<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 15, 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 INVESTMENTS 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:
ELINOR W. GAMMON, ESQ.
BARRY E. SIMMONS, ESQ.
KIRKPATRICK & LOCKHART LLP
SOUTH LOBBY--9TH FLOOR
1800 M STREET, N.W.
WASHINGTON, D.C. 20036-5891
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 JANUARY 25, 1995, THE NOTICE REQUIRED BY RULE 24F-2 FOR ITS FISCAL
YEAR ENDED NOVEMBER 30, 1994.
It is proposed that this filing will become effective on September 14,
1995 pursuant to Rule 488.
<PAGE>
PAINEWEBBER MANAGED INVESTMENTS TRUST
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following papers and documents:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheets
Letters to Shareholders
Notices of Special Meeting
Part A -- Prospectus/Proxy Statement
Part B -- Statement of Additional Information
Part C -- Other Information
Signature Page
Exhibits
<PAGE>
PAINEWEBBER MANAGED INVESTMENTS TRUST
FORM N-14 CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
PART A ITEM NO. PROSPECTUS/PROXY
AND CAPTION STATEMENT CAPTION
-------------------------------------------- -------------------------------------------
<S> <C> <C>
1. Beginning of Registration Statement and Cover Page
Outside Front Cover Page of Prospectus .....
2. Beginning and Outside Back Cover Page of Table of Contents
Prospectus .................................
3. Synopsis Information and Risk Factors ...... Synopsis; Comparison of Principal Risk
Factors
4. Information About the Transaction ........... Synopsis; The Proposed Transactions;
Appendix A; Appendix B
5. Information About the Registrant ............ Synopsis; Comparison of Principal Risk
Factors; Additional Information About
PaineWebber U.S. Government Income Fund;
Miscellaneous; See also the Prospectus of
PaineWebber U.S. Government Income Fund,
dated April 1, 1995, previously filed on
EDGAR, Accession Number 950130-95-000554.
6. Information About the Company Being Synopsis; Comparison of Principal Risk
Acquired ................................... Factors; Miscellaneous; See also,
Prospectuses of Mitchell Hutchins/Kidder,
Peabody Intermediate Fixed Income Fund,
dated December 29, 1994, as supplemented
June 22, 1995, both previously filed on
EDGAR, Accession Number 950117-95-000237;
and Mitchell Hutchins/Kidder, Peabody
Government Income Fund, Inc., dated June 1,
1995, previously filed on EDGAR, Accession
Number 950117-95-000172
7. Voting Information .......................... Voting Information
8. Interest of Certain Persons and Experts .... Not Applicable
9. Additional Information Required for Not Applicable
Reoffering by Persons Deemed to be
Underwriters ................................
PART B ITEM NO. STATEMENT OF ADDITIONAL
AND CAPTION INFORMATION CAPTION
---------------------- ---------------------------
10. Cover Page .................................. Cover Page
11. Table of Contents .......................... Not Applicable
12. Additional Information About the Registrant . Statement of Additional Information
of PaineWebber U.S. Government
Income Fund, dated April 1, 1995,
previously filed on EDGAR, Accession
Number 950130-95-000554
13. Additional Information About the Company Statements of Additional Information of
Being Acquired .............................. Mitchell Hutchins/Kidder, Peabody Intermediate
Fixed Income Fund, dated December 29, 1994
and Mitchell Hutchins/Kidder, Peabody Government
Income Fund, Inc., dated June 1, 1995,
previously filed on EDGAR, Accession
Number 950117-95-000172
<PAGE>
PART B ITEM NO. STATEMENT OF ADDITIONAL
AND CAPTION INFORMATION CAPTION
---------------------- -----------------------------
14. Financial Statements ......................... Annual Reports of PaineWebber U.S. Government
Income Fund for Fiscal Year Ended November 30,
1994, previously filed on EDGAR, Accession
Number 746703-95-000001; Mitchell Hutchins/Kidder,
Peabody Intermediate Fixed Income Fund for
Fiscal Year Ended August 31, 1994; and Mitchell
Hutchins/Kidder, Peabody Government Income
Fund, Inc. for Fiscal Year Ended January 31,
1995, previously filed on EDGAR, Accession Number
771588-95-000001
Semi-Annual Reports of PaineWebber U.S.
Government Income Fund for Six Months Ended May
31, 1995, previously filed on EDGAR, Accession
Number 746703-95-000002; and Mitchell Hutchins/
Kidder, Peabody Intermediate Fixed Income Fund
for Six Months Ended February 28, 1995, previously
filed on EDGAR, Accession Number 873803-95-000002.
Pro Forma Financial Statements for the Year
Ended May 31, 1995
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.
</TABLE>
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY
INTERMEDIATE FIXED INCOME FUND
(a series of Mitchell Hutchins/Kidder, Peabody Investment Trust)
September , 1995
Dear Shareholder:
The attached proxy materials describe a proposal that Mitchell
Hutchins/Kidder, Peabody Intermediate Fixed Income Fund ("MH/KP Intermediate
Income Fund") reorganize and become part of PaineWebber U.S. Government
Income Fund ("PW U.S. Government Income Fund") (each a "Fund"). If the
proposal is approved and implemented, each shareholder of MH/KP Intermediate
Income Fund automatically would become a shareholder of PW U.S. Government
Income Fund.
YOUR BOARD OF TRUSTEES RECOMMENDS A VOTE FOR THE REORGANIZATION PROPOSAL.
The Board believes that combining the two Funds will benefit MH/KP
Intermediate Income Fund's shareholders by providing them with a portfolio
that has an investment objective similar to that of MH/KP Intermediate Income
Fund, is managed in a similar manner and 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 the 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, Mitchell Hutchins/Kidder, Peabody
Investment Trust
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY
GOVERNMENT INCOME FUND, INC.
September , 1995
Dear Shareholder:
The attached proxy materials describe a proposal that Mitchell
Hutchins/Kidder, Peabody Government Income Fund, Inc. ("MH/KP Government
Income Fund") reorganize and become part of PaineWebber U.S. Government
Income Fund ("PW U.S. Government Income Fund") (each a "Fund"). If the
proposal is approved and implemented, each shareholder of Government Income
Fund automatically would become a shareholder of PW U.S. Government Income
Fund.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE REORGANIZATION PROPOSAL.
The Board believes that combining the two Funds will benefit MH/KP Government
Income Fund's shareholders by providing them with a portfolio that has an
investment objective similar to that of MH/KP Government Income Fund, is
managed in a similar manner and 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 the 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, Mitchell Hutchins/Kidder, Peabody
Government Income Fund, Inc.
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY
INTERMEDIATE FIXED INCOME FUND
(a series of Mitchell Hutchins/Kidder, Peabody Investment Trust)
----------------
NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS
October 16, 1995
----------------
To The Shareholders:
A special meeting of shareholders ("Meeting") of Mitchell Hutchins/Kidder,
Peabody Intermediate Fixed Income Fund ("MH/KP Intermediate Income Fund"), a
series of Mitchell Hutchins/Kidder, Peabody Investment Trust, will be held on
October 16, 1995 at 11:00 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 U.S. Government Income Fund ("PW U.S. Government
Income Fund"), a series of PaineWebber Managed Investments Trust, would
acquire the assets of MH/KP Intermediate Income Fund in exchange solely for
shares of beneficial interest in PW U.S. Government Income Fund and the
assumption by PW U.S. Government Income Fund of MH/KP Intermediate Income
Fund's liabilities, followed by the distribution of those shares to the
shareholders of MH/KP Intermediate Income 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 MH/KP Intermediate Income Fund at the close of business on
September 5, 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
September , 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 PROPOSALS NOTICED
ABOVE. In order to avoid the additional expense to MH/KP
Intermediate Income Fund 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>
MITCHELL HUTCHINS/KIDDER, PEABODY
GOVERNMENT INCOME FUND, INC.
----------------
NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS
October 16, 1995
----------------
To The Shareholders:
A special meeting of shareholders ("Meeting") of Mitchell Hutchins/Kidder,
Peabody Government Income Fund, Inc. ("MH/KP Government Income Fund") will be
held on October 16, 1995 at 11:00 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 U.S. Government Income Fund ("PW U.S. Government
Income Fund"), a series of PaineWebber Managed Investments Trust, would
acquire the assets of MH/KP Government Income Fund in exchange solely for
shares of beneficial interest in PW U.S. Government Income Fund and the
assumption by PW U.S. Government Income Fund of MH/KP Government Income
Fund's liabilities, followed by the distribution of those shares to the
shareholders of MH/KP Government Income 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 MH/KP Government Income Fund at the close of business on
September 5, 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 directors,
DIANNE E. O'DONNELL
Secretary
September , 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 PROPOSALS NOTICED
ABOVE. In order to avoid the additional expense to MH/KP Government
Income Fund 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 U.S. GOVERNMENT INCOME FUND
(A SERIES OF PAINEWEBBER MANAGED INVESTMENTS TRUST)
MITCHELL HUTCHINS/KIDDER, PEABODY
INTERMEDIATE FIXED INCOME FUND
(A SERIES OF MITCHELL HUTCHINS/KIDDER, PEABODY INVESTMENT TRUST)
MITCHELL HUTCHINS/KIDDER, PEABODY
GOVERNMENT INCOME FUND, INC.
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(TOLL FREE) 1-800-647-1568
----------------
PROSPECTUS/PROXY STATEMENT
SEPTEMBER , 1995
----------------
This Prospectus/Proxy Statement ("Proxy Statement") is being furnished to
shareholders of Mitchell Hutchins/Kidder, Peabody Intermediate Fixed Income
Fund ("MH/KP Intermediate Income Fund"), a series of Mitchell
Hutchins/Kidder, Peabody Investment Trust ("MH/KP Trust"), and Mitchell
Hutchins/Kidder, Peabody Government Income Fund, Inc. ("MH/KP Government
Income Fund") (each an "Acquired Fund" and collectively, the "Acquired
Funds"), in connection with the solicitation of proxies by MH/KP Trust's
board of trustees and MH/KP Government Income Fund's board of directors for
use at a combined special meeting of shareholders of the Acquired Funds, to
be held on October 16, 1995, at 11:00 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 two proposed reorganizations (each a
"Reorganization" and collectively, the "Reorganizations"). In each
Reorganization, PaineWebber U.S. Government Income Fund ("PW U.S. Government
Income Fund"), a series of PaineWebber Managed Investments Trust ("PW
Trust"), would acquire the assets of an Acquired Fund, in exchange solely for
shares of beneficial interest in PW U.S. Government Income Fund and the
assumption by PW U.S. Government Income Fund of that Acquired Fund's
liabilities. Those PW U.S. Government Income Fund shares then would be
distributed to that Acquired Fund's shareholders, by class, so that each such
shareholder would receive a number of full and fractional shares of the
applicable class of PW U.S. Government Income 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 of the corresponding class in the
Acquired Fund. As soon as practicable following these distributions, each
Acquired Fund will be terminated or dissolved, as applicable.
PW U.S. Government Income Fund is a diversified series of PW Trust, which
is an open-end management investment company. PW U.S. Government Income
Fund's investment objective is to provide high current income consistent with
the preservation of capital and liquidity. PW U.S. Government Income Fund
seeks to achieve its investment objective by investing primarily in U.S.
government securities.
<PAGE>
This Proxy Statement, which should be retained for future reference, sets
forth concisely the information about each Reorganization and PW U.S.
Government Income Fund that a shareholder should know before voting.
This Proxy Statement is accompanied by the Prospectus of PW U.S.
Government Income Fund dated April 1, 1995, and by its Annual Report to
Shareholders for the fiscal year ended November 30, 1994, which are
incorporated by this reference into this Proxy Statement. A Statement of
Additional Information for PW U.S. Government Income Fund dated September ,
1995, including pro forma historical financial statements, has been filed
with the Securities and Exchange Commission ("SEC") and is incorporated
herein by this reference. Prospectuses of MH/KP Intermediate Income Fund,
dated December 29, 1994 (as supplemented June 22, 1995), and MH/KP Government
Income Fund, dated June 1, 1995, and Statements of Additional Information of
PW U.S. Government Income Fund, dated April 1, 1995, MH/KP Intermediate
Income Fund, dated December 29, 1994, and MH/KP Government Income Fund, dated
June 1, 1995, have been filed with the SEC and are incorporated herein by
this reference. Copies of these documents, as well as each Acquired Fund's
annual report, or semi-annual report, if applicable, may be obtained without
charge and further inquiries may be made by contacting your investment
executive at PaineWebber Incorporated ("PaineWebber") or PaineWebber's
correspondent firms or by calling toll-free 1-800-647-1568.
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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
VOTING INFORMATION 1
APPROVAL OF THE REORGANIZATIONS 3
SYNOPSIS 3
COMPARATIVE FEE TABLES 4
COMPARISON OF PRINCIPAL RISK FACTORS 20
THE PROPOSED TRANSACTIONS 23
ADDITIONAL INFORMATION ABOUT PW U.S. GOVERNMENT INCOME FUND 30
MISCELLANEOUS 33
APPENDIX A -- AGREEMENT AND PLAN OF REORGANIZATION AND
TERMINATION WITH REPSECT TO MH/KP INTERMEDIATE INCOME FUND A-1
APPENDIX B -- AGREEMENT AND PLAN OF REORGANIZATION AND
DISSOLUTION WITH RESPECT TO MH/KP GOVERNMENT INCOME FUND B-1
</TABLE>
1
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY
INTERMEDIATE FIXED INCOME FUND
(A SERIES OF MITCHELL HUTCHINS/KIDDER, PEABODY INVESTMENT TRUST)
MITCHELL HUTCHINS/KIDDER,
PEABODY GOVERNMENT INCOME FUND, INC.
----------------
PROSPECTUS/PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD
ON
OCTOBER 16, 1995
----------------
VOTING INFORMATION
This Prospectus/Proxy Statement ("Proxy Statement") is being furnished to
shareholders of Mitchell Hutchins/Kidder, Peabody Intermediate Fixed Income
Fund ("MH/KP Intermediate Income Fund"), a series of Mitchell
Hutchins/Kidder, Peabody Investment Trust ("MH/KP Trust"), and MH/KP
Government Income Fund, Inc. ("MH/KP Government Income Fund") (each an
"Acquired Fund" and collectively, the "Acquired Funds"), in connection with
the solicitation of proxies by MH/KP Trust's board of trustees and Government
Income Fund's board of directors (each a "Board"), for use at a combined
special meeting of shareholders of the Acquired Funds, to be held on October
16, 1995, at 11:00 a.m., eastern time, and at any adjournment thereof
("Meeting"). This Proxy Statement will first be mailed to shareholders on or
about [September , 1995].
At least thirty percent of MH/KP Intermediate Income Fund's and one-third
of MH/KP Government Income Fund's shares outstanding on September 5, 1995,
represented in person or by proxy, must be present for the transaction of
business by that Acquired Fund at the Meeting. If, with respect to either
Acquired Fund, 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 with
respect to that Acquired Fund to permit further solicitation of proxies. Any
such adjournment will require the affirmative vote of a majority of those
shares of the Acquired Fund represented at the Meeting in person or by proxy.
The persons named as proxies will vote those proxies that they are entitled
to vote FOR the proposal in favor of such an adjournment and will vote those
proxies required to be voted AGAINST the proposal against such adjournment. A
shareholder vote may be taken on the proposal in this Proxy Statement prior
to any such adjournment if sufficient votes have been received and it is
otherwise appropriate.
Broker non-votes are shares held in street name for which the broker
indicates that instructions have not been received from the beneficial owners
or other persons entitled to vote and the broker does not have discretionary
voting authority. Abstentions and broker non-votes will be counted as shares
present for purposes of determining whether a quorum is present but will not
be voted for or against any adjournment or proposal. Accordingly, abstentions
and broker non-votes effectively will be a vote against adjournment or
against the proposal where the required vote is a percentage of the shares
present. 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.
<PAGE>
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, with respect to MH/KP
Intermediate Income Fund, and the Agreement and Plan of Reorganization and
Dissolution, with respect to MH/KP Government Income Fund, each dated as of
August 8, 1995 (each a "Reorganization Plan" and collectively, the
"Reorganization Plans"). The Reorganization Plans are attached to this Proxy
Statement as Appendix A (with respect to MH/KP Intermediate Income Fund) and
Appendix B (with respect to MH/KP Government Income Fund). Under each
Reorganization Plan, PaineWebber U.S. Government Income Fund ("PW U.S.
Government Income Fund"), a series of PaineWebber Managed Investments Trust
("PW Trust"), would acquire the assets of an Acquired Fund in exchange solely
for shares of beneficial interest in PW U.S. Government Income Fund and the
assumption by PW U.S. Government Income Fund of that Acquired Fund's
liabilities. Those PW U.S. Government Income Fund shares then would be
distributed to that Acquired Fund's shareholders, by class, so that each such
shareholder would receive a number of full and fractional shares of the
applicable class of PW U.S. Government Income 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 of the corresponding class in the
Acquired Fund. (Each of these transactions is referred to herein as a
"Reorganization.") After completion of a Reorganization, the participating
Acquired Fund will be terminated or dissolved, as applicable.
In addition, if you sign, date and return the enclosed proxy card, but
give no voting instructions, the duly appointed proxies may, in their
discretion, vote 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 MH/KP Trust or MH/KP Government Income Fund, as applicable, 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 5, 1995 ("Record Date"), MH/KP
Intermediate Income Fund had shares of beneficial interest outstanding,
and MH/KP Government Income Fund had shares of common stock
outstanding. The solicitation of proxies, the cost of which will be borne by
PW U.S. Government Income Fund, MH/KP Intermediate Income Fund and MH/KP
Government Income Fund (each a "Fund" and collectively, the "Funds") in
proportion to their respective net assets, will be made primarily by mail but
also may include telephone or oral communications by representatives of
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), who will not
receive any compensation therefor from the Funds, or by Shareholder
Communications Corporation, professional proxy solicitors retained by the
Acquired Funds, who will be paid fees and expenses of up to approximately
$2,500 for soliciting services. Management does not know of any person who
owns beneficially 5% or more of the shares of PW U.S. Government Income Fund,
or of either Acquired Fund. Trustees and officers of MH/KP Trust and
directors and officers of MH/KP Government Income Fund own in the aggregate
less than 1% of the shares of their respective Acquired Funds.
Summarized below are the proposals the shareholders of each Acquired Fund
are being asked to consider:
FUND PROPOSAL
---------------------------------- -------------------------------------
MH/KP Intermediate Income Fund To approve a Reorganization Plan.
MH/KP Government Income Fund To approve a Reorganization Plan.
2
<PAGE>
For voting purposes, the shareholders of each Acquired Fund will vote only
on the Reorganization Plan applicable to their Acquired Fund. Approval of a
Reorganization Plan and consummation of the transactions contemplated thereby
for one Acquired Fund does not depend on the approval of the other
Reorganization Plan by the other Acquired Fund's shareholders and
consummation of the transactions contemplated thereby.
Approval of the Reorganization Plan with respect to MH/KP Intermediate
Income Fund requires the affirmative vote of a majority of the outstanding
voting securities of that Fund. As defined in the Investment Company Act of
1940, as amended ("1940 Act"), "majority of the outstanding voting
securities" means the lesser of (1) 67% of MH/KP Intermediate Income Fund's
shares present at a meeting of shareholders if the owners of more than 50% of
its shares then outstanding are present in person or by proxy, or (2) more
than 50% of its outstanding shares. Approval of the Reorganization Plan with
respect to MH/KP Government Income Fund requires the affirmative vote of a
majority of the outstanding shares of MH/KP Government Income Fund entitled
to vote at the Meeting in accordance with Maryland law and MH/KP Government
Income Fund's Amended and Restated Articles of Incorporation. Each
outstanding full share of each Acquired Fund is entitled to one vote, and
each outstanding fractional share of each Acquired Fund is entitled to a
proportionate fractional share of one vote. If a Reorganization Plan is not
approved by the requisite vote of the shareholders of the involved Acquired
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 the Acquired Funds may exchange or redeem out of a Fund, they
do not have the appraisal rights which may be accorded to shareholders of
corporations that propose similar types of reorganizations under the laws of
some states.
APPROVAL OF THE REORGANIZATIONS
SYNOPSIS
The following is a summary of certain information contained elsewhere in
this Proxy Statement, the prospectuses of each Fund (which are incorporated
herein by reference), and the Reorganization Plans. Shareholders should read
this Proxy Statement and the prospectus of PW U.S. Government Income Fund
carefully. As discussed more fully below, the Boards believe that the
proposed Reorganizations will benefit their respective Acquired Fund's
shareholders. PW U.S. Government Income Fund has an investment objective
generally similar to those of MH/KP Intermediate Income Fund and MH/KP
Government Income Fund, although its investment strategy may differ from the
Acquired Funds' investment strategies in some material respects. It is
anticipated that, following the Reorganizations, each Acquired Fund's
shareholders, as shareholders of PW U.S. Government Income Fund, will be
subject to lower operating expenses as a percentage of average net assets.
THE REORGANIZATIONS
Each Board approved the Reorganization Plan with respect to its Acquired
Fund at meetings of the Boards held on July 20, 1995. Each Reorganization
Plan provides for the acquisition by PW U.S. Government Income Fund of the
assets of an Acquired Fund in exchange solely for Class A, Class C and Class
D shares of PW U.S. Government Income Fund and the assumption by PW U.S.
Government Income Fund of the liabilities of the Acquired Fund. Each Acquired
Fund then will distribute the PW U.S. Government Income Fund shares to its
shareholders, by class, so that each shareholder will receive the number of
full and fractional shares of the class of PW U.S. Government Income Fund
that corresponds most closely in terms of fees and other characteristics
("Corresponding Class") and that is equal in value to the value of such
shareholder's holdings in the Acquired Fund as of the Closing Date (defined
below). Each Acquired Fund then will be terminated or dissolved, as
applicable, as soon as practicable thereafter.
3
CAPITAL PRINTING SYSTEMS]
<PAGE>
The exchange of each Acquired Fund's assets for PW U.S. Government Income
Fund shares and PW U.S. Government Income Fund's assumption of the Acquired
Fund's liabilities will occur at or as of 4:00 p.m., eastern time, on October
20, 1995, or on such later date as the conditions to the closing are
satisfied ("Closing Date").
PW U.S. Government Income Fund offers for sale four classes of shares
(each a "Class" and collectively, "Classes"), designated as Class A, Class B,
Class C and Class D shares. In the Reorganizations, PW U.S. Government Income
Fund will issue only Class A, Class C and Class D shares in exchange for an
Acquired Fund's assets; Class B shares will not be issued. Each Acquired Fund
has three classes of shares, designated as Class A, Class B and Class C
shares. In connection with the Reorganizations, shareholders of Class A and
Class C shares of the Acquired Funds will receive Class A and Class C shares,
respectively, of PW U.S. Government Income Fund; Class B shareholders of the
Acquired Funds will receive Class D shares of PW U.S. Government Income Fund.
The following table shows which class of shares of PW U.S. Government
Income Fund will be received by shareholders of each class of shares of an
Acquired Fund.
MH/KP INTERMEDIATE INCOME FUND PW U.S. GOVERNMENT INCOME FUND
---------------------------------- ----------------------------------
Class A Class A
Class B Class D
Class C Class C
MH/KP GOVERNMENT INCOME FUND PW U.S. GOVERNMENT INCOME FUND
-------------------------------- ----------------------------------
Class A Class A
Class B Class D
Class C Class C
For the reasons set forth below under "The Proposed Transactions --
Reasons for the Reorganizations," MH/KP Trust's Board (with respect to MH/KP
Intermediate Income Fund) and MH/KP Government Income Fund's Board, including
the trustees and directors who are not "interested persons" as that term is
defined in the 1940 Act, of MH/KP Trust or MH/KP Government Income Fund
("Independent Persons"), have determined, in each instance, that the
Reorganization is in the best interests of the participating Acquired Fund,
that the terms of the Reorganization are fair and reasonable and that the
interests of such Acquired Fund's shareholders will not be diluted as a
result of the Reorganization. Accordingly, each Board recommends approval of
its Reorganization. In addition, PW Trust's board of trustees, including its
Independent Persons, has determined that the Reorganizations are in the best
interests of PW U.S. Government Income Fund, that the terms of the
Reorganizations are fair and reasonable and that the interests of PW U.S.
Government Income Fund's shareholders will not be diluted as a result of the
Reorganizations.
COMPARATIVE FEE TABLES
Certain fees and expenses that the Acquired Funds' shareholders pay,
directly or indirectly, are different from those incurred by PW U.S.
Government Income Fund shareholders. Each Acquired Fund's Class A shares are
sold with a maximum initial sales charge of up to 2.25% of the public
offering price. PW U.S. Government Income Fund's Class A shares normally are
sold with a maximum sales charge of up to 4% of the public offering
4
<PAGE>
price; however, the Class A shares of PW U.S. Government Income Fund that
will be distributed to shareholders of each Acquired Fund as part of the
Reorganization will not be subject to an initial sales charge. New purchases
of Class A shares of PW U.S. Government Income Fund following the
Reorganizations will be subject to an initial sales charge of up to 4%.
Acquired Fund shareholders are not charged a fee for each exchange of shares
for shares of a corresponding class of other PaineWebber or MH/KP mutual
funds. PW U.S. Government Income Fund shareholders pay a $5.00 fee for each
exchange.
Mitchell Hutchins, the administrator and investment adviser of the
Acquired Funds, is currently paid a management fee at the annual rate of
0.70% of the average daily net assets with respect to MH/KP Intermediate
Income Fund, and 0.63% of the average daily net assets with respect to MH/KP
Government Income Fund. PW U.S. Government Income Fund pays Mitchell Hutchins
an annual investment advisory and administration fee, computed daily and paid
monthly, at a rate of 0.50% of the average daily net assets. This annual rate
will continue following the Reorganizations.
The Class A shares of MH/KP Intermediate Income Fund pay 12b-1 fees that
are identical to those paid by the Class A shares of PW U.S. Government
Income Fund. Class A shares of MH/KP Government Income Fund pay 12b-1 fees
that are 25 basis points higher. The Class B shares of the Acquired Funds pay
12b-1 fees that are identical to those paid by the Class D shares of PW U.S.
Government Income Fund. No 12b-1 fees are paid by the Class C shareholders of
any of the Funds, but Class C shareholders of the Acquired Funds who hold
their Class C shares through the INSIGHT Investment Advisory Program (Service
Mark) ("INSIGHT program") must pay an investment advisory fee at the maximum
annual rate of 1.50% of the assets held through the INSIGHT program.
REORGANIZATION OF MH/KP INTERMEDIATE INCOME FUND INTO PW U.S. GOVERNMENT
INCOME FUND
The following tables show (1) the shareholder transaction expenses
currently incurred by the Class A, Class B and Class C shares of MH/KP
Intermediate Income Fund and the Class A, Class D and Class C shares of PW
U.S. Government Income Fund, and the shareholder transaction expenses that
each such Class will incur after giving effect to the Reorganization, and (2)
the operating fees and expenses incurred by the Class A, Class B and Class C
shares of MH/KP Intermediate Income Fund and the Class A, Class D and Class C
shares of PW U.S. Government Income Fund for the twelve months ended May 31,
1995, and pro forma fees for PW U.S. Government Income Fund's Class A, Class
C and Class D shares based on the same period after giving effect to the
Reorganization.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
PW U.S. GOVERNMENT
INCOME FUND
-------------------------------------
CLASS A CLASS D CLASS C
----------- ----------- -----------
<S> <C> <C> <C>
Maximum sales charge (as a
percentage of public
offering price) ............. 4% None None
Exchange fee ................. $5.00 $5.00 N/A*
Maximum contingent deferred
sales charge (as a
percentage of redemption
proceeds) ................... None None None
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
MH/KP INTERMEDIATE
INCOME FUND COMBINED FUND (ESTIMATED)
------------------------------------- -------------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS D CLASS C
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Maximum sales charge (as a
percentage of public
offering price) ............. 2.25% None None 4% None None
Exchange fee ................. None None None $5.00 $5.00 N/A*
Maximum contingent deferred
sales charge (as a
percentage of redemption
proceeds) ................... None None None None None None
</TABLE>
---------------
* Class C shares of PW U.S. Government Income Fund are not exchangeable.
5
<PAGE>
TOTAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
PW U.S. GOVERNMENT
INCOME FUND
(TWELVE MONTHS
ENDED 5/31/95)
-------------------------------
CLASS A CLASS D CLASS C
--------- --------- ---------
<S> <C> <C> <C>
Management Fees .... 0.50% 0.50% 0.50%
12b-1 Fees(3) ....... 0.25% 0.75% 0.00%
Other Expenses. .... 0.25% 0.26% 0.20%
--------- --------- ---------
Total Fund Operating
Expenses(4) ........ 1.00% 1.51% 0.70%
========= ========= =========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
MH/KP INTERMEDIATE
INCOME FUND
(TWELVE MONTHS
ENDED 5/31/95) COMBINED FUND (ESTIMATED)
--------------------------------- -------------------------------
CLASS A CLASS B(1) CLASS C(2) CLASS A CLASS D CLASS C
--------- ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Management Fees ..... 0.70% 0.70% 0.70% 0.50% 0.50% 0.50%
12b-1 Fees(3) ....... 0.25% 0.75% 0.00% 0.25% 0.75% 0.00%
Other Expenses ...... 0.69% 0.83% 0.60% 0.24% 0.25% 0.19%
--------- ---------- ---------- --------- --------- ---------
Total Fund Operating
Expenses(4) ........ 1.64% 2.28% 1.30% 0.99% 1.50% 0.69%
========= ========== ========== ========= ========= =========
</TABLE>
---------------
(1) Class B shares of MH/KP Intermediate Income Fund will be exchanged for
Class D shares of PW U.S. Government Income Fund.
(2) A maximum annual 1.50% advisory fee is payable by shareholders holding
Class C shares of MH/KP Intermediate Income Fund through the INSIGHT
program. This fee, which is not reflected in the Total Fund Operating
Expenses above, will continue to be assessed at that rate subsequent to
the Reorganization.
(3) 12b-1 fees for Class A and Class B shares of MH/KP Intermediate Income
Fund have two components, as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B
--------- ---------
<S> <C> <C>
12b-1 service fee ...... 0.25% 0.25%
12b-1 distribution fee 0.00% 0.50%
</TABLE>
12b-1 fees for Class A and Class D shares of PW U.S. Government Income
Fund have two components, as follows:
<TABLE>
<CAPTION>
CLASS A CLASS D
--------- ---------
<S> <C> <C>
12b-1 service fee ...... 0.25% 0.25%
12b-1 distribution fee 0.00% 0.50%
</TABLE>
12b-1 distribution fees are asset-based sales charges. Long-term Class B
and Class D shareholders may pay more in direct and indirect sales
charges (including distribution fees) than the economic equivalent of the
maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc. ("NASD") rules regarding investment companies.
(4) For the fiscal year ended November 30, 1994, Total Fund Operating
Expenses for Class A, Class D and Class C shares of PW U.S. Government
Income Fund were 0.95%, 1.45% and 0.65%, respectively. For the fiscal
year ended August 31, 1994, Total Fund Operating Expenses for the Class
A, Class B and Class C shares of MH/KP Intermediate Income Fund were
1.46%, 1.96% and 1.21%, respectively.
6
<PAGE>
EXAMPLE OF EFFECT OF 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. The fees shown below reflect a maximum initial sales charge of 4%
with respect to PW U.S. Government Income Fund and 2.25% with respect to
MH/KP Intermediate Income Fund of the public offering price that is charged
in connection with the sale of Class A shares. The amounts shown for PW U.S.
Government Income Fund and Combined Fund Class A shares held for one year are
higher than for MH/KP Intermediate Income Fund Class A shares held for one
year due to the higher initial sales charge normally imposed on PW U.S.
Government Income Fund Class A shares. However, no initial sales charge will
be charged in connection with Class A Shares of PW U.S. Government Income
Fund distributed to Class A shareholders of the Acquired Fund as part of the
Reorganization.
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
---------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
PW U.S. Government Income
Fund
Class A shares .......... $50 $71 $ 93 $158
Class D shares .......... $15 $48 $ 82 $180
Class C shares .......... $ 7 $22 $ 39 $ 87
MH/KP Intermediate Income
Fund
Class A shares .......... $39 $73 $110 $212
Class B shares .......... $23 $71 $122 $262
Class C shares(1) ....... $13 $41 $ 71 $157
Combined Fund
Class A shares .......... $50 $70 $ 93 $156
Class D shares .......... $15 $47 $ 82 $179
Class C shares(1) ....... $ 7 $22 $ 38 $ 86
<FN>
----------------
(1) Does not include advisory fees payable by shareholders holding Class C
shares through the INSIGHT program.
</TABLE>
This Example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund Operating
Expenses remain the same in the years shown. The above tables and the
assumption in the 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 the Funds'
shares.
This Example should not be considered a representation of past or future
expenses, and a Fund's actual expenses may be more or less than those shown.
The actual expenses attributable to each Class of a Fund's shares will depend
upon, among other things, the level of average net assets and the extent to
which a Fund incurs variable expenses, such as transfer agency costs.
REORGANIZATION OF MH/KP GOVERNMENT INCOME FUND INTO PW U.S. GOVERNMENT INCOME
FUND
The following tables show (1) the shareholder transaction expenses
currently incurred by the Class A, Class B and Class C shares of MH/KP
Government Income Fund and the Class A, Class D and Class C shares of PW U.S.
Government Income Fund, and the shareholder transaction expenses that each
such Class will incur
7
<PAGE>
after giving effect to the Reorganization, and (2) the operating fees and
expenses incurred by the Class A, Class B and Class C shares of MH/KP
Government Income Fund and the Class A, Class D and Class C shares of PW U.S.
Government Income Fund for the twelve months ended May 31, 1995, and pro
forma fees based on the same period for PW U.S. Government Income Fund's
Class A, Class D and Class C shares after giving effect to the
Reorganization.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
PW U.S. GOVERNMENT MH/KP GOVERNMENT
INCOME FUND INCOME FUND
------------------------------------- --------------------------------------
CLASS A CLASS D CLASS C CLASS A CLASS B CLASS C
----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Maximum sales
charge (as a
percentage of
public offering
price) ............ 4% None None 2.25% None None
Exchange fee ....... $5.00 $5.00 N/A* None None None
Maximum contingent
deferred sales
charge (as a
percentage of
redemption
proceeds) ......... None None None None None None
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
COMBINED FUND (ESTIMATED)
-------------------------------------
CLASS A CLASS D CLASS C
----------- ----------- -----------
<S> <C> <C> <C>
Maximum sales
charge (as a
percentage of
public offering
price) ............ 4% None None
Exchange fee ....... $5.00 $5.00 N/A*
Maximum contingent
deferred sales
charge (as a
percentage of
redemption
proceeds) ......... None None None
<FN>
---------------
* Class C shares of PW U.S. Government Income Fund are not exchangeable.
</TABLE>
TOTAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
MH/KP GOVERNMENT
INCOME FUND
PW U.S. GOVERNMENT INCOME FUND (TWELVE MONTHS ENDED
(TWELVE MONTHS ENDED 5/31/95) 5/31/95)
------------------------------- -----------------------------------
CLASS A CLASS D CLASS C CLASS A CLASS B(1) CLASS C(2)
--------- --------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Management Fees 0.50% 0.50% 0.50% 0.63% 0.63% 0.63%
12b-1 Fees(3) . 0.25% 0.75% 0.00% 0.50% 0.75% 0.00%
Other Expenses. 0.25% 0.26% 0.20% 0.41% 0.46% 0.32%
--------- --------- --------- --------- ---------- --------
Total Fund
Operating
Expenses (4) . 1.00% 1.51% 0.70% 1.54% 1.84% 0.95%
========= ========= ========= ========= ========== ========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
COMBINED FUND
(ESTIMATED)
--------------------------------
CLASS A CLASS D CLASS C
---------- --------- ---------
<S> <C> <C> <C>
Management Fees 0.50% 0.50% 0.50%
12b-1 Fees(3) . 0.25% 0.75% 0.00%
Other Expenses. 0.23% 0.25% 0.18%
---------- --------- ---------
Total Fund
Operating
Expenses (4) . 0.98% 1.50% 0.68%
========== ========= =========
<FN>
---------------
(1) Class B shares of MH/KP Government Income Fund will be exchanged for
Class D shares of PW U.S. Government Income Fund.
(2) A maximum annual 1.50% advisory fee is payable by shareholders holding
Class C shares of MH/KP Government Income Fund through the INSIGHT program.
This fee, which is not reflected in the Total Fund Operating Expenses above,
will continue to be assessed at that rate subsequent to the Reorganization.
8
<PAGE>
(3) 12b-1 fees for Class A and Class B shares of MH/KP Government Income
Fund have two components, as follows:
</TABLE>
<TABLE>
<CAPTION>
CLASS A CLASS B
--------- ---------
<S> <C> <C>
12b-1 service fee (maximum) ..... 0.25% 0.25%
12b-1 distribution fee (maximum) 0.25% 0.50%
</TABLE>
12b-1 fees for Class A and Class D shares of PW U.S. Government Income
Fund have two components, as follows:
<TABLE>
<CAPTION>
CLASS A CLASS D
--------- ---------
<S> <C> <C>
12b-1 service fee ..... 0.25% 0.25%
12b-1 distribution fee 0.25% 0.50%
</TABLE>
12b-1 distribution fees are asset-based sales charges. Long-term
shareholders of these classes may pay more in direct and indirect sales
charges (including distribution fees) than the economic equivalent of the
maximum front-end sales charge permitted by NASD rules regarding investment
companies.
(4) For the fiscal year ended November 30, 1994, Total Fund Operating
Expenses for Class A, Class D and Class C shares of PW U.S. Government
Income Fund were 0.95%, 1.45% and 0.65%, respectively. For the fiscal year
ended January 31, 1995, Total Fund Operating Expenses for Class A, Class B
and Class C shares of MH/KP Government Income Fund were 1.53%, 1.78% and
1.03%, respectively.
EXAMPLE OF EFFECT OF 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. The fees shown below reflect a maximum initial sales charge of 4%
with respect to PW U.S. Government Income Fund and 2.25% with respect to
MH/KP Government Income Fund of the public offering price that is charged in
connection with the sale of Class A shares. The amounts shown for PW U.S.
Government Income Fund and Combined Fund Class A shares held for one year are
higher than for MH/KP Government Income Fund Class A shares held for one year
due to the higher initial sales charge normally imposed on PW U.S. Government
Income Fund Class A shares. However, no initial sales charge will be charged
in connection with Class A shares of PW U.S. Government Income Fund
distributed to Class A shareholders of the Acquired Fund as part of the
Reorganization.
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
---------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
PW U.S. Government ....
Income Fund
Class A shares ........ $50 $71 $ 93 $158
Class D shares ........ $15 $48 $ 82 $180
Class C shares ........ $ 7 $22 $ 39 $ 87
MH/KP Government Income
Fund
Class A shares ........ $38 $70 $105 $202
Class B shares ........ $19 $58 $100 $216
Class C shares(1) .... $10 $30 $ 53 $117
Combined Fund
Class A shares ........ $50 $70 $ 92 $155
Class D shares ........ $15 $47 $ 82 $179
Class C shares(1) .... $ 7 $22 $ 38 $ 85
<FN>
---------------
(1) Does not include advisory fees payable by shareholders holding Class C
shares through the INSIGHT program.
</TABLE>
9
<PAGE>
This Example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund Operating
Expenses remain the same in the years shown. The above tables and the
assumption in the Example of a 5% annual return are required by regulations
of the SEC applicable to all mutual funds; the assumed 5% annual return is
not a prediction of, and does not represent, the projected or actual
performance of any Class of the Funds' shares.
This Example should not be considered a representation of past or future
expenses, and a Fund's actual expenses may be more or less than those shown.
The actual expenses attributable to each Class of a Fund's shares will depend
upon, among other things, the level of average net assets and the extent to
which a Fund incurs variable expenses, such as transfer agency costs.
REORGANIZATIONS OF MH/KP INTERMEDIATE INCOME FUND AND MH/KP GOVERNMENT INCOME
FUND INTO PW U.S. GOVERNMENT INCOME FUND
The following tables show (1) the shareholder transaction expenses
currently incurred by the Class A, Class B and Class C shares of MH/KP
Intermediate Income Fund and MH/KP Government Income Fund and the Class A,
Class D and Class C shares of PW U.S. Government Income Fund, and the
shareholder transaction expenses that each such Class will incur after giving
effect to the Reorganization, and (2) the operating fees and expenses
incurred by the Class A, Class B and Class C shares of MH/KP Intermediate
Income Fund and MH/KP Government Income Fund, respectively, and the Class A,
Class D and Class C shares of PW U.S. Government Income Fund for the twelve
months ended May 31, 1995, and pro forma fees based on the same period for PW
U.S. Government Income Fund's Class A, Class D and Class C shares after
giving effect to the Reorganizations.
10
<PAGE>
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
PW U.S. GOVERNMENT INCOME FUND MH/KP INTERMEDIATE INCOME FUND
------------------------------------- -----------------------------------
CLASS A CLASS D CLASS C CLASS A CLASS B CLASS C
----------- ----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Maximum sales
charge (as a
percentage of
public offering
price) ............ 4% None None 2.25% None None
Exchange fee ....... $5.00 $5.00 N/A* None None None
Maximum contingent
deferred sales
charge (as a
percentage of
redemption
proceeds) ......... None None None None None None
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
MH/KP GOVERNMENT INCOME FUND COMBINED FUND (ESTIMATED)
------------------------------------- -------------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS D CLASS C
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Maximum sales
charge (as a
percentage of
public offering
price) ............ 2.25% None None 4% None None
Exchange fee ....... None None None $5.00 $5.00 N/A*
Maximum contingent
deferred sales
charge (as a
percentage of
redemption
proceeds) ......... None None None None None None
<FN>
---------------
* Class C shares of PW U.S. Government Income Fund are not exchangeable.
</TABLE>
TOTAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
MH/KP INTERMEDIATE
INCOME FUND
PW U.S. GOVERNMENT INCOME FUND (TWELVE MONTHS ENDED
(TWELVE MONTHS ENDED 5/31/95) 5/31/95)
------------------------------- ---------------------------------
CLASS A CLASS D CLASS C CLASS A CLASS B(1) CLASS C(2)
--------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Management Fees 0.50% 0.50% 0.50% 0.70% 0.70 0.70%
12b-1 Fees(3) .. 0.25% 0.75% 0.00% 0.25% 0.75 0.00%
Other Expenses. 0.25% 0.26% 0.20% 0.69% 0.83 0.60%
--------- --------- --------- --------- -------- --------
Total Fund
Operating
Expenses (4) .. 1.00% 1.51% 0.70% 1.64% 2.28% 1.30%
========= ========= ========= ========= ========== ========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
MH/KP GOVERNMENT
INCOME FUND
(TWELVE MONTHS ENDED 5/31/95) COMBINED FUND (ESTIMATED)
--------------------------------- --------------------------------
CLASS A CLASS B(1) CLASS C(2) CLASS A CLASS D CLASS C
--------- ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Management Fees 0.63% 0.63% 0.63% 0.50% 0.50% 0.50%
12b-1 Fees(3) .. 0.50% 0.75% 0.00% 0.25% 0.75% 0.00%
Other Expenses. 0.41% 0.46% 0.32% 0.23% 0.24% 0.18%
--------- ---------- ---------- --------- --------- ---------
Total Fund
Operating
Expenses (4) .. 1.54% 1.84% 0.95% 0.98% 1.49% 0.68%
========= ========== ========== ========= ========= =========
</TABLE>
---------------
(1) Class B shares of MH/KP Intermediate Income Fund and MH/KP Government Income
Fund will be exchanged for Class D shares of PW U.S. Government Income Fund.
