation of the State. Some of these agencies, however,
are indirectly dependent on State appropriations. State-related agencies and
their outstanding debt as of December 31, 1993 include the Delaware River Joint
Toll Bridge Commission ($57.4 million), the Delaware River Port Authority
($239.4 million), the Pennsylvania Economic Development Financing Authority
($380.8 million), the Pennsylvania Energy Development Authority ($163.7
million), the Pennsylvania Higher Education Assistance Agency ($1.159 billion),
the Pennsylvania Higher Education Facilities Authority ($1.806 billion), the
State Public School Building Authority ($306.4 million), the Pennsylvania
Turnpike Commission ($1.153 billion), the Pennsylvania Industrial Development
Authority ($256.4 million) and the Pennsylvania Infrastructure Investment
Authority ($192.5 million). In addition, the Governor is statutorily required to
place in the budget of the Commonwealth an amount sufficient to make up any
deficiency in the capital reserve fund created for, or to avoid default on,
bonds issued by the Pennsylvania Housing Finance Agency ($2.066 billion of
revenue bonds and notes outstanding as of December 31, 1993), and an amount of
funds sufficient to alleviate any deficiency that may arise in the debt service
reserve fund for bonds issued by The Hospitals and Higher Education Facilities
Authority of Philadelphia. The budget as finally adopted by the legislation may
or may not include the amounts requested by the Governor.
LOCAL GOVERNMENT DEBT. Local government in Pennsylvania consists of
numerous individual units. Each unit is distinct and independent of other local
units, although they may overlap geographically.
There is extensive general legislation applying to local government. For
example, the Local Government Unit Debt Act provides for uniform debt limits for
local government units, including municipalities and school districts, and
prescribes methods of incurring, evidencing, securing and collecting debt. Under
the Local Government Unit Debt Act, the ability of Pennsylvania municipalities
and school districts to engage in general obligation borrowing without electoral
approval is generally limited by their recent revenue collection experience.
Generally, such subdivisions can levy real property taxes unlimited as to the
rate or amount to pay debt service on general obligation borrowings.
Municipalities may also issue revenue obligations without limit and without
affecting their general obligation borrowing capacity if the obligations are
projected to be paid solely from project revenues.
Municipal authorities and industrial development authorities are also
widespread in Pennsylvania. An authority is organized by a municipality acting
singly or jointly with another municipality and is governed by a Board appointed
by the governing unit of the creating municipality or municipalities. Typically,
authorities are established to acquire, own and lease or operate one or more
projects and to borrow money and issue revenue bonds to finance them.
A-24
<PAGE>
- --------------------------------------------------------------------------------
TEXAS SERIES
GENERAL. Beginning in late 1982, the decline of the State's oil and gas
industry, the devaluation of the Mexican peso and the generally soft national
economy combined to cause a significant reduction in the rate of growth of State
revenues. During late 1985 and early 1986, the price of oil fell dramatically
worldwide, which had a ripple effect causing other sectors of the State's
economy, such as real estate, to decline. As a result of an increase in
nonperforming loans in the energy and real estate sectors, major Texas bank
holding companies, individual banks and savings and loans experienced losses or
sharp downturns in profitabilities and several sought Federal assistance from
the FDIC.
As a further result of the drastic drop in the price of oil, the subsequent
loss of jobs and the overbuilding in the real estate markets, the State
experienced deficits for fiscal years ended August 31, 1986 and 1987 of $230
million and $744 million, respectively. The deficits occurred despite actions to
trim the 1987 biennial budget by $582 million and increasing taxes by $761
million. However, as a result of the budget trimming and increasing taxes and
the improving Texas economy, the State finished fiscal years 1988, 1989, 1990,
1991, 1992 and 1993 with surpluses in the General Revenue Fund of $114 million,
$298 million, $768 million, $712.8 million, $609.2 million and $1.624 billion,
respectively.
The Texas economy bottomed out at the end of 1986 and moved into recovery.
Based upon information gathered by the Texas Employment Commission and the
Bureau of Labor Statistics, the State has more than doubled the jobs that it
lost during the 1986-87 recession. In December 1990, the Texas jobless rate was
6.6%. The unemployment rate, however, began to increase in 1991 and by December
1992 was 7.6%. This increase appears to be merely temporary since by August 1993
the unemployment rate had again declined to 6.8%.
Manufacturing employment added about 50,000 jobs in 1987, 1988 and 1989 but
has experienced a contraction of about 21,400 jobs since late 1990. The slowdown
of consumer demand at the national level resulted in the job losses, which were
more pronounced nationwide. Total employment in Texas continued to expand in the
midst of the nation's 1990-91 recession. Over the 12-month period ending in
April 1992 Texas gained 89,300 jobs, an increase of 1.2%. Over the 12-month
period ending in June 1993 Texas gained 151,400 jobs, an increase of 2.1%. Most
of the new jobs have been in services, with health, business and other
miscellaneous sectors adding approximately 142,100 jobs from June 1992 to June
1993. During the 12-month period ended March 1994, the non-farm employment in
Texas increased by 3.4%.
STATE DEBT. Except as specifically authorized, the Texas Constitution
generally prohibits the creation of debt by or on behalf of the State, with two
exceptions: (i) debt created to supply casual deficiencies in revenues which
does not exceed in the aggregate, at any one time, $200,000 and (ii) debt to
repel invasion, suppress insurrection, defend the State in war or pay existing
debt. In addition, the State Constitution prohibits the Legislature from lending
the credit of the State to or in aid of any person, including municipalities, or
pledging the credit of the State in any manner for the payment of the
liabilities of any individual, association of individuals, corporation or
municipality. The limitations of the State Constitution do not prohibit the
issuance of revenue bonds. Furthermore, obligations which are payable from funds
expected to be available during the current budget period, such as tax and
revenue anticipation notes issued by the State Treasurer, do not constitute
'debt' within the meaning of the Texas Constitution. The State may issue tax and
revenue anticipation notes solely to coordinate the State's cash flow
A-25
<PAGE>
- --------------------------------------------------------------------------------
within a fiscal year and must mature and be paid in full during the biennium in
which the notes were issued.
At various times, State voters, by constitutional amendment, have
authorized the issuance of debt by the State, including general obligation
indebtedness for which the full faith and credit and the taxing power of the
State may be pledged. The total amount of general obligation bonds that have
been authorized by the voters is in excess of $8.28 billion. As of November 30,
1992, the general obligation and other constitutionally authorized indebtedness
of the State outstanding totaled $2.8 billion. Much of the outstanding bonded
indebtedness of the State is designed to be eventually self-supporting, even
though the full faith and credit of the State is pledged for its payment.
State of Texas general obligation bonds currently are rated Aa by Moody's
and AA by S&P.
REVENUE SOURCES AND TAX COLLECTION. Historically, the primary sources of
the State's revenues have been sales taxes, mineral severance taxes and Federal
grants. Due to the collapse of oil and gas prices and the resulting enactment by
recent State Legislatures of new tax measures, including those increasing the
rates of existing taxes and expanding the tax base for certain taxes, there has
been a reordering in the relative importance of the State's taxes in terms of
their contribution to the State's revenue in any year. Federal grants are the
State's largest revenue source, accounting for approximately 29.2% of total
revenue during fiscal year 1993. Sales taxes are the State's second largest
source of tax revenue, accounting for approximately 27% of the State's total
revenue during fiscal 1993. Licenses, fees and permits, the State's third
largest revenue source, accounted for 6.0% of the total revenue in fiscal year
1993. Interest and investment income is now the State's fourth largest revenue
source, accounting for approximately 5.9% of total revenue during fiscal year
1993, followed closely by the motor fuels tax with 5.8%. The remainder of the
State's revenues are derived primarily from other excise taxes. The State has no
personal or corporate income tax, although the State does impose a corporate
franchise tax based on the greater of a corporation's capital or net earned
surplus. The franchise tax is based upon net income apportionable to the State,
and thus works very much like a corporate income tax. It is likely to become a
substantially larger source of revenues in future years.
Total net revenues and opening balances for fiscal years 1988, 1989, 1990,
1991, 1992 and 1993 amounted to approximately $20.471 billion, $21.657 billion,
$23.622 billion, $26.190 billion, $29.647 billion and $33.795 billion,
respectively, which tax collections for the same periods amounted to $12.364
billion, $12.905 billion, $14.922 billion, $15.849 billion and $17.011 billion,
respectively.
The 73rd State Legislative Session convened in January 1993 and before
adjourning passed a budget for the 1994-95 biennium. The 1994-95 budget provides
for appropriations totalling $38.8 billion from general revenue related funds
and $70.1 billion from all fund sources. The 1994-95 biennium budget increases
general revenue funding by 10.6%, while funding from all funds increased by
11.4%. Funding for education has been increased to $1.4 billion, or 5.8%, while
health and human services increased $4.3 billion, or 22.5%.
LIMITATIONS ON TAXING POWERS. The State Constitution prohibits the State
from levying ad valorem taxes on property for general revenue purposes.
A-26
<PAGE>
- --------------------------------------------------------------------------------
The State Constitution also limits the rate of growth of appropriations
from tax revenues not dedicated by the Constitution during any biennium to the
estimated rate of growth for the State's economy. The Legislature may avoid the
constitutional limitation if it finds, by a majority vote of both houses, that
an emergency exists. The State Constitution authorizes the Legislature to
provide by law for the implementation of this restriction, and the Legislature,
pursuant to such authorization, has defined the estimated rate of growth in the
State's economy to mean the estimated increase in State personal income.
PETROLEUM PRODUCTION AND MINING. The Texas economy and the oil and gas
industry have been intricately linked since the discovery of the Spindletop
Field in southeast Texas in 1901. Dramatic increases in the price of oil in
1973-74 and 1979-81 propelled Texas into a leadership position in national
economic growth. This situation, however, has changed rapidly for Texas in the
past decade. The Texas economy reeled in 1982-83 and again in 1986 as the price
of West Texas Intermediate declined over 50% from $30 per barrel in November
1985 to under $12 per barrel in July 1986. During the oil-patch recession of
1986-87, Texas lost over 230,000 jobs as the decline in the energy industry
rippled through the rest of the economy. But since 1987, a general economic
rebound led by manufacturing, service and government has resulted in the gain of
over 746,000 jobs by April 1992.
FINANCIAL INSTITUTIONS. The decline in oil prices, particularly since
January 1986, and the recession that followed have had a severe effect on the
banking and savings and loans industries in Texas. In most cases, major Texas
bank holding companies, individual banks and savings and loans have experienced
losses or sharp downturns in profitability due to the increase in non-performing
loans in the energy and real estate sectors. The financial difficulties also
have led to a number of closings among banks and savings and loans. Texas bank
failures peaked in 1989, reaching 133 or two-thirds of all bank closings in the
nation. Texas bank failures declined to 103 in 1990, 31 in 1991 and 29 in 1992,
of which 20 were subsidiaries of a single bank holding company. Only 10 banks
failed in 1993, through the middle of November.
Some signs of recovery are now appearing. Texas bank profits in 1991 and
1992 were $1.1 billion, and $1.9 billion, respectively, substantially more than
the $651 million gain in 1990, which was the first annualized profit since 1985.
Also, total loans grew for the first time since 1985, to a level of $76.3
billion in 1992. Total deposits, total equity capital, and total assets also
rose. Most loan growth was in consumer real estate, as the total for business
lending continued to decline slowly. Mortgage refinancing has contributed to a
9.0% increase in total loans for the first half of 1993. Most of the serious
loan and foreclosed asset problems appear to have been 'written down' or
adequately reserved. Nonperforming loans for Texas banks decreased from $5.2
billion in December 1989 to $2.1 billion in December 1991, and have decreased
further to $130 million in December 1992.
Many Texas banks and banking organizations have consolidated to take
advantage of economies of scale. As of the end of 1991, Texas had 1,133 banks.
Some of the remaining multibank holding companies have yet to consolidate
affiliated banks into a single institution for various strategic reasons and
Texas has not yet seen much consolidation of smaller organizations outside the
major metropolitan areas.
The condition of Texas' thrifts, however, remains a serious problem. No
industry has been more severely affected by the decline in Texas real estate
values than the savings and loan industry. At the end of 1992, assets of private
sector Texas savings associations total $47.6 billion,
A-27
<PAGE>
- --------------------------------------------------------------------------------
down from the industry high in 1988 of $112.4 billion in assets. However, in
terms of profits, after a nearly flat year in 1991, the State's thrifts posted a
record of $705 million profit for 1992, the second highest in the nation.
PROPERTY VALUES AND TAXES. Various State laws place limits upon the amounts
of tax that can be levied upon the property subject to ad valorem taxes within
various taxing units, such as cities, counties and the districts which have ad
valorem taxing powers (including without limitation school and hospital
districts). Similarly, the amounts of sales and use taxes which can be levied
and the types of property and services to which sales and use taxes apply are
subject to legal restrictions.
Given the importance of energy-related industries to the Texas economy, and
over-building in many residential and commercial real estate markets, property
values throughout the State have experienced little, if any, appreciation, since
late 1985. In some areas property values have, in fact, declined. Because ad
valorem taxes are computed upon the appraised property valuations, and property
appraisals are required to be conducted only every four years, it may be several
years before the full impact of such declines in property values will be
reflected in tax collections. Conversely, if the energy industry should
experience an upturn or property values otherwise rebound, there may be a
similar lag-time before such a rise in property values results in increased ad
valorem tax collections. Areas whose tax bases include substantial oil and gas
producing properties are especially adversely affected by this.
The total value of taxable property in the State amounted to approximately
$632 billion in 1990, according to records maintained by the State Property Tax
Board derived from school district data in the State. This total included
approximately $250.6 billion of single-family residences, approximately $26.4
billion of multi-family residences, approximately $225.7 billion of commercial
and industrial property, and $44.0 billion for utilities. Property tax values in
1990 remained virtually unchanged.
In addition to any decline in property values and its anticipated effect on
the amount of taxes levied, the actual collectibility of such taxes may be
expected to decline. The security for any general obligation bond depends in
part on the ability of the taxing authority to collect delinquent taxes on a
timely basis through lawsuits and subsequent foreclosures in an amount
sufficient to service the debt. The taxing authority's right to collect taxes or
enforce the lien through suits and foreclosure are subject to various
bankruptcy, reorganization, and other such proceedings. Such proceedings are
often lengthy and result in the collection of taxes at a significantly later
date.
LITIGATION. In 1986, a group of school districts in the State with
relatively low ad valorem tax bases filed suit challenging the constitutionality
of Texas' system of financing public education. In June 1987, a final judgment
was entered by the District Court in Edgewood v. Kirby, holding that the Texas
School Financing System (implemented in conjunction with local school district
boundaries that contain unequal taxable property wealth for the financing of
public education) is 'unconstitutional and unenforceable' under the Texas
Constitution. On October 2, 1989, the Texas Supreme Court ruled that the State's
school financing system violates the State constitutional requirement that the
State Legislature 'establish and make suitable provision for the support and
maintenance of an efficient system of public free schools.' The Texas Supreme
Court did not instruct the Legislature as to the specifics of the legislation it
should enact or order the Legislature to raise taxes.
A-28
<PAGE>
- --------------------------------------------------------------------------------
After four special sessions, the Legislature passed a comprehensive school
reform bill (Senate Bill 1) in June 1990. In September 1990 a State District
judge ruled that the school finance section of Senate Bill 1 was
unconstitutional because it continued current inequities in the system and
ordered the state to devise a new system by September 1, 1991. The State
appealed the ruling and the Texas Supreme Court ruled in January 1991 to enforce
the injunction against State funding disbursements until April 1, 1991.
On April 15, 1991 a new school finance reform bill (Senate Bill 351) was
enacted. Under Senate Bill 351, local districts are entitled to a minimum local
property tax rate plus a guaranteed basic State allotment per pupil. The funding
mechanism is predicated upon tax base consolidation and created 188 new taxing
units known as County Education Districts (CED's), drawn largely along county
lines. Within each taxing unit, school districts share the revenue raised by the
minimum local property tax. Local school districts can raise additional monies
and enrich programs by levying additional amounts.
Several school districts challenged the constitutionality of Senate Bill
351 in June 1991. In August 1991, the State District Court held that the
creation of the CED's did not violate the Texas Constitution. In November 1991
the case was appealed to the Texas Supreme Court. The appeal was based upon
(among others) the claim that the creation of CED's amounted to a State property
tax in contravention of the State constitution. On January 30, 1992 (the day
before property tax payments for 1991 could be paid without becoming delinquent
and incurring penalties) the Texas Supreme Court reversed the decision of the
State District Court. While the Texas Supreme Court concluded that the CEDs and
the taxes they levy are unconstitutional, the Court allowed the Legislature
until June 1, 1993 to develop a new plan to be put in place by September 1993.
In the interim, the CED's can continue to collect and distribute the school
district property taxes for the 1991 and 1992 years, notwithstanding the fact
that the levy has been declared unconstitutional by the Texas Supreme Court. The
matter is now up to the Legislature to address, either at a special session
called by the Governor in 1992 or in the regularly scheduled 1993 legislative
session.
TEXAS CREDIT-ENHANCED REVENUE BONDS. Due to the overall economic downturn
in the State, a number of financial institutions in the State of Texas have been
weakened over the past several years. A number of revenue bonds, when issued,
had their ratings enhanced by various means, including letters of credit and
other guaranties issued by Texas banks and/or savings institutions. To the
extent that the financial institutions' ability to make such payments is
diminished, the risk of delay or default under such bonds would be
correspondingly increased.
In addition, the downturn in the Texas economy has caused a number of real
estate developers to default on loans from banks and savings and loans. Bond
issues used to fund developer loans could be affected by such defaults.
A-29
<PAGE>
<TABLE>
<S> <C>
- --------------------------------------------------------
Contents
- --------------------------------------------------------
Investment Objective and Policies 2
- --------------------------------------------------------
Management of the Fund 7
- --------------------------------------------------------
Principal Shareholders 12
- --------------------------------------------------------
Portfolio Transactions 13
- --------------------------------------------------------
Shares of the Fund 13
- --------------------------------------------------------
Redemption of Shares 14
- --------------------------------------------------------
Exchange of Shares 15
- --------------------------------------------------------
Determination of Net Asset Value 15
- --------------------------------------------------------
Determination of Current and Effective
Yields 16
- --------------------------------------------------------
Additional Information About the Fund 17
- --------------------------------------------------------
Ratings of Securities 17
- --------------------------------------------------------
Financial Statements 22
- --------------------------------------------------------
Appendix A-1
- --------------------------------------------------------
</TABLE>
PaineWebber/
Kidder,
Peabody
Municipal
Money
Market
Series
Statement of
Additional
Information
February 28, 1995
STATEMENT OF DIFFERENCES
<TABLE>
<S> <C>
The dagger footnote symbol shall be expressed as.......... 'D'
The double dagger footnote symbol shall be expressed as... 'D''D'
The service mark symbol shall be expressed as............. 'sm'
</TABLE>
Dear Shareholder
- ------------------------------------------------------------------------------
We are pleased to provide you with this annual report on the Kidder, Peabody
Municipal Money Market Series for the fiscal year ended October 31, 1994.
Annualized Yields as of 10/31/94*
Current
7-Day Effective or
Average Compounded 7-Day
Yield Average Yield
------------ ----------------
Connecticut 2.17% 2.19%
New Jersey 2.22% 2.24%
New York 2.26% 2.29%
As of October 31, 1994, the approximate net assets of the Connecticut, New
Jersey, and New York funds comprising the Series were $26 million, $32
million, and $63 million, respectively. Assets consisted exclusively of
high-quality, short-term municipal obligations offering dividends free from
Federal income tax and state personal income tax levels (where applicable).
Market Review
As you are probably aware, the past six months have represented a period of
great change for fixed income markets. Short-term interest rates rose steadily
over this period, fueled primarily by the Federal Reserve's attempts to
contain inflation and slow economic growth to a manageable level. In May, the
discount rate was raised by 50 basis points (or 0.50%); a similar action took
place in August. This was capped by a rate increase of 75 basis points on
November 14--the largest single rate hike in eight years. We expect this
policy to continue over the next six months and foresee an additional rise of
at least 25 to 50 basis points by next Spring.
This environment has been positive for Fund yields. We have taken advantage of
a rising interest rate environment by maintaining short average durations,
which allows the Fund to quickly react to higher rates and pass any increased
cash flow through to investors more rapidly. We will continue to maintain
short maturities in order to take advantage of rising interest rates over the
months ahead.
Sincerely,
/s/ George V. Grune, Jr. /s/ David A. Hartman
George V. Grune, Jr. David A. Hartman
Chairman Chief Investment Officer
New York, New York
December 15, 1994
* The current yield is determined by computing the net changes in value of one
share during a seven-day calendar period, dividing such change by the value
of the share at the beginning of the period and multiplying the return over
the seven-day period by 365/7. The effective yield is computed by
compounding the unannualized base period return, assuming the daily
reinvestment of dividends. Both figures are based on historical earnings and
are not intended to indicate future performance.
Kidder, Peabody Municipal Money Market Series--Connecticut Series
- ------------------------------------------------------------------------------
Schedule of Investments as of October 31, 1994
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE % OF NET
AMOUNT (NOTE 2a) ASSETS
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax Exempt Investments--101.1%
Branford Connecticut General Obligation Bds 3.17%,
4/13/95.................................................. $ 1,100,000 $ 1,098,790 4.3%
Bristol Connecticut, Bond Anticipation Note, 3.69%,
5/18/95.................................................. 850,000 850,844 3.3
Connecticut Dev. Auth. Series 85 (Conn Light & Power)
Variable Rate Demand Note, 3.40%(a)...................... 2,000,000 2,000,000 7.8
Connecticut State General Obligation Economic Recovery
Notes Series B, Variable Rate Demand Note, 3.35%, (LOC
Industrial Bank of Japan)(a)............................. 2,800,000 2,800,000 10.8
Connecticut Dev. Auth., (Shelton Inn), Variable Rate Demand
Note 3.60%(a)............................................ 300,000 300,000 1.1
Connecticut State General Obligation Note Series A, 5.25%
12/15/94................................................. 505,000 506,203 2.0
Connecticut Health Education Facility (Windham Hosp.,
Series B), General Obligation Note, 3.00%, 11/10/94 (LOC
Banque Paribas).......................................... 550,000 550,000 2.1
Connecticut Health Education Facility (Yale Univ. Series
M), General Obligation Note, 3.05%, 12/6/94.............. 1,300,000 1,300,000 5.0
Connecticut Health Education Facility (Yale Univ. Series
O), General Obligation Note, 3.05%, 12/6/94.............. 1,100,000 1,100,000 4.3
Connecticut Health Education Facility (Charlotte Hosp.
Series B), Variable Rate Demand Note, 3.40%, (LOC
Mitsubishi Bank)(a)...................................... 1,500,000 1,500,000 5.8
Connecticut Housing Authority, Morg. Fin. Prog. Series
1990C, General Obligation Bond, 3.00%, 11/3/94........... 1,000,000 1,000,000 3.9
Connecticut Special Obligation Series 1 Loc IBJ, Variable
Rate Demand Note, 3.45%, (LOC Industrial Bank of
Japan)(a)................................................ 1,940,000 1,940,000 7.5
Connecticut State Development Authority, Exeter Energy,
Variable Rate Demand Note, 3.45%, (LOC Sanwa Bank)(a).... 300,000 300,000 1.1
Connecticut Development Authority Health Care Corp for
Independent Living (Series 1990) Variable Rate Demand
Note, 3.35%, (LOC Credit Commercial of France)(a)........ 1,500,000 1,500,000 5.8
Connecticut Development Authority, Shw Inc., Variable Rate
Demand Note, 3.40%, (LOC Bayerishce Vereinsbank)(a)...... 2,300,000 2,300,000 8.9
Connecticut Clean Water Fund Bonds, General Obligation,
10.00%, 1/1/95........................................... 400,000 404,564 1.6
Darien, Connecticut Bond Anticipation Note, 3.75%,
6/20/95.................................................. 1,100,000 1,100,298 4.3
Easton, Connecticut Bond Anticipation Note, 3.57%,
6/14/95.................................................. 700,000 700,285 2.7
Enfield, Connecticut General Obligation Note, 6.70%,
6/15/95.................................................. 150,000 152,894 0.6
New Britain, Connecticut Bond Anticipation Note, 2.42%,
2/8/95................................................... 1,100,000 1,100,057 4.3
Puerto Rico, Commonwealth Variable Rate Demand Note, 2.85%,
(LOC Union Bank of Switzerland)(a)....................... 1,300,000 1,300,000 5.0
Stamford, Connecticut General Obligation Note, 3.07%,
3/22/95.................................................. 1,000,000 1,000,186 3.9
Westport, Connecticut Bond Anticipation Note, 3.52%,
6/14/95.................................................. 1,255,000 1,255,138 4.9
- ---------------------------------------------------------------------------------------------------------------
Total Investments (Cost $26,058,005)....................... 26,059,259 101.1
Other Assets Less Liabilities.............................. (295,987) (1.1)
----------- -------
Net Assets................................................. $25,763,272 100.0%
----------- -------
----------- -------
</TABLE>
See Notes to Financial Statements.
Kidder, Peabody Municipal Money Market Series--Connecticut Series
- ------------------------------------------------------------------------------
Schedule of Investments as of October 31, 1994
- ------------------------------------------------------------------------------
Summary of Combined Ratings (Unaudited)
STANDARD &
MOODY'S or POOR'S % OF VALUE
- ------------ ------------ ---------------
M1G-1(b) SP1(b) 47.8%
P1(c) A1+ & A1(c) 12.1
Not Rated(d) Not Rated(d) 40.1
-----
100.0%
-----
-----
Notes to Schedule of Investments:
(a) Securities payable on demand. The interest rate, which will change
periodically, is based upon bank prime rates or an index of market
interest rates.
(b) M1G-1 and SP1 are the highest ratings assigned to variable notes and
municipal notes by Moody's and Standard & Poor's, respectively.
(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 Trustees
to be of comparable quality to those rated securities in which the Fund
may invest.
See Notes to Financial Statements.