(2) A maximum annual 1.50% advisory fee is payable by shareholders holding
Class C shares of MH/KP Intermediate Income Fund and MH/KP Government Income
Fund through the INSIGHT program. This fee, which is not reflected in the
Total Fund Operating Expenses above, will continue to be assessed at that
rate subsequent to the Reorganization.
11
<PAGE>
(3) 12b-1 fees for Class A and Class B shares of MH/KP Intermediate Income
Fund have two components, as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B
--------- ---------
<S> <C> <C>
12b-1 service fee ..... 0.25% 0.25%
12b-1 distribution fee 0.00% 0.50%
</TABLE>
12b-1 fees for Class A and Class B shares of MH/KP Government Income Fund
have two components, as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B
--------- ---------
<S> <C> <C>
12b-1 service fee (maximum) ..... 0.25% 0.25%
12b-1 distribution fee (maximum) 0.25% 0.50%
</TABLE>
12b-1 fees for Class A and Class D shares of PW U.S. Government Income
Fund have two components, as follows:
<TABLE>
<CAPTION>
CLASS A CLASS D
--------- ---------
<S> <C> <C>
12b-1 service fee ..... 0.25% 0.25%
12b-1 distribution fee 0.00% 0.50%
</TABLE>
12b-1 distribution fees are asset-based sales charges. Long-term
shareholders of these classes may pay more in direct and indirect sales
charges (including distribution fees) than the economic equivalent of the
maximum front-end sales charge permitted by NASD rules regarding investment
companies.
(4) For the fiscal year ended November 30, 1994, Total Fund Operating
Expenses for Class A, Class D and Class C shares of PW U.S. Government
Income Fund were 0.95%, 1.45% and 0.65%, respectively. For the fiscal year
ended August 31, 1994, Total Fund Operating Expenses for Class A, Class B
and Class C shares of MH/KP Intermediate Income Fund were 1.46%, 1.96% and
1.21%, respectively. For the fiscal year ended January 31, 1995, Total Fund
Operating Expenses for Class A, Class B, and Class C shares of MH/KP
Government Income Fund were 1.53%, 1.78% and 0.95%, respectively.
12
<PAGE>
EXAMPLE OF EFFECT OF 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. The fees shown below reflect a maximum initial sales charge of 4%
with respect to PW U.S. Government Income Fund and 2.25% with respect to each
of MH/KP Intermediate Income Fund and MH/KP Government Income Fund of the
public offering price that is charged in connection with the sale of Class A
shares. The amounts shown for PW U.S. Government Income Fund and Combined
Fund Class A shares held for one year are higher than for the Acquired Funds'
Class A shares held for one year due to the higher initial sales charge
normally imposed on PW U.S. Government Income Fund Class A shares. However,
no initial sales charge will be charged in connection with Class A shares of
PW U.S. Government Income Fund distributed to Class A shareholders of the
Acquired Funds as part of the Reorganizations.
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
---------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
PW U.S. GOVERNMENT INCOME FUND
Class A shares ............... $50 $71 $ 93 $158
Class D shares ............... $15 $48 $ 82 $180
Class C shares ............... $ 7 $22 $ 39 $ 87
MH/KP INTERMEDIATE INCOME FUND
Class A shares ............... $39 $73 $110 $212
Class B shares ............... $23 $71 $122 $262
Class C shares(1) ............ $13 $41 $ 71 $157
MH/KP GOVERNMENT INCOME FUND
Class A shares ............... $38 $70 $105 $202
Class B shares ............... $19 $58 $100 $216
Class C shares(1) ............ $10 $30 $ 53 $117
COMBINED FUND
Class A shares ............... $50 $70 $ 92 $155
Class D shares ............... $15 $47 $ 81 $178
Class C shares(1) ............ $ 7 $22 $ 38 $ 85
</TABLE>
---------------
(1) Does not include advisory fees payable by shareholders holding Class C
shares through the INSIGHT program.
This Example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund Operating
Expenses remain the same in the years shown. The above tables and the
assumption in the Example of a 5% annual return are required by regulations
of the SEC applicable to all mutual funds; the assumed 5% annual return is
not a prediction of, and does not represent, the projected or actual
performance of any Class of the Funds' shares.
This Example should not be considered a representation of past or future
expenses, and a Fund's actual expenses may be more or less than those shown.
The actual expenses attributable to each Class of a Fund's shares will depend
upon, among other things, the level of average net assets and the extent to
which a Fund incurs variable expenses, such as transfer agency costs.
13
<PAGE>
FORMS OF ORGANIZATION
PW Trust and MH/KP Trust are each open-end management investment companies
organized as Massachusetts business trusts. Each Trust's Declaration of Trust
authorizes its trustees to create separate series and, within each series,
separate classes, of an unlimited number of shares of beneficial interest,
par value $.001 per share. PW U.S. Government Income Fund, a diversified
series of PW Trust, commenced operations on August 31, 1984. MH/KP
Intermediate Income Fund, a series of MH/KP Trust, commenced operations on
March 12, 1992. The Trusts do not issue share certificates. The Trusts are
also not required to (and do not) hold annual meetings of shareholders.
Although shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable for its obligations, each Trust's
Declaration of Trust expressly disclaims, and provides indemnification
against, such liability. Accordingly, the risks of a shareholder's incurring
financial loss on account of shareholder liability is limited to
circumstances in which PW U.S. Government Income Fund or MH/KP Intermediate
Income Fund itself would be unable to meet its obligations, a possibility
that Mitchell Hutchins, the investment adviser, believes is remote and, thus,
does not pose a material risk.
MH/KP Government Income Fund is a diversified, open-end, management
investment company organized as a Maryland corporation. It commenced
operations on November 22, 1985. It is authorized to issue 500 million shares
of common stock, par value $.01 per share. It does not currently issue share
certificates. MH/KP Government Income Fund is not required to (and does not)
hold shareholder meetings annually.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of each Fund are set forth below. PW
U.S. Government Income Fund has an investment objective generally similar to
those of MH/KP Intermediate Income Fund and MH/KP Government Income Fund in
that the primary focus of each Fund is on current income; however, its
investment strategy may differ from the Acquired Funds' investment strategies
in some material respects. There can be no assurance that any Fund will
achieve its investment objective, and each Fund's net asset value ("NAV")
fluctuates based upon changes in the value of its portfolio securities.
PW U.S. GOVERNMENT INCOME FUND. The investment objective of PW U.S.
Government Income Fund is to provide high current income consistent with the
preservation of capital and liquidity. The Fund seeks to achieve its
objective by investing primarily in U.S. government securities. Under normal
market conditions, the Fund invests at least 65% of its total assets in U.S.
government securities, including mortgage-backed securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities ("U.S.
government mortgage- backed securities"), other obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities and
repurchase agreements with respect to those securities. Subject to this 65%
investment policy, the Fund may invest up to 35% of its total assets in
mortgage- and asset-backed securities issued by private issuers that at the
time of purchase have been rated AAA by Standard & Poor's ("S&P"), Aaa by
Moody's Investors Service, Inc. ("Moody's"), have an equivalent rating from
another nationally recognized statistical rating organization ("NRSRO") or,
if unrated, are determined by Mitchell Hutchins to be of comparable quality.
The Fund may invest up to 5% of its total assets in investment grade debt
securities of other issuers, such as corporate debt securities. Securities
are considered to be investment grade if they are rated within the four
highest categories established by S&P or Moody's or have received an
equivalent rating from another NRSRO or, if unrated, are deemed by the Fund's
investment adviser to be of comparable quality. As a matter of fundamental
policy, the Fund normally concentrates at least 25% of its total assets in
mortgage- and
14
<PAGE>
asset-backed securities issued or guaranteed by private issuers or by
agencies or instrumentalities of the U.S. government. PW U.S. Government
Income Fund may also invest in certain coupon securities that are U.S.
Treasury notes and bonds that have been stripped of their unmatured interest
coupon receipts or interests in such U.S. Treasury securities or coupons.
MH/KP INTERMEDIATE INCOME FUND. The investment objective of MH/KP
Intermediate Income Fund is maximum total return, consisting primarily of
current income and secondarily of capital appreciation. The Fund seeks to
achieve its investment objective by following a strategy that contemplates
shifts (sometimes frequent) among a wide range of investments. The Fund
invests in the following classes of investments selected by GE Investment
Management Incorporated ("GEIM"), the Fund's sub-adviser, and monitored by
Mitchell Hutchins: securities issued or guaranteed by the U.S. government or
one of its agencies or instrumentalities ("Government Securities"); corporate
debt instruments, such as bonds, debentures, notes and non-convertible
preferred stock; mortgage-related securities, including adjustable-rate
mortgage-related securities ("ARMs"), collateralized mortgage obligations
("CMOs") and government stripped mortgage-related securities; asset- backed
and receivable-backed securities; and money market instruments. The Fund
generally invests in intermediate fixed income securities with the result
that, under normal market conditions, the average weighted maturity of the
Fund's portfolio will be between three and ten years, although the Fund may
hold instruments with remaining maturities of up to 30 years.
The Fund limits its purchases of debt securities to those that are
investment grade and at all times at least 65% of the Fund's total assets are
invested in securities rated in the three highest rating categories by S&P or
Moody's or, if unrated securities, deemed by GEIM to be of comparable
quality. The Fund invests primarily in U.S. debt securities that are traded
over-the-counter or listed on securities exchanges. Although the Fund
reserves freedom of action to invest up to 35% of its total assets in
securities of foreign companies or governments that are listed on foreign
securities exchanges or traded in foreign over-the-counter markets, at
present it limits its investment in these securities to not more than 5% of
its total assets.
MH/KP GOVERNMENT INCOME FUND. The investment objective of MH/KP Government
Income Fund is to provide high current income. The Fund seeks to achieve its
objective primarily from interest income from U.S. government securities,
premiums from put and call options on U.S. government securities and net
gains from closing purchase and sale transactions with respect to options on
U.S. government securities. The Fund may invest in mortgage-related
securities, including CMOs. The Fund may also realize net short-term gains
from sales of portfolio securities. In addition, the Fund may also invest up
to 20% of its assets in high-quality short-term investments, including
repurchase agreements. The Fund expects that under normal market conditions,
not less than 65% of the Fund's total assets will be invested in U.S.
government securities.
The Fund invests in U.S. Treasury securities, including bills, notes,
bonds and other debt securities issued by the U.S. Treasury. These
instruments are direct obligations of the U.S. government and differ
primarily in interest rates, maturities, call provisions and the times of
their issuances. The Fund also invests in securities issued by agencies of
the U.S. government or instrumentalities established or sponsored by the U.S.
government. These obligations, including those which are guaranteed by
federal agencies or instrumentalities, may or may not be backed by the "full
faith and credit" of the United States. The Fund's investments include
mortgage-backed securities of U.S. government issuers or private issuers.
These securities represent an undivided ownership interest in a pool of
mortgage loans. The Fund may purchase U.S. government securities on a
when-issued or delayed-delivery basis.
OTHER POLICIES OF THE FUNDS. All three Funds are authorized to use options
and futures contracts to reduce the overall risk of their investments
(hedge). PW U.S. Government Income Fund and MH/KP
15
<PAGE>
Government Income Fund also may use options to enhance income and PW U.S.
Government Income Fund may use interest rate futures contracts to enhance
income (subject to a limit of 5% of that Fund's net assets on the aggregate
amount of initial margin and premiums on futures positions that are not for
bona fide hedging purposes). PW U.S. Government Income Fund also may engage
in interest rate protection transactions, including interest rate swaps,
caps, collars and floors, for hedging purposes.
PW U.S. Government Income Fund and MH/KP Intermediate Income Fund may use
dollar rolls, in which the Fund sells mortgage-backed or other securities for
delivery in the current month and simultaneously contracts to purchase
substantially similar securities on a specified future date. PW U.S.
Government Income Fund also may use reverse repurchase agreements, in which
the Fund sells securities to a bank or dealer and agrees to repurchase the
securities at a mutually agreed-upon date and price. Dollar roll and reverse
repurchase agreement transactions are considered to be borrowings and so are
subject to each Fund's limitation on borrowing (33 1/3 % of total assets for
PW U.S. Government Income Fund and 20% for MH/KP Intermediate Income Fund).
MH/KP Government Income Fund is authorized to borrow from banks up to 30% of
the value of its net assets for leverage purposes.
Each Fund may engage in short sales "against the box," typically to defer
realization of gains and losses for tax purposes. (This is a short sale where
at all times the Fund owns at least an equal amount of the securities sold
short or other securities convertible or exchangeable into the securities
without further consideration.) MH/KP Intermediate Income Fund also may sell
securities short when the Fund does not own those securities, provided that
the market value of all securities sold short (other than "against the box")
does not exceed 25% of the value of the Fund's assets. In addition, MH/KP
Intermediate Income Fund may not (1) sell short the securities of any single
issuer listed on a national securities exchange to the extent of more than 2%
of the value of the Fund's net assets or (2) sell short the securities of any
class of an issuer to the extent of more than 2% of the outstanding
securities of the class at the time of the transaction.
Each Fund may lend its portfolio securities to broker-dealers and other
institutional investors (up to 10% of the total value of its portfolio
securities for PW U.S. Government Income Fund, 30% for MH/KP Government
Income Fund and 33 1/3 % for MH/KP Intermediate Income Fund) and receive
interest on the loan or a flat fee in addition to amounts equivalent to any
dividends, interest or other distributions on the securities loaned. Each
Fund may invest up to 10% of its total assets in illiquid securities.
OPERATIONS OF PW U.S. GOVERNMENT INCOME FUND FOLLOWING THE REORGANIZATIONS
There are differences in the investment objectives and some of the
investment policies of the Funds. It is expected, however, that PW U.S.
Government Income Fund will not make any additional revisions to its
investment objective or policies following the Reorganizations to reflect
those of either Acquired Fund. If the Reorganizations are approved, the
Acquired Funds will sell any assets that are inconsistent with the investment
policies of PW U.S. Government Income Fund prior to the effective time of the
Reorganizations, and the proceeds thereof will be held in temporary
investments or reinvested in assets that qualify to be held by PW U.S.
Government Income Fund. The need for the Acquired Funds to dispose of assets
prior to the effective time of the Reorganizations may result in selling
securities at a disadvantageous time and could result in an Acquired Fund's
realizing losses that would not otherwise have been realized.
After the Reorganizations, the trustees and officers of PW Trust and PW
U.S. Government Income Fund's investment adviser, distributor, exclusive
dealer and other outside agents will continue to serve PW U.S. Government
Income Fund in their current capacities. In addition, Nirmal Singh and Craig
M. Varrelman, who currently are primarily responsible for the day-to-day
portfolio management of PW U.S. Government Income Fund, will continue to be
primarily responsible for PW U.S. Government Income Fund's portfolio
management
16
<PAGE>
following the Reorganizations. Mr. Singh is a vice president of Mitchell
Hutchins responsible for overseeing mortgage-backed securities investments
for MH/KP Government Income Fund. Mr. Varrelman is a first vice president of
Mitchell Hutchins. Prior to joining Mitchell Hutchins in 1993, Mr. Singh was
with Merrill Lynch Asset Management, Inc., where he was a member of the
portfolio management team responsible for managing several diversified funds,
including mortgage-backed securities funds with assets totaling approximately
$8 billion. From 1990 to 1993, Mr. Singh was a senior portfolio manager at
Nomura Mortgage Funds Management Corporation, where he was responsible for
managing approximately $3 billion in mortgage assets. Mr. Varrelman has been
with Mitchell Hutchins as a portfolio manager since 1988 and manages fixed
income portfolios with assets totaling approximately $1.5 billion, with an
emphasis on U.S. government securities.
Effective on or about November 1, 1995, PW U.S. Government Income Fund's
Class C and Class D shares will be renamed Class Y and Class C shares,
respectively. In addition, Class A shares purchased after that date which are
purchased without an initial sales charge due to a sales charge waiver for
purchases of $1 million or more, and held less than one year, and Class D
shares that are held for less than one year, will be subject to a contingent
deferred sales charge ("CDSC") of 1% of the lower of (1) the NAV of the
shares at the time of purchase, or (2) the NAV of the shares at the time of
redemption.
PURCHASES
Shares of PW U.S. Government Income Fund are available through PaineWebber
and its correspondent firms or, for investors who are not clients of
PaineWebber, through PFPC Inc., PW U.S. Government Income Fund's transfer
agent ("Transfer Agent"). The minimum initial investment in PW U.S.
Government Income Fund is $1,000; subsequent purchases must be $100 or more.
Purchases through PaineWebber investment executives or correspondent firms
may be made in person or by mail, telephone or, for purchases of $1 million
or more, wire. PaineWebber investment executives and correspondent firms are
responsible for transmitting purchase requests to PaineWebber's New York City
offices promptly. Investors may pay for a purchase with checks drawn on U.S.
banks or with funds held in brokerage accounts at PaineWebber or its
correspondent firms. Payment is due on the third Business Day after the order
is received at PaineWebber's New York City offices. A "Business Day" is any
day, Monday through Friday, on which the New York Stock Exchange, Inc.
("NYSE") is open for business.
PW U.S. Government Income Fund's Class A shares normally are sold with a
maximum initial sales charge of up to 4% of the public offering price;
although, PW U.S. Government Income Fund Class A shares that will be
distributed to shareholders of the Acquired Funds as part of the
Reorganizations will not be subject to an initial sales charge. However,
following the Reorganizations, new purchases of Class A shares of PW U.S.
Government Income Fund will be subject to an initial sales charge of up to
4%, and any Class D or Class C shares of PW U.S. Government Income Fund that
are purchased by former Acquired Fund shareholders will be subject to their
respective terms.
For PW U.S. Government Income Fund, sales charge waivers and reduced sales
charge purchase plans are available for Class A shares, and exchange fee
waivers are available for Class A and Class D shares. Class D shares of PW
U.S. Government Income Fund are sold without an initial sales charge or CDSC.
No initial sales charge or CDSC is imposed with respect to Class A shares of
PW U.S. Government Income Fund that are purchased with reinvested dividends
or other distributions on that Class of shares.
Class C shares of PW U.S. Government Income Fund will be issued to holders
of Class C shares in MH/KP Intermediate Income Fund and MH/KP Government
Income Fund in connection with the Reorganizations. Effective November 1,
1995, PW U.S. Government Income Fund Class C shares (which will have been
renamed as Class Y shares) will be offered for sale to participants in
certain wrap fee investment advisory programs that
17
<PAGE>
are currently or in the future sponsored by PaineWebber and that may invest
in PaineWebber proprietary funds, provided that shares are purchased through
or in connection with those programs. While PW U.S. Government Income Fund is
authorized to sell Class C shares to employee benefit plans and retirement
plans of PaineWebber Group Inc. and its affiliates, to certain unit
investment trusts sponsored by PaineWebber, and to certain other parties. At
present, however, only participants in the INSIGHT program would be eligible
to purchase PW U.S. Government Income Fund Class C shares. PW U.S. Government
Income Fund Class C shares will be sold to eligible investors at NAV, without
any initial sales charge or CDSC, and without any Rule 12b-1 distribution or
service fees.
INSIGHT PROGRAM. An investor who purchases $50,000 or more of shares of
the PaineWebber or MH/KP mutual funds that are in the Flexible Pricing System
may participate in INSIGHT, a total portfolio asset allocation program
sponsored by PaineWebber, and thus become eligible to purchase PW U.S.
Government Income Fund Class C shares. INSIGHT offers comprehensive
investment services, including a personalized asset allocation investment
strategy using an appropriate combination of funds, professional investment
advice regarding investment among the funds by portfolio specialists,
monitoring of investment performance and comprehensive quarterly reports that
cover market trends, portfolio summaries and personalized account
information. Participation in INSIGHT is subject to payment of an advisory
fee to PaineWebber at the maximum annual rate of 1.5% of assets held through
the program (generally charged quarterly in advance), which covers all
INSIGHT investment advisory services and program administration fees.
Employees of PaineWebber and its affiliates are entitled to a 50% reduction
in the fee otherwise payable for participation in INSIGHT. INSIGHT clients
may elect to have their INSIGHT fees charged to their PaineWebber accounts
(by the automatic redemption of money market fund shares) or any other
PaineWebber accounts or billed separately.
Shares of the Acquired Funds are available through PaineWebber and its
correspondent firms, or for investors who are not clients of PaineWebber, the
Transfer Agent. The minimum initial investment in each Acquired Fund is
$1,000, and the minimum subsequent investment must be $50 or more, except
that for Individual Retirement Accounts ("IRAs"), other tax qualified
retirement plans and accounts established pursuant to Uniform Gifts/Transfers
to Minors Acts, the minimum initial investment is $250 and the minimum
subsequent investment is $1.00. The Acquired Funds' Class A shares normally
are sold with a maximum initial sales charge of 2.25% of the public offering
price. Class C shares are sold without an initial sales charge or CDSC,
although the Class C shares are currently available to participants in
INSIGHT, and a maximum annual investment advisory fee of 1.50% of shares held
through INSIGHT is paid by participants in that program.
REDEMPTIONS
Shareholders of each Fund may submit redemption requests to their
investment executives or correspondent firms in person or by telephone, mail
or wire. As each Fund's agent, PaineWebber may honor a redemption request by
repurchasing shares from a redeeming shareholder at the shares' NAV next
determined after receipt of the request by PaineWebber's New York City
offices. Within three Business Days after receipt of the request, repurchase
proceeds (less any applicable CDSC) will be paid by check or credited to the
shareholder's brokerage account at the election of the shareholder.
PaineWebber investment executives and correspondent firms are responsible for
promptly forwarding redemption requests to PaineWebber's New York City
offices. PaineWebber reserves the right not to honor any redemption request,
in which case PaineWebber promptly will forward the request to the Transfer
Agent for treatment as described below.
Shareholders of each Fund also may redeem shares through the Transfer
Agent. Shareholders should mail redemption requests directly to the Transfer
Agent: PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box
18
<PAGE>
8950, Wilmington, Delaware 19899. A redemption request will be executed at
the NAV per share next computed after it is received within seven days of the
receipt of the request. Shareholders are responsible for ensuring that a
request for redemption is received in "good order." "Good order" means that
the request must be accompanied by the following: (1) a letter of instruction
or a stock assignment specifying the number of shares or amount of investment
to be redeemed (or that all shares credited to the Fund account be redeemed),
signed by all registered owners of the shares in the exact names in which
they are registered, (2) a guarantee of the signature of each registered
owner by an eligible institution acceptable to the Transfer Agent and in
accordance with SEC rules, such as a commercial bank, trust company or member
of a recognized stock exchange, (3) other supporting legal documents for
estates, trusts, guardianships, custodianships, partnerships and corporations
and (4) duly endorsed share certificates, if any.
A shareholder (other than a participant in the PW SIP) may have redemption
proceeds of $1 million or more wired to the shareholder's PaineWebber
brokerage account or a commercial bank account designated by the shareholder.
Questions about this option, or redemption requirements generally, should be
referred to the shareholder's PaineWebber investment executive or
correspondent firm. If a shareholder requests redemption of shares which were
purchased recently, the Fund may delay payment until it is assured that good
payment has been received. In the case of purchases by check, this can take
up to 15 days.
Because the Funds incur certain fixed costs in maintaining shareholder
accounts, each Fund reserves the right to redeem all Fund shares in any
shareholder account having a NAV below the lesser of $500 or the current
minimum for initial purchasers (with respect to PW U.S. Government Income
Fund and MH/KP Intermediate Fixed Income Fund), or below $500 (with respect
to MH/KP Government Income Fund). If the Fund elects to do so, it will notify
the shareholder and provide the shareholder the opportunity to increase the
amount invested to the minimum required level or more within 60 days of the
notice. The Fund will not redeem accounts that fall below the minimum
required level solely as a result of a reduction in NAV per share.
If a Reorganization is approved with respect to an Acquired Fund, shares
of that Acquired Fund will cease to be offered on October 16, 1995, so that
its shares will no longer be available for purchase or exchange starting on
October 17 (the next Business Day). If the Meeting with respect to an
Acquired Fund is adjourned and the Reorganization involving it is approved on
a later date, its shares will no longer be available for purchase or exchange
on the business day following the date on which the Reorganization is
approved and all contingencies have been met. Redemptions of an Acquired
Fund's shares and exchanges of such shares for shares of any other
PaineWebber or MH/KP funds may be effected through the Closing Date.
EXCHANGES
Class A, Class B and Class D shares of each Fund may be exchanged for
shares of the Corresponding Class of other PaineWebber and MH/KP funds, and
Class A, Class B and Class D shares of each Fund may be acquired through an
exchange of shares of the Corresponding Class of other PaineWebber and MH/KP
funds, as provided in each Fund's prospectus. No initial sales charge is
imposed on the shares being acquired, and no CDSC will be imposed on the
shares being disposed of, through an exchange. Exchanges may be subject to
minimum investment and other requirements of the fund into which exchanges
are made. As noted above, the $5.00 service fee currently imposed on each
exchange of shares of PW U.S. Government Income Fund for shares of any other
PaineWebber or MH/KP fund will continue to be imposed following the
Reorganizations.
DIVIDENDS AND OTHER DISTRIBUTIONS
Dividends from each Fund's net investment income, if any, are declared
daily and paid monthly. Substantially all of PW U.S. Government Income Fund's
net capital gain (the excess of net long-term capital
19
<PAGE>
gain over net short-term capital loss) and net short-term capital gain, if
any, is distributed annually. MH/KP Intermediate Income Fund's net capital
gain, if any, is distributed annually after the close of the fiscal year in
which it is earned. MH/KP Government Income Fund makes quarterly
distributions of net short-term capital gains (net short-term capital gain in
excess of net short-term capital loss); its net long-term capital gains (net
long-term capital gain in excess of net short-term capital loss), if any, are
paid annually. Shareholders of each Fund may reinvest dividends and other
distributions in additional shares on the payment date at those shares' NAV
that day or receive them in cash. Each Fund may make additional
distributions, if necessary, to avoid a 4% excise tax on certain
undistributed ordinary income and capital gain.
On or before the Closing Date, each Acquired Fund will declare as a
distribution substantially all of its net investment income, net capital gain
and net short-term capital gain in order to maintain its tax status as a
regulated investment company. Each Acquired Fund will pay these distributions
only in cash. Similarly, on or before the Closing Date, PW U.S. Government
Income Fund may declare and distribute as a dividend to its shareholders, on
or before the Closing Date, substantially all of any previously undistributed
net investment income. Such distributions will also be paid only in cash.
FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATIONS
PW Trust has received an opinion of Kirkpatrick & Lockhart LLP, its
counsel, with respect to the Reorganization involving PW U.S. Government
Income Fund; MH/KP Trust has received an opinion of Willkie Farr & Gallagher,
its counsel, with respect to the Reorganization involving MH/KP Intermediate
Income Fund; and MH/KP Government Income Fund has received an opinion of
Sullivan & Cromwell, its counsel with respect to the Reorganization involving
that Fund, each to the effect that the proposed 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 any of the Funds or their
shareholders as a result of the Reorganizations. See "The Proposed
Transactions -- Federal Income Tax Considerations," page [ ].
COMPARISON OF PRINCIPAL RISK FACTORS
Because PW U.S. Government Income Fund's investment objective and policies
are generally similar to those of the Acquired Funds, in that the primary
focus of each Fund is on current income and each Fund invests a large portion
of its assets in securities of U.S. government issuers, the investment risks
of all three Funds are those typically associated with investing in an income
fund. Certain differences are identified below. See the prospectus of PW U.S.
Government Income Fund, which accompanies this Proxy Statement, for a more
detailed discussion of the investment risks of PW U.S. Government Income
Fund.
INTEREST RATE SENSITIVITY. The investment income of each Fund is based
upon the income earned on the securities it holds, less expenses incurred;
thus, each Fund's investment income may be expected to fluctuate in response
to changes in such expenses or income. For example, the investment income of
a Fund may be affected if it experiences a net inflow of new money that is
then invested in securities whose yield is higher or lower than that earned
on then-current investments. Generally, the value of the securities held by a
Fund, and thus the Fund's NAV per share, will rise when interest rates
decline. Conversely, when interest rates rise, the value of fixed income
securities, and thus the Fund's NAV per share, may be expected to decline.
TYPES OF DEBT SECURITIES. PW U.S. Government Income Fund and MH/KP
Government Income Fund each invests, under normal market conditions, at least
65% of its total assets in U.S. government securities. In the case of both
Funds, these securities consist of mortgage-backed securities or other
obligations issued or
20
<PAGE>
guaranteed by the U.S. government its agencies or instrumentalities. PW U.S.
Government Income Fund and MH/KP Government Income Fund each may invest in
mortgage-backed securities of private issuers, and PW U.S. Government Income
Fund also may invest in asset-backed securities of private issuers. In the
case of PW U.S. Government Income Fund, all mortgage- and asset-backed
securities of private issuers must be rated at the time of purchase AAA by
S&P, Aaa by Moody's, have an equivalent rating from another NRSRO or, if
unrated, be determined by Mitchell Hutchins to be of comparable quality. In
the case of MH/KP Government Income Fund, there is no express quality
standard for mortgage-backed securities of private issuers. MH/KP Government
Income Fund also is authorized to invest up to 20% of its assets in high
quality money market instruments, including commercial paper of domestic
corporations and bank obligations. In contrast, PW U.S. Government Income
Fund's investments in money market instruments are limited to obligations of
the U.S. government, its agencies or instrumentalities, and repurchase
agreements secured by such obligations. Unlike MH/KP Government Income Fund,
however, PW U.S. Government Income Fund may invest up to 5% of its total
assets in investment grade corporate obligations.
Unlike the other two Funds, MH/KP Intermediate Income Fund may invest
without limitation in corporate debt instruments, such as bonds, debentures,
notes and non-convertible preferred stock, in addition to investing in
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, mortgage-related securities, asset-backed and
receivable-backed securities and money market instruments. MH/KP Intermediate
Income Fund follows a strategy that contemplates shifts (sometimes frequent)
among a wide range of investments. PW U.S. Government Income Fund does not
have comparable freedom to shift its investments from one type of debt
security to another. As a result, PW U.S. Government Income Fund is not
subject to as much risk from mistiming a shift of investment type, but also
may not be able to afford as much opportunity for the enhanced return that
may result from such shifts.
PW U.S. Government Income Fund also has a fundamental policy of
concentrating, under normal market circumstances, at least 25% of its total
assets in mortgage- and asset-backed securities issued or guaranteed by
private issuers or by agencies or instrumentalities of the U.S. government.
Neither MH/KP Government Income Fund nor MH/KP Intermediate Income Fund has a
comparable concentration policy. PW U.S. Government Income Fund's
concentration policy has the effect of increasing that Fund's exposure to the
risks related to mortgage- and asset-backed securities and might cause the
Fund's NAV to fluctuate more than would be the case for a fund that is not
required to maintain at least 25% of its total assets in these types of
securities.
QUALITY OF PORTFOLIO SECURITIES. MH/KP Intermediate Income Fund is
permitted to purchase investment grade debt securities, although it must
maintain at all times at least 65% of its total assets in securities rated in
the three highest rating categories by S&P or Moody's or, if unrated,
determined by GEIM to be of comparable quality. (MH/KP Government Income
Fund, because it does not invest in corporate debt securities, is subject to
no such limitation.) This quality standard could permit MH/KP Intermediate
Income Fund to maintain a portfolio that is of lower quality than that
maintained by PW U.S. Government Income Fund, which is permitted to invest
only up to 5% of its total assets in investment grade securities other than
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities or (with respect to up to 35% of its total assets)
mortgage- and asset-backed securities rated AAA by S&P, Aaa by Moody's,
comparably rated by another NRSRO or, if unrated, determined by Mitchell
Hutchins to be comparable to such rated securities. Securities rated BBB by
S&P or Baa by Moody's are in the lowest investment grade category assigned by
those NRSROs, and Moody's considers such securities to have speculative
characteristics. Changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity for such securities to make
principal and interest payments than is the case for higher grade debt
securities. MH/KP Intermediate Fixed Income Fund is more subject to these
risks than PW U.S. Government Income Fund; however, because PW
21
<PAGE>
U.S. Government Income Fund is required to invest almost all its assets in
U.S. government securities and securities in the highest NRSRO rating
category, PW U.S. Government Income Fund may have less opportunity to earn as
high a return for its shareholders.
PORTFOLIO TURNOVER. Each Fund's portfolio is actively managed. The
portfolio turnover rates for PW U.S. Government Income Fund, MH/KP
Intermediate Fixed Income Fund and MH/KP Government Income Fund for the
fiscal years ended November 30, 1994, August 31, 1994 and January 31, 1995,
were 358%, 279% and 256%, respectively. Each Fund's portfolio turnover rate
may vary greatly from year to year and is not a limiting factor when Mitchell
Hutchins (or GEIM, with respect to MH/KP Intermediate Income Fund) deems
portfolio changes appropriate. A higher turnover rate for a particular Fund
(100% or more) will involve correspondingly greater increases in portfolio
transaction costs, which will be borne directly by that Fund, and may
increase the potential for short-term capital gains.
AVERAGE PORTFOLIO MATURITY. MH/KP Intermediate Income Fund, under normal
circumstances, maintains an average weighted portfolio maturity of three to
ten years, although the Fund may hold instruments with remaining maturities
of up to 30 years. This limitation on average portfolio maturity may, under
some circumstances, adversely affect MH/KP Intermediate Income Fund's ability
to achieve its investment objective of maximum total return due to the types
and remaining maturities of the securities in which that Fund invests. PW
U.S. Government Income Fund and MH/KP Government Income Fund are not subject
to any limitations on average portfolio maturity, which may be varied by
Mitchell Hutchins in response to actual or anticipated changes in market
conditions and interest rates.
FOREIGN SECURITIES. MH/KP Intermediate Income Fund is authorized to invest
up to 35% of its total assets in securities of foreign companies or
governments that are listed on foreign securities exchanges or traded in
foreign over-the-counter markets. At present, however, the Fund does not
anticipate investing more than 5% of its total assets in these types of
securities. To the extent that MH/KP Intermediate Income Fund invests in
foreign securities (whether denominated in U.S. dollars or foreign
currencies), it will be exposed to risks not typically associated with
investments in obligations of the U.S. government and domestic corporations.
Investment in foreign securities involves risks relating to political, social
and economic developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign issuers and
markets are subject. Individual foreign economies may differ favorably or
unfavorably from the U.S. economy. Securities of many foreign companies may
be less liquid and their prices more volatile than securities of comparable
U.S. companies. Foreign securities may from time to time be difficult to
liquidate rapidly without significantly depressing the price of those
securities. There may be less information publicly available concerning
foreign issuers of securities held by the Fund than is available concerning
U.S. issuers. Also, changes in foreign currency exchange rates will affect
the Fund's net asset value, the value of dividends and interest earned, gains
and losses realized on the sale of securities and net investment income to be
distributed to its shareholders by the Fund. In addition, some foreign
currency values may be volatile and there is the possibility of government
controls on currency exchange or governmental intervention in currency
markets. Any of these factors could adversely affect MH/KP Intermediate
Income Fund. Finally, the costs attributable to foreign investing that MH/KP
Intermediate Income Fund must bear frequently are higher than those
attributable to domestic investing. For example, the costs of maintaining
custody of securities in foreign countries exceed custodian costs related to
domestic securities.
MH/KP Government Income Fund may invest up to 10% of its assets in
obligations of foreign branches of U.S. banks. Such investments may be
subject to some of the same risks as foreign securities, including adverse
future political and economic developments, the possible imposition of
withholding taxes on interest income, the seizure or nationalization of
foreign deposits and foreign exchange controls, currency blockage or other
restrictions.
22
<PAGE>
PW U.S. Government Income Fund is not authorized to invest in securities
of foreign issuers or obligations of foreign branches of U.S. banks and,
accordingly, is not subject to the above risks.
HEDGING AND INCOME STRATEGIES USING OPTIONS AND FUTURES CONTRACTS. Each
Fund may use options and futures contracts for hedging purposes, and PW U.S.
Government Income Fund and MH/KP Government Income Fund may use options to
enhance income. PW U.S. Government Income Fund also may use interest rate
futures contracts to enhance income (subject to a limit of 5% of that Fund's
net assets on the amount of aggregate initial margin and premiums on futures
positions that are not for bona fide hedging purposes). There can be no
assurance, however, that any strategy utilizing these instruments will
succeed. If Mitchell Hutchins, or GEIM with respect to MH/KP Intermediate
Income Fund, incorrectly forecasts interest rates, market values or other
economic factors in utilizing a strategy involving options or futures
contracts for a Fund, the Fund would be in a better position had it not used
these instruments at all. The use of these strategies involves certain
special risks, including (1) the fact that skills needed to use hedging
instruments are different from those needed to select the Funds' securities,
(2) possible imperfect correlation, or even no correlation, between price
movements of hedging instruments and price movements of the investments being
hedged, (3) the fact that, while hedging strategies can reduce the risk of
loss, they can also reduce the opportunity for gain, or even result in
losses, by offsetting favorable price movements in hedged investments, and
(4) the possible inability of a Fund to purchase or sell a portfolio security
at a time that otherwise would be favorable for it to do so, or the possible
need for a Fund to sell a portfolio security at a disadvantageous time, due
to the need for the Fund to maintain "cover" or to segregate securities in
connection with transactions involving options and futures contracts and the
possible inability of a Fund to close out or to liquidate its position.
LENDING PORTFOLIO SECURITIES. Each Fund may lend securities to the extent
permitted under the 1940 Act. If a Fund lends securities, it is subject to
risks, which, like those associated with other extensions of credit, include
possible loss of rights in the collateral should the borrower fail
financially.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements. In
entering into such an agreement, a Fund bears a risk of loss in the event the
other party to the transaction defaults on its obligations and the Fund is
delayed or prevented from exercising its rights to dispose of the underlying
securities, including a risk of a possible decline in the value of the
underlying securities during the period in which the Fund seeks to assert its
rights to them, the risk of incurring expenses associated with asserting
those rights and the risk of losing all or a part of the income from the
agreement.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. Each Fund may purchase
securities on a when-issued or delayed-delivery basis. Securities purchased
on a when-issued or delayed-delivery basis may expose a Fund to risk because
the securities may experience fluctuations in value prior to their actual
delivery. A Fund will not accrue income with respect to a when-issued or
delayed-delivery security prior to its stated delivery date. Purchasing
securities on a when-issued or delayed-delivery basis can involve the
additional risk that the yield available in the market when the delivery
takes place may be higher than that obtained in the transaction itself.
THE PROPOSED TRANSACTIONS
REORGANIZATION PLANS
The terms and conditions under which the proposed transactions may be
consummated are set forth in the Reorganization Plans. Significant provisions
of the Reorganization Plans are summarized below; however, this summary is
qualified in its entirety by reference to the Reorganization Plans, which are
attached as Appendices A and B to this Proxy Statement.
23
<PAGE>
Each Reorganization Plan contemplates (1) PW U.S. Government Income Fund's
acquiring on the Closing Date the assets of an Acquired Fund in exchange
solely for its shares and its assumption of the Acquired Fund's liabilities
and (2) the constructive distribution of such shares to the shareholders of
the Acquired Fund, by Class.
The assets of each Acquired Fund to be acquired by PW U.S. Government
Income Fund include all cash, cash equivalents, securities, receivables and
other property owned by the Acquired Fund. PW U.S. Government Income Fund
will assume from each Acquired Fund all debts, liabilities, obligations and
duties of such Fund of whatever kind or nature; provided, however, that each
Acquired 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 U.S. Government Income Fund also will deliver its
shares to each Acquired Fund, which then will be constructively distributed
to the Acquired Funds' shareholders.
The value of an Acquired Fund's assets to be acquired, and the amount of
its liabilities to be assumed, by PW U.S. Government Income Fund and the NAV
of a Class A, a Class D and a Class C share of PW U.S. Government Income Fund
will be determined as of the close of regular trading on the NYSE on the
Closing Date. Where market quotations are readily available, portfolio
securities will be valued based upon such market quotations, provided such
quotations adequately reflect, in Mitchell Hutchins' judgment, the fair value
of the security. Where such market quotations are not readily available, such
securities will be valued based upon appraisals received from a pricing
service using a computerized matrix system or based upon appraisals derived
from information concerning the security or similar securities received from
recognized dealers in those securities. The amortized cost method of
valuation generally will be used to value debt instruments with 60 days or
less remaining to maturity, unless the Corporation's board of directors (with
respect to MH/KP Government Income Fund), PW Trust's board of trustees (with
respect to PW U.S. Government Income Fund), or MH/KP Trust's board of
trustees (with respect to MH/KP Intermediate Income Fund) determines that
this does not represent fair value. All other securities and assets will be
valued at fair value as determined in good faith by or under the direction of
the respective Boards. All investments quoted in foreign currencies will be
valued in U.S. dollars on the basis of the foreign currency exchange rates
prevailing at the time such valuation is determined by MH/KP Intermediate
Income Fund's custodian.
On, or as soon as practicable after, the Closing Date, each Acquired Fund
will distribute to its shareholders of record the shares of PW U.S.
Government Income Fund it received, by Class, so that each Acquired Fund
shareholder will receive a number of full and fractional shares of the
Corresponding Class or Classes of PW U.S. Government Income Fund equal in
value to the NAV of the shareholder's holdings in the Acquired Fund; each
Acquired Fund will be terminated or dissolved, as the case may be, as soon as
is practicable thereafter. Such distribution will be accomplished by opening
accounts on the books of PW U.S. Government Income Fund in the names of the
Acquired Funds' shareholders and by transferring thereto the shares of each
Class previously credited to the account of each Acquired Fund on those
books. Fractional shares in each Class of shares of PW U.S. Government Income
Fund will be rounded to the third decimal place.
Accordingly, immediately after each Reorganization, each former
shareholder of the participating Acquired Fund will own shares of the Class
of PW U.S. Government Income Fund that will equal the NAV of that
shareholder's shares of the Corresponding Class of the Acquired Fund
immediately prior to the Reorganization. Moreover, because shares of each
Class of PW U.S. Government Income Fund will be issued at net asset value in
exchange for the net assets applicable to the Corresponding Class of each
Acquired Fund, the aggregate value of shares of each Class of PW U.S.
Government Income Fund so issued will equal the aggregate value of the
Corresponding Class of the Acquired Fund. The NAV per share of PW U.S.
Government Income Fund will be unchanged by the transactions. Thus, the
Reorganizations will not result in a dilution of any shareholder interest.
24
<PAGE>
Any transfer taxes payable upon issuance of shares of PW U.S. Government
Income Fund in a name other than that of the registered holder of the shares
on the books of an Acquired 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 an Acquired Fund will continue to be its responsibility up
to and including the Closing Date and such later date on which such Fund is
terminated or dissolved.
The cost of the Reorganizations, including professional fees and the cost
of soliciting proxies for the Meeting, consisting principally of printing and
mailing expenses, together with the cost of any supplementary solicitation,
will be borne by the Funds in proportion to their respective net assets.
Mitchell Hutchins recommended this method of expense allocation to the
Boards. Mitchell Hutchins based its recommendations on its belief that the
method is fair because, for the reasons discussed under "Reasons for the
Reorganizations," the Reorganizations have the potential to benefit all
Funds. The Boards considered the expense allocation method in approving the
Reorganizations and in finding that the Reorganizations are in the best
interests of their respective Fund.
The consummation of each Reorganization is subject to a number of
conditions set forth in its Reorganization Plan, some of which may be waived
by an Acquired Fund. In addition, the Reorganization Plans may be amended in
any mutually agreeable manner, except that no amendment may be made
subsequent to the Meeting that would have a material adverse effect on the
shareholders' interests.