Kidder, Peabody Municipal Money Market Series--New Jersey Series
- ------------------------------------------------------------------------------
Schedule of Investments as of October 31, 1994
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE % OF NET
AMOUNT (NOTE 2a) ASSETS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax Exempt Investments--100.4%
Burlington Cty. Bond Anticipation Notes, 3.00%, 11/04/94......... $1,000,000 $ 1,000,020 3.1%
Camden Cty. Bond Anticipation Notes, 3.25%, 2/16/95.............. 700,000 699,840 2.2
Cape May Cty. Mun. Util. Dist., Mandatory Tender Bonds, 2.80%,
11/30/94....................................................... 1,000,000 1,000,000 3.1
Edison General Obligation Bonds, 7.10%, 1/01/95, (AMBAC
Insured)(b).................................................... 800,000 805,342 2.5
Essex Cnty., Imp. Auth., Variable Rate Demand Notes, Pooled Gov't
Loan Proj., Ser. 85, 3.25%, (LOC Banco Santander)(a)........... 600,000 600,000 1.9
Essex Cnty., Imp. Auth., Variable Rate Demand Notes, Pooled Gov't
Loan Proj., Ser. 86, 3.25%, (LOC Banco Santander)(a)........... 500,000 500,000 1.6
Milburn Bond Anticipation Notes, 3.02%, 11/15/94................. 1,000,000 1,000,045 3.1
Monmouth Cnty., Imp. Auth. Rev., Variable Rate Demand Notes,
3.25%, (LOC Union Bank of Switzerland)(a)...................... 1,600,000 1,600,000 5.0
New Jersey Econ. Dev. Auth., (Chambers Cogeneration Proj.),
2.75%, 11/03/94, (LOC Swiss Bank).............................. 1,000,000 1,000,000 3.1
New Jersey Econ. Dev. Auth., (Chambers Cogeneration Proj.),
3.35%, 8/01/94, (LOC Swiss Bank)............................... 1,000,000 1,000,000 3.1
New Jersey Econ. Dev. Auth., (Church & Dwight Co. Proj.),
Variable Rate Demand Notes, Ser. 1991, 3.20%, (LOC Bank of Nova
Scotia)(a)..................................................... 300,000 300,000 0.9
New Jersey Econ. Dev. Auth., (Composite Issue), Variable Rate
Demand Notes, Ser. 87D, 3.50%, (LOC National Westminster
Bank)(a)....................................................... 500,000 500,000 1.6
New Jersey Econ. Dev. Auth., (Composite Issue), Variable Rate
Demand Notes, Ser. 87G, 3.50%, (LOC National Westminster
Bank)(a)....................................................... 700,000 700,000 2.2
New Jersey Econ. Dev. Auth., (Curtis Wright Flight Systems),
Variable Rate Demand Notes, 3.25%, (LOC Bank of Nova
Scotia)(a)..................................................... 1,500,000 1,500,000 4.7
New Jersey Econ. Dev. Auth., 400 International Drive Partners,
Variable Rate Demand Notes, 3.20%, (LOC Morgan Guaranty)(a).... 1,900,000 1,900,000 5.9
New Jersey Econ. Dev. Auth., 400 International Drive Partners,
Variable Rate Demand Notes, 3.35%, (LOC Morgan Guaranty)(a).... 1,000,000 1,000,000 3.1
New Jersey Econ. Dev. Auth., Keystone 1992 Proj., 2.75%,
11/03/94, (LOC Union Bank of Switzerland)...................... 1,500,000 1,500,000 4.7
New Jersey Econ. Dev. Auth., Keystone 1992 Proj., 3.25%,
11/10/94, (LOC Union Bank of Switzerland)...................... 1,700,000 1,700,000 5.3
New Jersey Econ. Dev. Auth., (W.Y. Plastic Product Corp.),
Variable Rate Demand Notes, 3.50%, (LOC National Westminster
Bank)(a)....................................................... 600,000 600,000 1.9
New Jersey Econ. Dev. Auth., Variable Rate Demand Notes, Series
88A, 3.50% (LOC National Westminster Bank)(a).................. 550,000 550,000 1.7
New Jersey Econ. Dev. Auth., Variable Rate Demand Notes, 3.30%
(LOC Banque Paribas)(a)........................................ 1,000,000 1,000,000 3.1
New Jersey Sport & Expo. Auth., State Contract Bds., Variable
Rate Demand Notes, Ser. 1992C, 3.25%, (MBIA Insured)(a)(b)..... 1,000,000 1,000,000 3.1
Port Auth. of New York/New Jersey, Tax Exempt Commercial Paper,
2.75%, 11/03/94................................................ 1,000,000 1,000,000 3.1
Port Auth. of New York/New Jersey, Tax Exempt Commercial Paper,
3.20%, 11/08/94................................................ 450,000 450,000 1.4
</TABLE>
See Notes to Financial Statements.
Kidder, Peabody Municipal Money Market Series--New Jersey Series
- ------------------------------------------------------------------------------
Schedule of Investments as of October 31, 1994
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE % OF NET
AMOUNT (NOTE 2a) ASSETS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Port Auth. of New York/New Jersey, Tax Exempt Commercial Paper,
3.10%, 11/08/94................................................ $1,500,000 $ 1,500,000 4.7%
Princeton Borough, General Obligation Bonds, 3.75%, 4/14/95...... 1,452,000 1,453,579 4.6
Puerto Rico Commonwealth, 9.375%, 7/01/05........................ 1,100,000 1,183,533 3.7
Puerto Rico Ind. Med Auth., (International American University of
Puerto Rico) 2.90%, 12/06/94, (LOC Bank of Tokyo).............. 1,500,000 1,500,000 4.7
Puerto Rico Tourist (International American University of Puerto
Rico) 2.90%, 12/06/94, (LOC Banque Paribas).................... 1,200,000 1,200,000 3.8
Somerset Cty., Bond Anticipation Notes, 6.50%, 11/01/94.......... 1,050,000 1,050,000 3.3
Sussex Cty., (Utility Auth. Wastewater Nov), General Obligation
Bonds, 4/01/95, (AMBAC Insured)(b)............................. 125,000 126,003 0.4
Union Cty. Pollution Control Fin. Auth., Variable Rate Demand
Notes, (Exxon), Ser. 1994, 2.50%(a)............................ 1,200,000 1,200,000 3.8
- -----------------------------------------------------------------------------------------------------
Total Investments (Cost $32,118,362)............................. 32,118,362 100.4
Liabilities Less Other Assets.................................... (137,356) (0.4)
----------- ---------
Net Assets....................................................... $31,981,006 100.0%
----------- ---------
----------- ---------
</TABLE>
Summary of Combined Ratings (Unaudited)
STANDARD &
MOODY'S or POOR'S % OF VALUE
- ------------ ------------ ---------------
M1G1-1(c) SP1(c) 59.6%
P1(d) A1+ & A1(d) 17.2
Not Rated(e) Not Rated(e) 20.8
Aaa, Aa AAA, AA 2.4
-----
100.0%
-----
-----
Notes to Schedule of Investments:
(a) Securities payable on demand. 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) M1G-1 and SP1 are the highest ratings assigned to variable notes and
municipal notes by Moody's and Standard & Poor's, respectively.
(d) P1 and A1 are the highest ratings assigned tax-exempt commercial paper by
Moody's and Standard & Poor's, respectively.
(e) Securities which, while not rated, are determined by the Fund's Trustees
to be of comparable quality to those rated securities in which the Fund
may invest.
See Notes to Financial Statements.
Kidder, Peabody Municipal Money Market Series--New York Series
- ------------------------------------------------------------------------------
Schedule of Investments as of October 31, 1994
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE % OF NET
AMOUNT (NOTE 2a) ASSETS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax Exempt Investments--98.1%
Battery Park City Authority, Special Obligation Pre-Refunded
Bonds, 7.25%, 11/01/94 @ 103 (MBIA Insured)(b)................. $2,000,000 $ 2,060,206 3.3%
Franklin County, Industrial Development Authority, Variable Rate
Demand N (KES Chateaugay Project), Series 1991A, 3.20%, (LOC
Bank of Tokyo)(a).............................................. 1,000,000 1,000,000 1.6
Metropolitan Transportation Authority, Commuter Facilities,
Variable Rate Demand Notes, Series 1991, 3.20%, (LOC Morgan
Guaranty)(a)................................................... 3,300,000 3,300,000 5.2
Monroe County, Industrial Development Authority, Variable Rate
Demand Notes, (Granite Building Association) 3.15%, (LOC
Chemical Bank)(a).............................................. 950,000 950,000 1.5
Nassau County, Industrial Development Authority, Variable Rate
Demand Notes, Civic Facilities, (Cold Spring Harbor
Laboratory), 3.20%, (LOC Morgan Guaranty)(a)................... 3,000,000 3,000,000 4.7
Nassau County, Industrial Development Authority, Variable Rate
Demand Notes, Civic Facilities, (Cold Spring Harbor
Laboratory), Series 1993, 3.20%, (Morgan Guaranty)(a).......... 1,000,000 1,000,000 1.6
New York City, Housing Development Community, Variable Rate
Demand Notes, Columbus Gardens Project), Series 93A, 3.35%,
(LOC Citibank)(a).............................................. 600,000 600,000 0.9
New York City, Industrial Development Authority, Variable Rate
Demand Notes, (Fieldhouse Associates-JFK Project), 3.20%, (LOC
Banque Indosuez)(a)............................................ 1,000,000 1,000,000 1.6
New York City, Industrial Development Authority, Variable Rate
Demand Notes, (LaGuardia Associates Project), 3.20%, (LOC
Banque Indosuez)(a)............................................ 1,500,000 1,500,000 2.4
New York City, Industrial Development Authority, Variable Rate
Demand Notes, (Strohiem Romann Inc.), 3.25%, (LOC West Deutsche
Landesbanke)(a)................................................ 1,500,000 1,500,000 2.4
New York City, Municipal Water Finance Authority, Water & Sewer
Bond Anticipation Notes, 3.75%, 12/15/94....................... 3,000,000 3,003,180 4.7
New York City, Variable Rate Demand Notes, Subseries A-9, 3.75%,
(LOC Industrial Bank of Japan)(a).............................. 1,800,000 1,800,000 2.9
New York City, Variable Rate Demand Notes, Series H, Subseries
H-6, 3.40%, (MBIA Insured)(a)(b)............................... 1,000,000 1,000,000 1.6
New York State Dormitory Authority, Variable Rate Demand Notes,
(Cornell University), Series 1990B, 3.20% (LOC Morgan
Guaranty)(a)................................................... 1,000,000 1,000,000 1.6
New York State Energy Research & Development Authority, Pollution
Control Revenue, Variable Rate Demand Notes, (Central Hudson
Gas & Electric), Series 1985A, 3.25%, (LOC Bankers Trust)(a)... 1,000,000 1,000,000 1.6
New York State Energy Research & Development Authority, Variable
Rate Demand Notes, (Lilco Project), Series 93B, 2.85%, (LOC
Toronto Dominion Bank)(a)...................................... 1,100,000 1,100,000 1.7
New York State Energy Research & Development Authority, (Lilco
Project), Series A, 3.00%, 3/01/95, (LOC Deutshe Bank)......... 4,000,000 4,000,000 6.4
New York State Energy Research & Development Authority, Variable
Rate Demand Notes, (Niagara Mohawk Corp.), Series 1987A, 3.20%,
(LOC Toronto Dominion Bank)(a)................................. 1,400,000 1,400,000 2.2
New York State Energy Research & Development Authority, (NYSEG),
Series C, 2.95%, 12/07/94, (LOC Morgan Guaranty)............... 2,000,000 2,000,000 3.2
</TABLE>
See Notes to Financial Statements.
Kidder, Peabody Municipal Money Market Series--New York Series
- ------------------------------------------------------------------------------
Schedule of Investments as of October 31, 1994
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE % OF NET
AMOUNT (NOTE 2a) ASSETS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
New York State Housing Finance Authority, Variable Rate Demand
Notes, (Resident Housing), Series 1988A, 3.40%, (AMBAC
Insured)(a)(b)................................................. $1,950,000 $ 1,950,000 3.1%
New York State Housing Finance Authority, Variable Rate Demand
Notes, (Normandie Court Housing), Series 1991A, 3.35%, (LOC
Societe General)(a)............................................ 1,500,000 1,500,000 2.4
New York State Local Government Assistance Corp., Variable Rate
Demand Notes, Series A, 3.15%, (LOC Swiss Bank, Credit
Suisse)(a)..................................................... 4,000,000 4,000,000 6.4
New York State Local Government Assistance Corp., Variable Rate
Demand Notes, 3.15%, (LOC Swiss Bank, Credit Suisse)(a)........ 1,000,000 1,000,000 1.6
New York State Medical Care Facilities Finance Agency,
Pre-Refunded Bonds, Series 1985B, 9.75%, 1/15/95 @ 102 (Federal
Housing Administration Insured)................................ 3,000,000 3,097,497 4.9
New York State Tax Exempt Commercial Paper, Series P, 2.70%,
11/28/94....................................................... 2,300,000 2,300,000 3.7
New York State Tax Exempt Commercial Paper, Series P, 2.90%,
11/09/94....................................................... 1,000,000 1,000,000 1.6
North Hempstead, Variable Rate Demand Notes, (Solid Waste
Management), Series 1993A, 3.10%, (LOC National Westminister
Bank)(a)....................................................... 1,900,000 1,900,000 3.0
Oyster Bay, Bond Anticipation Notes, 3.00%, 11/18/94............. 2,000,000 1,999,758 3.2
Port Authority of New York/New Jersey, Tax Exempt Commercial
Paper, 2.75%, 11/03/94......................................... 2,000,000 2,000,000 3.2
Port Authority of New York/New Jersey, Tax Exempt Commercial
Paper, 3.00%, 11/09/94......................................... 1,630,000 1,630,000 2.6
Puerto Rico Government Development Bank, Variable Rate Demand
Notes, 3.10%, (LOC Credit Suisse/Sumitomo Bank)(a)............. 500,000 500,000 0.8
Suffolk County, Industrial Development Authority, Variable Rate
Demand Notes, (Nissequogue Cogen.), 3.25%, (LOC Toronto
Dominion Bank)(a).............................................. 1,500,000 1,500,000 2.4
Syracuse Bond Anticipation Notes, 3.25%, 3/03/95................. 3,000,000 3,003,399 4.7
Triborough Bridge & Tunnel Authority, Pre-Refunded Obligation
Bonds, 9.00%, 7/01/95 @ 102.................................... 2,000,000 2,109,758 3.4
- ----------------------------------------------------------------------------------------------------------------
Total Investments (Cost $61,703,600)............................. 61,703,798 98.1
Other Assets Less Liabilities.................................... 1,192,253 1.9
----------- -------
Net Assets....................................................... $62,896,051 100.0%
----------- -------
----------- -------
</TABLE>
Summary of Combined Ratings (Unaudited)
STANDARD &
MOODY'S or POOR'S % OF VALUE
- ------------ ------------ ---------------
M1G1-1(c) SP1(c) 53.3%
P1(d) A1+ & A1(d) 25.2
Not Rated(e) Not Rated(e) 9.7
Aaa, Aa AAA, AA 11.8
-----
100.0%
-----
-----
Notes to Schedule of Investments:
(a) Securities payable on demand. 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) M1G-1 and SP1 are the highest ratings assigned to variable notes and
municipal notes by Moody's and Standard & Poor's, respectively.
(d) P1 and A1 are the highest ratings assigned tax-exempt commercial paper by
Moody's and Standard & Poor's, respectively.
(e) Securities which, while not rated, are determined by the Fund's Trustees
to be of comparable quality to those rated securities in which the Fund may
invest.
See Notes to Financial Statements.
Kidder, Peabody Municipal Money Market Series
- ------------------------------------------------------------------------------
Statements of Assets and Liabilities as of October 31, 1994
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONNECTICUT NEW JERSEY NEW YORK
SERIES SERIES SERIES
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Investments, at value (Note 2a)........................... $26,059,259 $32,118,362 $61,703,798
Cash...................................................... -- -- 684,275
Interest receivable....................................... 180,104 231,705 575,616
Prepaid expenses (Note 2e)................................ 9,258 11,153 11,246
-------------------------------------
Total assets......................... 26,248,621 32,361,220 62,974,935
-------------------------------------
Liabilities
Payables:
Due to custodian...................................... 445,381 331,553 --
Investment advisory (Note 3).......................... 11,011 15,695 28,918
Distribution fees (Note 3)............................ 2,736 3,884 7,173
Dividends............................................. 1,575 1,943 3,940
Accrued expenses.......................................... 24,646 27,139 38,853
-------------------------------------
Total liabilities.................... 485,349 380,214 78,884
-------------------------------------
Net Assets
At value.................................................. $25,763,272 $31,981,006 $62,896,051
-------------------------------------
-------------------------------------
Outstanding shares of beneficial interest, ($.001 par
value) (Note 4)......................................... 25,770,924 32,002,527 62,940,628
-------------------------------------
-------------------------------------
Net Asset Values
Offering, and redemption prices per share................. $ 1.00 $ 1.00 $ 1.00
-------------------------------------
-------------------------------------
Net assets were comprised of:
Aggregate paid-in-capital............................. $25,770,924 $32,002,527 $62,940,628
Net unrealized gain on investments.................... 1,254 -- 198
Accumulated net realized capital losses............... (8,906) (21,521) (44,775)
Undistributed net investment income................... -- -- --
-------------------------------------
Net assets................................................ $25,763,272 $31,981,006 $62,896,051
-------------------------------------
-------------------------------------
</TABLE>
See Notes to Financial Statements.
Kidder, Peabody Municipal Money Market Series
- ------------------------------------------------------------------------------
Statements of Operations for the Year Ended October 31, 1994
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONNECTICUT NEW JERSEY NEW YORK
SERIES SERIES SERIES
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income
Interest income (net of $216,236, $183,400, and $349,653,
amortization of premiums, respectively -- Note 2b).......... $ 791,213 $1,072,714 $1,839,287
-----------------------------------
Expenses
Investment advisory (Note 3).................................. 151,858 207,338 358,032
Distribution (Note 3)......................................... 36,446 49,761 85,928
Pricing....................................................... 22,800 22,800 22,800
Shareholder servicing......................................... 13,320 17,264 22,120
Prospectus and shareholders' reports.......................... 12,055 17,640 24,339
Professional.................................................. 9,390 10,700 8,770
Custodian..................................................... 8,115 9,348 11,070
Amortization of organization expenses (Note 2e)............... 7,559 7,541 7,541
Federal and state registration................................ 4,084 4,278 7,871
Trustees' fees and expenses (Note 3).......................... 3,681 3,650 3,531
Miscellaneous................................................. 2,441 3,419 4,527
-----------------------------------
Total expenses........................... 271,749 353,739 556,529
-----------------------------------
Net Investment Income......................................... 519,464 718,975 1,282,758
Realized Loss on Investments (Note 2b)........................ (4,008) (18,801) (20,824)
Change in Unrealized Gain (Loss) on Investments (Note 2)...... 724 (140) (67)
-----------------------------------
Net Increase in Net Assets Resulting from Operations.......... $ 516,180 $ 700,034 $1,261,867
-----------------------------------
-----------------------------------
</TABLE>
See Notes to Financial Statements.
Kidder, Peabody Municipal Money Market Series
- ------------------------------------------------------------------------------
Statements of Changes in Net Assets
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONNECTICUT SERIES NEW JERSEY SERIES NEW YORK SERIES
----------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1993 1994 1993 1994 1993 1994
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net
Assets from Operations
Net investment income........ $ 476,005 $ 519,464 $ 614,398 $ 718,975 $ 775,740 $ 1,282,758
Net realized gain (loss) on
investments (Note 2b)...... 67 (4,008) (1,299) (18,801) (6,332) (20,824)
Change in unrealized gain
(loss) on investments (Note
2)......................... (498) 724 140 (140) 265 (67)
----------------------------------------------------------------------------
Net increase in net
assets resulting
from operations.... 475,574 516,180 613,239 700,034 769,673 1,261,867
Distributions to Shareholders
from (Notes 2c & d)
Net investment income........ (476,005) (519,464) (614,398) (718,975) (775,740) (1,282,758)
Increase (Decrease) in Net
Assets from
Net capital share
transactions (Note 4)...... (125,448) (2,170,701) 8,849,772 (4,473,284) 12,915,779 10,730,298
----------------------------------------------------------------------------
Total increase
(decrease) in net
assets............. (125,879) (2,173,985) 8,848,613 (4,492,225) 12,909,712 10,709,407
Net Assets
Beginning of year............ 28,063,136 27,937,257 27,624,618 36,473,231 39,276,932 52,186,644
----------------------------------------------------------------------------
End of year.................. $27,937,257 $25,763,272 $36,473,231 $31,981,006 $52,186,644 $62,896,051
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
Kidder, Peabody Municipal Money Market Series
- ------------------------------------------------------------------------------
Financial Highlights
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONNECTICUT SERIES NEW JERSEY SERIES
- ---------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
- ---------------------------------------------------------------------------------------------------
1991+ 1992 1993 1994 1991++ 1992 1993 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset
value,
beginning
of
period.. $1.0000 $0.9994 $0.9999 $0.9999 $1.0000 $0.9998 $0.9999 $0.9999
Income
from
Investment
Operations
Net
investment
income.. 0.0398 0.0223 0.0148 0.0172 0.0316 0.0246 0.0164 0.0175
Net
realized
and
unrealized
gain
(loss)
on
investments.. (0.0006) 0.0005 -- (0.0002) (0.0002) (0.0001) -- (0.0006)
---------------------------------------------------------------------------------
Total
increase
in net
asset
value
from
investment
operations.. 0.0392 0.0228 0.0148 0.0170 0.0314 0.0247 0.0164 0.0169
Distributions
to
shareholders
from net
investment
income.. (0.0398) (0.0223) (0.0148) (0.0172) (0.0316) (0.0246) (0.0164) (0.0175)
------------------------------------------------------------------------------------
Net asset
value,
end of
period.. $ 0.9994 $ 0.9999 $ 0.9999 $ 0.9997 $ 0.9998 $ 0.9999 $ 0.9999 $ 0.9993
====================================================================================
Total
return.. 4.10%* 2.25% 1.49% 1.74% 4.27%* 2.49% 1.65% 1.76%
Ratios
/Supplemental
Data
Net
assets,
end of
year (in
thousands).. $ 40,078 $ 28,063 $ 27,937 $ 25,763 $ 41,504 $ 27,625 $ 36,473 $ 31,981
Ratios to
Average
Net
Assets
Expenses,
excluding
distribution
fees,
net of
reimbursement.. 0.24%* 0.74% 0.85% 0.78% 0.15%* 0.74% 0.81% 0.73% 0.14%* 0.72% 0.76%
Expenses,
including
distribution
fees,
net of
reimbursement.. 0.36%* 0.86% 0.97% 0.90% 0.27%* 0.86% 0.93% 0.85% 0.26%* 0.84% 0.88%
Expenses,
before
reimbursement
from
manager.. 0.82%* 0.86% 0.97% 0.90% 0.83%* 0.86% 0.93% 0.85% 0.83%* 0.84% 0.88%
Net
investment
income.. 3.96%* 2.28% 1.47% 1.71% 4.20%* 2.51% 1.63% 1.74% 4.00%* 2.24% 1.50%
<CAPTION>
NEW YORK SERIES
YEAR ENDED OCTOBER 31,
1991++ 1992 1993 1994
<S> <C> <C> <C> <C>
Net asset
value,
beginning
of
period.. $ 1.0000 $ 0.9999 $ 0.9996 $ 0.9995
-------------------------------------------
Income
from
Investment
Operations
Net
investment
income.. 0.0303 0.0226 0.0151 0.0179
Net
realized
and
unrealized
gain
(loss)
on
investments (0.0001) (0.0003) (0.0001) (0.0002)
-------------------------------------------
Total
increase
in net
asset
value
from
investment
operations 0.0302 0.0223 0.0150 0.0177
Distributions
to
shareholers
from net
investment
income.. (0.0303) (0.0226) (0.0151) (0.0179)
-------------------------------------------
Net asset
value,
end of
period.. $ 0.9999 $ 0.9996 $ 0.9995 $ 0.9993
============================================
Total
return.. 4.09%* 2.28% 1.52% 1.81%
Ratios
/Supplemental
Data
Net
assets,
end of
year (in
thousands $ 38,725 $ 39,277 $ 52,187 $ 62,896
Ratios to
Average
Net
Assets
Expenses,
excluding
distribution
fees,
net of
reimbursement.. 0.14%* 0.72% 0.76% 0.66%
Expenses,
including
distribution
fees,
net of
reimbursement.. 0.26%* 0.84% 0.88% 0.78%
Expenses,
before
reimbursement
from
manager.. 0.83%* 0.84% 0.88% 0.78%
Net
investment
income.. 4.00%* 2.24% 1.50% 1.79%
</TABLE>
+ From November 6, 1990 (Commencement of Operations) to October 31, 1991.
++ From February 1, 1991 (Commencement of Operations) to October 31, 1991.
* Annualized.
See Notes to Financial Statements.
Kidder, Peabody Municipal Money Market Series
- ------------------------------------------------------------------------------
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 investment adviser and
manager. 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 for each series; 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) Securities 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 on the last business day
of each month. 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.
At October 31, 1994, for book purposes, the Connecticut Series, the New
Jersey Series, and the New York Series had net capital loss carryforwards of
$8,906, $21,521, and $44,775, respectively.
At October 31, 1994, for Federal income tax purposes, the cost of
investments was substantially the same as the cost for financial reporting
purposes (see Schedule of Investments). For the Connecticut Series, the New
Jersey Series and the New York Series net unrealized appreciation, based on
cost, for Federal income tax purposes, aggregated $1,254, -0- and $198,
respectively, all of which related to appreciated securities.
(d) It is the policy of the Fund 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 tax liability.
(e) Organization costs are being amortized on a straight-line basis over a
five-year period. Prepaid registration fees are charged to income as the
related shares are issued.
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 each series of the Fund for such
services are accrued daily and paid monthly at the annual rate of 1/2 of 1% of
the net assets of each series of the Fund, determined as of the close of each
business day. Total annual expenses of each series of the Fund, exclusive of
taxes, interest, and 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 limits prescribed by any state in which each
series of the Fund's shares are offered for sale, and KPAM will reimburse each
series of the Fund for any expenses in excess of such limits. No expense
reimbursement was required for the year ended October 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 annual rate of
.12% of the net assets of each series of the Fund, determined as of the close
of each business day.