REASONS FOR THE REORGANIZATIONS
MH/KP Trust's Board, including a majority of its Independent Persons, has
determined that the Reorganization involving MH/KP Intermediate Income Fund
is in the best interests of that Fund, that the terms of the Reorganization
are fair and reasonable and that the interests of the Fund's shareholders
will not be diluted as a result of the Reorganization. MH/KP Government
Income Fund's Board, including a majority of its Independent Persons, has
determined that the Reorganization is in the best interest of that Fund, that
the terms of the Reorganization are fair and reasonable and that the
interests of the Fund's shareholders will not be diluted as a result of the
Reorganization. In addition, PW Trust's Board, including a majority of its
Independent Persons, has determined that each Reorganization is in the best
interest of PW U.S. Government Income Fund, that the terms of the
Reorganization are fair and reasonable and that the interests of the Fund's
shareholders will not be diluted as a result of the Reorganization.
In considering the Reorganizations, the Boards made an extensive inquiry
into a number of factors, including the following:
(1) the compatibility of the investment objectives, policies and
restrictions of the Funds;
(2) the effect of the Reorganizations on expected investment performance
of the Funds;
(3) the effect of the Reorganizations on the expense ratio of PW U.S.
Government Income Fund relative to each Fund's current expense ratio;
(4) the costs to be incurred by each Fund as a result of the
Reorganizations;
(5) the tax consequences of the Reorganizations;
(6)possible alternatives to the Reorganizations, including continuing to
operate on a stand-alone basis or liquidation; and
(7)the potential benefits of the Reorganizations to other persons,
including Mitchell Hutchins and PaineWebber.
25
<PAGE>
The Reorganizations were recommended by Mitchell Hutchins to the Boards at
meetings of the Boards held on July 20, 1995. In considering the proposed
transactions, the Boards were advised by Mitchell Hutchins that combining the
Funds would result in lower expenses borne by the shareholders of each
Acquired Fund as a percentage of net assets. In addition, PW U.S. Government
Income Fund has a lower advisory fee than either of the Acquired Funds, and
the service fee it receives with respect to its Class A shares is lower than
the fee charged with respect to Class A shares of MH/KP Government Income
Fund. The Boards were further advised that the expenses of PW U.S. Government
Income Fund would also be likely to decrease if, as a result of the
Reorganizations, the combined Fund experienced increased sales of its shares.
In recommending the Reorganizations, Mitchell Hutchins advised the Boards
that the Funds have generally compatible investment objectives and policies,
with the material differences noted, and that PW U.S. Government Income Fund
and MH/KP Government Income Fund have substantially similar investment
strategies. Mitchell Hutchins also noted its belief that there is no reason
to maintain three Funds with similar investment objectives, two of which have
generally similar investment portfolios. MH/KP Trust's Board considered the
fact that MH/KP Intermediate Income Fund (unlike the other two Funds) has the
ability to invest in corporate debt. In order to preserve the tax-free nature
of the Reorganization of MH/KP Intermediate Income Fund with PW U.S.
Government Income Fund, the Board of PW Trust approved a change in the
investment policies of PW U.S. Government Income Fund to permit that Fund to
invest up to 5% of its total assets in corporate debt. The Boards were also
advised by Mitchell Hutchins that, if disposition of foreign securities held
by MH/KP Intermediate Income Fund should be necessary prior to the
Reorganization, any capital gains from such disposition would be offset by
the Fund's accumulated losses. In approving the proposed transactions, the
Boards took account of the opinion that PW U.S. Government Income Fund's
overall objective of high current income consistent with the preservation of
capital and liquidity by investing primarily in U.S. government securities
remains an appropriate one to offer to investors as part of an overall
investment strategy. The Boards also considered the fact that the risk
profile of PW U.S. Government Income Fund is generally similar to that of
MH/KP Government Income Fund and may represent less risk than that of MH/KP
Intermediate Income Fund.
Mitchell Hutchins also advised the Boards that it did not expect to
receive any immediate direct benefits from the Reorganizations, because the
compensation that would be received by it as investment adviser to the
combined Fund would be less than the aggregate compensation it receives from
the three Funds currently, assuming no change in aggregate net assets.
However, Mitchell Hutchins noted that it could benefit in the future if the
combined Fund's assets grow faster than would be the case for the three
separate Funds in the absence of the Reorganizations.
THE BOARDS OF TRUSTEES/DIRECTORS
RECOMMEND THAT THE SHAREHOLDERS OF THE
ACQUIRED FUNDS VOTE "FOR" THE REORGANIZATIONS
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 U.S. Government Income Fund as one of its series
and have authorized the public offering of four Classes of shares of PW U.S.
Government Income Fund. Each share in a Class represents an equal
proportionate interest in PW U.S. Government Income Fund with each other
share in that Class. Shares of PW U.S. Government Income Fund entitle their
holders to one vote per full share and fractional votes for fractional shares
held, except that each Class of shares has exclusive voting rights on matters
pertaining to its plan of distribution.
26
<PAGE>
On the Closing Date, PW U.S. Government Income Fund will have outstanding
four Classes of shares, designated as Class A, Class B, Class C and Class D
shares. Only Class A, Class C and Class D shares will be issued as part of
the Reorganizations. Each Class represents interests in the same assets of
the Fund. The Classes differ as follows: (1) each Class has exclusive voting
rights on matters pertaining to its plan of distribution; (2) Class A shares
are subject to an initial sales charge; (3) Class B shares bear ongoing
distribution fees, are subject to a CDSC upon certain redemptions and
automatically convert to Class A shares approximately six years after
issuance; (4) Class C shares have no initial sales charge and bear no service
or distribution fees, but may be purchased only by certain categories of
purchasers; (5) Class D shares are subject to neither an initial sales charge
nor a CDSC, bear ongoing distribution expenses and do not convert into any
other Class; and (6) each Class may bear differing amounts of certain
Class-specific expenses. Each share of each Class of PW U.S. Government
Income Fund is entitled to participate equally in dividends and other
distributions and the proceeds of any dissolution, except that because of the
higher expenses resulting from the distribution fees borne by the Class B and
Class D shares, dividends on those shares are expected to be lower than those
for Class A and Class C shares of the Fund. For the same reason, dividends on
Class B shares are expected to be lower than those on Class D shares.
Dividends on each Class also might be affected differently by the allocation
of other Class-specific expenses. Class C shares, which may be offered only
to a limited class of investors, are subject to neither an initial or
contingent deferred sales charge nor ongoing service or distribution fees.
PW Trust does not hold annual meetings of shareholders. There normally
will be no meetings of shareholders for the purpose of electing trustees
unless less than a majority of the trustees holding office have been elected
by shareholders, at which time the trustees then in office will call a
shareholders meeting for the election of trustees. Under the 1940 Act,
shareholders of record of at least two-thirds of the outstanding shares of an
investment company may remove a trustee by votes cast in person or by proxy
at a meeting called for that purpose. The trustees are required to call a
meeting of shareholders for the purpose of voting upon the question of
removal of any Trustee when requested in writing to do so by the shareholders
of record holding at least 10% of the Trust's outstanding shares.
FEDERAL INCOME TAX CONSIDERATIONS
The exchange of an Acquired Fund's assets for shares of PW U.S. Government
Income Fund shares and PW U.S. Government Income Fund's assumption of that
Acquired 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 Trust has received an opinion of Kirkpatrick & Lockhart LLP, its counsel
with respect to the Reorganization involving PW U.S. Government Income Fund;
MH/KP Trust has received an opinion of Willkie Farr & Gallagher, its counsel,
with respect to the Reorganization involving MH/KP Intermediate Income Fund;
and MH/KP Government Income Fund has received an opinion of Sullivan &
Cromwell, its counsel, with respect to the Reorganization involving that
Fund, each substantially to the effect that:
(i) PW U.S. Government Income Fund's acquisition of the Acquired
Fund's assets in exchange solely for PW U.S. Government Income Fund shares
and PW U.S. Government Income Fund's assumption of the Acquired Fund's
liabilities, followed by the Acquired Fund's distribution of those shares
to its shareholders constructively in exchange for their Acquired 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 the Acquired Fund on the
transfer to PW U.S. Government Income Fund of its assets in exchange
solely for PW U.S. Government Income Fund shares and PW U.S.
27
<PAGE>
Government Income Fund's assumption of the Acquired Fund's liabilities or
on the subsequent distribution of those shares to the Acquired Fund's
shareholders in constructive exchange for their Acquired Fund shares;
(iii) No gain or loss will be recognized to PW U.S. Government Income
Fund on its receipt of the transferred assets in exchange solely for PW
U.S. Government Income Fund shares and its assumption of the Acquired
Fund's liabilities;
(iv) PW U.S. Government Income Fund's basis for the transferred assets
will be the same as the basis thereof in the Acquired Fund's hands
immediately prior to the Reorganization, and PW U.S. Government Income
Fund's holding period for those assets will include the Acquired Fund's
holding period therefor;
(v) An Acquired Fund shareholder will recognize no gain or loss on the
constructive exchange of all its Acquired Fund shares solely for PW U.S.
Government Income Fund shares pursuant to the Reorganization; and
(vi) An Acquired Fund shareholder's basis for the PW U.S. Government
Income Fund shares to be received by it in the Reorganization will be the
same as the basis for its Acquired Fund shares to be constructively
surrendered in exchange for those PW U.S. Government Income Fund shares,
and its holding period for those PW U.S. Government Income Fund shares
will include its holding period for those PW U.S. Government Income 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 (regarding the recognition
of gain or loss and/or the determination of the basis or holding period) with
respect to any asset (including certain options, futures and forward
contracts) as to which any unrealized gain or loss is required to be
recognized for federal income tax purposes at the end of a taxable year (or
on the termination or transfer thereof) under a mark-to-market system of
accounting.
Utilization by PW U.S. Government Income Fund after the Reorganizations of
pre-Reorganization capital losses realized by an Acquired Fund could be
subject to limitation in future years under the Code.
Shareholders of an Acquired Fund should consult their tax advisers
regarding the effect, if any, of the Reorganizations in light of their
individual circumstances. Because the foregoing discussion only relates to
the federal income tax consequences of the Reorganizations, those
shareholders also should consult their tax advisers as to state and local tax
consequences, if any, of the Reorganizations.
CAPITALIZATION
The following tables show the capitalization of the Funds as of May 31,
1995 (unaudited) and on a pro forma combined basis (unaudited) as of that
date giving effect to the Reorganizations, and assuming that the Acquired
Funds indicated participate in the Reorganizations.
28
<PAGE>
If only MH/KP Intermediate Income Fund participates in the Reorganization:
<TABLE>
<CAPTION>
PW U.S. MH/KP
GOVERNMENT INTERMEDIATE PRO FORMA
INCOME FUND INCOME FUND COMBINED
-------------- -------------- --------------
<S> <C> <C> <C>
Net Assets
Class A .......... $405,579,008 $18,166,267 $423,745,275
Class B(1) ....... $ 91,313,714 $ 1,955,872 $ 91,313,714
Class C .......... $ 6,244,754 $ 1,119,988 $ 7,364,742
Class D(1) ....... $ 58,050,249 N/A $ 60,006,121
NAV Per Share
Class A .......... $8.95 $12.11 $8.95
Class B(1) ....... $8.95 $12.11 $8.95
Class C .......... $8.94 $12.11 $8.94
Class D(1) ....... $8.94 N/A $8.94
Shares Outstanding
Class A .......... 45,333,801 1,499,522 47,362,763
Class B(1) ....... 10,205,633 161,442 10,205,633
Class C .......... 698,559 92,489 823,843
Class D(1) ....... 6,494,838 N/A 6,713,525
</TABLE>
---------------
(1) Class B shares of MH/KP Intermediate Income Fund will be exchanged
for Class D shares of PW U.S. Government Income Fund.
If only MH/KP Government Income Fund participates in the Reorganization:
<TABLE>
<CAPTION>
PW U.S. MH/KP
GOVERNMENT GOVERNMENT PRO FORMA
INCOME FUND INCOME FUND COMBINED
-------------- ------------- --------------
<S> <C> <C> <C>
Net Assets
Class A .......... $405,579,008 $41,266,459 $446,845,467
Class B(1) ....... $ 91,313,714 $ 1,308,185 $ 91,313,714
Class C .......... $ 6,244,754 $ 3,347,882 $ 9,592,636
Class D(1) ....... $ 58,050,249 N/A $ 59,358,434
NAV Per Share
Class A .......... $8.95 $14.17 $8.95
Class B(1) ....... $8.95 $14.17 $8.95
Class C .......... $8.94 $14.17 $8.94
Class D(1). ...... $8.94 N/A $8.94
Shares Outstanding
Class A .......... 45,333,801 2,911,215 49,942,954
Class B(1) ....... 10,205,633 92,329 10,205,633
Class C .......... 698,559 236,332 1,073,148
Class D(1) ....... 6,494,838 N/A 6,641,180
</TABLE>
---------------
(1) Class B shares of MH/KP Government Income Fund will be exchanged for
Class D shares of PW U.S. Government Income Fund.
29
<PAGE>
If both Acquired Funds participate in the Reorganizations:
<TABLE>
<CAPTION>
PW U.S. MH/KP MH/KP
GOVERNMENT INTERMEDIATE GOVERNMENT PRO FORMA
INCOME FUND INCOME FUND INCOME FUND COMBINED
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net Assets
Class A .......... $405,579,008 $18,166,267 $41,266,459 $465,011,734
Class B(1) ....... $ 91,313,714 $ 1,955,872 $ 1,308,185 $ 91,313,714
Class C .......... $ 6,244,754 $ 1,119,988 $ 3,347,882 $ 10,712,624
Class D(1) ....... $ 58,050,249 N/A N/A $ 61,314,306
NAV Per Share
Class A .......... $8.95 $12.11 $14.17 $8.95
Class B(1) ....... $8.95 $12.11 $14.17 $8.95
Class C .......... $8.94 $12.11 $14.17 $8.94
Class D(1) ....... $8.94 N/A N/A $8.94
Shares Outstanding
Class A .......... 45,333,801 1,499,522 2,911,215 51,971,916
Class B(1) ....... 10,205,633 161,442 92,329 10,205,633
Class C .......... 698,559 92,489 236,332 1,198,432
Class D(1) ....... 6,494,838 N/A N/A 6,859,867
</TABLE>
---------------
(1) Class B shares of each Acquired Fund will be exchanged for Class D
shares of PW U.S. Government Income Fund.
ADDITIONAL INFORMATION ABOUT PW U.S. GOVERNMENT INCOME FUND
FINANCIAL HIGHLIGHTS
The table below provides condensed information concerning income and
capital changes for one Class A, one Class C and one Class D share of PW U.S.
Government Income Fund for the periods shown. (No Class B shares of PW U.S.
Government Income Fund will be issued in connection with the
Reorganizations.) This information is supplemented by the financial
statements and accompanying notes appearing in PW U.S. Government Income
Fund's Annual Report to Shareholders for the fiscal year ended November 30,
1994, and the unaudited financial statements and accompanying notes in PW
U.S. Government Income Fund's Semi-Annual Report to Shareholders for the six
months ended May 31, 1995, which are incorporated herein by this reference.
The financial statements and notes for the fiscal year ended November 30,
1994 and the financial information in the tables below, insofar as they
relate to the five years in the period ended November 30, 1994, have been
audited by Ernst & Young LLP, independent auditors, whose report thereon is
included in the Annual Report to Shareholders that accompanies this Proxy
Statement. The information appearing below for the periods prior to the year
ended November 30, 1990 also have been audited by Ernst & Young LLP, whose
reports thereon were unqualified.
Selected data for a Class A, a Class C and a Class D share of beneficial
interest of PW U.S. Government Income Fund outstanding throughout each period
is presented below:
30
<PAGE>
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
FOR THE SIX
MONTHS ENDED FOR THE YEARS ENDED NOVEMBER 30,
MAY 31, 1995 ---------------------------------
(UNAUDITED) 1994 1993 1992 1991
------------------------------------- ------------ -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 8.50 $ 10.03 $ 9.98 $ 9.97 $ 9.47
Net increase (decrease) from
investment
operations:
Net investment income .............. 0.30 0.60 0.67 0.75 0.77
Net realized and unrealized gains
(losses) from investment
transactions ...................... 0.45 (1.53) 0.05 0.01 0.49
Net increase (decrease) in net asset
value resulting from operations .... 0.75 (0.93) 0.72 (0.76) 1.26
Less Distributions:
Dividends from net investment
income ............................ (0.30) (0.60) (0.67) (0.75) (0.76)
Distributions from net realized
gains from investment
transactions ...................... -- -- -- -- --
Return of capital
Total dividends and distributions
to shareholders ................... -- -- -- -- --
------------ -------- -------- -------- --------
Totals ............................. (0.30) (0.60) (.67) (0.75) (.76)
------------ -------- -------- -------- --------
Net asset value, end of period ...... $ 8.95 $ 8.50 $10.03 $ 9.98 $ 9.97
============ ======== ======== ======== ========
Total investment return (1) .......... 9.08% (9.62)% 7.38% 7.92% 13.80%
============ ======== ======== ======== ========
Ratios/Supplemental Data:
Net assets, end of period
(000's omitted) ................... $405,579 $428,722 $648,923 $703,198 $737,189
Ratio of expenses to average
net assets ........................ 1.01%* 0.95% 0.91% 0.93% 0.87%
Ratio of net investment income to
average net assets .................. 7.02%* 6.48% 6.60% 7.42% 7.94%
Portfolio turnover rate ............ 91.33% 358.07% 83.13% 28.33% 71.22%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1990 1989 1988 1987 1986 1985
-------- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $9.51 $9.28 $9.31 $10.27 $10.18 $9.78
Net increase (decrease) from
investment
operations:
Net investment income .............. 0.76 0.80 0.80 0.81 0.96 1.03
Net realized and unrealized gains
(losses) from investment
transactions ...................... (0.05) 0.23 -- (0.85) 0.32 0.63
Net increase (decrease) in net asset
value resulting from operations ... 0.71 1.03 0.80 (0.04) 1.28 1.66
Less Distributions:
Dividends from net investment
income ............................ (0.75) (0.80) (0.80) (0.85) (0.96) (1.03)
Distributions from net realized
gains from investment
transactions ...................... -- -- -- (0.07) (0.23) (0.23)
Return of capital
Total dividends and distributions
to shareholders ................... -- -- (0.03) -- -- --
-------- -------- ---------- ---------- ---------- ----------
Totals ............................. (0.75) (0.80) (0.83) (0.92) (1.19) (1.26)
-------- -------- ---------- ---------- ---------- ----------
Net asset value, end of period ...... $ 9.47 $ 9.51 $ 9.28 $ 9.31 $ 10.27 $ 10.18
======== ======== ========== ========== ========== ==========
Total investment return (1) .......... 8.36% 11.66% 8.93% (0.21)% 13.51% 18.23%
======== ======== ========== ========== ========== ==========
Ratios/Supplemental Data:
Net assets, end of period
(000's omitted) ................... $795,240 $963,226 $1,279,535 $2,018,208 $3,139,662 $1,646,231
Ratio of expenses to average
net assets ........................ 0.66% 0.72% 0.67% 0.68% 0.66% 0.68%
Ratio of net investment income to
average net assets .................. 8.57% 8.82% 8.83% 8.44% 9.35% 10.04%
Portfolio turnover rate ............ 34.48% 124.54% 302.09% 98.00% 224.38% 255.67%
</TABLE>
---------------
* Annualized.
(1) Total investment return is calculated assuming a $1,000 investment on
the first day of each period reported, reinvestment of all dividends
and capital gain distributions at net asset value on the payable
dates, and a sale at net asset value on the last day of each period
reported. The figures do not include sales charges; results of Class
A shares would be lower if sales charges were included. Total
investment return information for periods of less than one year have
not been annualized.
31
<PAGE>
<TABLE>
<CAPTION>
CLASS D
--------------------------------------------------
FOR THE YEARS
FOR THE SIX ENDED FOR THE PERIOD
MONTHS ENDED NOVEMBER 30, JULY 2, 1992+ TO
MAY 31, 1995 ------------------ NOVEMBER 30,
(UNAUDITED) 1994 1993 1992
------------ -------- -------- ----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $8.49 $10.02 $9.98 $10.13
Net increase (decrease) from
investment
operations:
Net investment income ............. 0.28 0.55 0.62 0.25
Net realized and unrealized
gains (losses) from investment
transactions ..................... 0.45 (1.53) 0.04 (0.15)
Net increase (decrease) in net asset
value resulting from operations ... 0.73 (0.98) 0.66 0.10
Less Distributions:
Dividends from net investment
income ........................... (0.28) (0.55) (0.62) (0.25)
Distributions from net realized
gains from investment
transactions ..................... -- -- -- --
Return of Capital
Total dividends and distributions
to shareholders .................. -- -- -- --
------------ -------- -------- ----------------
Totals ............................ (0.28) (0.55) (0.62) (0.25)
------------ -------- -------- ----------------
Net asset value, end of period ..... $ 8.94 $ 8.49 $10.02 $9.98
============ ======== ======== ================
Total investment return (1) ......... 8.81% (10.08)% 6.75% 0.62%
============ ======== ======== ================
Ratios/Supplemental Data:
Net assets, end of period
(000's omitted) .................. $58,050 $68,400 $143,473 $127,026
Ratio of expenses to average net
assets ........................... 1.52%* 1.45% 1.40% 1.44%*
Ratio of net investment income
to average net assets ............ 6.55%* 5.99% 6.06% 6.13%*
Portfolio turnover rate ........... 91.33% 358.07% 83.13% 28.33%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------
FOR THE PERIOD
FOR THE SIX FOR THE YEARS ENDED SEPTEMBER 11,
MONTHS ENDED NOVEMBER 30, 1991+ TO
MAY 31, 1995 ----------------------- NOVEMBER 30,
(UNAUDITED) 1994 1993 1992 1991
------------ ------- ------ ------ --------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $8.49 $10.02 $9.97 $9.97 $9.88
Net increase (decrease) from
investment
operations:
Net investment income ............. 0.31 0.62 0.70 0.77 0.18
Net realized and unrealized
gains (losses) from investment
transactions ..................... 0.45 (1.53) 0.05 0.01 0.09
Net increase (decrease) in net asset
value resulting from operations ... 0.76 (0.91) 0.75 0.78 0.27
Less Distributions:
Dividends from net investment
income ........................... (0.31) (0.62) (0.70) (0.78) (0.18)
Distributions from net realized
gains from investment
transactions ..................... -- -- -- -- --
Return of Capital
Total dividends and distributions
to shareholders .................. -- -- -- -- --
------------ ------- ------ ------ --------------
Totals ............................ (0.31) (0.62) (0.70) (0.78) (0.18)
------------ ------- ------ ------ --------------
Net asset value, end of period ..... $ 8.94 $ 8.49 $10.02 $ 9.97 $ 9.97
============ ======= ====== ====== ==============
Total investment return (1) ......... 9.26% (9.37)% 7.69% 8.13% 2.37%
============ ======= ====== ====== ==============
Ratios/Supplemental Data:
Net assets, end of period
(000's omitted) .................. $6,245 $4,955 $6,232 $5,517 $4,514
Ratio of expenses to average net
assets ........................... 0.69% 0.65% 0.62% 0.63% 0.72%*
Ratio of net investment income
to average net assets ............ 7.29%* 6.76% 6.87% 7.70% 8.36%*
Portfolio turnover rate ........... 91.33% 358.07% 83.13% 28.33% 71.22%
</TABLE>
---------------
* Annualized
+ Commencement of offering of shares.
(1) Total investment return is calculated assuming a $1,000 investment on
the first day of each period reported, reinvestment of all dividends
and capital gain distributions at net asset value on the payable
dates, and a sale at net asset value on the last day of each period
reported. The figures do not include sales charges. Total investment
return information for periods of less than one year have not been
annualized.
32
<PAGE>
MISCELLANEOUS
AVAILABLE INFORMATION
PW Trust, MH/KP Trust and MH/KP Government Income Fund are each subject to
the informational requirements of the Securities Exchange Act of 1934 and the
1940 Act and in accordance therewith file reports, proxy material and other
information with the SEC. Such reports, proxy material and other information
can be inspected and copied at the Public Reference Room maintained by the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such
material can also be obtained from the Public Reference Branch, Office of
Consumer Affairs and Information Services, Securities and Exchange
Commission, Washington, D.C. 20549, at prescribed rates.
LEGAL MATTERS
Certain legal matters in connection with the issuance of PW U.S.
Government Income Fund shares will be passed upon by Kirkpatrick & Lockhart
LLP, counsel to PW Trust.
EXPERTS
The financial statements of PW U.S. Government Income Fund, MH/KP
Intermediate Income Fund and MH/KP Government Income Fund, that are included
in each Fund's Statement of Additional Information, incorporated herein by
reference, have been audited by Ernst & Young LLP, independent auditors with
respect to PW U.S. Government Income Fund, and Deloitte & Touche LLP,
independent auditors with respect to MH/KP Intermediate Income Fund and MH/KP
Government Income Fund, respectively, whose reports thereon are included in
the Funds' Annual Reports to shareholders for the fiscal years ended November
30, 1994, August 31, 1994 and January 31, 1995, respectively. The financial
statements audited by Ernst & Young LLP and Deloitte & Touche LLP are
incorporated herein by reference in reliance on their reports given on their
authority as experts in auditing and accounting.
33
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
THIS AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION ("Agreement") is
made as of August 8, 1995, between PaineWebber Managed Investments Trust, a
Massachusetts business trust ("PW Trust"), on behalf of PaineWebber U.S.
Government Income Fund, a segregated portfolio of assets ("series") thereof
("Acquiring Fund"), and Mitchell Hutchins/Kidder, Peabody Investment Trust, a
Massachusetts business trust ("MH/KP Trust"), on behalf of its Mitchell
Hutchins/Kidder, Peabody Intermediate Fixed Income Fund series ("Target").
(Acquiring Fund and Target are sometimes referred to herein individually as a
"Fund" and collectively as the "Funds," and PW Trust and MH/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
transactions are referred to herein as the "Reorganization." All agreements,
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 MH/KP Trust on behalf of
Target.
Acquiring Fund's shares are divided into four classes, designated Class A,
Class B, Class C, and Class D shares ("Class A Acquiring Fund Shares," "Class
B Acquiring Fund Shares," "Class C Acquiring Fund Shares," and "Class D
Acquiring Fund Shares," respectively). Except as noted in the following
sentence, these classes differ only with respect to the sales charges imposed
on the purchase of shares and the fees ("12b-1 fees") payable by each class
pursuant to plans adopted under Rule 12b-1 promulgated under the Investment
Company Act of 1940 ("1940 Act"), as follows: (1) Class A Acquiring Fund
Shares are offered at net asset value ("NAV") plus a sales charge, if
applicable, and are subject to a 12b-1 service fee at the annual rate of
0.25% of the average daily net assets attributable to the class ("class
assets"); (2) Class B Acquiring Fund Shares are offered at NAV without
imposition of any sales charge and are subject to a contingent deferred sales
charge and 12b-1 service and distribution fees at the respective annual rates
of 0.25% and 0.75% of class assets; (3) Class C Acquiring Fund Shares are and
will be offered to a limited class of offerees (currently only the trustee of
the PaineWebber Savings Investment Plan on behalf of that plan) at NAV
without imposition of any sales charge and are not subject to any 12b-1 fee;
and (4) Class D Acquiring Fund Shares are offered at NAV without imposition
of any sales charge and are subject to 12b-1 service and distribution fees at
the respective annual rates of 0.25% and 0.50% of class assets. These classes
also may differ from one another with respect to the allocation of certain
class-specific expenses other than 12b-1 fees. Only Classes A, C, and D
Acquiring Fund Shares are involved in the Reorganization.
Target's shares are divided into three classes, designated Class A, Class
B, and Class C shares ("Class A Target Shares," "Class B Target Shares," and
"Class C Target Shares," respectively). These classes are substantially
similar to the Class A, Class D, and Class C Acquiring Fund Shares,
respectively (though Class A Target Shares and Class A Acquiring Fund Shares
are subject to different maximum initial sales charges).
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-1
<PAGE>
(a) to issue and deliver to Target the number of full and fractional
(i) Class A Acquiring Fund Shares determined by dividing the net value of
Target (computed as set forth in paragraph 2.1) ("Target Value")
attributable to the Class A Target Shares by the NAV (computed as set
forth in paragraph 2.2) of a Class A Acquiring Fund Share, (ii) Class D
Acquiring Fund Shares determined by dividing the Target Value attributable
to the Class B Target Shares by the NAV (as so computed) of a Class D
Acquiring Fund Share, and (iii) Class C Acquiring Fund Shares determined
by dividing the Target Value attributable to the Class C Target Shares by
the NAV (as so computed) of a Class C Acquiring Fund Share; and
(b) to assume all of Target's liabilities described in paragraph 1.3
("Liabilities").
Such transactions shall take place at the Closing (as defined in paragraph
3.1).
1.2. The Assets shall include, without limitation, all cash, cash
equivalents, securities, receivables (including interest and dividends
receivable), claims and rights of action, rights to register shares under
applicable securities laws, books and records, deferred and prepaid expenses
shown as assets on Target's books, and other property owned by Target at the
Effective Time (as defined in paragraph 3.1).
1.3. The Liabilities shall include (except as otherwise provided herein)
all of Target's liabilities, debts, obligations, and duties of whatever kind
or nature, whether absolute, accrued, contingent, or otherwise, whether or
not arising in the ordinary course of business, whether or not determinable
at the Effective Time, and whether or not specifically referred to in this
Agreement, including without limitation Target's share of the expenses
described in paragraph 7.2. Notwithstanding the foregoing, Target agrees to
use its best efforts to discharge all of its known Liabilities prior to the
Effective Time.
1.4. At or immediately before the Effective Time, Target shall declare and
pay to its shareholders a dividend and/or other distribution 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 realized net capital
gain, if any, for the current taxable year through the Effective Time.
1.5. At the Effective Time (or as soon thereafter as is reasonably
practicable), Target shall constructively distribute the Acquiring Fund
Shares received by it pursuant to paragraph 1.1 to Target's shareholders of
record, determined as of the Effective Time (collectively "Shareholders" and
individually a "Shareholder"), in exchange for their Target Shares. Such
distribution shall be accomplished by the Funds' transfer agent ("Transfer
Agent") opening accounts on Acquiring Fund's share transfer books in the
Shareholders' names and transferring such Acquiring Fund Shares thereto. Each
Shareholder's account shall be credited with the respective pro rata number
of full and fractional (rounded to the third decimal place) Acquiring Fund
Shares due that Shareholder, by class (i.e., the account for a Shareholder of
Class A Target Shares shall be credited with the respective pro rata number
of Class A Acquiring Fund Shares due that Shareholder, the account for a
Shareholder of Class B Target Shares shall be credited with the respective
pro rata number of Class D Acquiring Fund Shares due that Shareholder, and
the account for a Shareholder of Class C Target Shares shall be credited with
the respective pro rata number of Class C Acquiring Fund Shares due that
Shareholder). All outstanding Target Shares, including any represented by
certificates, shall simultaneously be canceled on Target's share transfer
records. Acquiring Fund shall not issue certificates representing the
Acquiring Fund Shares in connection with the Reorganization.
1.6. As soon as reasonably practicable after distribution of the Acquiring
Fund Shares pursuant to paragraph 1.5, Target shall be terminated as a series
of MH/KP Trust and any further actions shall be taken in connection therewith
as required by applicable law.
A-2
<PAGE>
1.7. Any reporting responsibility of Target to a public authority is and
shall remain its responsibility up to and including the date on which it is
terminated.
1.8. Any transfer taxes payable upon issuance of Acquiring Fund Shares in
a name other than that of the registered holder on Target's books of the
Target Shares constructively exchanged therefor shall be paid by the person
to whom such Acquiring Fund Shares are to be issued, as a condition of such
transfer.
2. VALUATION
2.1. For purposes of paragraph 1.1(a), Target's net value shall be (a) the
value of the Assets computed as of 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 statement of additional information less (b) the amount of the
Liabilities as of the Valuation Time.
2.2. For purposes of paragraph 1.1(a), the NAV of a Class A Acquiring Fund
Share, a Class C Acquiring Fund Share, and a Class D Acquiring Fund Share
shall be computed as of the Valuation Time, using the valuation procedures
set forth in Acquiring Fund's then-current prospectus and statement of
additional information.
2.3. All computations pursuant to paragraphs 2.1 and 2.2 shall be made by
or under the direction of Mitchell Hutchins Asset Management Inc.
3. CLOSING AND EFFECTIVE TIME
3.1. The Reorganization, together with related acts necessary to
consummate the same ("Closing"), shall occur at the Funds' principal office
on October 20, 1995, or at such other place and/or on such other date as the
parties may agree. All acts taking place at the Closing shall be deemed to
take place simultaneously as of 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. MH/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 stating that (a) the Assets held by the custodian will be
transferred to Acquiring Fund at the Effective Time and (b) all necessary
taxes in conjunction with the delivery of the Assets, including all
applicable federal and state stock transfer stamps, if any, have been paid or
provision for payment has been made.
3.3. MH/KP Trust shall deliver to PW Trust at the Closing a list of the
names and addresses of the Shareholders and the number (by class) of
outstanding Target Shares owned by each Shareholder, all as of the Effective
Time, certified by the Secretary or Assistant Secretary of MH/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 MH/KP Trust
evidencing the Acquiring Fund Shares (by class) to be credited to Target at
the Effective Time or provide evidence satisfactory to MH/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 certificates, receipts, or other
documents as the other party or its counsel may reasonably request.
A-3
<PAGE>
3.4. Each Investment Company shall deliver to the other at the Closing a
certificate executed in its name by its President or a Vice President in form
and substance satisfactory to the recipient and dated the Effective Time, to
the effect that the representations and warranties it made in this Agreement
are true and correct at the Effective Time except as they may be affected by
the transactions contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1. Target represents and warrants as follows:
4.1.1. MH/KP Trust is an unincorporated voluntary association with
transferable shares organized as a business trust under a written
instrument ("Business Trust"); it is duly organized, validly existing, and
in good standing under the laws of the Commonwealth of Massachusetts; and
a copy of its Declaration of Trust is on file with the Secretary of the
Commonwealth of Massachusetts;
4.1.2. MH/KP Trust is duly registered as an open-end management
investment company under the 1940 Act, and such registration will be in
full force and effect at the Effective Time;
4.1.3. Target is a duly established and designated series of MH/KP
Trust;
4.1.4. At the Closing, Target will have good and marketable title to
the Assets and full right, power, and authority to sell, assign, transfer,
and deliver the Assets free of any liens or other encumbrances; and upon
delivery and payment for the Assets, Acquiring Fund will acquire good and
marketable title thereto;
4.1.5. 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 thereunder and do not include any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading;
4.1.6. Target is not in violation of, and the execution and delivery
of this Agreement and consummation of the transactions contemplated hereby
will not conflict with or violate, Massachusetts law or any provision of
MH/KP Trust's Declaration of Trust or By-Laws or of any agreement,
instrument, lease, or other undertaking to which Target is a party or by
which it is bound or result in the acceleration of any obligation, or the
imposition of any penalty, under any agreement, judgment, or decree to
which Target is a party or by which it is bound, except as previously
disclosed in writing to and accepted by PW Trust;
4.1.7. 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 contracts, including options, futures,
and forward contracts) will be terminated, or provision for discharge of
any liabilities of Target thereunder will be made, at or prior to the
Effective Time, without either Fund's incurring any liability or penalty
with respect thereto and without diminishing or releasing any rights
Target may have had with respect to actions taken or omitted to be taken
by any other party thereto prior to the Closing;
4.1.8. Except as otherwise disclosed in writing to and accepted by PW
Trust, no litigation, administrative proceeding, or investigation of or
before any court or governmental body is presently pending or (to Target's
knowledge) threatened against MH/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 litigation, proceeding, or investigation and is
not a party to or subject to the provisions of any order, decree, or
judgment of any court or governmental body that materially or adversely
affects its business or its ability to consummate the transactions
contemplated hereby;
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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 MH/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
Target's shareholders and receipt of any necessary exemptive relief or
no-action assurances requested from the Securities and Exchange Commission
("SEC") or its staff with respect to sections 17(a) and 17(d) of the 1940
Act, this Agreement will constitute a valid and legally binding obligation
of Target, enforceable in accordance with its terms, except as the same
may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium, and similar laws relating to or affecting
creditors' rights and by general principles of equity;
4.1.10. 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, authorizations, or
filings are required under the 1933 Act, the Securities Exchange Act of
1934 ("1934 Act"), or the 1940 Act for the execution or performance of
this Agreement by MH/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 amendment thereto
("Registration Statement"), including therein a prospectus/proxy statement
("Proxy Statement"), (b) receipt of 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 Statement, at the
time of the shareholders' meeting referred to in paragraph 5.2, and at the
Effective Time, the Proxy Statement will (a) comply in all material
respects with the applicable provisions of the 1933 Act, the 1934 Act, and
the 1940 Act and the regulations thereunder and (b) not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which such statements were made, not misleading;
provided that the foregoing shall not apply to statements in or omissions
from the Proxy Statement made in reliance on and in conformity with
information furnished by 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 regulated investment company ("RIC")
under Subchapter M of the Code for each past taxable year since it
commenced operations and will continue to meet all the requirements for
such qualification for its current taxable year; and it has no earnings
and profits accumulated in any taxable year in which the provisions of
Subchapter M did not apply to it. The Assets shall be invested at all
times through the Effective Time in a manner that ensures compliance with
the foregoing;
4.1.15. 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 securities) is invested
in the stock and securities of any one issuer, and not more than 50% of
the value of such assets is invested in the stock and securities of five
or fewer issuers; and
4.1.17. Target will be terminated as soon as reasonably practicable
after the Reorganization, but in all events within six months after the
Effective Time.
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4.2. Acquiring Fund represents and warrants as follows:
4.2.1. PW Trust is a Business Trust; it is duly organized, validly
existing, and in good standing under the laws of the Commonwealth of
Massachusetts; and a copy of its Declaration of Trust is on file with the
Secretary of the Commonwealth of Massachusetts;
4.2.2. PW Trust is duly registered as an open-end management
investment company under the 1940 Act, and such registration will be in
full force and effect at the Effective Time;
4.2.3. Acquiring Fund is a duly established and designated series of
PW Trust;
4.2.4. No consideration other than Acquiring Fund Shares (and
Acquiring Fund's assumption of the Liabilities) will be issued in exchange
for the Assets in the Reorganization;
4.2.5. The Acquiring Fund Shares to be issued and delivered to Target
hereunder will, at the Effective Time, have been duly authorized and, when
issued and delivered as provided herein, will be duly and validly issued
and outstanding shares of Acquiring Fund, fully paid and non-assessable,
except to the extent that under Massachusetts law shareholders of a
Business Trust may, under certain circumstances, be held personally liable
for its obligations. Except as contemplated by this Agreement, Acquiring
Fund does not have outstanding any options, warrants, or other rights to
subscribe for or purchase any of its shares, nor is there outstanding any
security convertible into any of its shares;
4.2.6. Acquiring Fund's current prospectus and statement of additional
information conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and
regulations thereunder and do not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
4.2.7. Acquiring Fund is not in violation of, and the execution and
delivery of this Agreement and consummation of the transactions
contemplated hereby will not conflict with or violate, Massachusetts law
or any provision of PW Trust's Declaration of Trust or By-Laws or of any
provision of any agreement, instrument, lease, or other undertaking to
which Acquiring Fund is a party or by which it is bound or result in the
acceleration of any obligation, or the imposition of any penalty, under
any agreement, judgment, or decree to which Acquiring Fund is a party or
by which it is bound, except as previously disclosed in writing to and
accepted by MH/KP Trust;
4.2.8. Except as otherwise disclosed in writing to and accepted by
MH/KP Trust, no litigation, administrative proceeding, or investigation of
or before any court or governmental body is presently pending or (to
Acquiring Fund's knowledge) threatened against PW Trust with respect to
Acquiring Fund or any of its properties or assets that, if adversely
determined, would materially and adversely affect Acquiring Fund's
financial condition or the conduct of its business; Acquiring Fund knows
of no facts that might form the basis for the institution of any such
litigation, proceeding, or investigation and is not a party to or subject
to the provisions of any order, decree, or judgment of any court or
governmental body that materially or adversely affects its business or its
ability to consummate the transactions contemplated hereby;
4.2.9. The execution, delivery, and performance of this Agreement has
been duly authorized as of the date hereof by all necessary action on the
part of PW Trust's board of trustees, which has made the determinations
required by Rule 17a-8(a) under the 1940 Act; and, subject to receipt of
any necessary exemptive relief or no-action assurances requested from the
SEC or its staff with respect to sections 17(a)
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and 17(d) of the 1940 Act, this Agreement will constitute a valid and
legally binding obligation of Acquiring Fund, enforceable in accordance
with its terms, except as the same may be limited by bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium, and similar
laws relating to or affecting creditors' rights and by general principles
of equity;
4.2.10. No governmental consents, approvals, authorizations, or
filings are required under the 1933 Act, the 1934 Act, or the 1940 Act for
the execution or performance of this Agreement by PW Trust, except for (a)
the filing with the SEC of the Registration Statement and a post-effective
amendment to PW Trust's registration statement, (b) receipt of the
exemptive relief referenced in subparagraph 4.2.9, and (c) such consents,
approvals, authorizations, and filings as have been made or received or as
may be required subsequent to the Effective Time;
4.2.11. On the effective date of the Registration Statement, at the
time of the shareholders' meeting referred to in paragraph 5.2, and at the
Effective Time, the Proxy Statement will (a) comply in all material
respects with the applicable provisions of the 1933 Act, the 1934 Act, and
the 1940 Act and the regulations thereunder and (b) not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which such statements were made, not misleading;
provided that the foregoing shall not apply to statements in or omissions
from the Proxy Statement made in reliance on and in conformity with
information furnished by MH/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 under Subchapter M of the
Code for each past taxable year since it commenced operations and will
continue to meet all the requirements for such qualification for its
current taxable year; Acquiring Fund intends to continue to meet all such
requirements for the next taxable year; and it has no earnings and profits
accumulated in any taxable year in which the provisions of Subchapter M
did not apply to it;
4.2.13. Acquiring Fund has no plan or intention to issue additional
Acquiring Fund Shares following the Reorganization except for shares
issued in the ordinary course of its business as a series of an open-end
investment company; nor does Acquiring Fund have any plan or intention to
redeem or otherwise reacquire any Acquiring Fund Shares issued to the
Shareholders pursuant to the Reorganization, other than through
redemptions arising in the ordinary course of that business;
4.2.14. Acquiring Fund (a) will actively continue Target's business in
substantially the same manner that Target conducted that business
immediately before the Reorganization, (b) has no plan or intention to
sell or otherwise dispose of any of the Assets, except for dispositions
made in the ordinary course of that business and dispositions necessary to
maintain its status as a RIC 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 dispositions thereof to maintain such status;
4.2.15. There is no plan or intention for Acquiring Fund to be
dissolved or merged into another corporation or business trust or any
"fund" thereof (within the meaning of section 851(h)(2) of the Code)
following the Reorganization;
4.2.16. Immediately after the Reorganization, (a) not more than 25% of
the value of Acquiring Fund's total assets (excluding cash, cash items,
and U.S. government securities) will be invested in the stock and
securities of any one issuer and (b) not more than 50% of the value of
such assets will be invested in the stock and securities of five or fewer
issuers; and
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4.2.17. Acquiring fund does not own, directly or indirectly, nor at
the Effective Time will it own, directly or indirectly, nor has it owned,
directly or indirectly, at any time during the past five years, any shares
of Target.