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 for each series. At October 31, 1994,
paid-in-capital amounted to $25,770,924
Kidder, Peabody Municipal Money Market Series
- ------------------------------------------------------------------------------
Notes to Financial Statements
- ------------------------------------------------------------------------------
for the Connecticut Series, $32,002,527 for the New Jersey Series and
$62,940,628 for the New York Series. Transactions in shares and dollars were
as follows:
YEAR YEAR
ENDED ENDED
OCTOBER 31, OCTOBER 31,
CONNECTICUT SERIES 1993 1994
Shares sold........... 107,004,794 83,745,065
Shares issued to
shareholders in
connection with the
reinvestment of
dividends........... 464,144 502,403
Shares redeemed....... (107,594,386) (86,418,169)
--------------------------
Net decrease...... (125,448) (2,170,701)
--------------------------
--------------------------
YEAR YEAR
ENDED ENDED
OCTOBER 31, OCTOBER 31,
NEW JERSEY SERIES 1993 1994
Shares sold........... 159,550,756 186,667,852
Shares issued to
shareholders in
connection with the
reinvestment of
dividends........... 599,779 701,364
Shares redeemed....... (151,300,763) (191,842,500)
--------------------------
Net increase
(decrease)...... 8,849,772 (4,473,284)
--------------------------
--------------------------
YEAR YEAR
ENDED ENDED
OCTOBER 31, OCTOBER 31,
NEW YORK SERIES 1993 1994
Shares sold........... 244,922,956 300,275,419
Shares issued to
shareholders in
connection with the
reinvestment of
dividends........... 748,193 1,248,214
Shares redeemed....... (232,755,370) (290,793,335)
--------------------------
Net increase...... 12,915,779 10,730,298
--------------------------
--------------------------
5. The Fund's investment strategy is to invest in obligations of the specific
states in each series and their municipalities. Payment of the principal and
interest of such securities depends upon the revenue generated by the
municipality or by the property financed by the securities. 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.
6. Under an agreement dated as of October 17, 1994, General Electric Company
has agreed to sell to PaineWebber Group, Inc. certain assets of Kidder Group
and its subsidiaries, including certain assets of Kidder and KPAM. The
consummation of this transaction, which is subject to a number of conditions
and cannot be assured, will result in the deemed assignment and automatic
termination of the agreements pursuant to which Kidder serves as the principal
underwriter of the Fund's shares and KPAM serves as the Fund's manager and
investment adviser. Continuation of the Fund's relationship with Kidder and
KPAM or their successors following the consummation of 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, continuation of the Fund's 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
Trustees will take such action as it determines to be appropriate and in the
best interests of the Fund and its shareholders.
Kidder, Peabody Municipal Money Market Series
- ------------------------------------------------------------------------------
Report of Independent Auditors
- ------------------------------------------------------------------------------
The Trustees and Shareholders,
Kidder, Peabody Municipal Money Market Series
(Consisting of the Connecticut, New Jersey and
New York Series):
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of the Connecticut Series, the New
Jersey Series and the New York Series of Kidder, Peabody Municipal Money
Market Series (the 'Fund'), as of October 31, 1994, the related statements of
operations for the year then ended and of changes in net assets 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 the
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 the
securities owned as of October 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 the Connecticut
Series, the New Jersey Series and the New York Series of Kidder, Peabody
Municipal Money Market Series at October 31, 1994, the results of their
operations, changes in their net assets and the financial highlights for each
of the respectively stated periods in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
New York, New York
November 30, 1994
Kidder Family of Funds
- ------------------------------------------------------------------------------
The Kidder Family of Funds provides a comprehensive selection of mutual funds.
Because successful investing may depend on the ability to diversify across
asset classes and geographic regions, the Kidder Family of Funds has been
carefully constructed to ensure that most major asset classes and geographic
regions are represented.
Stock Funds
- ----------------------------------------------
Kidder, Peabody Emerging Markets Equity Fund
o Seeks long-term capital appreciation by investing in the equity issues of
developing markets in Asia, Latin America, the Middle East, Southern and
Eastern Europe and Africa.
Kidder, Peabody Equity Income Fund, Inc.
o Seeks a combination of long-term capital appreciation and high current
dividend and interest income by investing in the common stocks of U.S.
companies.
Kidder, Peabody Global Equity Fund
o Seeks long-term capital growth by investing primarily in non-U.S. securities.
Kidder, Peabody Small Cap Equity Fund
o Seeks long-term capital appreciation by investing primarily in the stocks of
small-capitalization companies.
Bond Funds
- ----------------------------------------------
Kidder, Peabody Adjustable Rate Government Fund
o Seeks high current income with low net asset value volatility by investing
primarily in adjustable-rate mortgage-backed securities that are issued or
guaranteed by the U.S. government and its agencies (including FNMA and GNMA).
Kidder, Peabody Intermediate Fixed Income Fund
o Seeks maximum total return consisting primarily of current income and,
secondarily, capital appreciation, by investing in intermediate-term U.S.
debt securities rated in the three highest categories by recognized rating
agencies.
Kidder, Peabody Government Income Fund, Inc.
o Seeks high current income by investing primarily in fixed-income securities
issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
Kidder, Peabody Global Fixed Income Fund
o Seeks current income and capital appreciation by investing in fixed-income
securities primarily issued by U.S. and non-U.S. governments and authorities
and supranational organizations.
Kidder, Peabody Municipal Bond Fund
o Seeks current income exempt from federal taxation consistent with the
preservation of capital by investing primarily in high-quality, tax-exempt
municipal securities.
Flexible Funds
- ----------------------------------------------
Kidder, Peabody Asset Allocation Fund
o Seeks total return by investing in a strategically allocated portfolio of
common stocks included in the S&P 500 and/or U.S. treasury notes or U.S.
treasury bills.
Money Market Funds
- ----------------------------------------------
The following money markets funds all seek to maximize current income to the
extent possible consistent with preservation of capital and maintenance of
liquidity.
Kidder, Peabody Premium Account Fund
Kidder, Peabody Cash Reserve Fund, Inc.
Kidder, Peabody Government Money Fund, Inc.
Kidder, Peabody Tax Exempt Money Fund, Inc.
Kidder, Peabody California Tax Exempt Money Fund
Kidder, Peabody Municipal Money Market Series:
Connecticut, New York, New Jersey
(Each state fund is available only to residents of the related state.)
Please Note . . .
With respect to the Kidder, Peabody Adjustable Rate Government Fund, the
Kidder, Peabody Government Income Fund and the Kidder, Peabody money market
funds, the U.S. government guarantee applies to the timely payment of
principal and interest for the underlying securities, which are issued or
guaranteed by the U.S. government and not the fund itself. An investment in
any of the money market funds is neither insured nor guaranteed by the U.S.
government. Each money market fund seeks to maintain a stable net asset value
of $1.00 per share, but there can be no assurance that the fund will be able
to do so at all times.
The return and principal value of an investment in any of the Kidder funds is
not guaranteed and will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost.
- ---------------------------------------
Kidder, Peabody Municipal Money Market Series
60 Broad Street
New York, NY 10004
Trustees
------------------------------------------------
George V. Grune, Jr. Thomas R. Jordan
Chairman of the Trustee
Trustees Carl W. Schafer
and President Trustee
David J. Beaubien
Trustee
William W. Hewitt, Jr.
Trustee
Manager & Investment Adviser
------------------------------------------------
Kidder Peabody Asset Management, Inc.
60 Broad Street, New York, New York 10004
Distributor
------------------------------------------------
Kidder, Peabody & Co. Incorporated
10 Hanover Square, New York, New York 10005
Custodian, Transfer, Dividend & Recordkeeping Agent
------------------------------------------------
Investors Fiduciary Trust Company
127 West 10th Street, Kansas City, Missouri 64105
Independent Auditors
------------------------------------------------
Deloitte & Touche LLP
Two World Financial Center, New York, New York 10281
Legal Counsel
------------------------------------------------
Stroock & Stroock & Lavan
7 Hanover Square, New York, New York 10004
This report is for the information of the shareholders of the Kidder,
Peabody Municipal Money Market Series, but it may also be used as sales
literature when preceded or accompanied by the current prospectus which
gives details about charges, expenses, and investment objectives of the
Fund.
Kidder,
Peabody
Municipal
Money
Market
Series
KIDDER
- ---------------
FAMILY OF FUNDS
Annual Report
October 31, 1994
<PAGE>
PaineWebber RMA New York Municipal Money Fund & PW/KP Municipal Money Market
Series - New York Series
- ----------------------------------------------------------------------------
Statement of Net Assets
June 30, 1995 (unaudited)
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
PW/KP
PaineWebber Municipal Pro
Principal RMA NY Mmkt. Forma
Amount Maturity Interest Municipal NY Series Combined
(000) Dates Rates Value Value Value
- --------- -------------------- --------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Investments in Municipal Securities - 102.42% 102.49% 102.43%
$11,600 New York State
Tax Exempt Commercial Paper 07/20/95 to 09/13/95 3.150 to 4.150% $ 9,500,000 $ 2,100,000 $11,600,000
9,500 New York State
(Cornell University) A 4.350 1,500,000 1,500,000
1,100 New York State Dormitory Authority
(St. Francis Center at the Knowls) A 4.000 to 4.100 600,000 500,000 1,100,000
3,900 New York State Dormitory Authority
(Marion Osborne) A 4.050 3,900,000 3,900,000
2,500 New York State Dormitory Authority
(Masonic Hall Asylum) A 3.950 2,500,000 2,500,000
1,000 New York State Dormitory Authority
(Metropolitan Museum of Art) 07/01/95 7.625 1,000,000 1,000,000
7,800 New York State Dormitory Authority
(Metropolitan Museum of Art) A 3.850 to 3.900 5,800,000 2,000,000 7,800,000
2,500 New York State Dormitory Authority
(New York University) 07/01/96 3.650 1,500,690 1,000,457 2,501,147
13,500 New York State Dormitory Authority
(Oxford University Press) A 3.95 to 5.250 12,900,000 600,000 13,500,000
4,347 New York State Dormitory Authority
Tax Exempt Commercial Paper
(Pooled Loan Program) 08/14/95 to 10/13/95 3.500 to 4.000 3,947,000 400,000 4,347,000
8,900 New York State Dormitory Authority
Tax Exempt Commercial Paper
(Sloan Kettering Memorial) 07/25/95 to 09/22/95 3.050 to 4.100 6,500,000 2,400,000 8,900,000
10,500 New York State Energy Research &
Development Authority
(Central Hudson Gas & Electric) A 3.500 to 3.750 9,500,000 1,000,000 10,500,000
5,500 New York State Energy Research &
Development Authority (Lilco)
Adjustable Rate Bonds 03/01/96 4.700 2,000,000 3,500,000 5,500,000
3,000 New York State Energy Research &
Development Authority (New York
State Electric & Gas Corporation)
Adjustable Rate Bonds 10/15/95 to 12/01/95 4.100 to 4.600 3,000,000 3,000,000
2,100 New York State Energy Research &
Development Authority (New York
State Electric & Gas Corporation) A 4.500 2,100,000 2,100,000
4,000 New York State Energy Research &
Development Authority
(Niagara Mohawk) A 4.400 to 4.550 3,000,000 1,000,000 4,000,000
200 New York State Housing Development Corp. A 4.250 200,000 200,000
5,400 New York State Housing Finance Agency
(Mount Sinai Medical Center Project) A 4.000 5,400,000 5,400,000
1,145 New York State
Job Development Authority A 3.600 1,145,000 1,145,000
5,800 New York State Local Government
Assistance Corporation A 3.700 3,400,000 2,400,000 5,800,000
1,200 New York State Medical Facilities
Financing Agency (Buffalo
Children's Hospital) A 3.850 1,200,000 1,200,000
3,500 New York State Power
Adjustable Rate Bonds 09/01/95 4.000 to 4.400 2,500,000 1,000,000 3,500,000
2,000 Akron Central School District
Tax Anticipation Notes 09/13/95 5.000 2,000,521 2,000,521
350 Amhurst Central School District
Tax Anticipation Notes 09/01/95 7.300 351,944 351,944
3,600 Babylon General Obligation Bonds A 3.950 3,600,000 3,600,000
1,000 Bedford Central School District
Tax Anticipation Notes 11/16/95 3.750 700,623 300,267 1,000,890
500 Bronxville Tax Anticipation Notes 05/03/96 4.850 501,395 501,395
2,000 Buffalo Revenue Anticipation Notes 07/12/95 5.000 2,000,472 2,000,472
</TABLE>
<PAGE>
PaineWebber RMA New York Municipal Money Fund & PW/KP Municipal Money Market
Series - New York Series
- ----------------------------------------------------------------------------
Statement of Net Assets
June 30, 1995 (unaudited)
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
PW/KP
PaineWebber Municipal Pro
Principal RMA NY Mmkt. Forma
Amount Maturity Interest Municipal NY Series Combined
(000) Dates Rates Value Value Value
- --------- -------------------- --------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Investments in Municipal Securities -
(continued)
$3,200 Erie County Water Authority A 4.000% $3,200,000 $3,200,000
3,020 Erie County Revenue Anticipation
Notes 08/15/95 4.750 3,022,368 3,022,368
900 Greenburg Central School District
Tax Anticipation Notes 10/13/95 3.950 900,624 900,624
2,000 Half Hollows Central School District
Tax Anticipation Notes 06/28/96 4.250 to 4.500 1,611,088 $402,772 2,013,860
700 Hemstead Bond Anticipation Notes 08/17/95 4.500 700,776 700,776
3,100 Metropolitan Transportation Authority A 3.750 1,800,000 1,300,000 3,100,000
3,000 Monroe County Bond Anticipation Notes 06/07/96 4.500 1,508,076 1,508,028 3,016,104
900 Monroe Industrial Development
Authority (Electric Navigation/
Emerson Electric) Adjustable Rate
Bonds 07/01/95 3.600 900,000 900,000
4,070 Nassau County Bond Anticipation Notes 08/15/95 4.250 to 5.000 2,502,329 1,572,336 4,074,665
2,000 Nassau County Tax Anticipation Notes 11/15/95 to 03/15/96 4.250 to 5.000 2,007,021 2,007,021
3,100 Nassau County Industrial Development
Authority (Cold Spring Harbor
Laboratory Project) A 4.400 3,000,000 100,000 3,100,000
1,500 New York City Board of
Cooperative Educational Services
Tax Anticipation Notes 06/27/96 4.250 1,004,050 502,025 1,506,075
4,100 New York City Housing Development Corp.
(Columbus Gardens Project) A 4.000 1,900,000 2,200,000 4,100,000
2,200 New York City Housing Development Corp.
(East 17th Street Project) A 3.900 to 4.250 1,600,000 600,000 2,200,000
1,500 New York City Housing Development Corp.
(James Tower Project) A 3.850 1,500,000 1,500,000
3,100 New York City Housing Development Corp.
(Parkgate Tower Project) A 3.850 3,100,000 3,100,000
800 New York City Housing Development Corp.
(Queenswoods Apartments Project) A 4.000 800,000 800,000
10,200 New York City Housing Development Corp.
(Related 96th Street Project) A 3.750 8,500,000 1,700,000 10,200,000
800 New York City Industrial Development
Agency (Audobons) A 4.350 800,000 800,000
3,100 New York City Industrial Development
Agency (Calhoun School) A 3.750 3,100,000 3,100,000
2,700 New York City Industrial Development
Agency (JFK Field House) A 4.100 1,700,000 1,000,000 2,700,000
3,300 New York City Industrial Development
Agency (LaGuardia) A 4.100 1,800,000 1,500,000 3,300,000
1,500 New York City Industrial Development
Agency (Stroheim & Roman Inc.) A 3.600 1,500,000 1,500,000
10,000 New York City Municipal Finance
Authority Water and Sewer System
Tax Exempt Commercial Paper 07/21/95 to 08/22/95 3.850 to 4.200 9,000,000 1,000,000 10,000,000
3,400 New York City Trust for Cultural
Resources (Carnegie Hall) A 4.050 2,300,000 1,100,000 3,400,000
900 New York City Trust for Cultural
Resources (Museum of
Broadcasting) A 4.000 900,000 900,000
2,505 New York City Trust for Cultural
Resources (Museum of Natural
History) A 3.950 2,505,000 2,505,000
1,000 New York City Trust for Cultural
Resources (The Jewish Museum) A 4.000 1,000,000 1,000,000
1,100 New York City Trust for Cultural
Resources (The Guggenheim
Museum) A 4.350 700,000 400,000 1,100,000
8,500 New York City Tax Exempt A 4.000 to 4.300 6,300,000 2,200,000 8,500,000
Commercial Paper
5,100 New York City Tax Exempt Commercial 07/25/95 to 08/25/95 3.400 to 4.100 4,800,000 300,000 5,100,000
Paper
4,100 Niagara Falls Toll Bridge Commission A 4.000 4,100,000 4,100,000
3,700 North Hempstead Solid Waste A 3.750 1,800,000 1,900,000 3,700,000
1,140 Onondaga County
Industrial Development Authority
(McLane Co. Project) A 4.750 1,140,000 1,140,000
1,000 Pelham Union Free School District
Tax Anticipation Notes 11/06/95 4.000 701,148 300,492 1,001,640
1,400 Port Authority of NY & NJ
Versatile Structure A 4.050 to 4.150 1,400,000 1,400,000
</TABLE>
<PAGE>
PaineWebber RMA New York Municipal Money Fund & PW/KP Municipal Money Market
Series - New York Series
- ----------------------------------------------------------------------------
Statement of Net Assets
June 30, 1995 (unaudited)
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
PW/KP
PaineWebber Municipal Pro
Principal RMA NY Mmkt. Forma
Amount Maturity Interest Municipal NY Series Combined
(000) Dates Rates Value Value Value
- --------- -------------------- --------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Investments in Municipal Securities -
(concluded)
$2,500 Schenectady Central School District
Bond Anticipation Notes 06/27/96 4.250% $2,511,901 $ 2,511,901
1,470 Schenectady Industrial Development
Agency (Scotia Industrial Park) A 3.800 1,470,000 1,470,000
1,000 Seneca County Industrial Development
Agency (N.Y. Chiropractic College) A 4.050 1,000,000 1,000,000
1,100 Smithtown Central School District
Bond Anticipation Notes 06/27/96 4.250 804,193 $301,564 1,105,757
600 St. Lawrence County Industrial
Development Agency
(Reynolds Metal) A 4.250 600,000 600,000
2,500 Suffolk County Central School District
Tax Anticipation Notes 08/15/95 5.250 2,501,647 2,501,647
1,200 Suffolk County Industrial Development
Agency (Coldsprings Harbor) A 4.400 1,200,000 1,200,000
1,000 Suffolk County Industrial Development
Agency (Phototronix) A 4.100 900,000 100,000 1,000,000
2,900 Suffolk County Water Authority A 4.150 2,900,000 2,900,000
2,000 Three Village Central School District
Tax Anticipation Notes 06/28/96 4.500 2,013,900 2,013,900
1,355 Tompkins County Central School District
Bond Anticipation Notes 05/31/96 3.940 1,358,454 1,358,454
2,000 Triborough Bridge & Tunnel Authority 01/01/11(1) 9.000 2,039,993 2,039,993
2,350 Westchester General Obligation Bonds 12/14/95 5.000 2,355,952 2,355,952
1,000 Westchester Tax Anticipation Notes 12/14/95 5.000 1,002,174 1,002,174
1,000 Yonkers A 3.200 1,000,000 1,000,000
2,200 Yonkers Industrial Development Agency
Civic Facility Revenue Bonds
(Consumers Union Facility) A 3.750 to 3.950 2,200,000 2,200,000
4,500 Yonkers Industrial Development Bonds
(Kawasaki Rolling Stock) 12/01/95 4.600 4,500,000 4,500,000
-------------
Total Investments (cost-$197,466,172, $43,430,108 197,466,172 48,430,108 245,896,280
and $245,896,280 respectively, which
approximate cost for federal income tax
purposes) - 102.42%, 102.49% and 102.43%,
respectively.
Liabilities in excess of other assets- 2.42%, 2.49%
and 2.43%, respectively (4,667,402) (1,175,923) (5,843,325)
------------ ------------- -------------
Net Assets (applicable to 192,932,698, 47,256,106
and 240,188,804, respectively, shares of
beneficial interest at $1.00 per share) - 100.00% $192,798,770 $47,254,185 $240,052,955
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
- ---------------------------
A - Variable Rate Demand Notes are payable on demand. The interest rate shown
is the current rate as of June 30, 1995.
(1) Escrowed to 07/01/95 @ 102.
Weighted average maturity 48, 58 and 50 days respectively.
See Notes to Pro Forma Combined Financial Statements
<PAGE>
Pro Forma Combined
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Twelve Months Ended June 30, 1995
PaineWebber PW/KP Municipal
RMA Money Market Series-
New York Municipal New York Pro Forma
Fund Series Adjustments Combined
------------------ -------------------- ----------- ----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
INTEREST $6,450,070 $ 2,073,057 $0 $8,523,127
------------------ -------------------- ----------- ----------
EXPENSES:
Investment advisory and administration fees 923,010 309,733 0 1,232,743
Distribution fees 147,682 74,336 (24,779) 197,239
Transfer agency and service fees 73,761 27,899 (22,136) 76,524
Custody Fees 61,048 42,119 (21,806) 81,361
Other 99,575 44,455 (31,538) 112,492
------------------ -------------------- ----------- ----------
1,305,076 498,542 (100,259) 1,703,359
------------------ -------------------- ----------- ----------
LESS:
Fee waivers from adviser (50,014) 0 23,186 (26,828)
------------------ -------------------- ----------- ----------
Net expenses 1,255,062 498,542 (77,073) 1,676,531
------------------ -------------------- ----------- ----------
NET INVESTMENT INCOME 5,195,008 1,574,515 77,073 6,846,596
REALIZED (LOSSES) FROM INVESTMENT TRANSACTIONS (4,018) (5,297) (9,315)
------------------ -------------------- ----------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $5,190,990 $ 1,569,218 $77,073 $6,837,281
------------------ -------------------- ----------- ----------
------------------ -------------------- ----------- ----------
</TABLE>
See Notes to Pro Forma Combined Financial Statements
<PAGE>
Pro Forma Capitalization
as of June 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
PaineWebber PW/KP Municipal PaineWebber
RMA Money Market Series- RMA
New York Municipal New York New York Municipal
Fund Series Fund (as adjusted)(1)
------------------ -------------------- ---------------------
<S> <C> <C> <C>
Shareholders' Equity:
Capital stock shares of $0.001 par value per
share
(unlimited amount authorized)
192,932,698 shares outstanding for
PaineWebber RMA NY Municipal Fund (Actual)
47,256,106 shares outstanding for MH/KP
Municipal Money Market NY Series (Actual)
240,188,804 shares outstanding for
PaineWebber RMA NY Municipal Fund (As
adjusted) 192,932,698 47,256,106 240,188,804(2)(3)
Accumulated net realized losses from
investments (133,928) (1,921) (135,849)(4)
------------------ -------------------- ---------------------
Net Assets $192,798,770 $47,254,185 $240,052,955
------------------ -------------------- ---------------------
------------------ -------------------- ---------------------
</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 November
1995, at which time the results would be reflective of the actual
composition of shareholders' equity at that date.
(2) Assumes the issuance of 47,256,106 shares in exchange for the net assets
applicable to capital stock holders of PW/KP Muni Mmkt Series-NY Series.
The exchange is based on net asset value of $1.00.
(3) Does not include the impact of estimated Reorganization costs of $125,000.
(4) Assumes PW/KP Muni Mmkt NY's net realized losses from investment
transactions carry forward into PaineWebber RMA NY Muni.
See Notes to Pro Forma Combined Financial Statements
<PAGE>
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 Municipal Money Market Series--New York Series
("PW/KP Muni NY"), PaineWebber RMA New York Municipal Money Fund ("RMA NY")
would acquire the assets of PW/KP Muni NY in exchange solely for the assumption
by RMA NY of PW/KP Muni NY's liabilities and shares of RMA NY that correspond,
in aggregate, to the outstanding shares of PW/KP Muni NY Income. Shares of RMA
NY will be distributed to PW/KP Muni NY's shareholders at $1.00 per share, and
PW/KP Muni NY will be terminated as soon as practicable thereafter. Each PW/KP
Muni NY shareholder will receive the number of full and fractional shares of
RMA NY equal in value to such shareholders' holdings in the corresponding shares
of PW/KP Muni NY as of the closing date of the merger.
If the shareholders approve the Plan of Reorganization at a meeting on
November 3, PW/KP Muni NY will merge into RMA NY in November 1995. The pro forma
combined financial statements reflect the financial position of RMA NY and PW/KP
Muni NY at June 30, 1995 and the combined results of operations of RMA NY and
PW/KP Muni NY 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.
Currently, the expenses are voluntarily capped at 0.68% by the investment
adviser.
As a result of the Reorganization, expenses will be reduced due to duplication
of certain fixed expenses. It is estimated that costs of approximately $125,000
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.
<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 or judgement or mistake of
<PAGE>
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
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
2
<PAGE>
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
Exhibit No. Description of Exhibit
(1) (a) Declaration of Trust(1)
(b) Amendment effective January 28, 1988(2)
(c) Amendment effective August 23, 1988(3)
(d) Amendment effective March 28, 1991(4)
(e) Amendment effective July 1, 1991(5)
(2) By-Laws of the Trust(1)
(3) Not Applicable.
(4) Agreement of 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(6)
(b) Sub-Advisory and Sub-Administration Contract(6)
(7) Distribution Contract
(8) Bonus, Profit-Sharing, Pension or Other Similar Contracts--None
(9) (a) Custodian Agreement(8)
(b) Transfer Agency and Service Contract(6)
(10) Distribution Agreement and Rule 12b-1 Plan(7)
(11) Opinion and Consent of Kirkpatrick and Lockhart LLP (filed
herewith)
(12) (a) Opinion and Consent of Kirkpatrick & Lockhart LLP (filed
herewith)
(b) Opinion and Consent of Stroock & Stroock & Lavan (filed
herewith)
(13) Not Applicable.
(14) (a) Consent of Ernst & Young LLP (filed herewith)
(b) Consent of Deloitte and 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)
___________________
(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. 8 to
registration statement, SEC File No. 2-89016, filed March 31, 1988.
3
<PAGE>
(3) Incorporated by Reference from Post-Effective Amendment No. 11 to
registration statement, SEC File No. 2-89016, filed October 24, 1988.
(4) Incorporated by reference from Post-Effective Amendment No. 21 to
registration statement, SEC File No. 2-89016.
(5) Incorporated by reference from Post-Effective Amendment No. 22 to
registration statement, SEC File No. 2-89016, filed January 29, 1992.
(6) Incorporated by reference from Post-Effective Amendment No. 18 to
registration statement, SEC File No. 2-89016, filed January 29, 1991.
(7) Incorporated by reference from Post-Effective Amendment No. 28 to
the registration statement, SEC File No. 2-89016, filed August 29, 1994.