4.3. Each Fund represents and warrants as follows:
4.3.1. The fair market value of the Acquiring Fund Shares, when
received by the Shareholders, will be approximately equal to the fair
market value of their Target Shares constructively surrendered in exchange
therefor;
4.3.2. Its management (a) is unaware of any plan or intention of
Shareholders to redeem or otherwise dispose of any portion of the
Acquiring Fund Shares to be received by them in the Reorganization and (b)
does not anticipate dispositions of those Acquiring Fund Shares at the
time of or soon after the Reorganization to exceed the usual rate and
frequency of dispositions of shares of Target as 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;
4.3.3. The Shareholders will pay their own expenses, if any, incurred
in connection with the Reorganization;
4.3.4. Immediately following consummation of the Reorganization,
Acquiring Fund will hold substantially the same assets and be subject to
substantially the same liabilities that Target held or was subject to
immediately prior thereto, plus any liabilities and expenses of the
parties incurred in connection with the Reorganization;
4.3.5. The fair market value on a going concern basis of the Assets
will equal or exceed the Liabilities to be assumed by Acquiring Fund and
those to which the Assets are subject;
4.3.6. There is no intercompany indebtedness between the Funds that
was issued or acquired, or will be settled, at a discount;
4.3.7. Pursuant to the Reorganization, Target will transfer to
Acquiring Fund, and Acquiring Fund will acquire, at least 90% of the fair
market value of the net assets, and at least 70% of the fair market value
of the gross assets, held by Target immediately before the Reorganization.
For the purposes of this representation, any amounts used by Target to pay
its Reorganization expenses and redemptions and distributions made by it
immediately before the Reorganization (except for (a) distributions made
to conform to its policy of distributing all or substantially all of its
income and gains to avoid the obligation to pay federal income tax and/or
the excise tax under section 4982 of the Code and (b) redemptions not made
as part of the Reorganization) will be included as assets thereof held
immediately before the Reorganization;
4.3.8. None of the compensation received by any Shareholder who is an
employee of Target will be separate consideration for, or allocable to,
any of the Target Shares held by such Shareholder-employee; none of the
Acquiring Fund Shares received by any such Shareholder-employee will be
separate consideration for, or allocable to, any employment agreement; and
the consideration paid to any such Shareholder-employee will be for
services actually rendered and will be commensurate with amounts paid to
third parties bargaining at arm's-length for similar services; and
4.3.9. Immediately after the Reorganization, the Shareholders will not
own shares constituting "control" of Acquiring Fund within the meaning of
section 304(c) of the Code.
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5. COVENANTS
5.1. Each Fund covenants to operate its respective business in the
ordinary course between the date hereof and the Closing, it being understood
that (a) such ordinary course will include declaring and paying customary
dividends and other distributions and such changes in operations as are
contemplated by each Fund's normal business activities and (b) each Fund will
retain exclusive control of the composition of its portfolio until the
Closing; provided that Target shall not dispose of more than an insignificant
portion of its historic business assets during such period without Acquiring
Fund's prior consent.
5.2. Target covenants to call a shareholders' meeting to consider and act
upon this Agreement and to take all other action necessary to obtain approval
of the transactions contemplated hereby.
5.3. Target covenants that the Acquiring Fund Shares to be delivered
hereunder are not being acquired for the purpose of making any distribution
thereof, other than in accordance with the terms hereof.
5.4. Target covenants that it will assist PW Trust in obtaining such
information as PW Trust reasonably requests concerning the beneficial
ownership of Target Shares.
5.5. Target covenants that Target's books and records (including all books
and records required to be maintained under the 1940 Act and the rules and
regulations thereunder) will be turned over to PW Trust at the Closing.
5.6. Each Fund covenants to cooperate in preparing the Proxy Statement in
compliance with applicable federal securities laws.
5.7. Each Fund covenants that it will, from time to time, as and when
requested by the other Fund, execute and deliver or cause to be executed and
delivered all such assignments and other instruments, and will take or cause
to be taken such further action, as the other Fund may deem necessary or
desirable in order to vest in, and confirm to, (a) Acquiring Fund, title to
and possession of all the Assets, and (b) Target, title to and possession of
the Acquiring Fund Shares to be delivered hereunder, and otherwise to carry
out the intent and purpose hereof.
5.8. PW Trust covenants to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act, and such
state securities laws it may deem appropriate in order to continue its
operations after the Effective Time.
5.9. Subject to this Agreement, each Fund covenants to take or cause to be
taken all actions, and to do or cause to be done all things reasonably
necessary, proper, or advisable to consummate and effectuate the transactions
contemplated hereby.
6. CONDITIONS PRECEDENT
Each Fund's obligations hereunder shall be subject to (a) performance by
the other Fund of all the obligations to be performed hereunder at or before
the Effective Time, (b) all representations and warranties of the other Fund
contained herein being true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions
contemplated hereby, as of the Effective Time, with the same force and effect
as if made at and as of the Effective Time, and (c) the following further
conditions that, at or before the Effective Time:
6.1. This Agreement and the transactions contemplated hereby shall have
been duly adopted and approved by MH/KP Trust's board of trustees and shall
have been approved by Target's shareholders in accordance with applicable
law.
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6.2. All necessary filings shall have been made with the SEC and state
securities authorities, and no order or directive shall have been received
that any other or further action is required to permit the parties to carry
out the transactions contemplated hereby. The Registration Statement shall
have become effective under the 1933 Act, no stop orders suspending the
effectiveness thereof shall have been issued, and the SEC shall not have
issued an unfavorable report with respect to the Reorganization under section
25(b) of the 1940 Act nor instituted any proceedings seeking to enjoin
consummation of the transactions contemplated hereby under section 25(c) of
the 1940 Act. All consents, orders, and permits of federal, state, and local
regulatory authorities (including the SEC and state securities authorities)
deemed necessary by either Fund to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain same would not involve a risk of a material
adverse effect on the assets or properties of either Fund, provided that
either Fund may for itself waive any of such conditions.
6.3. At the Effective Time, no action, suit, or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or to obtain damages or other relief in connection
with, the transactions contemplated hereby.
6.4. MH/KP Trust shall have received an opinion of Kirkpatrick & Lockhart
LLP, counsel to PW Trust, substantially to the effect that:
6.4.1. Acquiring Fund is a duly established series of PW Trust, a
Business Trust duly organized and validly existing under the laws of the
Commonwealth of Massachusetts with power under its Declaration of Trust to
own all of its properties and assets and, to the knowledge of such
counsel, to carry on its business as presently conducted;
6.4.2. This Agreement (a) has been duly authorized, executed, and
delivered by PW Trust on behalf of Acquiring Fund and (b) assuming due
authorization, execution, and delivery of this Agreement by MH/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 distributed to the
Shareholders under this Agreement, assuming their due delivery as
contemplated by this Agreement, will be duly authorized and validly issued
and outstanding and fully paid and non-assessable, except to the extent
that under Massachusetts law shareholders of a Business Trust may, under
certain circumstances, be held personally liable for its obligations, and
no shareholder of Acquiring Fund has any preemptive right to subscribe for
or purchase such shares;
6.4.4. The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate PW Trust's Declaration of Trust or By-Laws or any provision of any
agreement (known to such counsel, without any independent inquiry or
investigation) to which PW Trust (with respect to Acquiring Fund) is a
party or by which it is bound or (to the knowledge of such counsel,
without any independent inquiry or investigation) result in the
acceleration of any obligation, or the imposition of any penalty, under
any agreement, judgment, or decree to which PW Trust (with respect to
Acquiring Fund) is a party or by which it is bound, except as set forth in
such opinion or as previously disclosed in writing to and accepted by
MH/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
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consummation by PW Trust on behalf of Acquiring Fund of the transactions
contemplated herein, except such as have been obtained under the 1933 Act,
the 1934 Act, and the 1940 Act and such as may be required under state
securities laws;
6.4.6. PW Trust is registered with the SEC as an investment company,
and to the knowledge of such counsel no order has been issued or
proceeding instituted to suspend such registration; and
6.4.7. To the knowledge of such counsel (without any independent
inquiry or investigation), (a) no litigation, administrative proceeding,
or investigation of or before any court or governmental body is pending or
threatened as to PW Trust (with respect to Acquiring Fund) or any of its
properties or assets attributable or allocable to Acquiring Fund and (b)
PW Trust (with respect to Acquiring Fund) is not a party to or subject to
the provisions of any order, decree, or judgment of any court or
governmental body that materially and adversely affects Acquiring Fund's
business, except as set forth in such opinion or as otherwise disclosed in
writing to and accepted by MH/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 documents and copies thereof without
independent verification thereof, (iii) limit such opinion to applicable
federal and state law, and (iv) define the word "knowledge" and related terms
to mean the knowledge of attorneys then with such firm who have devoted
substantive attention to matters directly related to this Agreement and the
Reorganization.
6.5. PW Trust shall have received an opinion of Willkie Farr & Gallagher,
counsel to MH/KP Trust, substantially to the effect that:
6.5.1. Target is a duly established series of MH/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, executed, and
delivered by MH/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
MH/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 MH/KP Trust's Declaration of Trust or By-Laws or any provision of
any agreement (known to such counsel, without any independent inquiry or
investigation) to which MH/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 MH/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
MH/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;
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6.5.5. MH/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 independent
inquiry or investigation), (a) no litigation, administrative proceeding,
or investigation of or before any court or governmental body is pending or
threatened as to MH/KP Trust (with respect to Target) or any of its
properties or assets attributable or allocable to Target and (b) MH/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 documents and copies thereof without
independent verification thereof, (iii) limit such opinion to applicable
federal and state law, and (iv) define the word "knowledge" and related terms
to mean the knowledge of attorneys then with such firm who have devoted
substantive attention to matters directly related to this Agreement and the
Reorganization.
6.6. PW Trust shall have received an opinion of Kirkpatrick & Lockhart
LLP, its counsel, addressed to and in form and substance satisfactory to it,
and MH/KP Trust shall have received an opinion of Willkie Farr & Gallagher,
its counsel, addressed to and in form and substance satisfactory to it, each
as to the federal income tax consequences mentioned below (each a "Tax
Opinion"). In rendering its Tax Opinion, each such counsel may rely as to
factual matters, exclusively and without independent verification, on the
representations made in this Agreement (or in separate letters addressed to
such counsel) and the certificates delivered pursuant to paragraph 3.4. Each
Tax Opinion shall be substantially to the effect that, based on the facts and
assumptions stated therein, for federal income tax purposes:
6.6.1. Acquiring Fund's acquisition of the Assets in exchange solely
for Acquiring Fund Shares and Acquiring Fund's assumption of the
Liabilities, followed by Target's distribution of those shares to the
Shareholders constructively in exchange for the Shareholders' Target
Shares, will constitute a reorganization within the meaning of section
368(a)(1)(C) of the Code, and each Fund will be "a party to a
reorganization" within the meaning of section 368(b) of the Code;
6.6.2. No gain or loss will be recognized to Target on the transfer to
Acquiring Fund of the Assets in exchange solely for Acquiring Fund Shares
and Acquiring Fund's assumption of the Liabilities or on the subsequent
distribution of those shares to the Shareholders in constructive exchange
for their Target Shares;
6.6.3. No gain or loss will be recognized to Acquiring Fund on its
receipt of the Assets in exchange solely for Acquiring Fund Shares and its
assumption of the Liabilities;
6.6.4. Acquiring Fund's basis for the Assets will be the same as the
basis thereof in Target's hands immediately before the Reorganization, and
Acquiring Fund's holding period for the Assets will include Target's
holding period therefor;
6.6.5. A Shareholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for Acquiring Fund
Shares pursuant to the Reorganization; and
6.6.6. A Shareholder's basis for the Acquiring Fund Shares to be
received by it in the Reorganization will be the same as the basis for its
Target Shares to be constructively surrendered in exchange for those
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Acquiring Fund Shares, and its holding period for those Acquiring Fund
Shares will include its holding period for those Target Shares, provided
they are held as capital assets by the Shareholder at the Effective Time.
Notwithstanding paragraphs 6.6.2 and 6.6.4, each Tax Opinion may state that
no opinion is expressed as to the effect of the Reorganization on the Funds
or any Shareholder with respect to any asset (including certain options,
futures, and forward contracts included in the Assets) as to which any
unrealized gain or loss is required to be recognized for federal income tax
purposes at the end of a taxable year (or on the termination or transfer
thereof) under a mark-to-market system of accounting.
At any time before the Closing, (a) Acquiring Fund may waive any of the
foregoing conditions if, in the judgment of PW Trust's board of trustees,
such waiver will not have a material adverse effect on its shareholders'
interests, and (b) Target may waive any of the foregoing conditions if, in
the judgment of MH/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)
expenses incurred in connection with entering into and carrying out the
provisions of this Agreement; (b) expenses associated with the preparation
and filing of the Registration Statement; (c) registration or qualification
fees and expenses of preparing and filing such forms as are necessary under
applicable state securities laws to qualify the Acquiring Fund Shares to be
issued in connection herewith in each state in which Target's shareholders
are resident as of the date of the mailing of the Proxy Statement to such
shareholders; (d) printing and postage expenses; (e) legal and accounting
fees; and (f) solicitation costs.
8. ENTIRE AGREEMENT; SURVIVAL
Neither party has made any representation, warranty, or covenant not set
forth herein, and this Agreement constitutes the entire agreement between the
parties. The representations, warranties, and covenants contained herein or
in any document delivered pursuant hereto or in connection herewith shall
survive the Closing.
9. TERMINATION OF AGREEMENT
This Agreement may be terminated at any time at or prior to the Effective
Time, whether before or after approval by Target's shareholders:
9.1. By either Fund (a) in the event of the other Fund's material breach
of any representation, warranty, or covenant contained herein to be performed
at or prior to the Effective Time, (b) if a condition to its obligations has
not been met and it reasonably appears that such condition will not or cannot
be met, or (c) if the Closing has not occurred on or before March 31, 1996;
or
9.2. By the parties' mutual agreement.
In the event of termination under paragraphs 9.1.(c) or 9.2, there shall be
no liability for damages on the part of either Fund, or the trustees or
officers of either Investment Company, to the other Fund.
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10. AMENDMENT
This Agreement may be amended, modified, or supplemented at any time,
notwithstanding approval thereof by Target's shareholders, in such manner as
may be mutually agreed upon in writing by the parties; provided that
following such approval no such amendment shall have a material adverse
effect on the Shareholders' interests.
11. MISCELLANEOUS
11.1. This Agreement shall be governed by and construed in accordance with
the internal laws of the Commonwealth of Massachusetts; provided that, in the
case of any conflict between such laws and the federal securities laws, the
latter shall govern.
11.2. Nothing expressed or implied herein is intended or shall be
construed to confer upon or give any person, firm, trust, or corporation
other than the parties and their respective successors and assigns any rights
or remedies under or by reason of this Agreement.
11.3. The parties acknowledge that each Investment Company is a Business
Trust. Notice is hereby given that this instrument is executed on behalf of
each Investment Company's trustees solely in their capacity as trustees, and
not individually, and that each Investment Company's obligations under this
instrument are not binding on or enforceable against any of its trustees,
officers, or shareholders, but are only binding on and enforceable against
the respective Funds' assets and property. Each Fund agrees that, in
asserting any rights or claims under this Agreement, it shall look only to
the other Fund's assets and property in settlement of such rights or claims
and not to such trustees or shareholders.
IN WITNESS WHEREOF, each party has caused this Agreement to be executed by
its duly authorized officer.
ATTEST:
PAINEWEBBER MANAGED INVESTMENTS TRUST,
on behalf of its series,
PAINEWEBBER U.S. GOVERNMENT INCOME FUND
By: /s/ Ilene Shore /s/ Dianne E. O'Donnell
------------------------ ----------------------------------
Assistant Secretary Vice President
ATTEST: MITCHELL HUTCHINS/KIDDER, PEABODY
INVESTMENT TRUST, on behalf of its series,
MITCHELL HUTCHINS/KIDDER, PEABODY
INTERMEDIATE FIXED INCOME FUND
By: /s/ Stephanie Johnson /s/ Scott Griff
---------------------- -----------------------------------
Assistant Secretary Vice President
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APPENDIX B
AGREEMENT AND PLAN OF REORGANIZATION AND DISSOLUTION
THIS AGREEMENT AND PLAN OF REORGANIZATION AND DISSOLUTION ("Agreement") is
made as of August 8, 1995, between PaineWebber Managed Investments Trust, a
Massachusetts business trust ("PW Trust"), on behalf of PaineWebber U.S.
Government Income Fund, a segregated portfolio of assets ("series") thereof
("Acquiring Fund"), and Mitchell Hutchins/Kidder, Peabody Government Income
Fund, Inc., a Maryland corporation ("Target"). (Acquiring Fund and Target are
sometimes referred to herein individually as a "Fund" and collectively as the
"Funds," and PW Trust and Target are sometimes referred to herein
individually as an "Investment Company" and collectively as the "Investment
Companies.")
This Agreement is intended to be, and is adopted as, a plan of a
reorganization described in section 368(a)(1)(C) of the Internal Revenue Code
of 1986, as amended ("Code"). The reorganization will involve the transfer to
Acquiring Fund of Target's assets solely in exchange for voting shares of
beneficial interest in Acquiring Fund ("Acquiring Fund Shares") and the
assumption by Acquiring Fund of Target's liabilities, followed by the
constructive distribution of the Acquiring Fund Shares to the holders of
shares of common stock in Target ("Target Shares") in exchange therefor, all
upon the terms and conditions set forth herein. The foregoing transactions
are referred to herein as the "Reorganization." All agreements,
representations, actions, and obligations described herein made or to be
taken or undertaken by Acquiring Fund are made and shall be taken or
undertaken by PW Trust on its behalf.
Acquiring Fund's shares are divided into four classes, designated Class A,
Class B, Class C, and Class D shares ("Class A Acquiring Fund Shares," "Class
B Acquiring Fund Shares," "Class C Acquiring Fund Shares," and "Class D
Acquiring Fund Shares," respectively). Except as noted in the following
sentence, these classes differ only with respect to the sales charges imposed
on the purchase of shares and the fees ("12b-1 fees") payable by each class
pursuant to plans adopted under Rule 12b-1 promulgated under the Investment
Company Act of 1940 ("1940 Act"), as follows: (1) Class A Acquiring Fund
Shares are offered at net asset value ("NAV") plus a sales charge, if
applicable, and are subject to a 12b-1 service fee at the annual rate of
0.25% of the average daily net assets attributable to the class ("class
assets"); (2) Class B Acquiring Fund Shares are offered at NAV without
imposition of any sales charge and are subject to a contingent deferred sales
charge and 12b-1 service and distribution fees at the respective annual rates
of 0.25% and 0.75% of class assets; (3) Class C Acquiring Fund Shares are and
will be offered to a limited class of offerees (currently only the trustee of
the PaineWebber Savings Investment Plan on behalf of that plan) at NAV
without imposition of any sales charge and are not subject to any 12b-1 fee;
and (4) Class D Acquiring Fund Shares are offered at NAV without imposition
of any sales charge and are subject to 12b-1 service and distribution fees at
the respective annual rates of 0.25% and 0.50% of class assets. These classes
also may differ from one another with respect to the allocation of certain
class-specific expenses other than 12b-1 fees. Only Classes A, C, and D
Acquiring Fund Shares are involved in the Reorganization.
Target's shares are divided into three classes, designated Class A, Class
B, and Class C shares ("Class A Target Shares," "Class B Target Shares," and
"Class C Target Shares," respectively). These classes are substantially
similar to the Class A, Class D, and Class C Acquiring Fund Shares,
respectively, except that Class A Target Shares and Class A Acquiring Fund
Shares are subject to different maximum initial sales charges and Class A
Target Shares are subject to a 12b-1 distribution fee at the annual rate of
0.25% of class assets.
In consideration of the mutual promises herein, the parties covenant and
agree as follows:
1. PLAN OF REORGANIZATION AND DISSOLUTION OF TARGET
1.1. Target agrees to assign, sell, convey, transfer, and deliver all of
its assets described in paragraph 1.2 ("Assets") to Acquiring Fund. Acquiring
Fund agrees in exchange therefor--
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(a) to issue and deliver to Target the number of full and fractional
(i) Class A Acquiring Fund Shares determined by dividing the net value of
Target (computed as set forth in paragraph 2.1) ("Target Value")
attributable to the Class A Target Shares by the NAV (computed as set
forth in paragraph 2.2) of a Class A Acquiring Fund Share, (ii) Class D
Acquiring Fund Shares determined by dividing the Target Value attributable
to the Class B Target Shares by the NAV (as so computed) of a Class D
Acquiring Fund Share, and (iii) Class C Acquiring Fund Shares determined
by dividing the Target Value attributable to the Class C Target Shares by
the NAV (as so computed) of a Class C Acquiring Fund Share; and
(b) to assume all of Target's liabilities described in paragraph 1.3
("Liabilities").
Such transactions shall take place at the Closing (as defined in paragraph
3.1).
1.2. The Assets shall include, without limitation, all cash, cash
equivalents, securities, receivables (including interest and dividends
receivable), claims and rights of action, rights to register shares under
applicable securities laws, books and records, deferred and prepaid expenses
shown as assets on Target's books, and other property owned by Target at the
Effective Time (as defined in paragraph 3.1).
1.3. The Liabilities shall include (except as otherwise provided herein)
all of Target's liabilities, debts, obligations, and duties of whatever kind
or nature, whether absolute, accrued, contingent, or otherwise, whether or
not arising in the ordinary course of business, whether or not determinable
at the Effective Time, and whether or not specifically referred to in this
Agreement, including without limitation Target's share of the expenses
described in paragraph 7.2. Notwithstanding the foregoing, Target agrees to
use its best efforts to discharge all of its known Liabilities prior to the
Effective Time.
1.4. At or immediately before the Effective Time, Target shall declare and
pay to its shareholders a dividend and/or other distribution 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 realized net capital
gain, if any, for the current taxable year through the Effective Time.
1.5. At the Effective Time (or as soon thereafter as is reasonably
practicable), Target shall constructively distribute the Acquiring Fund
Shares received by it pursuant to paragraph 1.1 to Target's shareholders of
record, determined as of the Effective Time (collectively "Shareholders" and
individually a "Shareholder"), in exchange for their Target Shares. Such
distribution shall be accomplished by the Funds' transfer agent ("Transfer
Agent") opening accounts on Acquiring Fund's share transfer books in the
Shareholders' names and transferring such Acquiring Fund Shares thereto. Each
Shareholder's account shall be credited with the respective pro rata number
of full and fractional (rounded to the third decimal place) Acquiring Fund
Shares due that Shareholder, by class (i.e., the account for a Shareholder of
Class A Target Shares shall be credited with the respective pro rata number
of Class A Acquiring Fund Shares due that Shareholder, the account for a
Shareholder of Class B Target Shares shall be credited with the respective
pro rata number of Class D Acquiring Fund Shares due that Shareholder, and
the account for a Shareholder of Class C Target Shares shall be credited with
the respective pro rata number of Class C Acquiring Fund Shares due that
Shareholder). All outstanding Target Shares, including any represented by
certificates, shall simultaneously be canceled on Target's share transfer
records. Acquiring Fund shall not issue certificates representing the
Acquiring Fund Shares in connection with the Reorganization.
1.6. As soon as reasonably practicable after distribution of the Acquiring
Fund Shares pursuant to paragraph 1.5, Target shall be dissolved and any
further actions shall be taken in connection therewith as required by
applicable law.
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1.7. Any reporting responsibility of Target to a public authority is and
shall remain its responsibility up to and including the date on which it is
dissolved.
1.8. Any transfer taxes payable upon issuance of Acquiring Fund Shares in
a name other than that of the registered holder on Target's books of the
Target Shares constructively exchanged therefor shall be paid by the person
to whom such Acquiring Fund Shares are to be issued, as a condition of such
transfer.
2. VALUATION
2.1. For purposes of paragraph 1.1(a), Target's net value shall be (a) the
value of the Assets computed as of 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 statement of additional information less (b) the amount of the
Liabilities as of the Valuation Time.
2.2. For purposes of paragraph 1.1(a), the NAV of a Class A Acquiring Fund
Share, a Class C Acquiring Fund Share, and a Class D Acquiring Fund Share
shall be computed as of the Valuation Time, using the valuation procedures
set forth in Acquiring Fund's then-current prospectus and statement of
additional information.
2.3. All computations pursuant to paragraphs 2.1 and 2.2 shall be made by
or under the direction of Mitchell Hutchins Asset Management Inc.
3. CLOSING AND EFFECTIVE TIME
3.1. The Reorganization, together with related acts necessary to
consummate the same ("Closing"), shall occur at the Funds' principal office
on October 20, 1995, or at such other place and/or on such other date as the
parties may agree. All acts taking place at the Closing shall be deemed to
take place simultaneously as of 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. Target shall deliver to PW Trust at the Closing a schedule of the
Assets as of the Effective Time, which shall set forth for all portfolio
securities included therein their adjusted tax basis and holding period by
lot. Target's custodian shall deliver at the Closing a certificate of an
authorized officer stating that (a) the Assets held by the custodian will be
transferred to Acquiring Fund at the Effective Time and (b) all necessary
taxes in conjunction with the delivery of the Assets, including all
applicable federal and state stock transfer stamps, if any, have been paid or
provision for payment has been made.
3.3. Target shall deliver to PW Trust at the Closing a list of the names
and addresses of the Shareholders and the number (by class) of outstanding
Target Shares owned by each Shareholder, all as of the Effective Time,
certified by the Secretary or Assistant Secretary of Target. The Transfer
Agent shall deliver at the Closing a certificate as to the opening on
Acquiring Fund's share transfer books of accounts in the Shareholders' names.
PW Trust shall issue and deliver a confirmation to Target evidencing the
Acquiring Fund Shares (by class) to be credited to Target at the Effective
Time or provide evidence satisfactory to Target that such Acquiring Fund
Shares have been credited to Target's account on Acquiring Fund's books. At
the Closing, each party shall deliver to the other such bills of sale,
checks, assignments, stock certificates, receipts, or other documents as the
other party or its counsel may reasonably request.
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<PAGE>
3.4. Each Investment Company shall deliver to the other at the Closing a
certificate executed in its name by its President or a Vice President in form
and substance satisfactory to the recipient and dated the Effective Time, to
the effect that the representations and warranties it made in this Agreement
are true and correct at the Effective Time except as they may be affected by
the transactions contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1. Target represents and warrants as follows:
4.1.1. Target is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland, and a copy of
its Articles of Incorporation is on file with the Department of
Assessments and Taxation of Maryland;
4.1.2. Target is duly registered as an open-end management investment
company under the 1940 Act, and such registration will be in full force
and effect at the Effective Time;
4.1.3. At the Closing, Target will have good and marketable title to
the Assets and full right, power, and authority to sell, assign, transfer,
and deliver the Assets free of any liens or other encumbrances; and upon
delivery and payment for the Assets, Acquiring Fund will acquire good and
marketable title thereto;
4.1.4. Target's current prospectus and statement of additional
information conform in all material respects to the applicable
requirements of the Securities Act of 1933 ("1933 Act") and the 1940 Act
and the rules and regulations thereunder and do not include any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading;
4.1.5. Target is not in violation of, and the execution and delivery
of this Agreement and consummation of the transactions contemplated hereby
will not conflict with or violate, Maryland law or any provision of
Target's Articles of Incorporation or By-Laws or of any agreement,
instrument, lease, or other undertaking to which Target is a party or by
which it is bound or result in the acceleration of any obligation, or the
imposition of any penalty, under any agreement, judgment, or decree to
which Target is a party or by which it is bound, except as previously
disclosed in writing to and accepted by PW Trust;
4.1.6. Except as disclosed in writing to and accepted by PW Trust, all
material contracts and other commitments of or applicable to Target (other
than this Agreement and investment contracts, including options, futures,
and forward contracts) will be terminated, or provision for discharge of
any liabilities of Target thereunder will be made, at or prior to the
Effective Time, without either Fund's incurring any liability or penalty
with respect thereto and without diminishing or releasing any rights
Target may have had with respect to actions taken or omitted to be taken
by any other party thereto prior to the Closing;
4.1.7. Except as otherwise disclosed in writing to and accepted by PW
Trust, no litigation, administrative proceeding, or investigation of or
before any court or governmental body is presently pending or (to Target's
knowledge) threatened against Target or any of its properties or assets
that, if adversely determined, would materially and adversely affect
Target's financial condition or the conduct of its business; Target knows
of no facts that might form the basis for the institution of any such
litigation, proceeding, or investigation and is not a party to or subject
to the provisions of any order, decree, or judgment of any court or
governmental body that materially or adversely affects its business or its
ability to consummate the transactions contemplated hereby;
4.1.8. The execution, delivery, and performance of this Agreement has
been duly authorized as of the date hereof by all necessary action on the
part of Target's board of directors, which has made the
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determinations required by Rule 17a-8(a) under the 1940 Act; and, subject
to approval by Target's shareholders, and receipt of any necessary exemptive
relief or no-action assurances requested from the Securities and Exchange
Commission ("SEC") or its staff with respect to section 17(a) and 17(d) of
the 1940 Act, this Agreement will constitute a valid and legally binding
obligation of Target, enforceable in accordance with its terms, except as
the same may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium, and similar laws relating to or affecting
creditors' rights and by general principles of equity;
4.1.9. At the Effective Time, the performance of this Agreement shall
have been duly authorized by all necessary action by Target's
shareholders;
4.1.10. No governmental consents, approvals, authorizations, or
filings are required under the 1933 Act, the Securities Exchange Act of
1934 ("1934 Act"), or the 1940 Act for the execution or performance of
this Agreement by Target, except for (a) the filing with the SEC of a
registration statement by PW Trust on Form N-14 relating to the Acquiring
Fund Shares issuable hereunder, and any supplement or amendment thereto
("Registration Statement"), including therein a prospectus/proxy statement
("Proxy Statement"), (b) receipt of the exemptive relief referenced in
subparagraph 4.1.8, and (c) such consents, approvals, authorizations, and
filings as have been made or received or as may be required subsequent to
the Effective Time;
4.1.11. On the effective date of the Registration Statement, at the
time of the shareholders' meeting referred to in paragraph 5.2, and at the
Effective Time, the Proxy Statement will (a) comply in all material
respects with the applicable provisions of the 1933 Act, the 1934 Act, and
the 1940 Act and the regulations thereunder and (b) not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which such statements were made, not misleading;
provided that the foregoing shall not apply to statements in or omissions
from the Proxy Statement made in reliance on and in conformity with
information furnished by PW Trust for use therein;
4.1.12. The Liabilities were incurred by Target in the ordinary course
of its business;
4.1.13. Target qualified for treatment as a regulated investment
company ("RIC") under Subchapter M of the Code for each past taxable year
since it commenced operations and will continue to meet all the
requirements for such qualification for its current taxable year; and it
has no earnings and profits accumulated in any taxable year in which the
provisions of Subchapter M did not apply to it. The Assets shall be
invested at all times through the Effective Time in a manner that ensures
compliance with the foregoing;
4.1.14. Target is not under the jurisdiction of a court in a
proceeding under Title 11 of the United States Code or similar case within
the meaning of section 368(a)(3)(A) of the Code;
4.1.15. Not more than 25% of the value of Target's total assets
(excluding cash, cash items, and U.S. government securities) is invested
in the stock and securities of any one issuer, and not more than 50% of
the value of such assets is invested in the stock and securities of five
or fewer issuers; and
4.1.16. Target will be dissolved as soon as reasonably practicable
after the Reorganization, but in all events within six months after the
Effective Time.
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4.2. Acquiring Fund represents and warrants as follows:
4.2.1. PW Trust is an unincorporated voluntary association with
transferable shares organized as a business trust under a written
instrument ("Business Trust"); it is duly organized, validly existing, and
in good standing under the laws of the Commonwealth of Massachusetts; and
a copy of its Declaration of Trust is on file with the Secretary of the
Commonwealth of Massachusetts;
4.2.2. PW Trust is duly registered as an open-end management
investment company under the 1940 Act, and such registration will be in
full force and effect at the Effective Time;
4.2.3. Acquiring Fund is a duly established and designated series of
PW Trust;
4.2.4. No consideration other than Acquiring Fund Shares (and
Acquiring Fund's assumption of the Liabilities) will be issued in exchange
for the Assets in the Reorganization;
4.2.5. The Acquiring Fund Shares to be issued and delivered to Target
hereunder will, at the Effective Time, have been duly authorized and, when
issued and delivered as provided herein, will be duly and validly issued,
and outstanding shares of Acquiring Fund, fully paid and non-assessable,
except to the extent that under Massachusetts law shareholders of a Business
Trust may, under certain circumstances, be held personally liable for its
obligations. Except as contemplated by this Agreement, Acquiring Fund does
not have outstanding any options, warrants, or other rights to subscribe for
or purchase any of its shares, nor is there outstanding any security
convertible into any of its shares;
4.2.6. Acquiring Fund's current prospectus and statement of additional
information conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and
regulations thereunder and do not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
4.2.7. Acquiring Fund is not in violation of, and the execution and
delivery of this Agreement and consummation of the transactions
contemplated hereby will not conflict with or violate, Massachusetts law
or any provision of PW Trust's Declaration of Trust or By-Laws or of any
provision of any agreement, instrument, lease, or other undertaking to
which Acquiring Fund is a party or by which it is bound or result in the
acceleration of any obligation, or the imposition of any penalty, under
any agreement, judgment, or decree to which Acquiring Fund is a party or
by which it is bound, except as previously disclosed in writing to and
accepted by Target;
4.2.8. Except as otherwise disclosed in writing to and accepted by
Target, no litigation, administrative proceeding, or investigation of or
before any court or governmental body is presently pending or (to
Acquiring Fund's knowledge) threatened against PW Trust with respect to
Acquiring Fund or any of its properties or assets that, if adversely
determined, would materially and adversely affect Acquiring Fund's
financial condition or the conduct of its business; Acquiring Fund knows
of no facts that might form the basis for the institution of any such
litigation, proceeding, or investigation and is not a party to or subject
to the provisions of any order, decree, or judgment of any court or
governmental body that materially or adversely affects its business or its
ability to consummate the transactions contemplated hereby;
4.2.9. The execution, delivery, and performance of this Agreement has
been duly authorized as of the date hereof by all necessary action on the
part of PW Trust's board of trustees, which has made the determinations
required by Rule 17a-8(a) under the 1940 Act; and subject to receipt of any
necessary exemptive relief or no action assurances requested from the SEC or
its staff with respect to sections 17(a) and 17(d) of the 1940 Act,
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this Agreement will constitute a valid and legally binding obligation of
Acquiring Fund, enforceable in accordance with its terms, except as the
same may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium, and similar laws relating to or affecting
creditors' rights and by general principles of equity;
4.2.10. No governmental consents, approvals, authorizations, or
filings are required under the 1933 Act, the 1934 Act, or the 1940 Act for
the execution or performance of this Agreement by PW Trust, except for (a)
the filing with the SEC of the Registration Statement and a post-effective
amendment to PW Trust's registration statement, (b) receipt of the exemptive
relief referenced in subparagraph 4.2.9, and (c) such consents approvals,
authorizations, and filings as have been made or received or as
may be required subsequent to the Effective Time;
4.2.11. On the effective date of the Registration Statement, at the
time of the shareholders' meeting referred to in paragraph 5.2, and at the
Effective Time, the Proxy Statement will (a) comply in all material
respects with the applicable provisions of the 1933 Act, the 1934 Act, and
the 1940 Act and the regulations thereunder and (b) not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which such statements were made, not misleading;
provided that the foregoing shall not apply to statements in or omissions
from the Proxy Statement made in reliance on and in conformity with
information furnished by Target for use therein;
4.2.12. Acquiring Fund is a "fund" as defined in section 851(h)(2) of
the Code; it qualified for treatment as a RIC under Subchapter M of the
Code for each past taxable year since it commenced operations and will
continue to meet all the requirements for such qualification for its
current taxable year; Acquiring Fund intends to continue to meet all such
requirements for the next taxable year; and it has no earnings and profits
accumulated in any taxable year in which the provisions of Subchapter M
did not apply to it;
4.2.13. Acquiring Fund has no plan or intention to issue additional
Acquiring Fund Shares following the Reorganization except for shares
issued in the ordinary course of its business as a series of an open-end
investment company; nor does Acquiring Fund have any plan or intention to
redeem or otherwise reacquire any Acquiring Fund Shares issued to the
Shareholders pursuant to the Reorganization, other than through
redemptions arising in the ordinary course of that business;
4.2.14. Acquiring Fund (a) will actively continue Target's business in
substantially the same manner that Target conducted that business
immediately before the Reorganization, (b) has no plan or intention to
sell or otherwise dispose of any of the Assets, except for dispositions
made in the ordinary course of that business and dispositions necessary to
maintain its status as a RIC 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 dispositions thereof to maintain such status;
4.2.15. There is no plan or intention for Acquiring Fund to be
dissolved or merged into another corporation or business trust or any
"fund" thereof (within the meaning of section 851(h)(2) of the Code)
following the Reorganization;
4.2.16. Immediately after the Reorganization, (a) not more than 25% of
the value of Acquiring Fund's total assets (excluding cash, cash items,
and U.S. government securities) will be invested in the stock and
securities of any one issuer and (b) not more than 50% of the value of
such assets will be invested in the stock and securities of five or fewer
issuers; and
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4.2.17. Acquiring Fund does not own, directly or indirectly, nor at
the Effective Time will it own, directly or indirectly, nor has it owned,
directly or indirectly, at any time during the past five years, any shares
of Target.
4.3. Each Fund represents and warrants as follows:
4.3.1. The fair market value of the Acquiring Fund Shares, when
received by the Shareholders, will be approximately equal to the fair
market value of their Target Shares constructively surrendered in exchange
therefor;
4.3.2. Its management (a) is unaware of any plan or intention of
Shareholders to redeem or otherwise dispose of any portion of the
Acquiring Fund Shares to be received by them in the Reorganization and (b)
does not anticipate dispositions of those Acquiring Fund Shares at the
time of or soon after the Reorganization to exceed the usual rate and
frequency of dispositions of shares of Target as an open-end investment
company. Consequently, its management expects that the percentage of
Shareholder interests, if any, that will be disposed of as a result of or
at the time of the Reorganization will be de minimis. Nor does its
management anticipate that there will be extraordinary redemptions of
Acquiring Fund Shares immediately following the Reorganization;
4.3.3. The Shareholders will pay their own expenses, if any, incurred
in connection with the Reorganization;
4.3.4. Immediately following consummation of the Reorganization,
Acquiring Fund will hold substantially the same assets and be subject to
substantially the same liabilities that Target held or was subject to
immediately prior thereto, plus any liabilities and expenses of the
parties incurred in connection with the Reorganization;
4.3.5. The fair market value on a going concern basis of the Assets
will equal or exceed the Liabilities to be assumed by Acquiring Fund and
those to which the Assets are subject;
4.3.6. There is no intercompany indebtedness between the Funds that
was issued or acquired, or will be settled, at a discount;
4.3.7. Pursuant to the Reorganization, Target will transfer to
Acquiring Fund, and Acquiring Fund will acquire, at least 90% of the fair
market value of the net assets, and at least 70% of the fair market value
of the gross assets, held by Target immediately before the Reorganization.
For the purposes of this representation, any amounts used by Target to pay
its Reorganization expenses and redemptions and distributions made by it
immediately before the Reorganization (except for (a) distributions made
to conform to its policy of distributing all or substantially all of its
income and gains to avoid the obligation to pay federal income tax and/or
the excise tax under section 4982 of the Code and (b) redemptions not made
as part of the Reorganization) will be included as assets thereof held
immediately before the Reorganization;
4.3.8. None of the compensation received by any Shareholder who is an
employee of Target will be separate consideration for, or allocable to,
any of the Target Shares held by such Shareholder-employee; none of the
Acquiring Fund Shares received by any such Shareholder-employee will be
separate consideration for, or allocable to, any employment agreement; and
the consideration paid to any such Shareholder-employee will be for
services actually rendered and will be commensurate with amounts paid to
third parties bargaining at arm's-length for similar services; and
4.3.9. Immediately after the Reorganization, the Shareholders will not
own shares constituting "control" of Acquiring Fund within the meaning of
section 304(c) of the Code.
B-8
<PAGE>
5. COVENANTS
5.1. Each Fund covenants to operate its respective business in the
ordinary course between the date hereof and the Closing, it being understood
that (a) such ordinary course will include declaring and paying customary
dividends and other distributions and such changes in operations as are
contemplated by each Fund's normal business activities and (b) each Fund will
retain exclusive control of the composition of its portfolio until the
Closing; provided that Target shall not dispose of more than an insignificant
portion of its historic business assets during such period without Acquiring
Fund's prior consent.
5.2. Target covenants to call a shareholders' meeting to consider and act
upon this Agreement and to take all other action necessary to obtain approval
of the transactions contemplated hereby.
5.3. Target covenants that the Acquiring Fund Shares to be delivered
hereunder are not being acquired for the purpose of making any distribution
thereof, other than in accordance with the terms hereof.
5.4. Target covenants that it will assist PW Trust in obtaining such
information as PW Trust reasonably requests concerning the beneficial
ownership of Target Shares.
5.5. Target covenants that Target's books and records (including all books
and records required to be maintained under the 1940 Act and the rules and
regulations thereunder) will be turned over to PW Trust at the Closing.
5.6. Each Fund covenants to cooperate in preparing the Proxy Statement in
compliance with applicable federal securities laws.
5.7. Each Fund covenants that it will, from time to time, as and when
requested by the other Fund, execute and deliver or cause to be executed and
delivered all such assignments and other instruments, and will take or cause
to be taken such further action, as the other Fund may deem necessary or
desirable in order to vest in, and confirm to, (a) Acquiring Fund, title to
and possession of all the Assets, and (b) Target, title to and possession of
the Acquiring Fund Shares to be delivered hereunder, and otherwise to carry
out the intent and purpose hereof.
5.8. PW Trust covenants to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act, and such
state securities laws it may deem appropriate in order to continue its
operations after the Effective Time.
5.9. Subject to this Agreement, each Fund covenants to take or cause to be
taken all actions, and to do or cause to be done all things reasonably
necessary, proper, or advisable to consummate and effectuate the transactions
contemplated hereby.
6. CONDITIONS PRECEDENT
Each Fund's obligations hereunder shall be subject to (a) performance by
the other Fund of all the obligations to be performed hereunder at or before
the Effective Time, (b) all representations and warranties of the other Fund
contained herein being true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions
contemplated hereby, as of the Effective Time, with the same force and effect
as if made at and as of the Effective Time, and (c) the following further
conditions that, at or before the Effective Time:
6.1. This Agreement and the transactions contemplated hereby shall have
been duly adopted and approved by Target's board of directors and shall have
been approved by Target's shareholders in accordance with applicable law.
B-9
<PAGE>
6.2. All necessary filings shall have been made with the SEC and state
securities authorities, and no order or directive shall have been received
that any other or further action is required to permit the parties to carry
out the transactions contemplated hereby. The Registration Statement shall
have become effective under the 1933 Act, no stop orders suspending the
effectiveness thereof shall have been issued, and the SEC shall not have
issued an unfavorable report with respect to the Reorganization under section
25(b) of the 1940 Act nor instituted any proceedings seeking to enjoin
consummation of the transactions contemplated hereby under section 25(c) of
the 1940 Act. All consents, orders, and permits of federal, state, and local
regulatory authorities (including the SEC and state securities authorities)
deemed necessary by either Fund to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain same would not involve a risk of a material
adverse effect on the assets or properties of either Fund, provided that
either Fund may for itself waive any of such conditions.