(8) Incorporated by reference from Post-Effective Amendment No. 7 to
registration statement SEC File No. 2-89016, filed February 1, 1988.
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 file 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 bonafide offering of them.
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 5th 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:
Signature Title Date
/s/ MARGO N. ALEXANDER President
- -------------------------- (Chief Executive Officer) September 5, 1995
Margo N. Alexander
/s/ E. GARRETT BEWKES, JR. Trustee and Chairman of September 5, 1995
- ------------------------- the Board of Trustees
E. Garrett Bewkes, Jr.
/s/ MEYER FELDBERG Trustee September 5, 1995
- --------------------------
Meyer Feldberg
/s/ GEORGE W. GOWEN Trustee September 5, 1995
- --------------------------
George W. Gowen
/s/ FREDERIC V. MALEK Trustee September 5, 1995
- --------------------------
Frederic V. Malek
/s/ FRANK P. L. MINARD Trustee September 5, 1995
- --------------------------
Frank P. L. Minard
/s/ JUDITH DAVIDSON MOYERS Trustee September 5, 1995
- --------------------------
Judith Davidson Moyers
/s/ THOMAS F. MURRAY Trustee September 5, 1995
- --------------------------
Thomas F. Murray
/s/ JULIAN F. SLUYTERS Vice President and September 5, 1995
- -------------------------- Treasurer (Principal
Julian F. Sluyters Financial and
Accounting Officer)
5
<PAGE>
PAINEWEBBER MANAGED MUNICIPAL TRUST
EXHIBIT INDEX
Exhibit No. Description of Exhibit Page
- ----------- ---------------------- -----
(1) (a) Declaration of Trust(1)
(b) Amendment effective January 28, 1988(2)
(c) Amendment effective August 23, 1988(3)
(d) Amendment effective March 28, 1991(4)
(e) Amendment effective July 1, 1991(5)
(2) By-Laws of the Trust(1)
(3) Not Applicable.
(4) Agreement of 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(6)
(b) Sub-Advisory and Sub-Administration Contract(6)
(7) Distribution Contract
(8) Bonus, Profit-Sharing, Pension or Other Similar
Contracts--None
(9) (a) Custodian Agreement(8)
(b) Transfer Agency and Service Contract(6)
(10) Distribution Agreement and Rule 12b-1 Plan(7)
(11) Opinion and Consent of Kirkpatrick and Lockhart LLP
(filed herewith)
(12) (a) Opinion and Consent of Kirkpatrick & Lockhart LLP
(filed herewith)
(b) Opinion and Consent of Stroock & Stroock & Lavan
(filed herewith)
(13) Not Applicable.
(14) (a) Consent of Ernst & Young LLP (filed herewith)
(b) Consent of Deloitte and 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)
___________________
(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. 8 to
registration statement, SEC File No. 2-89016, filed March 31, 1988.
(3) Incorporated by Reference from Post-Effective Amendment No. 11 to
registration statement, SEC File No. 2-89016, filed October 24, 1988.
(4) Incorporated by reference from Post-Effective Amendment No. 21 to
registration statement, SEC File No. 2-89016, filed April 29, 1991.
(5) Incorporated by reference from Post-Effective Amendment No. 22 to
registration statement, SEC File No. 2-89016, filed January 29, 1992.
(6) Incorporated by reference from Post-Effective Amendment No. 18 to
registration statement, SEC File No. 2-89016, filed January 29, 1991.
(7) Incorporated by reference from Post-Effective Amendment No. 28 to the
registration statement, SEC File No. 2-89016, filed August 29, 1994.
(8) Incorporated by reference from Post-Effective Amendment No. 7 to
registration statement, SEC File No. 2-89016, filed February 1, 1988.
AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
THIS AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
("Agreement") is made as of September 1, 1995, between PaineWebber
Managed Municipal Trust, a Massachusetts business trust ("PW
Trust"), on behalf of PaineWebber RMA New York Municipal Money
Fund, a segregated portfolio of assets ("series") thereof ("Acquir-
ing Fund"), and PaineWebber/Kidder, Peabody Municipal Money Market
Series, a Massachusetts business trust ("PW/KP Trust"), on behalf
of its PaineWebber/Kidder, Peabody Municipal Money Market New York
Series ("Target"). (Acquiring Fund and Target are sometimes re-
ferred to herein individually as a "Fund" and collectively as the
"Funds," and PW Trust and PW/KP Trust 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 transac-
tions are referred to herein as the "Reorganization." All agree-
ments, representations, actions, and obligations described herein
made or to be taken or undertaken by either Fund are made and shall
be taken or undertaken by PW Trust on behalf of Acquiring Fund and
by PW/KP Trust on behalf of Target.
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 reg-
ister 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 pro-
vided herein) all of Target's liabilities, debts, obligations, and
duties of whatever kind or nature, whether absolute, accrued, con-
tingent, 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 Agree-
ment, 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 Lia-
bilities prior to the Effective Time.
1.4. At or immediately before the Effective Time, Target
shall declare and pay to its shareholders a dividend in an amount
large enough so that it will have distributed substantially all
(and in any event not less than 90%) of its investment company
taxable income (computed without regard to any deduction for
dividends paid) and net interest income excludable from gross
income under section 103(a) of the Code for the current taxable
year through the Effective Time.
1.5. At the Effective Time (or as soon thereafter as is rea-
sonably 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 "Sharehold-
er"), 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.
- 2 -
1.6. As soon as reasonably practicable after distribution of
the Acquiring Fund Shares pursuant to paragraph 1.5, Target shall
be terminated as a series of PW/KP Trust 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 includ-
ing 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 there-
for shall be paid by the person to whom such Acquiring Fund Shares
are to be issued, as a condition of such transfer.
2. VALUATION
2.1. For purposes of paragraph 1.1(a), Target's net value
shall be (a) the value of the Assets computed as of the close of
regular trading on the New York Stock Exchange, Inc. ("NYSE") on
the date of the Closing ("Valuation Time"), using the valuation
procedures set forth in Target's then-current prospectus and state-
ment of additional information less (b) the amount of the Liabili-
ties as of the Valuation Time.
2.2. For purposes of paragraph 1.1(a), the NAV of an Ac-
quiring 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 5:00 p.m., Eastern time, at the Valua-
tion 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 Valua-
tion 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' prin-
cipal office on November 10, 1995, or at such other place and/or on
- 3 -
such other date as the parties may agree. All acts taking place at
the Closing shall be deemed to take place simultaneously as of the
close of business on the date thereof or at such other time as the
parties may agree ("Effective Time"). If, immediately before the
Valuation Time, (a) the 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. PW/KP Trust 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 stat-
ing 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. PW/KP Trust 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 Secre-
tary of PW/KP Trust. 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 PW/KP Trust evidencing
the Acquiring Fund Shares to be credited to Target at the Effective
Time or provide evidence satisfactory to PW/KP Trust 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 certi-
ficates, 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 recipi-
ent and dated the Effective Time, to the effect that the represen-
tations and warranties it made in this Agreement are true and cor-
rect at the Effective Time except as they may be affected by the
transactions contemplated by this Agreement.
- 4 -
4. REPRESENTATIONS AND WARRANTIES
4.1. Target represents and warrants as follows:
4.1.1. PW/KP Trust is an unincorporated voluntary asso-
ciation 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. PW/KP Trust 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. Target is a duly established and designated se-
ries of PW/KP Trust;
4.1.4. At the Closing, Target will have good and market-
able 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;
4.1.5. 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 there-
under 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 mislead-
ing;
4.1.6. Target is not in violation of, and the execution
and delivery of this Agreement and consummation of the trans-
actions contemplated hereby will not conflict with or violate,
Massachusetts law or any provision of PW/KP Trust's Declara-
tion 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 obli-
gation, 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;
4.1.7. 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
- 5 -
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 dimin-
ishing 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;
4.1.8. Except as otherwise disclosed in writing to and
accepted by PW Trust, no litigation, administrative proceed-
ing, or investigation of or before any court or governmental
body is presently pending or (to Target's knowledge) threat-
ened against PW/KP Trust with respect to 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 litiga-
tion, 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 transac-
tions contemplated hereby;
4.1.9. The execution, delivery, and performance of this
Agreement has been duly authorized as of the date hereof by
all necessary action on the part of PW/KP Trust's board of
trustees, which has made the determinations required by Rule
17a-8(a) under the 1940 Act; and, subject to approval by Tar-
get'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;
4.1.10. At the Effective Time, the performance of this
Agreement shall have been duly authorized by all necessary
action by Target's shareholders;
4.1.11. No governmental consents, approvals, authoriza-
tions, or filings are required under the 1933 Act, the Secu-
rities Exchange Act of 1934 ("1934 Act"), or the 1940 Act for
the execution or performance of this Agreement by PW/KP Trust,
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 amend-
ment thereto ("Registration Statement"), including therein a
prospectus/proxy statement ("Proxy Statement"), (b) receipt of
- 6 -
the exemptive relief referenced in subparagraph 4.1.9, and
(c) such consents, approvals, authorizations, and filings as
have been made or received or as may be required subsequent to
the Effective Time;
4.1.12. On the effective date of the Registration State-
ment, 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 state-
ments therein, in light of the circumstances under which such
statements were made, not misleading; provided that the fore-
going 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;
4.1.13. The Liabilities were incurred by Target in the
ordinary course of its business;
4.1.14. Target is a "fund" as defined in section
851(h)(2) of the Code; it qualified for treatment as a regu-
lated investment company under Subchapter M of the Code
("RIC") for each past taxable year since it commenced opera-
tions 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;
4.1.15. 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;
4.1.16. Not more than 25% of the value of Target's total
assets (excluding cash, cash items, and U.S. government secu-
rities) 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
4.1.17. Target will be terminated as soon as reasonably
practicable after the Reorganization, but in all events within
six months after the Effective Time.
- 7 -
4.2. Acquiring Fund represents and warrants as follows:
4.2.1. PW Trust is a Business Trust; it is duly organ-
ized, validly existing, and in good standing under the laws of
the Commonwealth of Massachusetts; and a copy of its Decla-
ration of Trust is on file with the Secretary of the Common-
wealth of Massachusetts;
4.2.2. PW Trust is duly registered as an open-end man-
agement investment company under the 1940 Act, and such reg-
istration will be in full force and effect at the Effective
Time;
4.2.3. Acquiring Fund is a duly established and desig-
nated 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 deli-
vered to Target hereunder will, at the Effective Time, have
been duly authorized and, when issued and delivered as pro-
vided herein, will be duly and validly issued and outstanding
shares of Acquiring Fund, fully paid and non-assessable, ex-
cept 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 secu-
rity 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;
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
- 8 -
previously disclosed in writing to and accepted by PW/KP
Trust;
4.2.8. Except as otherwise disclosed in writing to and
accepted by PW/KP Trust, no litigation, administrative pro-
ceeding, or investigation of or before any court or govern-
mental body is presently pending or (to Acquiring Fund's
knowledge) threatened against PW Trust with respect to Acquir-
ing 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 inves-
tigation 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 has been duly authorized as of the date hereof by
all necessary action on the part of PW Trust's board of trus-
tees, which has made the determinations required by Rule 17a-
8(a) under the 1940 Act; and, subject to receipt of any neces-
sary 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, reorganiza-
tion, moratorium, and similar laws relating to or affecting
creditors' rights and by general principles of equity;
4.2.10. No governmental consents, approvals, authoriza-
tions, 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 con-
sents, 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 State-
ment, 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 state-
ments therein, in light of the circumstances under which such
statements were made, not misleading; provided that the fore-
- 9 -
going shall not apply to statements in or omissions from the
Proxy Statement made in reliance on and in conformity with
information furnished by PW/KP Trust 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 con-
tinue 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 busi-
ness as a series of an open-end investment company; nor does
Acquiring Fund have any plan or intention to redeem or other-
wise reacquire any Acquiring Fund Shares issued to the Share-
holders 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 Tar-
get'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 ordi-
nary course of that business and dispositions necessary to
maintain its status as a RIC under Subchapter M of the Code,
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 dispo-
sitions 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 indi-
rectly, nor at the Effective Time will it own, directly or
- 10 -
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 approxi-
mately 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 dis-
positions 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 a series of
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 Reorganiza-
tion;
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 Reor-
ganization, 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;
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 distribu-
tions made by it immediately before the Reorganization (except
for (a) distributions made to conform to its policy of distri-
- 11 -
buting 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 Share-
holder who is an employee of Target will be separate consider-
ation 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 commensur-
ate with amounts paid to third parties bargaining at arm's-
length for similar services; and
4.3.9. Immediately after the Reorganization, the Share-
holders will not own shares constituting "control" of Acquir-
ing 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 declar-
ing 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 Acquir-
ing 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 mak-
ing any distribution thereof, other than in accordance with the
terms hereof.
5.4. Target covenants that it will assist PW Trust in obtain-
ing such information as PW Trust reasonably requests concerning the
beneficial ownership of Target Shares.
5.5. Target covenants that Target's books and records (in-
cluding all books and records required to be maintained under the
- 12 -
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 instru-
ments, and will take or cause to be taken such further action, as
the other Fund may deem necessary or desirable in order to vest in,
and confirm to, (a) Acquiring Fund, title to and possession of all
the Assets, and (b) Target, title to and possession of the Acquir-
ing 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 appropri-
ate 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) per-
formance 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 condi-
tions that, at or before the Effective Time:
6.1. This Agreement and the transactions contemplated hereby
shall have been duly adopted and approved by PW/KP Trust'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 sec-
- 13 -
tion 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 (in-
cluding 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 condi-
tions.