6.3. At the Effective Time, no action, suit, or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or to obtain damages or other relief in connection
with, the transactions contemplated hereby.
6.4. Target shall have received an opinion of Kirkpatrick & Lockhart LLP,
counsel to PW Trust, substantially to the effect that:
6.4.1. Acquiring Fund is a duly established series of PW Trust, a
Business Trust duly organized and validly existing under the laws of the
Commonwealth of Massachusetts with power under its Declaration of Trust to
own all of its properties and assets and, to the knowledge of such
counsel, to carry on its business as presently conducted;
6.4.2. This Agreement (a) has been duly authorized, executed, and
delivered by PW Trust on behalf of Acquiring Fund and (b) assuming due
authorization, execution, and delivery of this Agreement by Target, is a
valid and legally binding obligation of PW Trust with respect to Acquiring
Fund, enforceable in accordance with its terms, except as the same may be
limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium, and similar laws relating to or affecting creditors' rights
and by general principles of equity;
6.4.3. The Acquiring Fund Shares to be issued and distributed to the
Shareholders under this Agreement, assuming their due delivery as
contemplated by this Agreement, will be duly authorized and validly issued
and outstanding and fully paid and non-assessable, except to the extent
that under Massachusetts law shareholders of a Business Trust may, under
certain circumstances, be held personally liable for its obligations, and
no shareholder of Acquiring Fund has any preemptive right to subscribe for
or purchase such shares;
6.4.4. The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate PW Trust's Declaration of Trust or By-Laws or any provision of any
agreement (known to such counsel, without any independent inquiry or
investigation) to which PW Trust (with respect to Acquiring Fund) is a
party or by which it is bound or (to the knowledge of such counsel,
without any independent inquiry or investigation) result in the
acceleration of any obligation, or the imposition of any penalty, under
any agreement, judgment, or decree to which PW Trust (with respect to
Acquiring Fund) is a party or by which it is bound, except as set forth in
such opinion or as previously disclosed in writing to and accepted by
Target;
6.4.5. To the knowledge of such counsel (without any independent
inquiry or investigation), no consent, approval, authorization, or order
of any court or governmental authority is required for the
B-10
<PAGE>
consummation by PW Trust on behalf of Acquiring Fund of the transactions
contemplated herein, except such as have been obtained under the 1933 Act,
the 1934 Act, and the 1940 Act and such as may be required under state
securities laws;
6.4.6. PW Trust is registered with the SEC as an investment company,
and to the knowledge of such counsel no order has been issued or
proceeding instituted to suspend such registration; and
6.4.7. To the knowledge of such counsel (without any independent
inquiry or investigation), (a) no litigation, administrative proceeding,
or investigation of or before any court or governmental body is pending or
threatened as to PW Trust (with respect to Acquiring Fund) or any of its
properties or assets attributable or allocable to Acquiring Fund and (b)
PW Trust (with respect to Acquiring Fund) is not a party to or subject to
the provisions of any order, decree, or judgment of any court or
governmental body that materially and adversely affects Acquiring Fund's
business, except as set forth in such opinion or as otherwise disclosed in
writing to and accepted by Target.
In rendering such opinion, such counsel may (i) rely, as to matters governed
by the laws of the Commonwealth of Massachusetts, on an opinion of competent
Massachusetts counsel, (ii) make assumptions regarding the authenticity,
genuineness, and/or conformity of documents and copies thereof without
independent verification thereof, (iii) limit such opinion to applicable
federal and state law, and (iv) define the word "knowledge" and related terms
to mean the knowledge of attorneys then with such firm who have devoted
substantive attention to matters directly related to this Agreement and the
Reorganization.
6.5. PW Trust shall have received an opinion of Sullivan & Cromwell,
counsel to Target, substantially to the effect that:
6.5.1. Target is a corporation duly organized and validly existing
under the laws of the State of Maryland with power under its Articles of
Incorporation to own all of its properties and assets and, to the
knowledge of such counsel, to carry on its business as presently
conducted;
6.5.2. This Agreement (a) has been duly authorized, executed, and
delivered by Target and (b) assuming due authorization, execution, and
delivery of this Agreement by PW Trust on behalf of Acquiring Fund, is a
valid and legally binding obligation of Target 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 Target's Articles of Incorporation or By-Laws or any provision of
any agreement (known to such counsel, without any independent inquiry or
investigation) to which Target (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 Target is a party or by which it is bound, except as set
forth in such opinion or as previously disclosed in writing to and accepted
by PW Trust;
6.5.4. To the knowledge of such counsel (without any independent
inquiry or investigation), no consent, approval, authorization, or order
of any court or governmental authority is required for the consummation by
Target of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act, and the 1940 Act and such as
may be required under state securities laws;
6.5.5. Target is registered with the SEC as an investment company, and
to the knowledge of such counsel no order has been issued or proceeding
instituted to suspend such registration; and
B-11
<PAGE>
6.5.6. To the knowledge of such counsel (without any independent
inquiry or investigation), (a) no litigation, administrative proceeding,
or investigation of or before any court or governmental body is pending or
threatened as to Target or any of its properties or assets and (b) Target
is not a party to or subject to the provisions of any order, decree, or
judgment of any court or governmental body that materially and adversely
affects its business, except as set forth in such opinion or as otherwise
disclosed in writing to and accepted by PW Trust.
In rendering such opinion, such counsel may (i) rely, as to matters governed
by the laws of the State of Maryland, on an opinion of competent Maryland
counsel, (ii) make assumptions regarding the authenticity, genuineness,
and/or conformity of documents and copies thereof without independent
verification thereof, (iii) limit such opinion to applicable federal and
state law, and (iv) define the word "knowledge" and related terms to mean the
knowledge of attorneys then with such firm who have devoted substantive
attention to matters directly related to this Agreement and the
Reorganization.
6.6. PW Trust shall have received an opinion of Kirkpatrick & Lockhart
LLP, its counsel, addressed to and in form and substance satisfactory to it,
and Target shall have received an opinion of Sullivan & Cromwell, its
counsel, addressed to and in form and substance satisfactory to it, each as
to the federal income tax consequences mentioned below (each a "Tax
Opinion"). In rendering its Tax Opinion, each such counsel may rely as to
factual matters, exclusively and without independent verification, on the
representations made in this Agreement (or in separate letters addressed to
such counsel) and the certificates delivered pursuant to paragraph 3.4. Each
Tax Opinion shall be substantially to the effect that, based on the facts and
assumptions stated therein, for federal income tax purposes:
6.6.1. Acquiring Fund's acquisition of the Assets in exchange solely
for Acquiring Fund Shares and Acquiring Fund's assumption of the
Liabilities, followed by Target's distribution of those shares to the
Shareholders constructively in exchange for the Shareholders' Target
Shares, will constitute a reorganization within the meaning of section
368(a)(1)(C) of the Code, and each Fund will be "a party to a
reorganization" within the meaning of section 368(b) of the Code;
6.6.2. No gain or loss will be recognized to Target on the transfer to
Acquiring Fund of the Assets in exchange solely for Acquiring Fund Shares
and Acquiring Fund's assumption of the Liabilities or on the subsequent
distribution of those shares to the Shareholders in constructive exchange
for their Target Shares;
6.6.3. No gain or loss will be recognized to Acquiring Fund on its
receipt of the Assets in exchange solely for Acquiring Fund Shares and its
assumption of the Liabilities;
6.6.4. Acquiring Fund's basis for the Assets will be the same as the
basis thereof in Target's hands immediately before the Reorganization, and
Acquiring Fund's holding period for the Assets will include Target's
holding period therefor;
6.6.5. A Shareholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for Acquiring Fund
Shares pursuant to the Reorganization; and
6.6.6. A Shareholder's basis for the Acquiring Fund Shares to be
received by it in the Reorganization will be the same as the basis for its
Target Shares to be constructively surrendered in exchange for those
Acquiring Fund Shares, and its holding period for those Acquiring Fund
Shares will include its holding period for those Target Shares, provided
they are held as capital assets by the Shareholder at the Effective Time.
B-12
<PAGE>
Notwithstanding paragraphs 6.6.2 and 6.6.4, each Tax Opinion may state that
no opinion is expressed as to the effect of the Reorganization on the Funds
or any Shareholder with respect to any asset (including certain options,
futures, and forward contracts included in the Assets) as to which any
unrealized gain or loss is required to be recognized for federal income tax
purposes at the end of a taxable year (or on the termination or transfer
thereof) under a mark-to-market system of accounting.
At any time before the Closing, (a) Acquiring Fund may waive any of the
foregoing conditions if, in the judgment of PW Trust's board of trustees,
such waiver will not have a material adverse effect on its shareholders'
interests, and (b) Target may waive any of the foregoing conditions if, in
the judgment of its board of directors, such waiver will not have a material
adverse effect on the Shareholders' interests.
7. BROKERAGE FEES AND EXPENSES
7.1. Each Investment Company represents and warrants to the other that
there are no brokers or finders entitled to receive any payments in
connection with the transactions provided for herein.
7.2. Except as otherwise provided herein, all expenses incurred in
connection with the transactions contemplated by this Agreement (whether or
not they are consummated) will be borne by the Funds proportionately, as
follows: each such expense will be borne by the Funds in proportion to their
respective net assets as of the close of business on the last business day of
the month in which such expense was incurred. Such expenses include: (a)
expenses incurred in connection with entering into and carrying out the
provisions of this Agreement; (b) expenses associated with the preparation
and filing of the Registration Statement; (c) registration or qualification
fees and expenses of preparing and filing such forms as are necessary under
applicable state securities laws to qualify the Acquiring Fund Shares to be
issued in connection herewith in each state in which Target's shareholders
are resident as of the date of the mailing of the Proxy Statement to such
shareholders; (d) printing and postage expenses; (e) legal and accounting
fees; and (f) solicitation costs.
8. ENTIRE AGREEMENT; SURVIVAL
Neither party has made any representation, warranty, or covenant not set
forth herein, and this Agreement constitutes the entire agreement between the
parties. The representations, warranties, and covenants contained herein or
in any document delivered pursuant hereto or in connection herewith shall
survive the Closing.
9. TERMINATION OF AGREEMENT
This Agreement may be terminated at any time at or prior to the Effective
Time, whether before or after approval by Target's shareholders:
9.1. By either Fund (a) in the event of the other Fund's material breach
of any representation, warranty, or covenant contained herein to be performed
at or prior to the Effective Time, (b) if a condition to its obligations has
not been met and it reasonably appears that such condition will not or cannot
be met, or (c) if the Closing has not occurred on or before March 31, 1996;
or
9.2. By the parties' mutual agreement.
In the event of termination under paragraphs 9.1.(c) or 9.2, there shall
be no liability for damages on the part of either Fund, or the
trustees/directors or officers of either Investment Company, to the other Fund.
10. AMENDMENT
This Agreement may be amended, modified, or supplemented at any time,
notwithstanding approval thereof by Target's shareholders, in such manner as
may be mutually agreed upon in writing by the parties; provided that
following such approval no such amendment shall have a material adverse
effect on the Shareholders' interests.
B-13
<PAGE>
11. MISCELLANEOUS
11.1. This Agreement shall be governed by and construed in accordance with
the internal laws of the Commonwealth of Massachusetts; provided that, in the
case of any conflict between such laws and the federal securities laws, the
latter shall govern.
11.2. Nothing expressed or implied herein is intended or shall be
construed to confer upon or give any person, firm, trust, or corporation
other than the parties and their respective successors and assigns any rights
or remedies under or by reason of this Agreement.
11.3. The parties acknowledge that PW Trust is a Business Trust. Notice is
hereby given that this instrument is executed on behalf of PW Trust's
trustees solely in their capacity as trustees, and not individually, and that
PW Trust's obligations under this instrument are not binding on or
enforceable against any of its trustees, officers, or shareholders, but are
only binding on and enforceable against Acquiring Fund's assets and property.
Target agrees that, in asserting any rights or claims under this Agreement,
it shall look only to Acquiring 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 INVESTMENTS TRUST,
on behalf of its series,
PAINEWEBBER U.S. GOVERNMENT INCOME FUND
By: /s/ Ilene Shore /s/ Dianne E. O'Donnell
------------------------- -------------------------------------
Assistant Secretary Vice President
ATTEST:
MITCHELL HUTCHINS/KIDDER, PEABODY
GOVERNMENT INCOME FUND, INC.
By: /s/ Stephanie Johnson /s/ Scott Griff
------------------------- -------------------------------------
Assistant Secretary Vice President
B-14
<PAGE>
PAINEWEBBER U.S. GOVERNMENT INCOME FUND
(a series of PaineWebber Managed Investments Trust)
MITCHELL HUTCHINS/KIDDER, PEABODY
INTERMEDIATE FIXED INCOME FUND
(a series of Mitchell Hutchins/Kidder, Peabody Investment Trust)
MITCHELL HUTCHINS/KIDDER, PEABODY
GOVERNMENT INCOME FUND, INC.
1285 Avenue of the Americas
New York, New York 10019
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information relates specifically to
two proposed reorganizations whereby PaineWebber U.S. Government Income
Fund ("PW U.S. Government Income Fund"), a series of PaineWebber Managed
Investments Trust would acquire the assets of each of Mitchell
Hutchins/Kidder, Peabody Intermediate Fixed Income Fund ("MH/KP
Intermediate Income Fund"), a series of Mitchell Hutchins/Kidder,
Peabody Investment Trust, and Mitchell Hutchins/Kidder, Peabody
Government Income Fund, Inc. ("MH/KP Government Income Fund"), in exchange
solely for shares of beneficial interest in PW U.S. Government Income
Fund and its assumption of MH/KP Intermediate Income Fund's and MH/KP
Government Income Fund's liabilities.
This Statement of Additional Information consists of this cover
page and the following described documents, each of which is attached
hereto, except as noted, and are incorporated herein by this reference:
(1) The Statement of Additional Information of PW U.S. Government
Income Fund, dated April 1, 1995, File No. 811-4040, filed
March 24, 1995, SEC EDGAR Accession Number 950130-95-000554.
(2) The Statement of Additional Information of MH/KP Intermediate
Income Fund, dated December 29, 1994.
(3) The Statement of Additional Information of MH/KP Government
Income Fund, dated June 1, 1995, File No. 811-4040, filed May
23, 1995, SEC EDGAR Accession Number 950117-95-000172.
(4) The Annual Report to Shareholders of PW U.S. Government
Income Fund, dated November 30, 1994, File No. 811-4040,
filed January 27, 1995, SEC EDGAR Accession Number 746703-95-
000001.
(5) The Annual Report to Shareholders of MH/KP Intermediate
Income Fund, dated August 31, 1994.
(6) The Annual Report to Shareholders of MH/KP Government Income
Fund, dated January 31, 1995, File No. 811-4333, filed March
30, 1995, SEC EDGAR Accession Number 771588-95-000001.
(7) The Semi-Annual Report to Shareholders of PaineWebber PW U.S.
Government Income Fund, for the six months ended May 31,
1995, File No. 811-4040, filed August 2, 1995, SEC EDGAR
Accession Number 746703-95-000002.
(8) The Semi-Annual Report to Shareholders of MH/KP Intermediate
Income Fund, for the six months ended February 28, 1995, File
No. 811-6292, filed April 27, 1995, SEC EDGAR Accession Number
873803-95-000002.
(9) Pro Forma Financial Statements for the Year Ended May 31,
1995.
This Statement of Additional Information is not a prospectus and
should be read only in conjunction with the prospectus/proxy statement
dated September , 1995 relating to the above-referenced transactions.
A copy of this prospectus/proxy statement may be obtained by calling
any PaineWebber Incorporated investment executive or correspondent firm
or by calling toll-free 1-800-647-1568. This Statement of Additional
Information is dated September , 1995.
Statement of Additional Information December 29, 1994
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Kidder, Peabody Intermediate Fixed Income Fund
60 Broad Street New York, New York 10004-2350 (212) 656-1737
This Statement of Additional Information supplements the information contained
in the Prospectus dated December 29, 1994, of Kidder, Peabody Intermediate
Fixed Income Fund (the "Fund"), a series of Kidder, Peabody Investment Trust
(the "Trust"), and should be read together with the Prospectus. The Prospectus
may be obtained without charge by writing or calling the Trust at the address
or the telephone number listed above. This Statement of Additional
Information, although not a prospectus, is incorporated in its entirety by
reference into the Prospectus.
For ease of reference, the section headings used in this Statement of
Additional Information are identical to those used in the Prospectus except as
noted in parentheses in the Table of Contents.
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MANAGER
Kidder Peabody Asset Management, Inc.
INVESTMENT ADVISER
GE Investment Management Incorporated
DISTRIBUTOR
Kidder, Peabody & Co. Incorporated
[Logo]
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INVESTMENT OBJECTIVE AND POLICIES
The Prospectus discusses the investment objective of the Fund and the policies
to be employed to achieve that objective. Supplemental information is set out
below concerning certain of the securities and other instruments in which the
Fund may invest, the investment techniques and strategies that the Fund may
utilize and certain risks involved with those investments, techniques and
strategies.
Rule 144A Securities
The Fund may purchase securities that are not registered under the Securities
Act of 1933, as amended (the "1933 Act"), but that can be sold to "qualified
institutional buyers" in accordance with Rule 144A under the 1933 Act ("Rule
144A Securities"). Particular Rule 144A Securities are considered illiquid
and, therefore, subject to the Fund's limitation on the purchase of illiquid
securities, unless the Trustees determine on an ongoing basis that an adequate
trading market exists for the Rule 144A Securities. The Fund's purchasing Rule
144A Securities could have the effect of increasing the level of illiquidity
in the Fund to the extent that qualified institutional buyers become
uninterested for a time in purchasing Rule 144A Securities. The Board of
Trustees may adopt guidelines and delegate to Kidder Peabody Asset Management,
Inc. ("KPAM"), the Fund's manager, or to GE Investment Management Incorporated
("GEIM"), the Fund's investment adviser, the daily function of determining and
monitoring the liquidity of Rule 144A Securities, although the Board of
Trustees will retain ultimate responsibility for any determination regarding
liquidity. The ability to sell to qualified institutional buyers under Rule
144A is a recent development and neither KPAM nor GEIM can predict how this
market will develop. The Board of Trustees will carefully monitor any
investments by the Fund in Rule 144A Securities.
Government Securities
Securities issued or guaranteed by the U.S. Government or one of its agencies
or instrumentalties ("Government Securities") in which the Fund may invest
include debt obligations of varying maturities issued by the U.S. Treasury or
issued or guaranteed by an agency or instrumentality of the U.S. Government,
including the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration,
Government National Mortgage Association ("GNMA"), General Services
Administration, Central Bank for Cooperatives, Federal Farm Credit Banks,
Federal Home Loan Banks, Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal Intermediate Credit Banks, Federal Land Banks, Federal National
Mortgage Association ("FNMA"), Maritime Administration, Tennessee Valley
Authority, District of Columbia Armory Board, Student Loan Marketing
Association and Resolution Trust Corporation. Direct obligations of the U.S.
Treasury include a variety of securities that differ in their interest rates,
maturities and dates of issuance. Because the United States Government is not
obligated by law to provide support to an instrumentality that it sponsors,
the Fund invests obligations issued by an instrumentality of the U.S.
Government only if KPAM or GEIM determines that the instrumentality's credit
risk does not make its securities unsuitable for investment by the Fund.
2
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Exchange Rate-Related Government Securities
The Fund may invest up to 5% of its net assets in Government Securities for
which the principal repayment at maturity, while paid in U.S. dollars, is
determined by reference to the exchange rate between the U.S. dollar and the
currency of one or more foreign countries ("Exchange Rate-Related
Securities"). The interest payable on these securities is denominated in U.S.
dollars and is not subject to foreign currency risk and, in most cases, is
paid at rates higher than most other Government Securities in recognition of
the foreign currency risk component of Exchange Rate-Related Securities.
Exchange Rate-Related Securities are issued in a variety of forms,
depending on the structure of the principal repayment formula. The principal
repayment formula may be structured so that the securityholder will benefit if
a particular foreign currency to which the security is linked is stable or
appreciates against the U.S. dollar. In the alternative, the principal
repayment formula may be structured so that the securityholder benefits if the
U.S. dollar is stable or appreciates against the linked foreign currency.
Finally, the principal repayment formula can be a function of more than one
currency and, therefore, be designed as a combination of those forms.
Mortgage Related Securities
The average maturity of pass-through pools of mortgage related securities
varies with the maturities of the underlying mortgage instruments. In
addition, a pool's stated maturity may be shortened by unscheduled payments on
the underlying mortgages. Factors affecting mortgage prepayments include the
level of interest rates, general economic and social conditions, the location
of the mortgaged property and age of the mortgage. Because prepayment rates of
individual pools vary widely, it is not possible to predict accurately the
average life of a particular pool. Common practice is to assume that
prepayments will result in an average life ranging from two to ten years for
pools of fixed rate 30-year mortgages. Pools of mortgages with other
maturities or different characteristics will have varying average life
assumptions.
Mortgage related securities may be classified as private, governmental or
government related, depending on the issuer or guarantor. Private mortgage
related securities represent pass-through pools consisting principally of
conventional residential mortgage loans created by non-governmental issuers,
such as commercial banks, savings and loan associations and private mortgage
insurance companies. Governmental mortgage related securities are backed by
the full faith and credit of the United States. GNMA, the principal U.S.
guarantor of such securities, is a wholly owned U.S. governmental corporation
within the Department of Housing and Urban Development. Government related
mortgage backed securities are not backed by the full faith and credit of the
United States. Issuers of these securities include FNMA and FHLMC. FNMA is a
government sponsored corporation owned entirely by private stockholders that
is subject to general regulation by the Secretary of Housing and Urban
Development. Pass-through securities issued by FNMA are guaranteed as to
timely payment of principal and interest by FNMA. FHLMC is a corporate
instrumentality of the United States, the stock of which is owned by the
Federal Home Loan Banks. Participation certificates representing interests in
mortgages from FHLMC's national portfolio are guaranteed as to the timely
payment of interest and ultimate collection of principal by FHLMC.
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GEIM expects that private, governmental entities may create mortgage loan
pools offering pass-through investments in addition to those described above.
The mortgages underlying these securities may be alternative mortgage
instruments, that is, mortgage instruments whose principal or interest
payments may vary or whose terms to maturity may be shorter than previously
customary. As new types of mortgage backed securities are developed and
offered to investors, GEIM, consistent with the Fund's investment objective
and policies, will consider making investments in those new types of
securities on behalf of the Fund.
The Fund also may invest in pass-through securities backed by adjustable
rate mortgages that have been introduced by GNMA, FNMA and FHLMC. These
securities bear interest at a rate that is adjusted monthly, quarterly or
annually. The prepayment experience of the mortgages underlying these
securities may vary from that for fixed rate mortgages. The Fund will only
purchase mortgage related securities issued by persons that are governmental
agencies or instrumentalities or fall outside, or are excluded from, the
definition of investment company under the Investment Company Act of 1940, as
amended (the "1940 Act").
Supranational Organizations. The Fund may invest in fixed income
securities issued by supranational organizations, which are entities
designated or supported by a government or governmental entity to promote
economic development and include, among others, the Asian Development Bank,
the European Coal and Steel Community, the European Economic Community and the
World Bank. These organizations have no taxing authority and are dependent
upon their members for payments of interest and principal. Moreover, the
lending activities of supranational entities are limited to a percentage of
their total capital (including "callable capital" contributed by members at an
entity's call), reserves and net income.
Investment Techniques and Strategies
Forward Currency Transactions. The Fund may hold currencies to meet
settlement requirements for foreign securities and may engage in currency
exchange transactions to protect against uncertainty in the level of future
exchange rates between a particular foreign currency and the U.S. dollar or
between foreign currencies in which the Fund's securities are or may be
denominated. Forward currency contracts are agreements to exchange one
currency for another at a future date. The date (which may be any agreed-upon
fixed number of days in the future), the amount of currency to be exchanged
and the price at which the exchange will take place will be negotiated and
fixed for the term of the contract at the time that the Fund enters into the
contract. Forward currency contracts (1) are traded in a market conducted
directly between currency traders (typically, commercial banks or other
financial institutions) and their customers, (2) generally have no deposit
requirements and (3) are typically consummated without payment of any
commissions. The Fund, however, may enter into forward currency contracts
requiring deposits or involving the payment of commissions. To assure that the
Fund's forward currency contracts are not used to achieve investment leverage,
the Fund will segregate cash or readily marketable securities with its
custodian, or a designated sub-custodian, in an amount at all times equal to
or exceeding the Fund's commitment with respect to the contracts.
Upon maturity of a forward currency contract, the Fund may (1) pay for and
receive the underlying currency, (2) negotiate with the dealer to roll over
the contract into a new forward currency contract with a new future settlement
date or (3) negotiate with the dealer to terminate
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the forward contract by entering into an offset with the currency trader
providing for the Fund's paying or receiving the difference between the
exchange rate fixed in the contract and the then current exchange rate. The
Fund may also be able to negotiate such an offset prior to maturity of the
original forward contract. No assurance can be given that new forward
contracts or offsets will always be available to the Fund.
In hedging a specific portfolio position, the Fund may enter into a
forward contract with respect to either the currency in which the position is
denominated or another currency deemed appropriate by GEIM. The amount the
Fund may invest in forward currency contracts is limited to the amount of the
Fund's aggregate investments in foreign currencies.
At or before the maturity of a forward currency contract, the Fund may
either sell a portfolio security and make delivery of the currency, or retain
the security and offset its contractual obligation to deliver the currency by
purchasing a second contract pursuant to which the Fund will obtain, on the
same maturity date, the same amount of the currency that it is obligated to
deliver. If the Fund retains the portfolio security and engages in an
offsetting transaction, the Fund, at the time of execution of the offsetting
transaction, will incur a gain or a loss to the extent that movement has
occurred in forward currency contract prices. Should forward prices decline
during the period between the Fund's entering into a forward contract for the
sale of a currency and the date it enters into an offsetting contract for the
purchase of the currency, the Fund will realize a gain to the extent that the
price of the currency it has agreed to sell exceeds the price of the currency
it has agreed to purchase. Should forward prices increase, the Fund will
suffer a loss to the extent that the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
The cost to the Fund of engaging in currency transactions varies with
factors such as the currency involved, the length of the contract period and
the market conditions then prevailing. The use of forward currency contracts
does not eliminate fluctuations in the underlying prices of the securities,
but it does establish a rate of exchange that can be achieved in the future.
In addition, although forward currency contracts limit the risk of loss due to
a decline in the value of the hedged currency, at the same time, they limit
any potential gain that might result should the value of the currency
increase.
If a devaluation is generally anticipated, the Fund may not be able to
contract to sell currency at a price above the devaluation level it
anticipates. The Fund will not enter into a currency transaction if, as a
result, it will fail to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code"), for a given year. See
"Taxes -- Tax Status of the Fund and its Shareholders."
Options on Foreign Currencies. The Fund may purchase and write put and
call options on foreign currencies for the purpose of hedging against declines
in the U.S. dollar value of foreign currency-denominated securities and
against increases in the U.S. dollar cost of securities to be acquired by the
Fund. Like the writing of other kinds of options, the writing of an option on
a foreign currency constitutes only a partial hedge, up to the amount of the
premium received; the Fund could also be required, with respect to any option
it has written, to purchase or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The purchase of an option on a
foreign currency may constitute an effective hedge against fluctuations in
exchange rates, although in the event of rate movements adverse to the Fund's
position, the Fund may
5
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forfeit the entire amount of the premium plus related transaction costs.
Options on foreign currencies to be written or purchased by the Fund are
traded on U.S. exchanges or over-the-counter. The Fund limits the premiums
paid on options on foreign currencies to 5% of the value of its total assets.
To protect against diminutions in the value of securities held by the Fund
in a particular foreign currency, the Fund may purchase put options on the
foreign currency. In such a case, if the value of the currency declined, the
Fund would have the right to sell the currency for a fixed amount in U.S.
dollars, which would offset, in whole or in part, the adverse effect on the
Fund's portfolio that otherwise would have resulted. When an increase in the
U.S. dollar value of a currency in which securities to be acquired by the Fund
are denominated is projected, thereby increasing the cost of the securities,
the Fund conversely may purchase call options on the currency. The purchase of
the options could offset, at least partially, the effects of the adverse
movements in exchange rates. As in the case of other types of options,
however, the benefit to the Fund deriving from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, if currency exchange rates do not move in the direction,
or to the extent, anticipated, the Fund could sustain losses on transactions
in foreign currency options that would require it to forego a portion, or all,
of the benefits of advantageous changes in the rates. The premiums paid by the
Fund in purchasing options on foreign currencies, options on securities and
options on stock indexes will be limited to not more than 20% of the Fund's
net assets.
When GEIM anticipates a decline in the U.S. dollar value of foreign
currency-denominated securities due to adverse fluctuations in exchange rates,
the Fund could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option would most
likely not be exercised, and the diminution in value of portfolio securities
would be offset by the amount of the premium received. Instead of purchasing a
call option to hedge against an anticipated increase in the U.S. dollar cost
of securities to be acquired, the Fund could write a put option on the
relevant currency that, if rates moved in the manner projected, would expire
unexercised and allow the Fund to hedge the increased cost up to the amount of
the premium. As in the case of other types of options, however, the writing of
a foreign currency option will constitute only a partial hedge up to the
amount of the premium, and only if rates move in the expected direction. If
this does not occur, the option may be exercised and the Fund would be
required to purchase or sell the underlying currency at a loss that may not be
offset by the amount of the premium. Through the writing of options on foreign
currencies, the Fund may also be required to forego all, or a portion, of the
benefits that might otherwise have been obtained from favorable movements in
exchange rates.
The Fund may write covered call options on foreign currencies. A call
option written by the Fund on a foreign currency is "covered" if the Fund owns
the foreign currency underlying the call or has an absolute and immediate
right to acquire the foreign currency without additional cash consideration
(or for additional cash consideration held in a segregated account by the
Fund's custodian or by a designated sub-custodian) upon conversion or exchange
of other foreign currency held by the Fund. A call option also is deemed to be
covered if the Fund has a call on the same foreign currency and in the same
principal amount as the call written when the exercise price of the call held
(1) is equal to or less than the exercise price of the call written or (2) is
greater than the exercise price of the call written if the difference is
maintained by the Fund in
6
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cash, Government Securities and other high-grade liquid debt securities in a
segregated account with the Fund's custodian or with a designated
sub-custodian.
The Fund may write uncovered call options on foreign currencies to provide
a hedge against a decline, due to an adverse change in exchange rates, in the
U.S. dollar value of a security that the Fund owns or has a right to acquire.
A call option written for these purposes, typically referred to as
"cross-hedging," would be written on a foreign currency that GEIM determines
is closely correlated with the foreign currency in which the hedged security
is denominated. In such circumstances, the Fund would collateralize the option
by maintaining in a segregated account with its custodian, or with a
designated sub-custodian, cash or Government Securities in an amount not less
than the value of the underlying foreign currency in U.S. dollars. To the
extent that cash or cash equivalents, including Government Securities, are
maintained by the Fund in a segregated account with the Fund's custodian or
with a designated sub-custodian to collateralize the Fund's writing of options
on foreign currencies, options on securities and options on stock indexes, the
Fund will limit the collateralization to not more than 50% of its net assets.
Options. To the extent required by the laws of certain states, the Fund
may not be permitted to commit more than 5% of its assets to premiums when
purchasing call and put options on securities. Should these state laws change
or should the Fund obtain a waiver of their application, the Fund may commit
more than 5% of its assets to premiums when purchasing call and put options on
securities. In addition, should the Trust determine that a commitment is no
longer in the best interests of the Fund and its shareholders, the Trust will
revoke the commitment by terminating the sale of the Fund's shares in the
state involved.
Futures Contracts. The Fund may trade securities index, currency and
interest rate futures contracts to the extent permitted under rules and
interpretations adopted by the Commodity Futures Trading Commission (the
"CFTC"). U.S. futures contracts have been designed by exchanges that have been
designated as "contract markets" by the CFTC, and must be executed through a
futures commission merchant, or brokerage firm, that is a member of the
relevant contract market. Futures contracts trade on a number of contract
markets, and, through their clearing corporations, the exchanges guarantee
performance of the contracts as between the clearing members of the exchange.
The purpose of trading futures contracts is to protect the Fund from
fluctuations in value of investment securities without its necessarily buying
or selling the securities. Because the value of the Fund's investment
securities will exceed the value of the futures contracts sold by the Fund, an
increase in the value of the futures contracts could only mitigate, but not
totally offset, the decline in the value of the Fund's assets. No
consideration is paid or received by the Fund upon trading a futures contract.
Upon trading a futures contract, the Fund will be required to deposit in a
segregated account with its custodian or a designated sub-custodian an amount
of cash, short-term Government Securities or other U.S. dollar-denominated,
high-grade, short-term money market instruments equal to approximately 1% to
10% of the contract amount (this amount is subject to change by the exchange
on which the contract is traded and brokers may charge a higher amount). This
amount is known as "initial margin" and is in the nature of a performance bond
or good faith deposit on the contract that is returned to the Fund upon
termination of the futures contract, assuming that all contractual obligations
have been satisfied; the broker will have access to amounts in the margin
account if the Fund fails to meet its
7
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contractual obligations. Subsequent payments, known as "variation margin," to
and from the broker, will be made daily as the price of the currency or
securities underlying the futures contract fluctuates, making the long and
short positions in the futures contract more or less valuable, a process known
as "marking-to-market." At any time prior to the expiration of a futures
contract, the Fund may elect to close a position by taking an opposite
position, which will operate to terminate the Fund's existing position in the
contract.
Positions in futures contracts may be closed out only on the exchange on
which they were undertaken (or through a linked exchange). No secondary market
for futures contracts currently exists, and although the Fund intends to trade
futures contracts only if an active market for them exists, no assurance can
be given that an active market will exist for the contracts at any particular
time. Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made on that day at a
price beyond that limit. Prices for futures contracts may move to the daily
limit for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting the Fund to
substantial losses. In that case, and in the event of adverse price movements,
the Fund would be required to make daily cash payments of variation margin. In
such circumstances, an increase in the value of the portion of the Fund's
securities being hedged, if any, may partially or completely offset losses on
the futures contract.
Options on Futures Contracts. The Fund may purchase and write put and call
options on securities index, currency and interest rate futures contracts that
are traded on a U.S. exchange or board of trade or a foreign exchange, to the
extent permitted under rules and interpretations of the CFTC, as a hedge
against changes in market conditions and interest rates, and may enter into
closing transactions with respect to those options to terminate existing
positions. No assurance can be given that the closing transactions can be
effected.
Lending Portfolio Securities. The Fund may lend portfolio securities to
well-known and recognized U.S. and foreign brokers, dealers and banks. These
loans, if and when made, may not exceed 33 1/3% of the value of the Fund's
total assets. The Fund will not lend securities to Kidder, Peabody & Co.
Incorporated ("Kidder, Peabody"), the Fund's distributor, unless the Fund has
applied for and received specific authority to do so from the Securities and
Exchange Commission (the "SEC"). The Fund's loans of securities will be
collateralized by cash, letters of credit or Government Securities. The cash
or instruments collateralizing the Fund's loans of securities will be
maintained at all times in a segregated account with the Fund's custodian, or
with a designated sub-custodian, in an amount at least equal to the current
market value of the loaned securities. From time to time, the Fund may pay a
part of the interest earned from the investment of collateral received for
securities loaned to the borrower and/or a third party that is unaffiliated
with the Fund and is acting as a "finder." The Fund will comply with the
following conditions whenever it loans securities: (1) the Fund must receive
at least 100% cash collateral or equivalent securities from the borrower; (2)
the borrower must increase the collateral whenever the market value of the
securities loaned rises above the level of the collateral; (3) the Fund must
be able to terminate the loan at any time; (4) the Fund must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions on the loaned securities, and any increase in market value; (5)
the Fund may pay only reasonable custodian fees in connection with the loan;
and (6) voting rights on the loaned securities may pass to the borrower except
that,
8
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if a material event adversely affecting the investment in the loaned
securities occurs, the Trust's Board of Trustees must terminate the loan and
regain the right to vote the securities.
When-Issued and Delayed-Delivery Securities. When the Fund engages in
when-issued or delayed-delivery securities transactions, it relies on the
other party to consummate the trade. Failure of the seller to do so may result
in the Fund's incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
Investment Restrictions
Investment restrictions numbered 1 through 13 below have been adopted by the
Trust as fundamental policies with respect to the Fund. Under the 1940 Act, a
fundamental policy may not be changed without the vote of a majority of the
outstanding voting securities of the Fund, as defined in the 1940 Act.
Investment restrictions numbered 14 through 16 may be changed by a vote of a
majority of the Trustees at any time.
Under the investment restrictions adopted by the Trust with respect to the
Fund:
1. The Fund will not purchase securities (other than Government
Securities) of any issuer if, as a result of the purchase, more than 5% of
the value of the Fund's total assets would be invested in the securities
of the issuer, except that up to 25% of the value of the Fund's total
assets may be invested without regard to this 5% limitation.
2. The Fund will not purchase more than 10% of the voting securities
of any one issuer, or more than 10% of the securities of any class of any
one issuer, except that this limitation is not applicable to the Fund's
investments in Government Securities, and up to 25% of the Fund's assets
may be invested without regard to these 10% limitations.
3. The Fund will not borrow money, except that the Fund may enter into
forward roll transactions and borrow from banks for temporary or emergency
(not leveraging) purposes, including the meeting of redemption requests
and cash payments of dividends and distributions that might otherwise
require the untimely disposition of securities, in an amount not to exceed
20% of the value of the Fund's total assets (including the amount
borrowed) valued at market less liabilities (not including the amount
borrowed) at the time the borrowing is made. Whenever borrowings, other
than forward roll transactions, exceed 5% of the value of the total assets
of the Fund, the Fund will not make any additional investments.
4. The Fund will not lend money to other persons, except through
purchasing debt obligations, lending portfolio securities in an amount not
to exceed 33 1/3% of the Fund's assets taken at value and entering into
repurchase agreements.
5. The Fund will invest no more than 25% of the value of its total
assets in securities of issuers in any one industry. For purposes of this
restriction, the term industry will be deemed to include (a) the
government of any country other than the United States, but not the United
States Government and (b) any supranational organization.
6. The Fund will not purchase securities on margin, except that the
Fund may engage in short sales of securities and obtain any short-term
credits necessary for the clearance of purchases and sales of securities.
For purposes of this restriction, the deposit or payment of
9
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initial or variation margin in connection with futures contracts or
options on futures contracts will not be deemed to be a purchase of
securities on margin.
7. The Fund will not purchase or sell real estate or real estate
limited partnership interests, except that the Fund may purchase and sell
securities of companies that deal in real estate or interests in real
estate.
8. The Fund will not purchase or sell commodities or commodity
contracts (except currencies, securities index, currency and interest rate
futures contracts and related options, forward foreign currency contracts
and other similar contracts).
9. The Fund will not invest in oil, gas or other mineral leases or
exploration or development programs.
10. The Fund will not act as an underwriter of securities, except that
the Fund may acquire securities under circumstances in which, if the
securities were sold, the Fund might be deemed to be an underwriter for
purposes of the 1933 Act.
11. The Fund will not purchase any security, other than a security
acquired pursuant to a plan of reorganization or an offer of exchange, if
as a result of the purchase (a) the Fund would own any securities of an
open-end investment company or more than 3% of the total outstanding
voting stock of any closed-end investment company or (b) more than 5% of
the value of the Fund's total assets would be invested in securities of
any one or more closed-end investment companies.
12. The Fund will not participate on a joint or joint-and-several
basis in any securities trading account.
13. The Fund will not make investments for the purpose of exercising
control of management.
14. The Fund will not purchase any security, if as a result of the
purchase, the Fund would then have more than 5% of its total assets
invested in securities of companies (including predecessors) that have
been in continuous operation for fewer than three years.
15. The Fund will not purchase or retain securities of any company if,
to the knowledge of the Fund, any of the Trust's Trustees or officers or
any officer or director of GEIM or KPAM individually owns more than .5% of
the outstanding securities of the company and together they own
beneficially more than 5% of the securities.
16. The Fund will not invest in warrants (other than warrants acquired
by the Fund as part of a unit or attached to securities at the time of
purchase) if, as a result, the investments (valued at the lower of cost or
market) would exceed 5% of the value of the Fund's net assets of which not
more than 2% of the Fund's net assets may be invested in warrants not
listed on a recognized foreign or domestic stock exchange.
The Trust may make commitments regarding the Fund more restrictive than
the restrictions listed above so as to permit the sale of the Fund's shares in
certain states. Should the Trust determine that a commitment is no longer in
the best interests of the Fund and its shareholders, the Trust will revoke the
commitment by terminating the sale of the Fund's shares in the state involved.
The percentage limitations contained in the restrictions listed above apply at
the time of purchases of securities.
10
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Risk Factors and Special Considerations
Investment in Foreign Securities. Investing in securities issued by
foreign companies and governments involves considerations and potential risks
not typically associated with investing in obligations issued by the United
States Government and domestic corporations. Less information may be available
about foreign companies than about domestic companies and foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards or to other regulatory practices and requirements
comparable to those applicable to domestic companies. The values of foreign
investments are affected by changes in currency rates or exchange control
regulations, restrictions or prohibitions on the repatriation of foreign
currencies, application of foreign tax laws, including withholding taxes,
changes in governmental administration or economic or monetary policy (in the
United States or abroad) or changed circumstances in dealings between nations.
Costs are also incurred in connection with conversions between various
currencies. In addition, foreign brokerage commissions are generally higher
than those charged in the United States and foreign securities markets may be
less liquid, more volatile and less subject to governmental supervision than
in the United States. Investments in foreign countries could be affected by
other factors not present in the United States, including expropriation,
confiscatory taxation, lack of uniform accounting and auditing standards and
potential difficulties in enforcing contractual obligations and could be
subject to extended clearance and settlement periods.
Currency Exchange Rates. The Fund's share value may change when the
currencies, other than the U.S. dollar, in which the Fund's portfolio
investments are denominated strengthen or weaken against the U.S. dollar.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments
in different countries as seen from an international perspective. Currency
exchange rates can also be affected unpredictably by intervention by U.S. or
foreign governments or central banks or by currency controls or political
developments in the United States or abroad.
Forward Currency Contracts, Futures Contracts and Options on Foreign
Currencies. In entering into forward currency contracts, the Fund is subject
to a number of risks and special considerations. The market for forward
currency contracts, for example, may be limited with respect to certain
currencies. The existence of a limited market may in turn restrict the Fund's
ability to hedge against the risk of devaluation of currencies in which the
Fund holds a substantial quantity of securities. The successful use of forward
currency contracts as a hedging technique draws upon GEIM's special skills and
experience with respect to those instruments and usually depends on GEIM's
ability to forecast interest rate and currency exchange rate movements
correctly. Should interest or exchange rates move in an unexpected manner, the
Fund may not achieve the anticipated benefits of forward currency contracts or
may realize losses and thus be in a less advantageous position than if those
strategies had not been used. In addition, the correlation between movements
in the prices of those contracts and movements in the prices of the currencies
hedged or used for cover will not be perfect.
The Fund's ability to dispose of its positions in forward currency
contracts depends on the availability of active markets in those instruments
and GEIM cannot now predict the amount of trading interest that may exist in
the future in forward currency contracts. Forward currency contracts may be
closed out only by the parties entering into an offsetting contract. As a
result,
11
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no assurance can be given that the Fund will be able to utilize these
contracts effectively for the purposes described above.
Certain transactions involving futures contracts, options on foreign
currencies and forward currency contracts are not traded on contract markets
regulated by the CFTC; forward currency contracts also are not regulated by
the SEC. Instead, forward currency contracts are traded through financial
institutions acting as market-makers. Foreign currency options are traded on
certain national securities exchanges, such as the Philadelphia Stock Exchange
and the Chicago Board Options Exchange, subject to SEC regulation. In the
forward currency market, no daily price fluctuation limits are applicable, and
adverse market movements could therefore continue to an unlimited extent over
a period of time. Moreover, a trader of forward currency contracts could lose
amounts substantially in excess of its initial investments, due to the
collateral requirements associated with those positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on those
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to those transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may exist, potentially permitting the Fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options are
subject to the risks of the availability of a liquid secondary market as
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exercise and settlement of
exchange-traded foreign currency options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign
countries for this purpose. As a result, the OCC may, if it determines that
foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing members, impose special procedures on
exercise and settlement, such as technical changes in the mechanics of
delivery of currency, the fixing of dollar settlement prices or prohibitions
on exercise.
Futures contracts, options on futures contracts, forward currency
contracts and options on foreign currencies may be traded on foreign
exchanges, to the extent permitted by the CFTC. These transactions are subject
to the risk of governmental actions affecting trading in or the prices of
foreign currencies or securities. The value of these positions also could be
adversely affected by (1) other complex foreign political and economic
factors, (2) lesser availability of data on which to make trading decisions
than in the United States, (3) delays in the Fund's ability to act upon
economic events occurring in foreign markets during nonbusiness hours in the
United States, (4) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States and (5)
lesser trading volume.
Exchange Rate-Related Securities. Investments in Exchange Rate-Related
Securities entail special risks. The possibility exists of significant changes
in rates of exchange between the U.S.
12
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dollar and any foreign currency to which an Exchange Rate-Related Security is
linked. If currency exchange rates do not move in the direction or to the
extent anticipated by GEIM at the time of purchase of the security, the amount
of principal repaid at maturity might be significantly below the par value of
the security, which might not be offset by the interest earned by the Fund
over the term of the security. The rate of exchange between the U.S. dollar
and other currencies is determined by the forces of supply and demand in the
foreign exchange markets. These forces are affected by the international
balance of payments and other economic and financial conditions, government
intervention, speculation and other factors. The imposition or modification of
foreign exchange controls by the U.S. or foreign governments or intervention
by central banks could also affect exchange rates. Finally, there is no
assurance that sufficient trading interest to create a liquid secondary market
will exist for a particular Exchange Rate-Related Security due to conditions
in the debt and foreign currency markets. Illiquidity in the forward foreign
exchange market and the high volatility of the foreign exchange market may
from time to time combine to make it difficult to sell an Exchange
Rate-Related Security prior to maturity without incurring a significant price
loss.
Portfolio Transactions and Turnover
Decisions to buy and sell securities for the Fund are made by GEIM, subject to
review by KPAM and the Trustees. Transactions on domestic stock exchanges and
some foreign stock exchanges involve the payment of negotiated brokerage
commissions. On exchanges on which commissions are negotiated, the cost of
transactions may vary among different brokers. On most foreign exchanges,
commissions are generally fixed.
No stated commission is generally applicable to securities traded in U.S.
over-the-counter markets, but the prices of those securities include
undisclosed commissions or mark-ups. The cost of securities purchased from
underwriters includes an underwriting commission or concession, and the prices
at which securities are purchased from and sold to dealers include a dealer's
mark-up or mark-down. Government Securities generally are purchased from
underwriters or dealers, although certain newly issued Government Securities
may be purchased directly from the United States Treasury or from the issuing
agency or instrumentality.
In selecting brokers or dealers to execute securities transactions on
behalf of the Fund, GEIM seeks the best overall terms available. In assessing
the best overall terms available for any transaction, GEIM considers factors
that it deems relevant, including the breadth of the market in the security,
the price of the security, the financial condition and execution capability of
the broker or dealer and the reasonableness of the commission, if any, for the
specific transaction and on a continuing basis. In addition, the investment
advisory agreement among the Trust, KPAM and GEIM relating to the Fund
authorizes GEIM, on behalf of the Fund, in selecting brokers or dealers to
execute a particular transaction, and in evaluating the best overall terms
available, to consider the brokerage and research services (as those terms are
defined in Section 28(e) of the Securities Exchange Act of 1934) provided to
the Fund and/or other accounts over which GEIM or its affiliates exercise
investment discretion. The fees under the Investment Advisory Agreement (the
"Advisory Agreement") are not reduced by reason of the Fund's receiving
brokerage and research services. The Trustees periodically review the
commissions paid by the Fund to determine if the commissions paid over
representative periods of time were reasonable in relation to the benefits
inuring to the Fund. Over-the-counter purchases and sales by the Fund
13
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are transacted directly with principal market makers except in those cases in
which better prices and executions may be obtained elsewhere. The Fund does
not purchase any security, including Government Securities, during the
existence of any underwriting or selling group relating to the security of
which Kidder, Peabody is a member, except to the extent permitted under rules,
interpretations or exemptions of the SEC. For the fiscal years ended August
31, 1994 and August 31, 1993 and for the period March 12, 1992 (commencement
of operations) to August 31, 1992, the Fund did not pay any brokerage
commissions.
The Fund does not consider portfolio turnover rate a limiting factor in
making investment decisions. The Fund's turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the year
by the monthly average value of portfolio securities. Securities with
remaining maturities of one year or less on the date of acquisition are
excluded from the calculation.
MANAGEMENT OF THE FUND
Trustees and Officers
The names of Trustees and officers of the Trust, together with information as
to their principal business occupations during the last five years, are shown
below. An asterisk appears before the name of each Trustee who is an
"interested person" of the Trust, as defined in the 1940 Act.
George V. Grune, Jr., Trustee, Chairman of the Board and President.
Executive Managing Director of the Asset Management Division of Kidder,
Peabody and President and a Director of KPAM.
David J. Beaubien, Trustee. Chairman of Yankee Environmental Systems,
Inc., manufacturer of meteorological measuring instruments. Director of IEC,
Inc., manufacturer of electronic assemblies, Belfort Instruments, Inc.,
manufacturer of environmental instruments, and Oriel Corp., manufacturer of
optical instruments. Prior to January 1991, Senior Vice President of EG&G,
Inc., a company that makes and provides a variety of scientific and
technically oriented products and services.
William W. Hewitt, Jr., Trustee. Trustee of The Guardian Asset Allocation
Fund, The Guardian Baillie Gifford International Fund, The Guardian Bond Fund,
Inc., The Guardian Cash Fund, Inc., The Guardian Park Ave. Fund, The Guardian
Stock Fund, Inc., The Guardian Cash Management Trust and The Guardian U.S.
Government Trust.
Russell H. Johnson, Trustee and Vice Chairman. Managing Director of
Kidder, Peabody and a Managing Director and a director of KPAM. Prior to April
1993 and December 1991, Senior Vice President of KPAM and Kidder, Peabody,
respectively.
Thomas R. Jordan, Trustee. Principal of The Dilenschneider Group, Inc., a
corporate communications and public policy counseling firm. Prior to January
1992, Senior Vice President of Hill and Knowlton, a public relations and
public affairs firm. Prior to April 1991, President of The Jordan Group, a
management consulting and strategies development firm.
Carl W. Schafer, Trustee. President of the Atlantic Foundation, a
charitable foundation supporting mainly oceanographic exploration and
research. Director of International Agritech
14
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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 Bio Techniques Laboratories
Inc., an agricultural biotechnology company. Prior to January 1993, chairman
of the Investment Advisory Committee of the Howard Hughes Medical Institute
and director of Ecova Corporation, a toxic waste treatment firm. Prior to May
1990, principal of Rockefeller and Company, Inc., manager of investments.
Robert W. Aufiero, Executive Vice President and Chief Investment Officer.
Senior Portfolio Manager and Vice President, Fixed Income Portfolios, of
General Electric Investment Corporation ("GEIC"), a registered investment
adviser, assigned to GEIM. Prior to January 1993, Vice President and Portfolio
Manager/Trader at Shields Asset Management, Inc., a registered investment
adviser.
David J. Beck, Senior Vice President and Investment Officer. Vice
President, Fixed Income Portfolios, of GEIC, assigned to GEIM. Prior to
September 1993, Investment Manager, Fixed Income Portfolios. Prior to 1992,
officer of Money Market Fund Investments of GEIC.
Robert B. Jones, Senior Vice President. Senior Vice President of Kidder,
Peabody and Senior Vice President and director of KPAM. Prior to December
1990, Vice President of Kidder, Peabody.
Lawrence H. Kaplan, Senior Vice President, General Counsel and Secretary.
Senior Vice President and Associate General Counsel of Kidder, Peabody,
director, Senior Vice President, General Counsel and Assistant Secretary of
KPAM and a director and/or officer of various Kidder, Peabody subsidiaries.
Prior to November 1990, attorney in private practice with the law firm of
Brown & Wood.
John J. Boretti, Vice President and Chief Financial Officer. Vice
President of Kidder, Peabody and Vice President and Chief Financial Officer of
KPAM. Prior to October 1992, self employed as a consultant. Prior to August
1992, Director, Executive Vice President, Chief Financial Officer and
Treasurer of USF&G Review Management Corp., Vice President and director of
USF&G Investment Management Corp., Treasurer of USF&G Mutual Funds, Executive
Vice President, Treasurer and Chief Financial Officer of USF&G Investment
Services, Inc. and director of Axe Houghton Management. Prior to December
1990, Vice President of USF&G Financial Services.
Ronald A. Huether, Treasurer and Assistant Secretary. Vice President of
Kidder, Peabody and a Vice President and Treasurer of KPAM.
Lisa S. Kellman, Assistant Secretary. Assistant Vice President of Kidder,
Peabody and KPAM. Prior to January 1993, Administrative Officer of Kidder,
Peabody.
Leonard I. Chubinsky, Assistant Vice President and Assistant Secretary.
Assistant Vice President and Assistant General Counsel of Kidder, Peabody and
Assistant Vice President of KPAM. Prior to July 1992, attorney with
Curtiss-Wright Corporation, a diversified manufacturing company. Prior to July
1989, Vice President of National Securities & Research Corporation.
Helen V. Del Bove, Assistant Treasurer. Assistant Vice President of
Kidder, Peabody and Vice President of KPAM.
Certain of the Trustees and officers of the Trust are directors and/or
trustees and officers of other mutual funds managed by KPAM. The addresses of
the non-interested Trustees are as follows: 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,
15
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200 Park Avenue, New York, New York 10166; and Mr. Schafer, P.O. Box 1164,
Princeton, New Jersey 08542. The address of each of Mr. Grune, Mr. Johnson and
the officers listed above, other than Messrs. Aufiero and Beck, is 60 Broad
Street, New York, New York 10004-2350. The address of Messrs. Aufiero and Beck
is 3003 Summer Street, Stamford, Connecticut 06094.
By virtue of the responsibilities assumed by KPAM under its management
agreement with the Trust (the "Management Agreement"), and by GEIM under its
Advisory Agreement with KPAM and the Trust, the Fund requires no executive
employees other than officers of the Trust, none of whom devotes full time to
the affairs of the Fund. Trustees and officers of the Fund, as a group, owned
less than 1% of the outstanding shares of beneficial interest of each Class of
the Fund as of December 1, 1994. The Trust pays each Trustee who is not an
officer, director or employee of KPAM, GEIM, or any of their affiliates, an
annual retainer of $1,000, and $375 for each Board of Trustees meeting
attended, and reimburses the Trustee for out-of-pocket expenses associated
with attendance at Board meetings. The Chairman of the Board's Audit Committee
receives an annual fee of $250. No officer, director or employee of KPAM,
GEIM, or any of their affiliates, receives any compensation from the Trust for
serving as an officer or Trustee of the Trust. For the fiscal year ended
August 31, 1994, the Trust paid $57,907 in Trustees" fees and out-of-pocket
expenses, of which $11,891 was allocated to the Fund.
Manager
KPAM, located at 60 Broad Street, New York, New York 10004-2350, and a
wholly-owned subsidiary of Kidder, Peabody, bears all expenses in connection
with the performance of its services as the Fund's manager.
The Management Agreement, pursuant to the terms of which KPAM acts as the
Fund's manager, remains in effect for an initial term of two years and
thereafter continues in effect from year to year, provided its continuance is
approved at least annually by (1) the Trustees or (2 ) by a vote of a majority
of the Fund's outstanding voting securities, as defined in the 1940 Act,
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 1940 Act,
of any party to the Management Agreement, by vote cast in person at a meeting
called for the purpose of voting on such approval. The Management Agreement
was most recently continued by the Trustees, including a majority of the
Trustees who are not "interested persons," at a meeting held on March 2, 1994.
The Management Agreement is terminable without penalty, by the Trust on not
more than 60 nor less than 30 days" notice to KPAM, by vote of the holders of
a majority of the Fund's outstanding voting securities, as defined in the 1940
Act, or by KPAM on not more than 60 nor less than 30 days" notice to the
Trust. The Management Agreement will terminate automatically in the event of
its assignment, as defined in the 1940 Act and the rules thereunder.
For the fiscal year ended August 31, 1994, the Trust paid fees of $366,675
to KPAM with respect to the Fund. For the fiscal year ended August 31, 1993
and for the period March 12, 1992 (commencement of operations) through August
31, 1992, the Trust accrued fees of $407,415 and $104,757, respectively, to
KPAM with respect to the Fund. However, during these periods, KPAM waived fees
and reimbursed the Trust for a portion of the Fund's expenses in the amounts
of $164,415 and $80,190, respectively.
16
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KPAM will not be liable for any error of judgment or mistake of law or for
any loss suffered by the Trust with respect to the Fund in connection with the
matters to which the Management 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 Management Agreement.
Under its Management Agreement, KPAM has agreed that, if in any fiscal
year of the Fund, the aggregate expenses of the Fund (including management
fees, but excluding interest, taxes, brokerage and, with the prior written
consent of the necessary state securities commissions, extraordinary expenses)
exceed the expense limitation of any state having jurisdiction over the Trust,
KPAM will reimburse the Trust for the excess expense. This expense
reimbursement obligation is limited to the amount of KPAM's fees under the
Management Agreement. Any expense reimbursement will be estimated, reconciled
and paid on a monthly basis. As of the date of this Statement of Additional
Information, the most restrictive state expense limitation applicable to the
Fund requires reimbursement of expenses in any year that the Fund's expenses
subject to the limitation exceed 2 1/2% of the first $30 million of the
average daily value of the Fund's net assets, 2% of the next $70 million of
the average daily value of the Fund's net assets and 1 1/2% of the remaining
average daily value of the Fund's net assets. For the fiscal year ended August
31, 1994, the Fund's expenses did not exceed such limitations.
Investment Adviser
GEIM, located at 3003 Summer Street, P.O. Box 7900, Stamford, Connecticut
06904, and a wholly-owned subsidiary of General Electric Company, bears all
expenses in connection with the performance of its services as the Fund's
investment adviser. The Advisory Agreement remains in effect for an initial
term of two years and thereafter continues in effect from year to year,
provided its continuance is approved at least annually by (1) the Trustees or
(2) by a vote of a majority of the Fund's outstanding voting securities, as
defined in the 1940 Act, 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 1940 Act, of any party to the Advisory Agreement, by vote cast
in person at a meeting called for the purpose of voting on such approval. The
Advisory Agreement was most recently continued by the Trustees, including a
majority of the Trustees who are not "interested persons," at a meeting held
on March 2, 1994. The Advisory Agreement is terminable without penalty, by the
Trust on not more than 60 nor less than 30 days" notice to GEIM, by vote of
the holders of a majority of the Fund's outstanding voting securities, as
defined in the 1940 Act, or by GEIM on not more than 60 nor less than 30 days"
notice to the Trust. The Advisory Agreement will terminate automatically in
the event of its assignment, as defined in the 1940 Act and the rules
thereunder.
For the fiscal year ended August 31, 1994, KPAM paid fees of $261,911 to
GEIM with respect to the Fund. For the fiscal year ended August 31, 1993 and
for the period March 12, 1992 (commencement of operations) through August 31,
1992, KPAM accrued fees of $291,011 and $74,826, respectively, to GEIM with
respect to the Fund. However, during these periods, GEIM waived a portion of
its fees in the amount of $117,439 and waived its total fees, respectively.
Under the Advisory Agreement, GEIM has agreed that, if in any fiscal year
of the Fund, the aggregate expenses of the Fund (including management fees,
but excluding interest, taxes, brokerage and, with the prior written consent
of the necessary state securities commissions,
17
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extraordinary expenses) exceed the expense limitation of any state having
jurisdiction over the Trust, GEIM will reimburse KPAM for 70% on the Fund's
average daily net assets up to $200 million and 50% thereafter of the amount
KPAM is required to reimburse the Trust under the Management Agreement. The
expense reimbursement obligation of GEIM is limited to the amount of GEIM's
fees under the Advisory Agreement. For the fiscal year ended August 31, 1994,
the Fund's expenses did not exceed such limitations.
GEIM will not be liable for any error of judgment or mistake of law or for
any loss suffered by the Trust with respect to the Fund in connection with the
matters to which the Advisory 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 Advisory Agreement.
Distributor
Kidder, Peabody, 10 Hanover Square, New York, New York 10005-3592, serves as
the distributor of the Fund's shares on a best efforts basis. Under a
Shareholder Servicing and Distribution Plan (the "Plan") adopted by the Trust
with respect to the Fund pursuant to Rule 12b-1 under the 1940 Act, the Trust
pays Kidder, Peabody monthly fees calculated at the aggregate annual rates of
.25% and .75% of the value of the Fund's average daily net assets attributed
to Class A shares and Class B shares, respectively. Under its terms, the Plan
continues from year to year, so long as its continuance is approved annually
by vote of the Trust's Board of Trustees, including a majority of the Trustees
who are not interested persons of the Trust and who have no direct or indirect
financial interest in the operation of the Plan (the "Independent Trustees").
The Plan may not be amended to increase materially the amount to be spent for
the services provided by Kidder, Peabody without Fund shareholder approval,
and all material amendments of the Plan also must be approved by the Trustees
in the manner described above. The Plan may be terminated with respect to a
Class at any time, without penalty, by vote of a majority of the Independent
Trustees or by a vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) represented by the Class on not more than 30 days"
written notice to Kidder, Peabody.
Pursuant to the Plan, Kidder, Peabody provides the Trust's Board of
Trustees with periodic reports of amounts expended under the Plan and the
purpose for which the expenditures were made. The Trustees believe that the
Fund's expenditures under the Plan benefit the Fund and its shareholders by
providing better shareholder services and by facilitating the distribution of
shares. With respect to Class A shares, for the fiscal year ended August 31,
1994, Kidder, Peabody received $115,682 from the Fund, of which it is
estimated that $54,140 was spent on commission credits to branch offices for
payments of shareholder servicing compensation to Investment Executives and
$178,862 was spent on overhead and other branch office shareholder servicing-
related expenses. With respect to Class B shares, for the fiscal year ended
August 31, 1994, Kidder, Peabody received $22,083 from the Fund, of which it
is estimated that $155 was spent on advertising, $1,503 was spent on printing
and mailing of prospectuses to other than current shareholders, $10,376 was
spent on commission credits to branch offices for payments of commissions and
shareholder servicing compensation to Investment Executives and $10,049 was
spent on overhead and other branch office distribution or shareholder
servicing-related expenses. The term "overhead and other branch office
distribution or shareholder servicing-related
18
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expenses" represents (1) the expenses of operating Kidder, Peabody's branch
offices in connection with the sale of Fund shares or servicing of shareholder
accounts, including lease costs, the salaries and employee benefits of
operations and sales and servicing support personnel, utility costs,
communications costs and the costs of stationery and supplies, (2) the costs
of client sales seminars, (3) travel expenses of mutual fund sales
coordinators to promote the sale of Fund shares and (4) other incidental
expenses relating to branch promotion or servicing of Fund sales.
Custodian and Recordkeeping Agent
State Street Bank and Trust Company ('state Street"), located at One Monarch
Drive, North Quincy, Massachusetts 02171, serves as the Fund's custodian and
recordkeeping agent. In those capacities, State Street maintains custody of
the Fund's portfolio securities, calculates the Fund's net asset value per
share and maintains certain accounting and financial records of the Fund.
Under its custodial agreement with the Trust, State Street is authorized
to appoint one or more banking institutions as sub-custodians of assets owned
by the Fund.
Transfer and Dividend Agent
Investors Fiduciary Trust Company ("IFTC"), located at 127 West 10th Street,
Kansas City, Missouri 64105, serves as the Fund's transfer and dividend agent.
As transfer agent, IFTC maintains the Trust's official record of Fund
shareholders and as dividend agent, IFTC is responsible for crediting
dividends to the accounts of Fund shareholders.
Independent Auditors
Deloitte & Touche LLP, located at Two World Financial Center, New York, New
York 10281, serves as independent auditors for the Trust. In that capacity,
Deloitte & Touche LLP audits the Trust's financial statements.
Counsel
Willkie Farr & Gallagher, located at One Citicorp Center, 153 East 53rd
Street, New York, New York 10022, serves as counsel to the Trust.
PRINCIPAL SHAREHOLDERS
With respect to the Fund, to the knowledge of the Trust, the following persons
owned of record 5% or more of Class A's shares of beneficial interest as of
December 1, 1994:
Citizens Gas Supply Corp., 330 Atlantic Avenue, Boston, Massachusetts
02110-3302, owned 9.65% of the Class" outstanding shares.
Amelia Peabody Charitable Fund, 201 Devonshire Street, Boston,
Massachusetts 02110-1401, owned 9.09% of the Class" outstanding shares.
With respect to the Fund, to the knowledge of the Trust, the following
persons owned of record 5% or more of Class B's shares of beneficial interest
as of December 1, 1994:
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Hans Almquist, Conservator for Sven G. Hedgborn, 4664 Don Lorenzo
Drive, Los Angeles, California 90008-4180, owned 15.33% of the Class"
outstanding shares.
Hartford Stage Co., 50 Church Street, Hartford, Connecticut
06108-3736, owned 6.71% of the Class" outstanding shares.
With respect to the Fund, to the knowledge of the Trust, the following
persons owned of record 5% or more of Class C's shares of beneficial interest
as of December 1, 1994:
Susan Embree Parker, 1st Trust and Co. for the benefit of 993204 0001,
IRA standard, 219 East 69th Street, New York, New York, 10021-5452, owned
8.08% of the Class" outstanding shares.
Judy L. Murray, 6360 Puerto Drive, Rancho Murieta, California
95683-9357, owned 5.01% of the Class" outstanding shares.
The Fund is not aware as to whether or to what extent shares owned of
record also are owned beneficially.
REDEMPTION OF SHARES
Detailed information on how to redeem shares of the Fund is included in the
Prospectus. The right of redemption of shares of the Fund may be suspended or
the date of payment postponed (1) for any periods during which the New York
Stock Exchange (the "NYSE") is closed (other than for customary weekend and
holiday closings), (2) when trading in the markets the Fund normally utilizes
is restricted, or 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 (3) for such other periods as
the SEC by order may permit for the protection of the Fund's shareholders.
Systematic Withdrawal Plan
A systematic withdrawal plan (the "Withdrawal Plan") is available to each Fund
shareholder with $20,000 or more invested in a Class who wishes to receive
redemption payments monthly. Withdrawals of at least $200 monthly may be made
under the Withdrawal Plan by redeeming as many shares of the Class as may be
necessary to cover the stipulated withdrawal payment. To the extent that
withdrawals exceed dividends, distributions and appreciation of a
shareholder's investment in the Class, the value of the shareholder's
investment will be reduced; continued withdrawal payments may further reduce
the shareholder's investment and ultimately exhaust it. Withdrawal payments
should not be considered as income from investment in the Fund. A
shareholder's purchasing of additional shares of the Fund while participating
in the Withdrawal Plan would generally not be advantageous, and for that
reason purchases of shares in amounts less than at least one year's scheduled
withdrawals or $2,400, whichever is greater, by participants in the Withdrawal
Plan will not ordinarily be permitted.
Shareholders who wish to participate in the Withdrawal Plan and who hold
their shares in certificated form must deposit their share certificates with
IFTC, as agent for Withdrawal Plan members. All dividends and distributions on
shares in the Withdrawal Plan are reinvested in shares of the same Class
automatically at net asset value.
20
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DETERMINATION OF NET ASSET VALUE
As noted in the Prospectus, net asset value is not calculated on certain
holidays. On those days, securities held by the Fund may nevertheless be
actively traded, and the value of the Fund's shares could be significantly
affected.
The Fund may invest in foreign securities and, as a result, the
calculation of each Class" net asset value may not take place
contemporaneously with the determination of the prices of certain of the
portfolio securities used in the calculation. A security that is listed or
traded on more than one exchange is valued for purposes of calculating each
Class" net asset value at the quotation on the exchange determined to be the
primary market for the security. All assets and liabilities initially
expressed in foreign currency values are converted into U.S. dollar values at
the mean between the bid and offered quotations of the currencies against U.S.
dollars as last quoted by any recognized dealer. If the bid and offered
quotations are not available, the rate of exchange will be determined in good
faith by the Trustees. In carrying out the Board's valuation policies, State
Street may consult with an independent pricing service retained by the Trust.
EXCHANGE PRIVILEGE
The exchange privilege described in the Prospectus may be suspended or
postponed if (1) redemption of Fund shares is suspended under Section 22(e) of
the 1940 Act or (2) the Trust temporarily delays or ceases the sale of the
Fund's shares because the Fund is unable to invest amounts effectively in
accordance with its investment objective, policies and restrictions.
Shares of each Class may be exchanged for shares of the same Class (or the
sole Class offered) in the following funds in the Kidder Family of Funds, to
the extent shares are offered for sale in the shareholder's state of
residence:
Kidder, Peabody Adjustable Rate Government Fund, a series of the Trust,
seeks high current income while limiting the degree of fluctuation of its
net asset value resulting from movements in interest rates by investing
in adjustable rate securities and Government Securities.
Kidder, Peabody Asset Allocation Fund, a series of the Trust, seeks total
return by following a systematic investment strategy that actively
allocates the fund's assets among common stocks, U.S. Treasury notes and
U.S. Treasury bills.
Kidder, Peabody California Tax Exempt Money Fund, a money market fund
designed for California investors, seeks maximum current income exempt
from federal and California income taxation to the extent consistent with
the preservation of capital and the maintenance of liquidity.
Kidder, Peabody Cash Reserve Fund, Inc., a general purpose money market
fund, seeks maximum current income to the extent consistent with the
preservation of capital and the maintenance of liquidity.
Kidder, Peabody Emerging Markets Equity Fund, a series of Kidder, Peabody
Investment Trust II ("Trust II"), seeks long term capital appreciation
through an actively managed portfolio consisting of equity securities of
issuers in emerging markets in Asia, Latin America, the Middle East,
Southern Europe, Eastern Europe and Africa.
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Kidder, Peabody Equity Income Fund, Inc. seeks reasonably high current
dividend and interest income and long term capital appreciation, while
limiting risk to principal, through investments primarily in equity
securities.
Kidder, Peabody Global Equity Fund, a series of the Trust, seeks long
term growth of capital through investments primarily in foreign equity
securities.
Kidder, Peabody Global Fixed Income Fund, a series of the Trust, seeks
total return through an actively managed portfolio of fixed income
securities issued primarily by governmental authorities, foreign
government related issuers and supranational organizations.
Kidder, Peabody Government Income Fund, Inc. seeks high current income
through investments in Government Securities.
Kidder, Peabody Government Money Fund, Inc., a money market fund, seeks
maximum current income to the extent consistent with the preservation of
capital and the maintenance of liquidity through investment in Government
Securities.
Kidder, Peabody Municipal Bond Fund, a series of Trust II, seeks as high
a level of current interest income that is exempt from Federal income
taxation as is consistent with prudent investment management and the
preservation of capital through investments primarily in high quality
municipal obligations.
Kidder, Peabody Municipal Money Market Series -- Connecticut Series, a
money market fund designed for Connecticut investors, seeks maximum
current income exempt from federal and Connecticut income taxation to the
extent consistent with the preservation of capital and the maintenance of
liquidity.
Kidder, Peabody Municipal Money Market Series -- New Jersey Series, a
money market fund designed for New Jersey investors, seeks maximum
current income exempt from federal and New Jersey income taxation to the
extent consistent with the preservation of capital and the maintenance of
liquidity.
Kidder, Peabody Municipal Money Market Series -- New York Series, a money
market fund designed for New York investors, seeks maximum current income
exempt from federal, New York State and New York City income taxation to
the extent consistent with the preservation of capital and the
maintenance of liquidity.
Kidder, Peabody Premium Account Fund, a general purpose money market fund
for persons subscribing to the Kidder, Peabody Premium Account asset
management system, seeks maximum current income to the extent consistent
with the preservation of capital and the maintenance of liquidity.
Kidder, Peabody Small Cap Equity Fund, a series of Kidder, Peabody
Investment Trust III, seeks long term capital appreciation through
investments primarily in equity securities of small capitalization
companies.
Kidder, Peabody Tax Exempt Money Fund, Inc., a money market fund, seeks
maximum current income exempt from federal income taxation to the extent
consistent with the preservation of capital and the maintenance of
liquidity.
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TAXES
Set forth below is a summary of certain income tax considerations generally
affecting the Fund and its shareholders. The summary is not intended as a
substitute for individual tax planning, and shareholders are urged to consult
their tax advisors regarding the application of federal, state, local and
foreign tax laws to their specific tax situations.
Tax Status of the Fund and Its Shareholders
The Fund will be treated as a separate entity for federal income tax purposes.
The Fund's net investment income, capital gains and distributions will be
determined separately from any other series that the Trust may designate.
The Fund has qualified for the fiscal year ended August 31, 1994 to be
treated as a "regulated investment company" under the Code and intends to
continue to qualify for this treatment for each year. If the Fund (1) is a
regulated investment company and (2) distributes to its shareholders at least
90% of its net investment income (including for this purpose its net realized
short-term capital gains), the Fund will not be liable for federal income
taxes to the extent that its net investment income and its net realized
long-term and short-term capital gains, if any, are distributed to its
shareholders.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other foreign taxes. The payment of these taxes
will reduce the amount of dividends and distributions paid to the Fund's
shareholders. It is not expected that the Fund will be able to elect, for
federal income tax purposes, to treat certain foreign income taxes it pays as
having been paid by its shareholders.
The Fund's transactions in foreign currencies, forward currency contracts,
options and futures contracts (including options and futures on foreign
currencies) are subject to special provisions of the Code that, among other
things, may affect the character of gains and losses realized by the Fund
(that is, may affect whether gains or losses are ordinary or capital),
accelerate recognition of income to the Fund and defer Fund losses. These
rules (1) could affect the character, amount and timing of distributions to
shareholders of the Fund, (2) will require the Fund to "mark to market"
certain types of the positions in its portfolio (that is, treat them as if
they were closed out), and (3) may cause the Fund to recognize income without
receiving cash with which to make distributions in amounts necessary to
satisfy the distribution requirements for avoiding income and excise taxes
described above and in the Prospectus. The Fund seeks to monitor its
transactions, seeks to make the appropriate tax elections and seeks to make
the appropriate entries in its books and records when it acquires any foreign
currency, forward currency contract, option, futures contract or hedged
investment, to mitigate the effect of these rules and prevent disqualification
of the Fund as a regulated investment company.
As a general rule, a shareholder's gain or loss on a sale or redemption of
Fund shares is a long-term capital gain or loss if the shareholder has held
the shares for more than one year. The gain or loss is a short-term capital gain
or loss if the shareholder has held the shares for one year or less.
The Fund's net realized long-term capital gains are distributed as
described in the Prospectus. The distributions ("capital gain dividends"), if
any, are taxable to shareholders as long-term capital gains, regardless of how
23
------------------------------------------------------------------------------
long a shareholder has held Fund shares, and are designated as capital gain
dividends in a written notice mailed by the Trust to the shareholders of the
Fund after the close of the Fund's prior taxable year. If a shareholder
receives a capital gain dividend with respect to any Fund share, and if the
share is sold before it has been held by the shareholder for more than six
months, then any loss on the sale or exchange of the share, to the extent of
the capital gain dividend, is treated as a long-term capital loss.
Investors considering buying Fund shares on or just prior to the record
date for a taxable dividend or capital gain distribution should be aware that
the amount of the forthcoming dividend or distribution payment will be a
taxable dividend or distribution payment.
Special rules contained in the Code apply when a Fund shareholder (1)
disposes of shares of the Fund through a redemption or exchange within 90 days
of purchase and (2) subsequently acquires shares of a fund in the Kidder
Family of Funds on which a sales charge normally is imposed without paying a
sales charge in accordance with the exchange privilege described in the
Prospectus. In these cases, any gain on the disposition of the Fund shares
will be increased, or loss decreased, by the amount of the sales charge paid
when the shares were acquired, and that amount will increase the adjusted
basis of the fund shares subsequently acquired. In addition, if shares of the
Fund are purchased within 30 days of redeeming shares at a loss, the loss will
not be deductible and instead will increase the basis of the newly purchased
shares.
If a shareholder fails to furnish the Trust with a correct taxpayer
identification number, fails to report fully dividend or interest income, or
fails to certify that he or she has provided a correct taxpayer identification
number and that he or she is not subject to "backup withholding," then the
shareholder may be subject to a 31% "backup withholding" tax with respect to
(1) taxable dividends and distributions from the Fund and (2) the proceeds of
any redemptions of Fund shares. An individual's taxpayer identification number
is his or her social security number. The backup withholding tax is not an
additional tax and may be credited against a taxpayer's regular federal income
tax liability.
DETERMINATION OF PERFORMANCE
As noted in the Prospectus, the Trust, from time to time, may quote the Fund's
performance, in terms of the Classes" total returns, in reports or other
communications to shareholders or in advertising material. To the extent any
advertisement or sales literature of the Fund describes the expenses or
performance of any Class, it will also disclose this information for the other
Classes.
The 30-day yield figure described in the Prospectus is calculated for a Class
according to a formula prescribed by the SEC, expressed as follows:
YIELD = 2[( a-b +1)6-1]
cd
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursement).
c = the average daily number of shares outstanding
during the period that were entitled to
receive dividends.
d = the maximum offering price per share on the
last day of the period.
24
------------------------------------------------------------------------------
For the purposes of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by the Portfolio at a
discount or premium, the formula generally calls for amortization of the
discount or premium; the amortization schedule will be adjusted monthly to
reflect changes in the market values of the debt obligations.
Investors should recognize that in periods of declining interest rates,
the Fund's yield will tend to be somewhat higher than prevailing market rates,
and in periods of rising interest rates will tend to be somewhat lower. In
addition, when interest rates are falling, the inflow of net new money to the
Fund from the continuous sale of its shares will likely be invested in
instruments producing lower yields than the balance of its portfolio of
securities, thereby reducing the current yield of the Fund. In periods of
rising interest rates the opposite can be expected to occur.
The average annualized total return figures described in the Prospectus
are computed for a Class according to a formula prescribed by the SEC. The
formula can be expressed as follows:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of a 1-, 5- or 10-year
period at the end of the 1-, 5- or 10-year
period (or fractional portion thereof), assuming
investment of all dividends and distributions.
The ERV assumes complete redemption of the hypothetical investment at the
end of the measuring period.
A Class" aggregate total return figures described in the Prospectus
represent the cumulative change in the value of an investment in shares of the
Class for the specified period and are computed by the following formula:
ERV-P
AGGREGATE TOTAL RETURN = P
Where: P = a hypothetical initial payment of $1,000; and
ERV = Ending Redeemable Value of a hypothetical $1,000 investment
made at the beginning of a 1-, 5- or 10-year period at the
end of the 1-, 5- or 10-year period (or fractional portion
thereof), assuming reinvestment of all dividends and
distributions.
25
------------------------------------------------------------------------------
The Fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of the Fund's performance for any specified period in the
future. In addition, because the Fund's performance will fluctuate, it may not
provide a basis for comparing an investment in the Fund with certain bank
deposits or other investments that pay a fixed yield for a stated period of
time.
Set forth below is performance information for the periods indicated
expressed as a percentage:
<TABLE>
<CAPTION>
Class A Shares Class B Shares* Class C Shares*
------------------------ ----------------- -----------------
30-Day Yield
--------------------------------------------------------------
<S> <C> <C> <C>
30 days ended August 31, 1994..... 5.55% 5.18% 5.93%
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
----------------------------------------------------------
Maximum Sales Charge
------------------------
Included Excluded
----------- -----------
<S> <C> <C> <C> <C>
1 year ended August 31, 1994...... (4.78)% (2.62)% (3.11)% (2.30)%
Inception (March 12, 1992) to
August 31, 1994................. 4.63 5.61
May 10, 1993 to August 31, 1994... (.42) .33
</TABLE>
<TABLE>
<CAPTION>
Annual Total Return
----------------------------------------------------------
Maximum Sales Charge
------------------------
Year ended August 31 Included Excluded
---------------------------------- ----------- -----------
<S> <C> <C> <C> <C>
Inception (March 12, 1992) to
1992............................ 5.55% 8.02%
1993.............................. 6.34 8.80
May 10, 1993 to 1993.............. 2.64% 2.80%
1994.............................. (4.78)% (2.62)% (3.11) (2.30)
</TABLE>
<TABLE>
<CAPTION>
Aggregate Total Return
--------------------------------------------------------------
Maximum Sales Charge
------------------------
Included Excluded
----------- -----------
<S> <C> <C> <C> <C>
Inception (March 12, 1992) to
August 31, 1994................. 11.83% 14.44%
May 10, 1993 to August 31, 1994... (.55)% .44%
</TABLE>
---------------
* Prior to May 10, 1993 no Class B shares or Class C shares were publicly
issued.
GENERAL INFORMATION
The Trust was organized as an unincorporated business trust under the laws of
The Commonwealth of Massachusetts pursuant to a Declaration of Trust dated
March 28, 1991, as amended from time to time (the "Declaration"). The Fund
commenced operations on March 12, 1992. In the interest of economy and
convenience, certificates representing shares in the Trust are not physically
issued except upon specific request made by a shareholder to IFTC. IFTC
maintains a record of each shareholder's ownership of Fund shares.
Massachusetts law provides that shareholders of the Trust could, under
certain circumstances, be held personally liable for the obligations of the
Trust. The Declaration disclaims
26
------------------------------------------------------------------------------
shareholder liability for acts or obligations of the Trust, however, and
requires that notice of the disclaimer be given in each agreement, obligation
or instrument entered into or executed by the Trust or a Trustee. The
Declaration provides for indemnification from the Trust's property for all
losses and expenses of any shareholder of the Trust held personally liable for
the obligations of the Trust. Thus, the risk of a Fund shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Trust would be unable to meet its obligations, a possibility that
the Trust's management believes is remote. Upon payment of any liability
incurred by the Trust, the shareholder paying the liability will be entitled
to reimbursement from the general assets of the Trust. The Trustees intend to
conduct the operations of the Trust in such a way so as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the Trust.
27
Kidder, Peabody Intermediate Fixed Income Fund
------------------------------------------------------------------------------
Schedule of Investments as of August 31, 1994
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE % OF NET
AMOUNT COST (NOTE 1a) ASSETS
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset-Backed Securities
American Express Master Trust 5.375%, 07/15/01..... $ 500,000 $ 499,346 $ 452,150 1.2%
GMAC 1992 D Grantor Trust 5.550%, 05/15/97......... 252,122 251,944 252,172 0.7
Charming Shoppes Master Trust 7.000%, 04/15/99..... 138,000 136,853 136,178 0.3
Premier Auto Trust 6.200%, 10/02/97................ 200,000 199,969 199,960 0.5
Premier Auto Trust 6.650%, 04/02/98................ 71,000 70,949 70,808 0.2
----------- ----------- ---------
Total Asset-Backed Securities.............. 1,159,061 1,111,268 2.9
---------------------------------------------------------------------------------------------------------------
Corporate Notes
Associates Corp. North America 7.500%, 10/15/96.... 500,000 519,151 507,610 1.3
BCH Cayman Islands 8.250%, 06/15/04................ 125,000 124,086 123,386 0.3
Bell Tel. Co. Pa. 8.350%, 12/30/15................. 250,000 290,100 272,087 0.7
Beneficial Corp. 9.375%, 02/17/97.................. 500,000 522,634 528,445 1.4
Bergen Brunswig Corp. 5.625%, 01/15/96............. 500,000 499,496 494,785 1.3
Boeing Co. 7.950%, 08/15/24........................ 200,000 199,874 200,886 0.5
Boise Cascade Corp. 7.375%, 08/01/97............... 100,000 99,558 99,418 0.3
CMC Sec. Corp. 5.776%, 09/25/23.................... 81,083 84,706 83,329 0.2
Chase Manhattan Corp. 7.590%, 01/30/96............. 500,000 493,033 508,620 1.3
Citicorp 7.700%, 03/20/95.......................... 250,000 249,139 252,765 0.7
Countrywide Funding Corp. 8.250%, 07/15/02......... 600,000 672,286 606,750 1.6
Ferrovie Dello Sta. 9.125%, 07/06/09............... 500,000 574,449 546,562 1.4
Finland Rep 7.875%, 07/28/04....................... 125,000 126,620 126,066 0.3
First Boston Mtg Sec. Corp. 7.050%, 07/25/23....... 167,789 168,663 166,816 0.4
First USA Wilmington DE 4.962%, 07/07/97........... 300,000 299,248 299,130 0.8
Ford Motor Credit 8.875%, 03/13/95................. 500,000 507,852 508,400 1.3
General Motors Acceptance Corp. 6.100%, 09/11/97... 1,000,000 991,246 969,620 2.5
General Motors Acceptance Corp. 8.500%, 03/15/96... 225,000 231,799 230,535 0.6
Hanson America Inc. Trust 2.370%, 03/01/01......... 250,000 177,822 176,875 0.4
Hydro Quebec 8.050%, 07/07/24...................... 125,000 125,000 126,081 0.3
Hydro Quebec 8.250%, 04/15/26...................... 250,000 276,782 237,082 0.6
ITT Floorplan Receivables 4.765%, 02/15/01......... 500,000 499,794 499,950 1.3
ITT Financial Corp. 8.350%, 11/01/04............... 250,000 258,224 256,595 0.7
K Mart Corp. 8.850%, 12/15/11...................... 100,000 103,165 102,339 0.3
Lehman Brothers 8.050%, 01/15/19................... 800,000 851,909 803,000 2.1
Long Island Lighting Co. 8.900%, 07/15/19.......... 235,000 237,898 197,477 0.5
Long Island Lighting Co. 7.300%, 07/15/99.......... 500,000 520,949 471,230 1.2
New England Telephone & Telegraph Co. 7.875%,
11/15/29......................................... 125,000 129,995 130,685 0.3
News America Holdings Inc. 10.125%, 10/15/12....... 300,000 323,550 320,808 0.8
Nippon Telegraph & Telephone Corp. 9.500%,
07/27/98......................................... 100,000 109,031 108,367 0.3
Nynex Cap. Funding 7.610%, 07/19/99................ 125,000 126,406 126,720 0.3
Paine Webber Group Inc. 8.760%, 03/11/97........... 550,000 577,137 570,966 1.4
Petroleos Mexicanos 5.562%, 03/08/99............... 150,000 149,095 148,875 0.4
Prudential Home Mtg. Sec. 0.1214%, 04/25/24........ 5,206,628 26,033 26,033 0.1
</TABLE>
See Notes to Financial Statements.