6.3. At the Effective Time, no action, suit, or other pro-
ceeding 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. PW/KP Trust shall have received an opinion of Kirkpat-
rick & 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, exe-
cuted, and delivered by PW Trust on behalf of Acquiring Fund
and (b) assuming due authorization, execution, and delivery of
this Agreement by PW/KP Trust on behalf of 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 dis-
tributed 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 obli-
gations, and no shareholder of Acquiring Fund has any preemp-
tive 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
- 14 -
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 investiga-
tion) 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 imposi-
tion 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 PW/KP
Trust;
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 Ac-
quiring 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 secu-
rities laws;
6.4.6. PW Trust is registered with the SEC as an invest-
ment company, and to the knowledge of such counsel no order
has been issued or proceeding instituted to suspend such reg-
istration; and
6.4.7. To the knowledge of such counsel (without any in-
dependent inquiry or investigation), (a) no litigation, admin-
istrative 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 PW/KP 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 docu-
ments 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 sub-
stantive attention to matters directly related to this Agreement
and the Reorganization.
- 15 -
6.5. PW Trust shall have received an opinion of Stroock &
Stroock & Lavan, counsel to PW/KP Trust, substantially to the
effect that:
6.5.1. Target is a duly established series of PW/KP
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;
6.5.2. This Agreement (a) has been duly authorized, exe-
cuted, and delivered by PW/KP Trust on behalf of 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 PW/KP Trust with
respect to 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 PW/KP Trust's Declaration
of Trust or By-Laws or any provision of any agreement (known
to such counsel, without any independent inquiry or investiga-
tion) to which PW/KP Trust (with respect to 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
PW/KP Trust (with respect to 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 PW/KP Trust on behalf of
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. PW/KP 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
6.5.6. To the knowledge of such counsel (without any in-
dependent inquiry or investigation), (a) no litigation, admin-
- 16 -
istrative proceeding, or investigation of or before any court
or governmental body is pending or threatened as to PW/KP
Trust (with respect to Target) or any of its properties or
assets attributable or allocable to Target and (b) PW/KP Trust
(with respect to 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 docu-
ments 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 sub-
stantive 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 PW/KP Trust 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 represen-
tations 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 distribu-
tion of those shares to the Shareholders constructively in
exchange for the Shareholders' Target Shares, will constitute
a reorganization within the meaning of section 368(a)(1)(C) of
the Code, and each Fund will be "a party to a reorganization"
within the meaning of section 368(b) of the Code;
6.6.2. No gain or loss will be recognized to Target on
the transfer to Acquiring Fund of the Assets in exchange
solely for Acquiring Fund Shares and Acquiring Fund's assump-
tion of the Liabilities or on the subsequent distribution of
those shares to the Shareholders in constructive exchange for
their Target Shares;
- 17 -
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 in-
clude 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 Reorgan-
ization on the Funds or any Shareholder with respect to any asset
as to which any unrealized gain or loss is required to be recog-
nized 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 PW/KP Trust's
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) ex-
- 18 -
penses 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) registra-
tion 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 share-
holders; (d) printing and postage expenses; (e) legal and account-
ing fees; and (f) solicitation costs.
8. ENTIRE AGREEMENT; SURVIVAL
Neither party has made any representation, warranty, or cove-
nant not set forth herein, and this Agreement constitutes the
entire agreement between the parties. The representations, warran-
ties, and covenants contained herein or in any document delivered
pursuant hereto or in connection herewith shall survive the Clos-
ing.
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 con-
tained 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 sharehold-
ers, in such manner as may be mutually agreed upon in writing by
the parties; provided that following such approval no such amend-
ment shall have a material adverse effect on the Shareholders' in-
terests.
- 19 -
11. MISCELLANEOUS
11.1. This Agreement shall be governed by and construed in
accordance with the internal laws of the Commonwealth of Massachu-
setts; 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 succes-
sors 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 In-
vestment Company's obligations under this instrument are not bind-
ing 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.
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 NEW YORK
MUNICIPAL MONEY FUND
By: /s/ Ilene Shore /s/ Dianne E. O'Donnell
------------------------- ----------------------------------
Assistant Secretary Vice President
ATTEST: PAINEWEBBER/KIDDER, PEABODY MUNICI-
PAL MONEY MARKET SERIES,
on behalf of its series,
PAINEWEBBER/KIDDER, PEABODY
MUNICIPAL MONEY MARKET NEW
YORK SERIES
By: /s/ Stephanie H. Johnson /s/ Scott Griff
------------------------- ----------------------------------
Assistant Secretary Vice President
- 20 -
September 1, 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 New York 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 Municipal
Money Market Series ("PW/KP Trust"), on behalf of its
PaineWebber/Kidder, Peabody Municipal Money Market Series - New
York Series ("PW/KP Fund").
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
PaineWebber Managed Municipal Trust
September 1, 1995
Page 2
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 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: /s/ Elinor S. Gammon
----------------------------
Elinor W. Gammon
THEODORE L. PRESS
(202) 778-9025
[email protected]
September 1, 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 New York 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 Municipal Money Market Series - New York Series
("Target"), a series of PaineWebber/Kidder, Peabody Municipal Money Market
Series ("PW/KP Trust"),1 pursuant to an Agreement and Plan of Reorganization and
Termination between them dated as of September 1, 1995 ("Plan"), attached as an
exhibit to the prospectus/proxy statement to be furnished in connection with the
solicitation of proxies by PW/KP Trust's board of trustees for use at a special
meeting of Target shareholders ("Special Meeting") to be held on November 10,
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, PW Trust 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 close of regular
trading on the New York Stock Exchange, Inc. on the date of the
Closing (as hereinafter defined) ("Shareholders") constructively in
exchange for their shares of beneficial interest in Target ("Target
Shares") (such transac-
- --------
1 Acquiring Fund and Target are referred to herein individually either by
such names or as a "Fund" and collectively as the "Funds," and PW Trust and
PW/KP Trust are referred to herein individually either by such names or as an
"Investment Company" and collectively as the "Investment Companies."
PaineWebber Managed Municipal Trust
September 1, 1995
Page 2
tion sometimes being referred to herein as the "Reorganization"),
will constitute a "reorganization" within the meaning of section
368(a)(1)(C)2 and that each
Fund will be a "party to a reorganization" within the meaning of
section 368(b),
(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 and statement of additional information ("SAI"), both
dated February 28, 1995, 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 Investment Company 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 10, 1988.
PW/KP Trust is a Massachusetts business trust formed pursuant to a Declaration
of Trust dated September 14, 1990; Target commenced operations as a series
thereof on February 1, 1991. 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
Acquiring 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 Acquiring
Fund's sub-adviser and sub-administrator and Target's investment adviser and
administrator.
- --------
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").
PaineWebber Managed Municipal Trust
September 1, 1995
Page 3
At or immediately before the close of business on the date on which
the Reorganization, together with all related acts necessary to consummate the
same ("Closing") occurs, scheduled for November 10, 1995 (or on such other
date or at such other time as the parties may agree) ("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.
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
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
Acquiring Fund ("Acquiring Fund Shares") determined by
dividing the net
PaineWebber Managed Municipal Trust
September 1, 1995
Page 4
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 PW/KP Trust, on
behalf of 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;
PaineWebber Managed Municipal Trust
September 1, 1995
Page 5
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 a
series of 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 Shareholderswill 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
PaineWebber Managed Municipal Trust
September 1, 1995
Page 6
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).
PW/KP Trust also has represented and warranted to us on behalf of
Target as follows:
1. The Liabilities were incurred by Target in the ordinary
course of its business;
2. Target is a "fund" as defined in section 851(h)(2); it
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 accu-
PaineWebber Managed Municipal Trust
September 1, 1995
Page 7
mulated 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.
PaineWebber Managed Municipal Trust
September 1, 1995
Page 8
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 solely in exchange 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 (sec-
tion 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)).
PaineWebber Managed Municipal Trust
September 1, 1995
Page 9
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 each Fund is a separate series thereof.
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
PaineWebber Managed Municipal Trust
September 1, 1995
Page 10
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.
Neither Investment Company as such, however, is participating in the
Reorganization, but rather series of each of them are the participants.
Ordinarily, a transaction involving segregated pools of assets (such as the
Funds) could not qualify as a reorganization, because the pools would not be
corporations. Under section 851(h), however, each 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 each Investment Company).
Thus, we believe that each 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 sharehold-
ers 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.
PaineWebber Managed Municipal Trust
September 1, 1995
Page 11
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 corpora-
tion 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.
PaineWebber Managed Municipal Trust
September 1, 1995
Page 12
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).
PaineWebber Managed Municipal Trust
September 1, 1995
Page 13
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 a series of an open-end investment com-
pany. 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 terminated. 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. Sections
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
PaineWebber Managed Municipal Trust
September 1, 1995
Page 14
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) pro-
vides 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.
PaineWebber Managed Municipal Trust
September 1, 1995
Page 15
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 terminated 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
- --------
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.
PaineWebber Managed Municipal Trust
September 1, 1995
Page 16
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,
PaineWebber Managed Municipal Trust
September 1, 1995
Page 17
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 Share- holder 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
/s/ Theodore L. Press
By: -------------------------
Theodore L. Press
Exhibit 12(b)
[LETTERHEAD OF STROOK & STROOK & LAVAN]
September 1, 1995
PaineWebber/Kidder, Peabody Municipal
Money Market Series - New York Series
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 Municipal Money Market Series - New
York Series ("PW/KP Fund"), a series of PaineWebber/ Kidder,
Peabody Municipal Money Market Series, a Massachusetts business
trust, and PaineWebber RMA New York 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
PaineWebber/Kidder, Peabody Municipal
Money Market Series - New York Series
September 1, 1995
Page 2
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's hands immediately before the
Reorganization, and PW Fund's holding period for the Assets will
include PW/KP Fund's holding period therefor;
PaineWebber/Kidder, Peabody Municipal
Money Market Series - New York Series
September 1, 1995
Page 3
(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.
We hereby consent to the filing of this opinion as an exhibit to
the Registration Statement and to the reference to us in the Proxy
Statement/Prospectus 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 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 report on PaineWebber RMA New York Municipal
Money Fund dated August 17, 1995, in this Registration Statement (Form N-14) of
PaineWebber Managed Municipal Trust.
/s/ Ernst & Young LLP
-----------------------
Ernst & Young LLP
New York, New York
September 5, 1995
CONSENT OF INDEPENDENT AUDITORS
PaineWebber/Kidder, Peabody Municipal Money Market Series-New York Series:
We consent to the incorporation by reference in this Registration Statement
on Form N-14 of our report dated November 30, 1994, appearing in the annual
report to shareholders for the year ended October 31, 1994, and to the
reference to us under the caption "Experts" appearing in the Prospectus/Proxy
Statement which also is a part of such Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
New York, New York
September 5, 1995
[LETTERHEAD OF ORRICK, HERRINGTON & SUTCLIFFE]
September 1, 1995
Mitchell Hutchins
1285 Avenue of the Americas
New York, New York 10019
Re: PaineWebber RMA New York Municipal Money Fund, a
series of PaineWebber Managed Municipal Trust (the
"New York Fund")
--------------------------------------------------
We hereby consent to the filing of this consent as an exhibit to the
registration statement on Form N-14 for the New York Fund dated as of the date
hereof (the "Registration Statement") and to the use of our name as counsel to
the New York Fund with respect to the New York law in the Registration Statement
and the Prospectus for the New York Fund.
Very truly yours,
/s/ Orrick, Herrington, & Sutcliffe
Orrick, Herrington, & Sutcliffe
PROXY
PaineWebber/Kidder, Peabody Municipal Money Market New York Series, a series of
PaineWebber/Kidder, Peabody Municipal Money Market Series Notice of Special
Meeting of Shareholders - November __, 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 Municipal Money Market
New York Series, a series of PaineWebber/Kidder, Peabody Municipal Money Market
Series.
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 AGAINSTABSTAIN
1.To consider an agreement and Plan of
Reorganization and Termination under
which PaineWebber RMA New York
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 ____ ________
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
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 739243
<NAME> PAINEWEBBER MANAGED MUNICIPAL TRUST
<SERIES>
<NUMBER> 2
<NAME> PAINEWEBBER RMA NEW YORK 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> 197466
<INVESTMENTS-AT-VALUE> 197466
<RECEIVABLES> 5670
<ASSETS-OTHER> 11
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 203431
<PAYABLE-FOR-SECURITIES> 6031
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4601
<TOTAL-LIABILITIES> 10632
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 192933
<SHARES-COMMON-STOCK> 192933
<SHARES-COMMON-PRIOR> 165241
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (134)
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 192799
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6450
<OTHER-INCOME> 0
<EXPENSES-NET> (1255)
<NET-INVESTMENT-INCOME> 5195
<REALIZED-GAINS-CURRENT> (4)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 5191
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5195)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1109690
<NUMBER-OF-SHARES-REDEEMED> (1087057)
<SHARES-REINVESTED> 5059
<NET-CHANGE-IN-ASSETS> 27688
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (130)
<GROSS-ADVISORY-FEES> 923
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1305
<AVERAGE-NET-ASSETS> 184602
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.028
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (0.028)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.68
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