28
Kidder, Peabody Intermediate Fixed Income Fund
------------------------------------------------------------------------------
Schedule of Investments as of August 31, 1994
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
FACE VALUE % OF NET
AMOUNT COST (NOTE 1a) ASSETS
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sears Roebuck & Co. 10.000%, 02/03/12.............. $ 200,000 $ 239,594 $ 229,022 0.6%
Super Value Store 5.875%, 11/15/95................. 500,000 500,482 499,025 1.3
Taubman Realty Group Ltd Partner 8.000%,
06/15/99......................................... 150,000 149,933 150,376 0.4
Tenaga Nasional Bershad 7.875%, 06/15/04........... 175,000 174,371 173,789 0.4
Time Warner Entertainment Co. L.P. 7.250%,
09/01/08......................................... 125,000 123,698 109,480 0.3
----------- ----------- ---------
Total Corporate Notes...................... 12,334,808 11,989,985 30.9
---------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities
Federal Home Loan Mortgage Corp. (FHLMC):
FHLMC 7.000%, 05/15/99............................. 842,000 810,412 835,264 2.2
FHLMC 8.250%, 07/15/19............................. 800,000 785,553 811,920 2.1
FHLMC 9.250%, 06/01/02............................. 328,579 349,115 340,079 0.9
FHLMC 7.950%, 01/15/20............................. 165,000 172,627 166,980 0.4
FHLMC 8.750%, 04/01/01............................. 376,173 401,094 383,470 1.0
FHLMC 6.326%, 09/15/08............................. 43,433 40,790 29,765 0.1
FHLMC 5.340%, 06/15/23............................. 34,000 28,446 19,309 0.1
FHLMC 6.500%, 10/15/08............................. 375,000 350,837 343,763 0.9
Federal National Mortgage Association Certificates
(FNMA):
FNMA 7.500%, 09/25/05(a)........................... 740,000 720,100 735,042 1.9
FNMA 9.000%, 12/25/18(a)........................... 275,000 291,500 283,938 0.7
FNMA 7.500%, 03/25/17(a)........................... 100,000 100,835 100,580 0.3
FNMA 6.500%, 10/25/07(a)........................... 250,000 235,237 232,475 0.6
FNMA 8.500%, 07/25/18(a)........................... 754,000 754,730 771,040 2.0
FNMA 7.500%, 06/01/23.............................. 580,716 595,869 563,585 1.5
FNMA 8.000%, 07/01/02.............................. 198,617 207,678 201,417 0.5
FNMA 7.000%, 07/01/17.............................. 176,031 182,413 174,342 0.5
FNMA 6.500%, 02/01/24.............................. 19,889 19,616 18,229 0.1
FNMA 6.500%, 02/01/14.............................. 514,838 513,149 478,748 1.2
FNMA 6.500%, 02/01/14.............................. 236,518 235,742 215,799 0.6
FNMA 6.500%, 02/01/14.............................. 296,420 299,013 275,641 0.7
FNMA 6.250%, 04/17/10.............................. 194,000 165,953 166,801 0.4
FNMA 8.000%, 08/01/24.............................. 408,000 404,303 406,213 1.0
FNMA 8.000%, 07/01/24.............................. 909,244 895,322 905,062 2.3
FNMA 15-YR. DWARF 5.500%, 01/01/99................. 150,000 134,531 135,750 0.4
FNMA Strip Mtg. 9.000%, 11/01/19................... 89,323 27,233 29,039 0.1
FNMA Strip Mtg. 9.000%, 01/01/17................... 32,982 10,056 10,686 --
Government National Mortgage Association
Certificates (GNMA):
GNMA 6.500%, 07/15/08.............................. 320,751 323,858 305,130 0.8
GNMA 6.500%, 12/15/23.............................. 500,138 495,605 450,279 1.2
GNMA 6.500%, 12/15/23.............................. 340,113 337,031 306,207 0.8
GNMA 7.000%, 10/15/23.............................. 291,349 300,408 272,137 0.7
GNMA 6.500%, 12/15/23.............................. 144,392 143,084 129,477 0.3
GNMA 7.000%, 07/15/23.............................. 180,723 175,668 168,806 0.4
</TABLE>
See Notes to Financial Statements.
29
Kidder, Peabody Intermediate Fixed Income Fund
------------------------------------------------------------------------------
Schedule of Investments as of August 31, 1994
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
FACE VALUE % OF NET
AMOUNT COST (NOTE 1a) ASSETS
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GNMA 7.000%, 11/15/23.............................. $ 50,914 $ 49,490 $ 47,437 0.1%
GNMA 7.000%, 03/15/24.............................. 173,092 168,251 161,679 0.4
GNMA 7.000%, 05/15/24.............................. 663,669 645,107 619,907 1.6
GNMA 8.000%, 05/15/17.............................. 172,164 178,835 170,959 0.4
Collateralized Mortgage Obligation (CMO) 8.000%,
01/01/17......................................... 860,397 893,682 853,255 2.2
Salomon Brothers Mortgage Securities 8.125%,
11/01/12......................................... 130,085 137,890 131,061 0.3
----------- ----------- ---------
Total Mortgage-Backed Securities........... 12,581,063 12,251,271 31.7
---------------------------------------------------------------------------------------------------------------
Sovereign Debt
Nova Scotia Provence 8.250%, 11/15/19.............. 225,000 233,789 234,396 0.6
---------------------------------------------------------------------------------------------------------------
U.S. Government
U.S. Treasury Bonds, 10.375%, 11/15/09............. 650,000 875,815 788,125 2.0
U.S. Treasury Bonds, 9.875%, 11/15/15.............. 1,400,000 1,946,373 1,729,434 4.5
U.S. Treasury Bonds, 7.500%, 11/15/16.............. 665,000 726,463 656,269 1.7
U.S. Treasury Bonds, 9.250%, 02/15/16.............. 750,000 883,909 877,620 2.3
U.S. Treasury Notes, 8.250%, 07/15/98.............. 3,000,000 3,211,155 3,161,250 8.1
U.S. Treasury Notes, 7.875%, 04/15/98.............. 750,000 778,459 780,120 2.0
U.S. Treasury Notes, 7.875%, 08/15/01.............. 400,000 424,109 419,064 1.1
U.S. Treasury Notes, 7.500%, 11/15/01.............. 400,000 416,063 410,748 1.1
U.S. Treasury Notes, 6.250%, 02/15/03.............. 800,000 748,621 755,376 2.0
U.S. Treasury Notes, 6.500%, 04/30/99.............. 650,000 646,917 643,195 1.7
U.S. Treasury Notes, 6.500%, 05/15/97.............. 479,000 478,773 480,423 1.2
U.S. Treasury Notes, 7.250%, 05/15/04.............. 200,000 198,951 200,688 0.5
U.S. Treasury Notes, 7.750%, 02/15/01.............. 870,000 934,255 905,619 2.3
----------- ----------- ---------
Total U.S. Government...................... 12,269,863 11,807,931 30.5
---------------------------------------------------------------------------------------------------------------
Discount Notes
Federal Home Loan Mortgage 4.700%, 09/01/94........ 1,000,000 1,000,000 1,000,000 2.6
----------- ----------- ---------
Total Investments.......................... $39,578,584 38,394,851 99.2
---------------------------------------------------------------------------------------------------------------
EXPIRATION
MONTH/
EXERCISE
PRICE
---------------------------------------------------------------------------------------------------------------
Outstanding Put Option Written
U.S. Treasury Notes, (premium received $2,734)..... Sep/$100 (1,781) (0.0)
---------------------------------------------------------------------------------------------------------------
Total Investments, Net of Outstanding Put Option
Written.......................................... 38,393,070 99.2
Other Assets Less Liabilities...................... 304,881 0.8
----------- ---------
Net Assets......................................... $38,697,951 100.0%
----------- ---------
----------- ---------
</TABLE>
(a) Represents REMIC Securities.
See Notes to Financial Statements.
30
Kidder, Peabody Intermediate Fixed Income Fund
------------------------------------------------------------------------------
Statement of Assets and Liabilities as of August 31, 1994
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Assets
Investments, at value (identified cost-$39,578,584) (Note 1a).............. $38,394,851
Cash....................................................................... 76,810
Receivables:
Securities sold........................................................ $ 25,626
Shares sold............................................................ 49,842
Interest............................................................... 527,130 602,598
---------
Prepaid expenses (Note 1d)................................................. 113,901
-----------
Total assets.......................................... 39,188,160
-----------
Liabilities
Written Put option outstanding, at value (premium received $2,734) (Note
1e)...................................................................... 1,781
Payables:
Securities purchased................................................... 161,205
Shares redeemed........................................................ 228,980
Dividends (Note 1b).................................................... 10,836
Investment advisory fees (Note 2)...................................... 23,217
Service fees (Note 2).................................................. 7,961
Distribution fees (Note 2)............................................. 1,270 433,469
---------
Accrued expenses........................................................... 54,959
-----------
Total liabilities..................................... 490,209
-----------
Net Assets
At value................................................................... $38,697,951
-----------
-----------
Net assets were comprised of:
Aggregate paid-in capital.............................................. $41,127,038
Undistributed net investment income.................................... -0-
Accumulated net realized capital losses................................ (1,246,307)
Net unrealized depreciation on investments and options................. (1,182,780)
-----------
Net assets................................................................. $38,697,951
-----------
-----------
CLASS A CLASS B CLASS C
----------- ---------- ----------
Net assets................................................... $34,221,675 $2,796,072 $1,680,204
Outstanding shares of beneficial interest, ($.001 par
value)..................................................... 2,934,786 239,790 144,153
Net asset value per share.................................... $11.66 $11.66 $11.66
Maximum offering price per share ($11.66[div].9775).......... $11.93 N\A N\A
</TABLE>
See Notes to Financial Statements.
31
Kidder, Peabody Intermediate Fixed Income Fund
------------------------------------------------------------------------------
Statement of Operations for the Year Ended August 31, 1994
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net Investment Income
Interest and discounts earned (Note 1c)....................... $ 3,109,468
Expenses
Investment advisory (Note 2).................................. $ 354,173
Servicing (Note 2):
Class A................................................... $ 115,750
Class B................................................... 7,495 123,245
---------
Pricing....................................................... 47,998
Professional.................................................. 47,992
Prospectus and shareholders" reports.......................... 29,121
Amortization of organization expenses (Note 1d)............... 36,122
Shareholder servicing......................................... 35,210
Federal and state registration................................ 27,158
Custodian..................................................... 17,450
Distribution Class B (Note 2)................................. 14,991
Trustees" fees and expenses (Note 2).......................... 10,380
Miscellaneous................................................. 7,041
------------
Total expenses........................... 750,881
-----------
Net Investment Income......................................... 2,358,587
Realized and Unrealized Loss on Investments (Note 3)
Realized loss from security transactions (excluding short-term
securities):
Proceeds from sales....................................... 145,602,534
Cost of securities sold................................... (146,682,580)
------------
Net realized loss on investment transactions.................. (1,080,046)
Change in unrealized depreciation on securities............... (2,781,878)
-----------
Net Decrease in Net Assets
Resulting from operations..................................... $(1,503,337)
-----------
-----------
</TABLE>
See Notes to Financial Statements.
32
Kidder, Peabody Intermediate Fixed Income Fund
------------------------------------------------------------------------------
Statements of Changes in Net Assets
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31,
1993 1994
--------------------------
<S> <C> <C>
Increase (Decrease) in Net Assets Resulting from Operations
Net investment income..................................................... $ 3,438,892 $ 2,358,587
Net realized gain (loss) on investment transactions....................... 1,101,205 (1,080,046)
Change in unrealized appreciation (depreciation) on securities............ 292,716 (2,781,878)
--------------------------
Net increase (decrease) in net assets resulting from operations... 4,832,813 (1,503,337)
--------------------------
Distributions to Shareholders from Net Investment Income (Note 1g)
Class A................................................................... (3,397,391) (2,152,026)
Class B*.................................................................. (12,568) (126,577)
Class C*.................................................................. (28,933) (79,984)
--------------------------
Total distribution from net investment income..................... (3,438,892) (2,358,587)
--------------------------
Distributions to Shareholders from Net Realized Short-Term
Capital Gains (Note 1g)
Class A................................................................... (429,370) (861,874)
Class B................................................................... -0- (49,787)
Class C................................................................... -0- (27,420)
--------------------------
Total distribution from net realized short-term capital gains..... (429,370) (939,081)
--------------------------
Capital Share Transactions (Note 4)
Net proceeds from sale of shares.......................................... 29,105,024 9,963,505
Net asset value of shares issued to shareholders in connection with the
reinvestment of dividends............................................... 2,767,532 2,498,504
Cost of shares redeemed................................................... (21,233,792) (29,198,771)
--------------------------
Net increase (decrease) in net assets derived from capital share
transactions.................................................... 10,638,764 (16,736,762)
--------------------------
Total increase (decrease) in net assets........................... 11,603,315 (21,537,767)
Net Assets
Beginning of year......................................................... 48,632,403 60,235,718
--------------------------
End of year............................................................... $ 60,235,718 $ 38,697,951
--------------------------
--------------------------
</TABLE>
*From May 10, 1993 (Commencement of Class Operations) to August 31, 1993.
See Notes to Financial Statements.
33
Kidder, Peabody Intermediate Fixed Income Fund
------------------------------------------------------------------------------
Financial Highlights
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
--------------------------------------------------------------------------------------
PERIOD YEAR YEAR PERIOD YEAR PERIOD YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
AUGUST AUGUST AUGUST AUGUST AUGUST AUGUST AUGUST
31, 31, 31, 31, 31, 31, 31,
1992+ 1993 1994 1993++ 1994 1993++ 1994
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $12.00 $12.56 $12.77 $12.63 $12.77 $12.63 $12.76
--------------------------------------------------------------------------------------
Income from Investment
Operations
Net investment income......... 0.39 0.74 0.57 0.19 0.51 0.22 0.60
Net realized and unrealized
gain (loss) on
investments................. 0.56 0.30 (0.89) 0.14 (0.89) 0.13 (0.88)
--------------------------------------------------------------------------------------
Total from investment
operations.................. 0.95 1.04 (0.32) 0.33 (0.38) 0.35 (0.28)
--------------------------------------------------------------------------------------
Distributions to shareholders
from (Note 1g)
Net investment income......... (0.39) (0.74) (0.57) (0.19) (0.51) (0.22) (0.60)
Net realized capital gains.... -- (0.09) (0.22) -- (0.22) -- (0.22)
--------------------------------------------------------------------------------------
Total distributions........... (0.39) (0.83) (0.79) (0.19) (0.73) (0.22) (0.82)
--------------------------------------------------------------------------------------
Net asset value, end of
period...................... $12.56 $12.77 $11.66 $12.77 $11.66 $12.76 $11.66
======================================================================================
Total return #................ 17.02% 8.80% (2.62)% 8.53% (3.11)% 9.04% (2.30)%
Ratios/Supplemental Data
Net assets, end of period (in
thousands).................. $48,632 $57,402 $34,222 $1,698 $2,796 $1,136 $1,680
Ratios to Average Net Assets
Expenses, excluding
distribution and service
fees, net of
reimbursement............... .16%* 0.83% 1.21% 0.83%* 1.21% 0.83%* 1.21%
Expenses, including
distribution and service
fees, net of
reimbursement............... .40%* 1.08% 1.46% 1.53%* 1.96% 0.83%* 1.21%
Expenses, before reimbursement
from manager................ 1.63%* 1.31% 1.46% 1.76%* 1.96% 1.06%* 1.21%
Net investment income......... 6.76%* 5.73% 4.69% 5.28%* 4.20% 5.98%* 4.94%
Portfolio turnover rate....... 33.03% 148.92% 279.07% 148.92% 279.07% 148.92% 279.07%
</TABLE>
+ From March 12, 1992 (Commencement of Operations) to August 31, 1992.
++ From May 10, 1993 (Commencement of Operations) to August 31, 1993.
# Total return does not reflect the effects of a sales charge, and is
calculated by giving effect to their reinvestment of dividends on the
dividend payment date.
* Annualized
See Notes to Financial Statements.
34
Kidder, Peabody Intermediate Fixed Income Fund
------------------------------------------------------------------------------
Notes to Financial Statements
------------------------------------------------------------------------------
1. The Fund is a series of the Kidder, Peabody Investment Trust, which is
registered under the Investment Company Act of 1940 as a diversified, open-end
investment management company. The Fund commenced operations on March 12,
1992. The following is a summary of significant accounting policies
consistently followed by the Fund.
On May 10, 1993 the Fund adopted the Choice Pricing System[sm]. The System
offers three classes of shares having identical voting, liquidation and other
rights. Class A Shares are sold subject to a front-end sales load and a
service fee of .25% per annum of average class net assets. Class B shares are
sold at net asset value without a sales load and bear a distribution fee of
.50% per annum and a service fee of .25% per annum of average class net
assets. Class C shares, which are available exclusively to employees of
Kidder, Peabody, employee benefit plans of Kidder, Peabody and participants of
the Insight Investment Advisory Program, are sold at net asset value without a
sales load and bear no such distribution or service fees. Classes A and B have
exclusive voting rights as to matters relating to the 12b-1 Distribution Plan.
On May 10, 1993 all pre-existing shares of the Fund converted to class A
shares at net asset value, with the exception of shares eligible for class C.
(a) Generally, the Fund's investments are valued at market value or, in the
absence of a market value, at fair value as determined by or under the
direction of the Trustees. Investments in Government Securities and other
securities traded over-the-counter, other than short-term investments that
mature in 60 days or less, are valued at the average of the quoted bid and
asked prices in the over-the-counter market. Short-term investments that
mature in 60 days or less are valued on the basis of amortized cost when the
Trustees have determined that amortized cost represents fair value. A security
that is traded on a stock exchange is valued at the last sale price on that
exchange or, if no sales occurred during the day, at a current quoted bid
price. An option that is written by the Fund is generally valued at the last
sale price or, in the absence of the last sale price, the last offer price. An
option that is purchased by the Fund is generally valued at the last sale
price or, in the absence of the last sales price, the last bid price. The
value of a futures contract is equal to the unrealized gain or loss on the
contract that is determined by marking the contract to the current settlement
price for a like contract on the valuation date of the futures contract. A
settlement price may not be used if the market makes a limit move with respect
to a particular futures contract or if the securities underlying the futures
contract experience significant price fluctuations after the determination of
the settlement price. When a settlement price cannot be used, future contracts
will be valued at their fair market value as determined by or under the
direction of the Trustees.
(b) It is the Fund's policy to continue to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all its taxable income to shareholders. The method of
such distribution for purposes of maintaining regulated investment company
status is made on a fund level rather than class level basis. Therefore, no
Federal income tax provision is required.
(c) Security transactions are recorded on a trade date basis. Dividend
income and distributions to shareholders are recorded on the ex-dividend
dates. Interest income is earned from settlement date and is recognized on an
accrual basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(d) Prepaid registration fees are charged to income as the related shares
are issued. Organization costs are being amortized evenly over a sixty month
period.
(e) When the Fund writes a call or put option, an amount equal to the
premium received is included in the Fund's statement of assets and liabilities
as an asset and an equivalent liability. The amount of the liability is
subsequently "marked to market" to reflect the current market value of the
option written. If an option which the Fund has written expires on its
stipulated date, the Fund realizes a gain in the amount of the premium
originally received, and the liability related to such option is extinguished.
If the Fund enters into a closing purchase transaction, it realizes a gain or
loss determined by the difference between the premium received and the cost of
the closing transaction. If a call option which the Fund has written is
exercised, the Fund realizes a gain or loss from the sale of the underlying
security and the proceeds from such sale are increased by the premium
originally received. If a put option which the Fund has written is exercised,
the amount of the premium originally received reduces the cost of the security
which
35
Kidder, Peabody Intermediate Fixed Income Fund
------------------------------------------------------------------------------
Notes to Financial Statements
------------------------------------------------------------------------------
the Fund purchases upon exercise of the option. As the writer of an option,
the Fund may have no control over whether the underlying securities are sold
(called) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written option.
Written and purchased options are non-income producing investments.
The premium paid by the Fund for the purchase of a call or put option is
included in the Fund's statement of assets and liabilities as an investment
and subsequently "marked to market" to reflect the current market value of the
option purchased. If a call or put option which the Fund has purchased expires
on the stipulated expiration date, the Fund realizes a loss in the amount of
the cost of the option. If the Fund enters into a closing sale transaction, it
realizes a gain or loss, depending on whether the proceeds from the sale are
greater or less than the cost of the option. If the Fund exercises a put
option, it realizes a gain or loss from the sale of the underlying security
and the proceeds from such sale are decreased by the premium originally paid.
If the Fund exercises a call option, the cost of the security which the Fund
purchases upon exercise is increased by the premium originally paid.
(f) A futures contract is an agreement between two parties to buy and sell a
security for a set price on a future date. Initial margin deposits are made
upon entering into futures contracts and can be either cash or securities.
During the period the futures contract is open, changes in the value of the
contract are recognized as unrealized gains or losses by "marking to market"
on a daily basis to reflect the market value of the contract at the end of
each day's trading. Variation margin payments are made or received, depending
upon whether unrealized gains or losses are incurred. When the contract is
closed, the Fund records a realized gain or loss equal to the difference
between the proceeds from (or cost of) the closing transaction and the Fund's
basis in the contract.
The Fund invests in financial futures contracts solely for the purpose of
hedging its existing portfolio securities against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Fund may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in the movement of the
futures contracts and the underlying hedged asset.
(g) Income and Fund level expenses are allocated to each class on a pro-rata
basis based upon each class" daily settled net assets. Class specific expenses
are charged directly to each class. Dividends from net investment income are
calculated daily based upon the respective classes net investment income.
Distributions of net realized gains are allocated based upon the outstanding
shares of each class.
The Fund distributes monthly substantially all its net investment income.
Net long-term realized gains, if any, will be distributed annually. For book
and tax purposes, as of August 31, 1994, the Fund had net accumulated capital
losses of $1,246,307.
2. The Fund has entered into a management agreement with Kidder Peabody Asset
Management, Inc. ("KPAM"), a wholly-owned subsidiary of Kidder, Peabody & Co.
Incorporated ("KP"). General Electric Capital Services, Inc., a wholly-owned
subsidiary of General Electric Company, ("GE"), has a 100% interest in Kidder,
Peabody Group Inc., the parent company of KP. KPAM serves as the Fund's
manager and receives a fee, accrued daily and paid monthly at the annual rate
of .70% of the Fund's average daily net assets. KPAM in turn employs GE
Investment Management Incorporated ("GEIM"), a wholly owned subsidiary of GE,
as the Fund's investment adviser, in which capacity GEIM receives from KPAM a
fee, accrued daily and paid monthly, at the annual rate of .50% of the Fund's
average daily net assets. As the Fund's manager, KPAM is generally responsible
for furnishing, or causing to be furnished to the Fund, investment management
and administrative services.
As the Fund's investment adviser, GEIM manages the Fund's portfolio, makes
decisions for the Fund, and places purchase and sale orders for the Fund's
portfolio transactions. GEIM also pays the salaries of all officers and
employees who are employed by both GEIM and the Fund, provides the Fund with
investment officers, and employs a professional staff of portfolio managers
who draw upon a variety of sources for research information for the Fund.
Total annual expenses of the Fund, exclusive of taxes, interest, all
brokers" commissions and other normal charges incidental to the purchase and
sale of portfolio securities, but including fees paid to KPAM, are not
36
Kidder, Peabody Intermediate Fixed Income Fund
------------------------------------------------------------------------------
Notes to Financial Statements
------------------------------------------------------------------------------
expected to exceed the limits prescribed by any state in which the Fund's
shares are offered for sale. KPAM will reimburse the Fund for any expenses in
excess of such limits. No expense reimbursement was required for the year
ended August 31, 1994.
KP is the exclusive distributor of the Fund's shares. Its services include
payment of sales commissions to registered representatives and various other
promotional and sales-related expenses. KP receives monthly, from the Fund,
the distribution and service fees which are calculated and accrued daily. KP
also receives the proceeds of any front-end sales loads with respect to the
purchase of shares of class A.
Certain officers and/or Trustees of the Fund are officers and/or directors
of KPAM and/or GEIM. Each Trustee who is not an "affiliated person" of either
KPAM or GEIM receives an annual fee of $1,000 and an attendance fee of $375
per meeting.
3. Purchases and sales of securities, excluding short-term securities and
maturities, for the year ended August 31, 1994 were $130,887,910 and
$145,602,534 respectively. As of August 31, 1994 net unrealized depreciation,
based on cost for Federal income tax purposes, aggregated $1,182,780 of which
$140,529 related to appreciated securities and $1,323,319 related to
depreciated securities. The aggregate cost of securities at August 31, 1994
for book and Federal income tax purposes was $39,578,584.
4. The Declaration of Trust of the Fund permits the Trustees to issue an
unlimited number of shares of beneficial interest, par value $.001 per share.
Transactions totaling $9,963,505 from net proceeds from sale of shares,
$29,198,771 representing cost of shares redeemed and $2,498,504 representing
reinvestment of dividends for the year ended August 31, 1994 were as follows
for each class:
<TABLE>
<CAPTION>
CLASS A SHARES AMOUNT
--------------------------------------------------
<S> <C> <C>
Year ended August 31, 1994:
Shares sold.............. 452,513 $ 5,600,161
Shares issued to
shareholders in
connection with the
reinvestment of
dividends.............. 184,168 2,245,936
Shares redeemed.......... (2,197,635) (26,682,102)
-----------------------
Net decrease......... (1,560,954) $(18,836,005)
-----------------------
-----------------------
Year ended August 31, 1993:
Shares sold.............. 2,014,256 $ 25,252,343
Shares issued to
shareholders in
connection with the
reinvestment of
dividends.............. 218,734 2,730,454
Shares redeemed.......... (1,609,448) (20,140,745)
-----------------------
Net increase......... 623,542 $ 7,842,052
-----------------------
-----------------------
CLASS B SHARES AMOUNT
--------------------------------------------------
Year ended August 31, 1994:
Shares sold.............. 233,486 $ 2,887,987
Shares issued to
shareholders in
connection with the
reinvestment of
dividends.............. 12,288 148,583
Shares redeemed.......... (138,949) (1,636,839)
-----------------------
Net increase......... 106,825 $ 1,399,731
-----------------------
-----------------------
May 10, 1993 to August
31, 1993:
Shares sold.............. 135,760 $ 1,712,376
Shares issued to
shareholders in
connection with the
reinvestment of
dividends.............. 950 12,043
Shares redeemed.......... (3,745) (47,000)
-----------------------
Net increase......... 132,965 $ 1,677,419
-----------------------
-----------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES AMOUNT
--------------------------------------------------
<S> <C> <C>
Year ended August 31, 1994:
Shares sold.............. 120,023 $ 1,475,357
Shares issued to
shareholders in
connection with the
reinvestment of
dividends.............. 8,593 103,985
Shares redeemed.......... (73,435) (879,830)
-----------------------
Net increase......... 55,181 $ 699,512
-----------------------
-----------------------
May 10, 1993 to August
31, 1993:
Shares sold.............. 169,557 $ 2,140,305
Shares issued to
shareholders in
connection with the
reinvestment of
dividends.............. 1,981 25,035
Shares redeemed.......... (82,566) (1,046,047)
-----------------------
Net increase......... 88,972 $ 1,119,293
-----------------------
-----------------------
</TABLE>
37
Kidder, Peabody Intermediate Fixed Income Fund
------------------------------------------------------------------------------
Notes to Financial Statements
Auditors
------------------------------------------------------------------------------
5. The Fund takes possession of securities under repurchase agreements before
releasing any money to the counterparty under such agreement. Eligible
collateral for repurchase agreement transactions are the instruments that the
Fund is allowed to invest in, as stated in the Prospectus. The Fund attempts
to attain a short maturity (2 years or less), although that is not always
available. The value of the collateral must be a minimum of 102% of the market
value of the securities being loaned, allowing for minor variations arising
from marking to market of such collateral. If the issuer defaults or if
bankruptcy or regulatory proceedings are commenced with respect to the issuer,
the realization of the proceeds may be delayed or limited.
Report of Independent
The Trustees and Shareholders,
Kidder, Peabody Intermediate Fixed Income Fund
(one of the portfolios constituting the Kidder, Peabody Investment Trust):
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Kidder, Peabody Intermediate
Fixed Income Fund as of August 31, 1994, and 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 responsibilty of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned at August 31, 1994 by correspondence with the custodian and brokers;
where replies were not received from brokers, we performed other auditing
procedures. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Kidder, Peabody
Intermediate Fixed Income Fund as of August 31, 1994, the results of its
operations, the changes in its 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
October 14, 1994
38
------------------------------------------------------------------------------
APPENDIX
DESCRIPTION OF RATINGS OF STANDARD & POOR's CORPORATION
AND MOODY's INVESTORS SERVICE, INC.
Description of Standard & Poor's Corporation corporate bond ratings:
AAA -- Bonds rated AAA have the highest rating assigned to a debt
obligation. 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 highest rated issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds in this category than for bonds in higher rated
categories.
Description of Moody's Investors Service, Inc. corporate bond ratings:
Aaa -- Bonds rated Aaa are judged to be 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. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of these issues.
Aa -- Bonds which are 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 securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Moody's Investors Service, Inc. applies the numerical modifiers 1, 2 and 3
to each generic rating classification from Aa through B. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating
category.
39
------------------------------------------------------------------------------
Description of Standard & Poor's Corporation commercial paper ratings:
Commercial paper rated A-1 by Standard & Poor's Corporation indicates that
the degree of safety regarding timely payment is either overwhelming or very
strong. Those issues determined to possess overwhelming safety characteristics
are denoted A-1+. Capacity for timely payment on commercial paper rated A-2 is
strong, but the relative degree of safety is not as high as for issues
designated A-1.
Description of Moody's Investors Service, Inc. commercial paper ratings:
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's Investors Service, Inc. Issuers rated Prime-1 (or related supporting
institutions) are considered to have a superior capacity for repayment of
short term promissory obligations. Issuers rated Prime-2 (or related
supporting institutions) are considered to have a strong capacity for
repayment of short term promissory obligations. This will normally be
evidenced by many of the characteristics of issuers rated Prime-1 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 alternative liquidity is
maintained.
40
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[THIS PAGE INTENTIONALLY LEFT BLANK]
------------------------------------
Contents
------------------------------------
Investment Objective and Policies 2
------------------------------------
Management of the Fund 14
------------------------------------
Principal Shareholders 19
------------------------------------
Redemption of Shares 20
------------------------------------
Determination of Net Asset Value 21
------------------------------------
Exchange Privilege 21
------------------------------------
Taxes (See in the Prospectus
"Dividends, Distributions and
Taxes") 23
------------------------------------
Determination of Performance (See in
the Prospectus "Performance
Information") 24
------------------------------------
General Information 26
------------------------------------
Financial Statements 28
------------------------------------
Appendix 39
------------------------------------
Kidder,
Peabody
Intermediate
Fixed
Income
Fund
Statement of
Additional
Information
December 29, 1994
In affiliation with
GE Investment Management
Dear Shareholder
------------------------------------------------------------------------------
We are pleased to provide you with this annual report on the Kidder, Peabody
Intermediate Fixed Income Fund. The report covers the 12 months ended August
31, 1994. Performance and market highlights are summarized for your
convenience below:
Total Returns as of 8/31/94
<TABLE>
<CAPTION>
Class A Class B Class C
--------- --------- ---------
<S> <C> <C> <C>
Past Six Months (1.68)% (1.93)% (1.48)%
Past Twelve Months (2.62)% (3.11)% (2.30)%
</TABLE>
KP Intermediate Fixed Income Fund (Class A shares) posted a total return of
(2.62)% over the past 12 months. In comparison, the Lehman Brothers Aggregate
Bond Index return was (1.51)% during this same time period. The Fund
underperformed the index primarily because the Fund's average duration was
longer than that of the index. As a result, higher interest rates, which tend
to adversely affect the values of instruments with longer maturities more than
those with shorter maturities, tended to depress the values of the Fund's
investments to a greater degree than those on which the index is based.
The Fund declared and paid total per share income and capital gains
distributions of $0.79 for Class A, $0.73 for Class B, and $0.82 for Class C
during the twelve months ending on August 31, 1994. 30-day SEC yields as of
August 31, 1994 were 5.55% for Class A, 5.18% for Class B, and 5.93% for Class
C.2 Please review the pages that follow for complete performance information,
including SEC-required data, which reflects the deduction of the initial sales
charge on Class A shares.
Market Report
As you are probably aware, the last 12 months rank among the most tumultuous
ever experienced by fixed income markets. The conditions were virtually
unprecedented in history. After reaching a low in October of 1993, interest
rates began a steady rise on the heels of economic recovery. This eroded the
value of the existing bond supply and led to heavy selling. In January, the
Federal Reserve began implementing an on-going series of interest rate hikes
in an attempt to calm fears about inflation. Steadily rising interest rates
triggered a firm bear mentality in all fixed income sectors. The situation was
made worse by several other factors in the spring and summer of 1994. A weak
dollar lowered the value of dollar-denominated securities and discouraged
foreign investors from entering U.S. markets. In addition, a slowdown in
refundings and financings led to shrinking supply in many segments, including
the high yield and municipal sectors, affecting both liquidity and
opportunity.
The Fund assumed a defensive position over this time period to protect against
market volatility by seeking income at the
(Continued)
1 Data is based on historic investment results and is not indicative of future
performance. Total return includes the reinvestment of all dividends and
capital gains. The Fund's total return is net of any fees and expenses
incurred during the period and does not reflect the 2.25% initial sales
charge on Class A shares.
2 The 30-day SEC yield on Class A shares is based on the maximum offering
price, which includes a 2.25% sales charge.
short-to-intermediate point along the yield curve and focusing on quality.
Looking ahead, we are optimistic that the worst has passed and that returns
will improve over the next six months. We believe that most of the
inflationary fears have already been addressed in the bond markets. Even if
the Federal Reserve again raises rates, we do not expect the reaction in fixed
income sectors to be as severe as in the past. We are adopting a wait-and-see
attitude, however, and maintaining our defensive portfolio position as we wait
for returns to improve.
Thank you for your participation in the Kidder, Peabody Intermediate Fixed
Income Fund. Please contact your Kidder, Peabody Investment Executive if you
have any questions or if you require assistance with any other financial
needs.
Sincerely,
George V. Grune, Jr. Robert Aufiero
Chairman Chief Investment Officer
New York, New York
October 14, 1994
Average Annual Total Returns (Unaudited)
------------------------------------------------------------------------------
In accordance with Securities and Exchange Commission (SEC) regulations, the
following represent average annual returns with all distributions reinvested
as of June 30, 1994, the most recent calendar quarter. The returns on Class A
shares were computed assuming payment of a maximum 2.25% sales charge. Past
performance should not be taken as an indication of future results. The
investment return and principal value of an investment in the fund will
fluctuate so that shares, when redeemed, may be worth more or less than their
original cost.
<TABLE>
<CAPTION>
Inception One Life of
Date Year the Fund
----------- --------- -----------
<S> <C> <C> <C>
Class A 3/12/92 (4.84)% 4.17%
Class B 5/10/93 (3.15)% (1.95)%
Class C 5/10/93 (2.42)% (1.21)%
</TABLE>
Kidder, Peabody Intermediate Fixed Income Fund -- Results of a $10,000
Investment (Unaudited)
------------------------------------------------------------------------------
The following graphs present an example of how $10,000 grew between the Fund's
(Class A, B, and C) inception and August 31, 1994. The results on Class A
shares reflect a payment of a 2.25% maximum sales charge. Thus, the net amount
invested was $9,772. There is no sales charge on Class B or Class C shares,
nor on dividends or capital gains reinvested in additional shares. Results
shown do not take into account income or capital gains taxes but do reflect
deduction of applicable operating expenses.
Value of $10,000 Invested Since Inception as of August 31, 1994
------------------------------------------------------------------------------
Class A
[CHART]
Class B
[CHART]
Class C
[CHART]
About the Index
------------------------------------------------------------------------------
The Lehman Aggregate Bond Index includes securities from the Lehman
Government/Corporate Bond Index, Mortgage-Backed Securities Index, and Yankee
Bond Index. Total return comprises price appreciation/depreciation and income
as a percentage of the original investment. Indexes are rebalanced monthly by
market capitalization. The index is unmanaged and does not reflect the
deduction of management fees and fund costs.
Kidder, Peabody Intermediate Fixed Income Fund
------------------------------------------------------------------------------
Schedule of Investments as of August 31, 1994
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE % OF NET
AMOUNT COST (NOTE 1a) ASSETS
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset-Backed Securities
American Express Master Trust 5.375%, 07/15/01..... $ 500,000 $ 499,346 $ 452,150 1.2%
GMAC 1992 D Grantor Trust 5.550%, 05/15/97......... 252,122 251,944 252,172 0.7
Charming Shoppes Master Trust 7.000%, 04/15/99..... 138,000 136,853 136,178 0.3
Premier Auto Trust 6.200%, 10/02/97................ 200,000 199,969 199,960 0.5
Premier Auto Trust 6.650%, 04/02/98................ 71,000 70,949 70,808 0.2
----------- ----------- ---------
Total Asset-Backed Securities.............. 1,159,061 1,111,268 2.9
---------------------------------------------------------------------------------------------------------------
Corporate Notes
Associates Corp. North America 7.500%, 10/15/96.... 500,000 519,151 507,610 1.3
BCH Cayman Islands 8.250%, 06/15/04................ 125,000 124,086 123,386 0.3
Bell Tel. Co. Pa. 8.350%, 12/30/15................. 250,000 290,100 272,087 0.7
Beneficial Corp. 9.375%, 02/17/97.................. 500,000 522,634 528,445 1.4
Bergen Brunswig Corp. 5.625%, 01/15/96............. 500,000 499,496 494,785 1.3
Boeing Co. 7.950%, 08/15/24........................ 200,000 199,874 200,886 0.5
Boise Cascade Corp. 7.375%, 08/01/97............... 100,000 99,558 99,418 0.3
CMC Sec. Corp. 5.776%, 09/25/23.................... 81,083 84,706 83,329 0.2
Chase Manhattan Corp. 7.590%, 01/30/96............. 500,000 493,033 508,620 1.3
Citicorp 7.700%, 03/20/95.......................... 250,000 249,139 252,765 0.7
Countrywide Funding Corp. 8.250%, 07/15/02......... 600,000 672,286 606,750 1.6
Ferrovie Dello Sta. 9.125%, 07/06/09............... 500,000 574,449 546,562 1.4
Finland Rep 7.875%, 07/28/04....................... 125,000 126,620 126,066 0.3
First Boston Mtg Sec. Corp. 7.050%, 07/25/23....... 167,789 168,663 166,816 0.4
First USA Wilmington DE 4.962%, 07/07/97........... 300,000 299,248 299,130 0.8
Ford Motor Credit 8.875%, 03/13/95................. 500,000 507,852 508,400 1.3
General Motors Acceptance Corp. 6.100%, 09/11/97... 1,000,000 991,246 969,620 2.5
General Motors Acceptance Corp. 8.500%, 03/15/96... 225,000 231,799 230,535 0.6
Hanson America Inc. Trust 2.370%, 03/01/01......... 250,000 177,822 176,875 0.4
Hydro Quebec 8.050%, 07/07/24...................... 125,000 125,000 126,081 0.3
Hydro Quebec 8.250%, 04/15/26...................... 250,000 276,782 237,082 0.6
ITT Floorplan Receivables 4.765%, 02/15/01......... 500,000 499,794 499,950 1.3
ITT Financial Corp. 8.350%, 11/01/04............... 250,000 258,224 256,595 0.7
K Mart Corp. 8.850%, 12/15/11...................... 100,000 103,165 102,339 0.3
Lehman Brothers 8.050%, 01/15/19................... 800,000 851,909 803,000 2.1
Long Island Lighting Co. 8.900%, 07/15/19.......... 235,000 237,898 197,477 0.5
Long Island Lighting Co. 7.300%, 07/15/99.......... 500,000 520,949 471,230 1.2
New England Telephone & Telegraph Co. 7.875%,
11/15/29......................................... 125,000 129,995 130,685 0.3
News America Holdings Inc. 10.125%, 10/15/12....... 300,000 323,550 320,808 0.8
Nippon Telegraph & Telephone Corp. 9.500%,
07/27/98......................................... 100,000 109,031 108,367 0.3
Nynex Cap. Funding 7.610%, 07/19/99................ 125,000 126,406 126,720 0.3
Paine Webber Group Inc. 8.760%, 03/11/97........... 550,000 577,137 570,966 1.4
Petroleos Mexicanos 5.562%, 03/08/99............... 150,000 149,095 148,875 0.4
Prudential Home Mtg. Sec. 0.1214%, 04/25/24........ 5,206,628 26,033 26,033 0.1
</TABLE>
See Notes to Financial Statements.
Kidder, Peabody Intermediate Fixed Income Fund
------------------------------------------------------------------------------
Schedule of Investments as of August 31, 1994
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
FACE VALUE % OF NET
AMOUNT COST (NOTE 1a) ASSETS
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sears Roebuck & Co. 10.000%, 02/03/12.............. $ 200,000 $ 239,594 $ 229,022 0.6%
Super Value Store 5.875%, 11/15/95................. 500,000 500,482 499,025 1.3
Taubman Realty Group Ltd Partner 8.000%,
06/15/99......................................... 150,000 149,933 150,376 0.4
Tenaga Nasional Bershad 7.875%, 06/15/04........... 175,000 174,371 173,789 0.4
Time Warner Entertainment Co. L.P. 7.250%,
09/01/08......................................... 125,000 123,698 109,480 0.3
----------- ----------- ---------
Total Corporate Notes...................... 12,334,808 11,989,985 30.9
---------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities
Federal Home Loan Mortgage Corp. (FHLMC):
FHLMC 7.000%, 05/15/99............................. 842,000 810,412 835,264 2.2
FHLMC 8.250%, 07/15/19............................. 800,000 785,553 811,920 2.1
FHLMC 9.250%, 06/01/02............................. 328,579 349,115 340,079 0.9
FHLMC 7.950%, 01/15/20............................. 165,000 172,627 166,980 0.4
FHLMC 8.750%, 04/01/01............................. 376,173 401,094 383,470 1.0
FHLMC 6.326%, 09/15/08............................. 43,433 40,790 29,765 0.1
FHLMC 5.340%, 06/15/23............................. 34,000 28,446 19,309 0.1
FHLMC 6.500%, 10/15/08............................. 375,000 350,837 343,763 0.9
Federal National Mortgage Association Certificates
(FNMA):
FNMA 7.500%, 09/25/05(a)........................... 740,000 720,100 735,042 1.9
FNMA 9.000%, 12/25/18(a)........................... 275,000 291,500 283,938 0.7
FNMA 7.500%, 03/25/17(a)........................... 100,000 100,835 100,580 0.3
FNMA 6.500%, 10/25/07(a)........................... 250,000 235,237 232,475 0.6
FNMA 8.500%, 07/25/18(a)........................... 754,000 754,730 771,040 2.0
FNMA 7.500%, 06/01/23.............................. 580,716 595,869 563,585 1.5
FNMA 8.000%, 07/01/02.............................. 198,617 207,678 201,417 0.5
FNMA 7.000%, 07/01/17.............................. 176,031 182,413 174,342 0.5
FNMA 6.500%, 02/01/24.............................. 19,889 19,616 18,229 0.1
FNMA 6.500%, 02/01/14.............................. 514,838 513,149 478,748 1.2
FNMA 6.500%, 02/01/14.............................. 236,518 235,742 215,799 0.6
FNMA 6.500%, 02/01/14.............................. 296,420 299,013 275,641 0.7
FNMA 6.250%, 04/17/10.............................. 194,000 165,953 166,801 0.4
FNMA 8.000%, 08/01/24.............................. 408,000 404,303 406,213 1.0
FNMA 8.000%, 07/01/24.............................. 909,244 895,322 905,062 2.3
FNMA 15-YR. DWARF 5.500%, 01/01/99................. 150,000 134,531 135,750 0.4
FNMA Strip Mtg. 9.000%, 11/01/19................... 89,323 27,233 29,039 0.1
FNMA Strip Mtg. 9.000%, 01/01/17................... 32,982 10,056 10,686 --
Government National Mortgage Association
Certificates (GNMA):
GNMA 6.500%, 07/15/08.............................. 320,751 323,858 305,130 0.8
GNMA 6.500%, 12/15/23.............................. 500,138 495,605 450,279 1.2
GNMA 6.500%, 12/15/23.............................. 340,113 337,031 306,207 0.8
GNMA 7.000%, 10/15/23.............................. 291,349 300,408 272,137 0.7
GNMA 6.500%, 12/15/23.............................. 144,392 143,084 129,477 0.3
GNMA 7.000%, 07/15/23.............................. 180,723 175,668 168,806 0.4
</TABLE>
See Notes to Financial Statements.
Kidder, Peabody Intermediate Fixed Income Fund
------------------------------------------------------------------------------
Schedule of Investments as of August 31, 1994
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
FACE VALUE % OF NET
AMOUNT COST (NOTE 1a) ASSETS
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GNMA 7.000%, 11/15/23.............................. $ 50,914 $ 49,490 $ 47,437 0.1%
GNMA 7.000%, 03/15/24.............................. 173,092 168,251 161,679 0.4
GNMA 7.000%, 05/15/24.............................. 663,669 645,107 619,907 1.6
GNMA 8.000%, 05/15/17.............................. 172,164 178,835 170,959 0.4
Collateralized Mortgage Obligation (CMO) 8.000%,
01/01/17......................................... 860,397 893,682 853,255 2.2
Salomon Brothers Mortgage Securities 8.125%,
11/01/12......................................... 130,085 137,890 131,061 0.3
----------- ----------- ---------
Total Mortgage-Backed Securities........... 12,581,063 12,251,271 31.7
---------------------------------------------------------------------------------------------------------------
Sovereign Debt
Nova Scotia Provence 8.250%, 11/15/19.............. 225,000 233,789 234,396 0.6
---------------------------------------------------------------------------------------------------------------
U.S. Government
U.S. Treasury Bonds, 10.375%, 11/15/09............. 650,000 875,815 788,125 2.0
U.S. Treasury Bonds, 9.875%, 11/15/15.............. 1,400,000 1,946,373 1,729,434 4.5
U.S. Treasury Bonds, 7.500%, 11/15/16.............. 665,000 726,463 656,269 1.7
U.S. Treasury Bonds, 9.250%, 02/15/16.............. 750,000 883,909 877,620 2.3
U.S. Treasury Notes, 8.250%, 07/15/98.............. 3,000,000 3,211,155 3,161,250 8.1
U.S. Treasury Notes, 7.875%, 04/15/98.............. 750,000 778,459 780,120 2.0
U.S. Treasury Notes, 7.875%, 08/15/01.............. 400,000 424,109 419,064 1.1
U.S. Treasury Notes, 7.500%, 11/15/01.............. 400,000 416,063 410,748 1.1
U.S. Treasury Notes, 6.250%, 02/15/03.............. 800,000 748,621 755,376 2.0
U.S. Treasury Notes, 6.500%, 04/30/99.............. 650,000 646,917 643,195 1.7
U.S. Treasury Notes, 6.500%, 05/15/97.............. 479,000 478,773 480,423 1.2
U.S. Treasury Notes, 7.250%, 05/15/04.............. 200,000 198,951 200,688 0.5
U.S. Treasury Notes, 7.750%, 02/15/01.............. 870,000 934,255 905,619 2.3
----------- ----------- ---------
Total U.S. Government...................... 12,269,863 11,807,931 30.5
---------------------------------------------------------------------------------------------------------------
Discount Notes
Federal Home Loan Mortgage 4.700%, 09/01/94........ 1,000,000 1,000,000 1,000,000 2.6
----------- ----------- ---------
Total Investments.......................... $39,578,584 38,394,851 99.2
---------------------------------------------------------------------------------------------------------------
EXPIRATION
MONTH/
EXERCISE
PRICE
---------------------------------------------------------------------------------------------------------------
Outstanding Put Option Written
U.S. Treasury Notes, (premium received $2,734)..... Sep/$100 (1,781) (0.0)
---------------------------------------------------------------------------------------------------------------
Total Investments, Net of Outstanding Put Option
Written.......................................... 38,393,070 99.2
Other Assets Less Liabilities...................... 304,881 0.8
----------- ---------
Net Assets......................................... $38,697,951 100.0%
----------- ---------
----------- ---------
</TABLE>
(a) Represents REMIC Securities.
See Notes to Financial Statements.
Kidder, Peabody Intermediate Fixed Income Fund
------------------------------------------------------------------------------
Statement of Assets and Liabilities as of August 31, 1994
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Assets
Investments, at value (identified cost-$39,578,584) (Note 1a).............. $38,394,851
Cash....................................................................... 76,810
Receivables:
Securities sold........................................................ $ 25,626
Shares sold............................................................ 49,842
Interest............................................................... 527,130 602,598
---------
Prepaid expenses (Note 1d)................................................. 113,901
-----------
Total assets.......................................... 39,188,160
-----------
Liabilities
Written Put option outstanding, at value (premium received $2,734) (Note
1e)...................................................................... 1,781
Payables:
Securities purchased................................................... 161,205
Shares redeemed........................................................ 228,980
Dividends (Note 1b).................................................... 10,836
Investment advisory fees (Note 2)...................................... 23,217
Service fees (Note 2).................................................. 7,961
Distribution fees (Note 2)............................................. 1,270 433,469
---------
Accrued expenses........................................................... 54,959
-----------
Total liabilities..................................... 490,209
-----------
Net Assets
At value................................................................... $38,697,951
-----------
-----------
Net assets were comprised of:
Aggregate paid-in capital.............................................. $41,127,038
Undistributed net investment income.................................... -0-
Accumulated net realized capital losses................................ (1,246,307)
Net unrealized depreciation on investments and options................. (1,182,780)
-----------
Net assets................................................................. $38,697,951
-----------
-----------
CLASS A CLASS B CLASS C
----------- ---------- ----------
Net assets................................................... $34,221,675 $2,796,072 $1,680,204
Outstanding shares of beneficial interest, ($.001 par
value)..................................................... 2,934,786 239,790 144,153
Net asset value per share.................................... $11.66 $11.66 $11.66
Maximum offering price per share ($11.66[div].9775).......... $11.93 N\A N\A
</TABLE>
See Notes to Financial Statements.
Kidder, Peabody Intermediate Fixed Income Fund
------------------------------------------------------------------------------
Statement of Operations for the Year Ended August 31, 1994
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net Investment Income
Interest and discounts earned (Note 1c)....................... $ 3,109,468
Expenses
Investment advisory (Note 2).................................. $ 354,173
Servicing (Note 2):
Class A................................................... $ 115,750
Class B................................................... 7,495 123,245
---------
Pricing....................................................... 47,998
Professional.................................................. 47,992
Prospectus and shareholders" reports.......................... 29,121
Amortization of organization expenses (Note 1d)............... 36,122
Shareholder servicing......................................... 35,210
Federal and state registration................................ 27,158
Custodian..................................................... 17,450
Distribution Class B (Note 2)................................. 14,991
Trustees" fees and expenses (Note 2).......................... 10,380
Miscellaneous................................................. 7,041
------------
Total expenses........................... 750,881
-----------
Net Investment Income......................................... 2,358,587
Realized and Unrealized Loss on Investments (Note 3)
Realized loss from security transactions (excluding short-term
securities):
Proceeds from sales....................................... 145,602,534
Cost of securities sold................................... (146,682,580)
------------
Net realized loss on investment transactions.................. (1,080,046)
Change in unrealized depreciation on securities............... (2,781,878)
-----------
Net Decrease in Net Assets
Resulting from operations..................................... $(1,503,337)
-----------
-----------
</TABLE>
See Notes to Financial Statements.
Kidder, Peabody Intermediate Fixed Income Fund
------------------------------------------------------------------------------
Statements of Changes in Net Assets
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31,
1993 1994
--------------------------
<S> <C> <C>
Increase (Decrease) in Net Assets Resulting from Operations
Net investment income..................................................... $ 3,438,892 $ 2,358,587
Net realized gain (loss) on investment transactions....................... 1,101,205 (1,080,046)
Change in unrealized appreciation (depreciation) on securities............ 292,716 (2,781,878)
--------------------------
Net increase (decrease) in net assets resulting from operations... 4,832,813 (1,503,337)
--------------------------
Distributions to Shareholders from Net Investment Income (Note 1g)
Class A................................................................... (3,397,391) (2,152,026)
Class B*.................................................................. (12,568) (126,577)
Class C*.................................................................. (28,933) (79,984)
--------------------------
Total distribution from net investment income..................... (3,438,892) (2,358,587)
--------------------------
Distributions to Shareholders from Net Realized Short-Term
Capital Gains (Note 1g)
Class A................................................................... (429,370) (861,874)
Class B................................................................... -0- (49,787)
Class C................................................................... -0- (27,420)
--------------------------
Total distribution from net realized short-term capital gains..... (429,370) (939,081)
--------------------------
Capital Share Transactions (Note 4)
Net proceeds from sale of shares.......................................... 29,105,024 9,963,505
Net asset value of shares issued to shareholders in connection with the
reinvestment of dividends............................................... 2,767,532 2,498,504
Cost of shares redeemed................................................... (21,233,792) (29,198,771)
--------------------------
Net increase (decrease) in net assets derived from capital share
transactions.................................................... 10,638,764 (16,736,762)
--------------------------
Total increase (decrease) in net assets........................... 11,603,315 (21,537,767)
Net Assets
Beginning of year......................................................... 48,632,403 60,235,718
--------------------------
End of year............................................................... $ 60,235,718 $ 38,697,951
--------------------------
--------------------------
</TABLE>
*From May 10, 1993 (Commencement of Class Operations) to August 31, 1993.
See Notes to Financial Statements.
Kidder, Peabody Intermediate Fixed Income Fund
------------------------------------------------------------------------------
Financial Highlights
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
--------------------------------------------------------------------------------------
PERIOD YEAR YEAR PERIOD YEAR PERIOD YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
AUGUST AUGUST AUGUST AUGUST AUGUST AUGUST AUGUST
31, 31, 31, 31, 31, 31, 31,
1992+ 1993 1994 1993++ 1994 1993++ 1994
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $12.00 $12.56 $12.77 $12.63 $12.77 $12.63 $12.76
--------------------------------------------------------------------------------------
Income from Investment
Operations
Net investment income......... 0.39 0.74 0.57 0.19 0.51 0.22 0.60
Net realized and unrealized
gain (loss) on
investments................. 0.56 0.30 (0.89) 0.14 (0.89) 0.13 (0.88)
--------------------------------------------------------------------------------------
Total from investment
operations.................. 0.95 1.04 (0.32) 0.33 (0.38) 0.35 (0.28)
--------------------------------------------------------------------------------------
Distributions to shareholders
from (Note 1g)
Net investment income......... (0.39) (0.74) (0.57) (0.19) (0.51) (0.22) (0.60)
Net realized capital gains.... -- (0.09) (0.22) -- (0.22) -- (0.22)
--------------------------------------------------------------------------------------
Total distributions........... (0.39) (0.83) (0.79) (0.19) (0.73) (0.22) (0.82)
--------------------------------------------------------------------------------------
Net asset value, end of
period...................... $12.56 $12.77 $11.66 $12.77 $11.66 $12.76 $11.66
======================================================================================
Total return #................ 17.02% 8.80% (2.62)% 8.53% (3.11)% 9.04% (2.30)%
Ratios/Supplemental Data
Net assets, end of period (in
thousands).................. $48,632 $57,402 $34,222 $1,698 $2,796 $1,136 $1,680
Ratios to Average Net Assets
Expenses, excluding
distribution and service
fees, net of
reimbursement............... .16%* 0.83% 1.21% 0.83%* 1.21% 0.83%* 1.21%
Expenses, including
distribution and service
fees, net of
reimbursement............... .40%* 1.08% 1.46% 1.53%* 1.96% 0.83%* 1.21%
Expenses, before reimbursement
from manager................ 1.63%* 1.31% 1.46% 1.76%* 1.96% 1.06%* 1.21%
Net investment income......... 6.76%* 5.73% 4.69% 5.28%* 4.20% 5.98%* 4.94%
Portfolio turnover rate....... 33.03% 148.92% 279.07% 148.92% 279.07% 148.92% 279.07%
</TABLE>
+ From March 12, 1992 (Commencement of Operations) to August 31, 1992.
++ From May 10, 1993 (Commencement of Operations) to August 31, 1993.
# Total return does not reflect the effects of a sales charge, and is
calculated by giving effect to their reinvestment of dividends on the
dividend payment date.
* Annualized
See Notes to Financial Statements.
Kidder, Peabody Intermediate Fixed Income Fund
------------------------------------------------------------------------------
Notes to Financial Statements
------------------------------------------------------------------------------
1. The Fund is a series of the Kidder, Peabody Investment Trust, which is
registered under the Investment Company Act of 1940 as a diversified, open-end
investment management company. The Fund commenced operations on March 12,
1992. The following is a summary of significant accounting policies
consistently followed by the Fund.
On May 10, 1993 the Fund adopted the Choice Pricing System[sm]. The System
offers three classes of shares having identical voting, liquidation and other
rights. Class A Shares are sold subject to a front-end sales load and a
service fee of .25% per annum of average class net assets. Class B shares are
sold at net asset value without a sales load and bear a distribution fee of
.50% per annum and a service fee of .25% per annum of average class net
assets. Class C shares, which are available exclusively to employees of
Kidder, Peabody, employee benefit plans of Kidder, Peabody and participants of
the Insight Investment Advisory Program, are sold at net asset value without a
sales load and bear no such distribution or service fees. Classes A and B have
exclusive voting rights as to matters relating to the 12b-1 Distribution Plan.
On May 10, 1993 all pre-existing shares of the Fund converted to class A
shares at net asset value, with the exception of shares eligible for class C.
(a) Generally, the Fund's investments are valued at market value or, in the
absence of a market value, at fair value as determined by or under the
direction of the Trustees. Investments in Government Securities and other
securities traded over-the-counter, other than short-term investments that
mature in 60 days or less, are valued at the average of the quoted bid and
asked prices in the over-the-counter market. Short-term investments that
mature in 60 days or less are valued on the basis of amortized cost when the
Trustees have determined that amortized cost represents fair value. A security
that is traded on a stock exchange is valued at the last sale price on that
exchange or, if no sales occurred during the day, at a current quoted bid
price. An option that is written by the Fund is generally valued at the last
sale price or, in the absence of the last sale price, the last offer price. An
option that is purchased by the Fund is generally valued at the last sale
price or, in the absence of the last sales price, the last bid price. The
value of a futures contract is equal to the unrealized gain or loss on the
contract that is determined by marking the contract to the current settlement
price for a like contract on the valuation date of the futures contract. A
settlement price may not be used if the market makes a limit move with respect
to a particular futures contract or if the securities underlying the futures
contract experience significant price fluctuations after the determination of
the settlement price. When a settlement price cannot be used, future contracts
will be valued at their fair market value as determined by or under the
direction of the Trustees.
(b) It is the Fund's policy to continue to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all its taxable income to shareholders. The method of
such distribution for purposes of maintaining regulated investment company
status is made on a fund level rather than class level basis. Therefore, no
Federal income tax provision is required.
(c) Security transactions are recorded on a trade date basis. Dividend
income and distributions to shareholders are recorded on the ex-dividend
dates. Interest income is earned from settlement date and is recognized on an
accrual basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(d) Prepaid registration fees are charged to income as the related shares
are issued. Organization costs are being amortized evenly over a sixty month
period.
(e) When the Fund writes a call or put option, an amount equal to the
premium received is included in the Fund's statement of assets and liabilities
as an asset and an equivalent liability. The amount of the liability is
subsequently "marked to market" to reflect the current market value of the
option written. If an option which the Fund has written expires on its
stipulated date, the Fund realizes a gain in the amount of the premium
originally received, and the liability related to such option is extinguished.
If the Fund enters into a closing purchase transaction, it realizes a gain or
loss determined by the difference between the premium received and the cost of
the closing transaction. If a call option which the Fund has written is
exercised, the Fund realizes a gain or loss from the sale of the underlying
security and the proceeds from such sale are increased by the premium
originally received. If a put option which the Fund has written is exercised,
the amount of the premium originally received reduces the cost of the security
which
Kidder, Peabody Intermediate Fixed Income Fund
------------------------------------------------------------------------------
Notes to Financial Statements
------------------------------------------------------------------------------
the Fund purchases upon exercise of the option. As the writer of an option,
the Fund may have no control over whether the underlying securities are sold
(called) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written option.
Written and purchased options are non-income producing investments.
The premium paid by the Fund for the purchase of a call or put option is
included in the Fund's statement of assets and liabilities as an investment
and subsequently "marked to market" to reflect the current market value of the
option purchased. If a call or put option which the Fund has purchased expires
on the stipulated expiration date, the Fund realizes a loss in the amount of
the cost of the option. If the Fund enters into a closing sale transaction, it
realizes a gain or loss, depending on whether the proceeds from the sale are
greater or less than the cost of the option. If the Fund exercises a put
option, it realizes a gain or loss from the sale of the underlying security
and the proceeds from such sale are decreased by the premium originally paid.
If the Fund exercises a call option, the cost of the security which the Fund
purchases upon exercise is increased by the premium originally paid.
(f) A futures contract is an agreement between two parties to buy and sell a
security for a set price on a future date. Initial margin deposits are made
upon entering into futures contracts and can be either cash or securities.
During the period the futures contract is open, changes in the value of the
contract are recognized as unrealized gains or losses by "marking to market"
on a daily basis to reflect the market value of the contract at the end of
each day's trading. Variation margin payments are made or received, depending
upon whether unrealized gains or losses are incurred. When the contract is
closed, the Fund records a realized gain or loss equal to the difference
between the proceeds from (or cost of) the closing transaction and the Fund's
basis in the contract.
The Fund invests in financial futures contracts solely for the purpose of
hedging its existing portfolio securities against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Fund may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in the movement of the
futures contracts and the underlying hedged asset.
(g) Income and Fund level expenses are allocated to each class on a pro-rata
basis based upon each class" daily settled net assets. Class specific expenses
are charged directly to each class. Dividends from net investment income are
calculated daily based upon the respective classes net investment income.
Distributions of net realized gains are allocated based upon the outstanding
shares of each class.
The Fund distributes monthly substantially all its net investment income.
Net long-term realized gains, if any, will be distributed annually. For book
and tax purposes, as of August 31, 1994, the Fund had net accumulated capital
losses of $1,246,307.
2. The Fund has entered into a management agreement with Kidder Peabody Asset
Management, Inc. ("KPAM"), a wholly-owned subsidiary of Kidder, Peabody & Co.
Incorporated ("KP"). General Electric Capital Services, Inc., a wholly-owned
subsidiary of General Electric Company, ("GE"), has a 100% interest in Kidder,
Peabody Group Inc., the parent company of KP. KPAM serves as the Fund's
manager and receives a fee, accrued daily and paid monthly at the annual rate
of .70% of the Fund's average daily net assets. KPAM in turn employs GE
Investment Management Incorporated ("GEIM"), a wholly owned subsidiary of GE,
as the Fund's investment adviser, in which capacity GEIM receives from KPAM a
fee, accrued daily and paid monthly, at the annual rate of .50% of the Fund's
average daily net assets. As the Fund's manager, KPAM is generally responsible
for furnishing, or causing to be furnished to the Fund, investment management
and administrative services.
As the Fund's investment adviser, GEIM manages the Fund's portfolio, makes
decisions for the Fund, and places purchase and sale orders for the Fund's
portfolio transactions. GEIM also pays the salaries of all officers and
employees who are employed by both GEIM and the Fund, provides the Fund with
investment officers, and employs a professional staff of portfolio managers
who draw upon a variety of sources for research information for the Fund.
Total annual expenses of the Fund, exclusive of taxes, interest, all
brokers" commissions and other normal charges incidental to the purchase and
sale of portfolio securities, but including fees paid to KPAM, are not
Kidder, Peabody Intermediate Fixed Income Fund
------------------------------------------------------------------------------
Notes to Financial Statements
------------------------------------------------------------------------------
expected to exceed the limits prescribed by any state in which the Fund's
shares are offered for sale. KPAM will reimburse the Fund for any expenses in
excess of such limits. No expense reimbursement was required for the year
ended August 31, 1994.
KP is the exclusive distributor of the Fund's shares. Its services include
payment of sales commissions to registered representatives and various other
promotional and sales-related expenses. KP receives monthly, from the Fund,
the distribution and service fees which are calculated and accrued daily. KP
also receives the proceeds of any front-end sales loads with respect to the
purchase of shares of class A.
Certain officers and/or Trustees of the Fund are officers and/or directors
of KPAM and/or GEIM. Each Trustee who is not an "affiliated person" of either
KPAM or GEIM receives an annual fee of $1,000 and an attendance fee of $375
per meeting.
3. Purchases and sales of securities, excluding short-term securities and
maturities, for the year ended August 31, 1994 were $130,887,910 and
$145,602,534 respectively. As of August 31, 1994 net unrealized depreciation,
based on cost for Federal income tax purposes, aggregated $1,182,780 of which
$140,529 related to appreciated securities and $1,323,319 related to
depreciated securities. The aggregate cost of securities at August 31, 1994
for book and Federal income tax purposes was $39,578,584.
4. The Declaration of Trust of the Fund permits the Trustees to issue an
unlimited number of shares of beneficial interest, par value $.001 per share.
Transactions totaling $9,963,505 from net proceeds from sale of shares,
$29,198,771 representing cost of shares redeemed and $2,498,504 representing
reinvestment of dividends for the year ended August 31, 1994 were as follows
for each class:
<TABLE>
<CAPTION>
CLASS A SHARES AMOUNT
--------------------------------------------------
<S> <C> <C>
Year ended August 31, 1994:
Shares sold.............. 452,513 $ 5,600,161
Shares issued to
shareholders in
connection with the
reinvestment of
dividends.............. 184,168 2,245,936
Shares redeemed.......... (2,197,635) (26,682,102)
-----------------------
Net decrease......... (1,560,954) $(18,836,005)
-----------------------
-----------------------
Year ended August 31, 1993:
Shares sold.............. 2,014,256 $ 25,252,343
Shares issued to
shareholders in
connection with the
reinvestment of
dividends.............. 218,734 2,730,454
Shares redeemed.......... (1,609,448) (20,140,745)
-----------------------
Net increase......... 623,542 $ 7,842,052
-----------------------
-----------------------
CLASS B SHARES AMOUNT
--------------------------------------------------
Year ended August 31, 1994:
Shares sold.............. 233,486 $ 2,887,987
Shares issued to
shareholders in
connection with the
reinvestment of
dividends.............. 12,288 148,583
Shares redeemed.......... (138,949) (1,636,839)
-----------------------
Net increase......... 106,825 $ 1,399,731
-----------------------
-----------------------
May 10, 1993 to August
31, 1993:
Shares sold.............. 135,760 $ 1,712,376
Shares issued to
shareholders in
connection with the
reinvestment of
dividends.............. 950 12,043
Shares redeemed.......... (3,745) (47,000)
-----------------------
Net increase......... 132,965 $ 1,677,419
-----------------------
-----------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES AMOUNT
--------------------------------------------------
<S> <C> <C>
Year ended August 31, 1994:
Shares sold.............. 120,023 $ 1,475,357
Shares issued to
shareholders in
connection with the
reinvestment of
dividends.............. 8,593 103,985
Shares redeemed.......... (73,435) (879,830)
-----------------------
Net increase......... 55,181 $ 699,512
-----------------------
-----------------------
May 10, 1993 to August
31, 1993:
Shares sold.............. 169,557 $ 2,140,305
Shares issued to
shareholders in
connection with the
reinvestment of
dividends.............. 1,981 25,035
Shares redeemed.......... (82,566) (1,046,047)
-----------------------
Net increase......... 88,972 $ 1,119,293
-----------------------
-----------------------
</TABLE>
Kidder, Peabody Intermediate Fixed Income Fund
------------------------------------------------------------------------------
Notes to Financial Statements
Auditors
------------------------------------------------------------------------------
5. The Fund takes possession of securities under repurchase agreements before
releasing any money to the counterparty under such agreement. Eligible
collateral for repurchase agreement transactions are the instruments that the
Fund is allowed to invest in, as stated in the Prospectus. The Fund attempts
to attain a short maturity (2 years or less), although that is not always
available. The value of the collateral must be a minimum of 102% of the market
value of the securities being loaned, allowing for minor variations arising
from marking to market of such collateral. If the issuer defaults or if
bankruptcy or regulatory proceedings are commenced with respect to the issuer,
the realization of the proceeds may be delayed or limited.
Report of Independent Auditors
The Trustees and Shareholders,
Kidder, Peabody Intermediate Fixed Income Fund
(one of the portfolios constituting the Kidder, Peabody Investment Trust):
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Kidder, Peabody Intermediate
Fixed Income Fund as of August 31, 1994, and 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 responsibilty of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned at August 31, 1994 by correspondence with the custodian and brokers;
where replies were not received from brokers, we performed other auditing
procedures. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Kidder, Peabody
Intermediate Fixed Income Fund as of August 31, 1994, the results of its
operations, the changes in its 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
October 14, 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 Intermediate Fixed Income Fund
60 Broad Street
New York, New York 10004
Trustees
------------------------------------------------
George V. Grune, Jr. William W. Hewitt, Jr.
Chairman of the Trustee
Trustees Thomas R. Jordan
and President Trustee
Russell H. Johnson Carl W. Schafer
Trustee and Vice Trustee
Chairman
David J. Beaubien
Trustee
Manager
------------------------------------------------
Kidder Peabody Asset Management, Inc.
60 Broad Street, New York, New York 10004
Investment Adviser
------------------------------------------------
GE Investment Management Incorporated
3003 Summer Street, Stamford, Connecticut 06904
Distributor
------------------------------------------------
Kidder, Peabody & Co. Incorporated
10 Hanover Square, New York, New York 10005
Custodian & Recordkeeping Agent
------------------------------------------------
State Street Bank & Trust Company
1776 Heritage Drive, A4East
Quincy, Massachusetts 02171
Transfer & Dividend Agent
------------------------------------------------
Investors Fiduciary Trust Company
127 West 10th Street, Kansas City, Missouri 64105
Independent Auditors
------------------------------------------------
Deloitte & Touche LLP
1633 Broadway, New York, New York 10019
Legal Counsel
------------------------------------------------
Willkie Farr & Gallagher
One Citicorp Center, 153 East 53rd Street
New York, New York 10022
This report is for the information of the shareholders of the Kidder,
Peabody Intermediate Fixed Income Fund, 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.
KPIFI-2
Kidder,
Peabody
Intermediate
Fixed
Income
Fund
Annual Report
August 31, 1994
In affiliation with
GE Investment Management
KIDDER
FAMILY OF FUNDS
Portfolio of Investments
May 31, 1995 (unaudited)
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates
---------- -------- --------
<S> <C> <C>
U.S. Government Obligations- 35.31%
$78,065 U.S. Treasury Bonds ...................................... 05/15/20 to 11/15/24 7.500 to 8.750%
142,565 U.S. Treasury Notes ...................................... 11/15/97 to 11/15/04 5.125 to 7.875
Total U.S. Government Obligations (cost - $190,003,478, $10,232,031,
$9,688,648 and $209,924,157 respectively) ..........................................
Government National Mortgage Association Certificates- 9.61%
23,297 GNMA ..................................................... 09/15/20 11.500
3,409 GNMA ..................................................... 06/15/11 to 02/15/16 11.000
220 GNMA ..................................................... 09/15/14 to 02/15/16 10.500
76 GNMA ..................................................... 09/15/15 to 11/15/19 10.000
1,011 GNMA ............................................................ 08/15/17 9.500
23,395 GNMA ......................................................04/15/11 to 04/15/25 9.000
4,638 GNMA ......................................................11/15/17 to 10/15/24 8.500
343 GNMA ................................................................. 11/20/05 7.500
392 GNMA ................................................................. 07/15/08 6.500
367 GNMA ................................................................. 01/15/99 6.000
367 GNMA ARM TBA......................................................... 12/15/99 7.000
50 GNMA ARM TBA......................................................... 01/15/99 6.000
Total Government National Mortgage Association Certificates (cost - $47,361,491,
$9,634,284 , $2,182,470 and $59,178,244 respectively) .......................
Federal Home Loan Mortgage Corporation Certificates- 8.31%
6,627 FHLMC .....................................................06/01/04 to 12/01/05 10.500
4,430 FHLMC ................................................................ 09/01/05 10.000
7,918 FHLMC .................................................... 06/01/22 to 03/01/25 8.500
30,899 FHLMC .................................................... 04/01/22 to 01/01/23 8.000
760 FHLMC ................................................................ 12/01/00 6.000
Total Federal Home Loan Mortgage Corporation Certificates (cost - $46,470,079,
$4,505,715, $1,146,948 and $52,122,742 respectively) .......................
Federal National Mortgage Association Certificates- 10.15%
226 FNMA ................................................................. 04/01/17 8.500
6,825 FNMA ..................................................... 04/01/24 to 05/01/25 8.000
500 FNMA ................................................................. 02/01/14 7.500
57,458 FNMA ..................................................... 07/10/98 to 02/01/25 7.000
243 FNMA ................................................................. 08/01/00 6.500
Total Federal National Mortgage Association Certificates (cost - $45,880,213,
$14,651,326, $1,079,132 and $61,610,671 respectively) .......................
Agency Backed Notes- 22.43%
57,500 Federal Home Loan Mortgage Corporation.................... 09/01/04 to 09/23/99 7.420 to 7.610
8,100 Federal National Mortgage Association ................... 07/10/98 to 08/11/04 5.220 to 8.900
Total Agency Backed Notes (cost - $134,306,384, $0, $0 and $134,306,384
respectively) .............................................................................
</TABLE>
<TABLE>
<CAPTION>
PaineWebber
U.S. Government MH/KP Government MH/KP Intermediate Pro forma
Income Fund Income Fund Fixed Income Fund Combined
Value Value Value Value
------------------ ---------------- ------------------ ---------
<S> <C> <C> <C>
$70,040,479 $3,261,268 $73,301,747
131,085,800 10,623,808 6,871,846 148,581,454
------------ ---------- ---------- -----------
201,126,279 10,623,808 10,133,114 221,883,201
------------ ---------- ---------- -----------
26,179,802 26,179,802
3,777,517 3,777,517
241,116 241,116
82,267 82,267
209,873 209,873
18,372,432 4,857,441 400,319 23,630,192
26,170 4,649,931 137,398 4,813,499
351,859 351,859
306,432 306,432
369,408 369,408
375,221 375,221
50,016 50,016
------------ ---------- ---------- -----------
48,355,921 9,830,755 2,200,526 60,387,202
------------ ---------- ---------- -----------
7,005,717 7,005,717
4,670,799 4,670,799
3,554,498 4,655,837 8,210,335
31,309,814 337,356 31,647,170
668,275 668,275
------------ ---------- ---------- -----------
46,540,828 4,655,837 1,005,631 52,202,296
------------ ---------- ---------- -----------
129,855 129,855
6,509,923 438,304 6,948,227
196,375 196,375
47,481,812 8,674,079 155,079 56,310,970
195,458 195,458
------------ ---------- ---------- -----------
47,481,812 15,184,002 1,115,071 63,780,885
------------ ---------- ---------- -----------
59,295,449
81,619,113 59,295,449
81,619,113
------------ ---------- ---------- -----------
140,914,562 140,914,562
------------ ---------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates
---------- -------- --------
<S> <C> <C>
Stripped Mortgage-Backed Securities- 0.01%
$90 FNMA FNS 257 1 ............................................... 02/01/24 0.000%
110 FNMA FNS 215 2 ............................................... 04/01/23 7.000
Total Stripped Mortgage Backed Securities (cost - $0, $0, $85,693 and
$85,693 respectively) ..............................................................................
Agency Collateralized Mortgage Obligations-4.70%
200 FHLMC 1096 E .................................................06/15/21 7.000
10,000 FHLMC Series 1762, Class 1762 - A2 ............................. 10/15/06 1.000
7,365 FNMA REMIC Trust 1993 .......................................... 12/25/97 5.000
10,010 FNMA 94 M 5C.................................................... 02/25/09 8.400
150 CMO Trust, Class Z ............................................ 01/01/17 8.000
119 Salomon Brothers Mortgage Securities, Series 1984............... 11/01/12 8.125
Total Agency Collateralized Mortgage Obligations (cost - $27,208,838, $0, $431,214
and $27,640,052 respectively) ..............................................................................
Asset - Backed Securities- 2.84%
210 American Express Master Trust ................................. 09/15/99 7.150
138 Charming Shoppes Master Trust ................................. 04/15/03 7.000
120 Mid St Trust IV ............................................... 04/01/30 8.330
150 Sears Credit Account Master Trust ............................. 06/15/04 8.100
350 Standard Credit Card Master Trust .............................. 04/07/08 7.250
200 United Airlines Passthrough Trust ............................. 10/19/18 3.907
4,996 Western Financial, Series 1994-4, Class A-1 ............. ...... 01/01/00 7.100
11,525 Western Financial, Series 1994-4, Class A-2 .................... 01/01/00 7.100
Total Asset - Backed Securities (cost - $16,462,562, $0, $1,129,621 and
$17,592,183 respectively)...........................................................................
Corporate Notes- 0.65%
250 American Home Products ........................................ 02/15/00 7.700
125 BCH Cayman Islands ............................................. 06/15/04 8.250
125 Bell Telephone Co. of Pennsylvania ............................ 12/15/30 8.350
100 Boise Cascade Corporation ..................................... 08/01/97 7.375
75 Central Mississippi Power Co. ................................. 06/02/98 7.400
150 Ford Motor Credit Co. ......................................... 05/15/99 7.250
600 General Motors Acceptance Corporation ......................... 09/11/97 6.100
50 Great Atlantic & Pacific Tea Inc. ............................. 01/15/98 9.125
100 Great Lakes Power Inc. ........................................ 12/01/99 8.900
245 Hydro Quebec ...................................... 02/01/12 to 04/15/26 8.250 to 11.750
400 Lehman Brothers Holdings ....................................... 01/15/19 8.050
100 Midland Bank ................................................... 05/01/25 7.650
125 New England Telephone & Telegraph Co. ......................... 11/15/29 7.875
400 News America Holdings Inc. .........................12/15/01 to 10/15/12 10.125 to 12.000
100 Niagara Mohawk Power Corp. ..................................... 11/01/05 9.750
100 Nippon Telephone & Telegraph Co. .............................. 07/27/98 9.500
550 PaineWebber Group Inc. ........................................ 03/11/97 8.760
150 Petoleous Mexicanos ........................................... 03/08/99 7.312
150 Vornado Finance Corporation ................................... 11/23/00 6.360
Total Corporate Notes (cost - $0, $0, $4,054,601 and $4,054,601 respectively)
</TABLE>
<TABLE>
<CAPTION>
PaineWebber
U.S. Government MH/KP Government MH/KP Intermediate Pro forma
Income Fund Income Fund Fixed Income Fund Combined
Value Value Value Value
--------------- ---------------- ------------------ ----------
<S> <C> <C> <C>
56,433 $56,433
29,361 29,361
----------- ----------- --------- ---------
85,794 85,794
----------- ----------- --------- ---------
198,060 198,060
10,903,125 10,903,125
7,226,485 7,226,485
10,792,031 10,792,031
305,995 305,995
116,194 116,194
----------- ----------- --------- ---------
28,921,641 422,189 29,541,890
----------- ----------- --------- ---------
214,855 214,855
140,458 140,458
126,009 126,009
157,125 157,125
360,388 360,388
204,200 204,200
5,057,874 5,057,874
11,582,480 11,582,480
----------- ----------- --------- ---------
16,640,354 1,203,035 17,843,389
----------- ----------- --------- ---------
262,358 262,358
131,128 131,128
151,103 151,103
101,217 101,217
75,150 75,150
153,381 153,381
595,272 595,272
52,243 52,243
105,965 105,965
298,766 298,766
409,000 409,000
105,050 105,050
139,571 139,571
453,428 453,428
115,107 115,107
108,933 108,933
569,487 569,487
125,250 125,250
145,875 145,875
----------- ----------- --------- ---------
4,098,284 4,098,284
----------- ----------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates
---------- -------- --------
<S> <C> <C>
Short - Term U.S. Government Obligations- 0.55%
$ 3,430 U.S. Treasury Bills (cost - $0, $3,430,000, $0 and $3,430,000
respectively) ................................................. 06/01/95 5.120%
Discount Note - 0.05%
300 Federal Farm Credit Bank (cost - $0, $0, $300,000 and
$300,000 respectively) ........................................ 06/05/95 0.000
Time Deposit - 0.02 %
150 State Street Cayman Islands (cost - $0, $0, $150,000 and
$150,000 respectively) ............................... 06/01/95 6.125
Repurchase Agreements - 2.03%
10,400 Repurchase Agreement dated 05/31/95, with
Salomon Brothers Inc., collateralized
by $10,668,000 U.S. Treasury Notes, 4.375% due
08/15/96; proceeds; $10,401,768 ................................ 06/01/95 6.120
1,962 Repurchase Agreement dated 05/31/95, with
Citicorp Securities Inc., collateralized
by $1,360,000 U.S. Treasury Bonds, 11.750% due
11/15/14; proceeds; $1,962,335.................................. 06/01/95 6.150
410 Repurchase Agreement dated 05/31/95, with
State Street Bank & Trust Co., collateralized
by $422,300 U.S. Treasury Bills, 7.500% due
02/29/96; proceeds; $ 410,069................................... 06/01/95 6.070
Total Repurchase Agreements (cost - $10,400,000, $1,962,000, $410,000
and $12,772,000 respectively) ...................................................................
Investments Sold Short- (0.07) %
430 FNMA TBA (cost - $0, $0, $436,114 and $436,114
respectively) ................................................. 12/31/99 8.000
Total Investments (cost $518,093,045, $44,415,356, $20,222,954
and $582,731,355 respectively) - 96.59% ................................................
Other assets in excess of liabilities- 3.41% ..............................................
Net Assets- 100.00% ......................................................................
<FN>
----------
ARM - Adjustable Rate Mortgage
REMIC - Real Estate Mortgage Conduit
</TABLE>
<TABLE>
<CAPTION>
PaineWebber
U.S. Government MH/KP Government MH/KP Intermediate Pro forma
Income Fund Income Fund Fixed Income Fund Combined
Value Value Value Value
--------------- ---------------- ------------------ ----------
<S> <C> <C> <C>
3,430,000 $3,430,000
------------ ----------- ---------- ----------
299,805 299,805
------------ ----------- ---------- ----------
150,000 150,000
------------ ----------- ---------- ----------
10,400,000 $10,400,000
------------ ----------- ---------- ----------
1,962,000 1,962,000
------------ ----------- ---------- ----------
410,000 410,000
------------ ----------- ---------- ----------
10,400,000 1,962,000 410,000 12,772,000
------------ ----------- ---------- ----------
(439,003) (439,003)
------------ ----------- ---------- ----------
540,381,397 45,686,402 20,684,446 606,950,305
20,806,328 236,124 359,621 21,402,073
------------ ----------- ---------- ----------
$561,187,725 $45,922,526 $21,044,067 $628,352,378
============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
<TABLE>
Pro forma Combined
Statement of Assets and Liabilities
May 31, 1995
(unaudited)
<CAPTION>
PaineWebber MH/KP MH/KP
U.S. Government Government Intermediate
Income Income Fixed Income Pro forma
Fund Fund Fund Combined
--------------- ---------- ------------- ---------
<S> <C> <C> <C> <C>
Assets
Investments in securities, at value
(cost-$518,093,045, $44,415,356 and
$20,222,954, respectively) $540,381,397 $45,686,402 $20,882,506 $606,950,305
Other assets 34,449,399 491,335 1,510,975 36,451,709
------------ ----------- ----------- ------------
Total assets 574,830,796 46,177,737 22,393,481 643,402,014
------------ ----------- ----------- ------------
Total liabilities 13,643,071 255,211 1,151,354 15,049,636
------------ ----------- ----------- ------------
Beneficial interest/Capital stock,
$0.001, $0.001, $0.001, and $0.001
par value respectively (unlimited
amount authorized) 824,095,702 54,658,183 23,207,030 901,960,915
Accumulated undistributed (distributions
in excess of) net investment income (1,927,892) 0 0 (1,927,892)
Accumulated net realized losses from
investment, option and futures
transactions (283,268,438) (10,006,702) (2,624,456) (295,899,596)
Net unrealized appreciation/
(depreciation) of investments 22,288,353 1,271,045 659,553 24,218,951
------------ ----------- ----------- ------------
Net assets $561,187,725 $45,922,526 $21,242,127 $628,352,378
============ =========== =========== ============
Class A:
Net assets $405,579,008 $41,266,459 $18,166,267 $465,011,734
------------ ----------- ----------- ------------
Shares outstanding 45,333,801 2,911,215 1,499,522 51,971,916
------------ ----------- ----------- ------------
Net asset value and redemption value
per share $8.95 $14.17 $12.11 $8.95
============ =========== =========== ============
Maximum offering price per share
(net asset value plus sales charges
of 4.00%, 2.25%, and 2.25%, respectively) $9.32 $14.49 $12.39 $9.32
============ =========== =========== ============
Class B:
Net assets $ 91,313,714 $ 1,308,185 $ 1,955,872 $ 91,313,714
------------ ----------- ----------- ------------
Shares outstanding 10,205,633 92,329 161,442 10,205,633
------------ ----------- ----------- ------------
Net asset value and offering price
per share $8.95 $14.17 $12.11 $8.95
============ =========== =========== ============
Class C:
Net assets $ 6,244,754 $ 3,347,882 $ 1,119,988 $ 10,712,624
------------ ----------- ----------- ------------
Shares outstanding 698,559 236,332 92,489 1,198,432
------------ ----------- ----------- ------------
Net asset value, offering price and
redemption value per share $8.94 $14.17 $12.11 $8.94
============ =========== =========== ============
Class D: *
Net assets $ 58,050,249 $ 61,314,306
------------ ----------- ----------- ------------
Shares outstanding 6,494,838 6,859,867
------------ ----------- ----------- ------------
Net asset value, offering price and
redemption value per share $8.94 $8.94
============ =========== =========== ============
</TABLE>
---------------
* Pro forma combined includes MH/KP Class B shares
See Notes to Pro Forma Combined Financial Statements
<TABLE>
Pro Forma Combined
Statement of Operations
(Unaudited)
<CAPTION>
For the Twelve Months Ended May 31, 1995
PaineWebber MH/KP MH/KP
U.S. Government Government Intermediate
Income Income Fixed Income Pro Forma
Fund Fund Fund Adjustments Combined
--------------- ---------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Investment Income
Interest and dividends $49,626,204 $4,222,910 $2,292,084 $0 $56,141,198
----------- ---------- ---------- -------- -----------
Expenses:
Investment advisory and administration
fees 3,153,866 351,390 221,899 (133,678) 3,593,477
Distribution fees 2,713,122 264,298 87,794 (126,984) 2,938,230
Transfer agency and service fees 577,025 49,484 31,291 (59,623) 598,177
Legal and audit fees 109,500 24,734 43,626 (57,410) 120,450
Other 938,257 156,389 145,678 (279,605) 960,719
----------- ---------- ---------- -------- -----------
7,491,770 846,295 530,288 (657,300) 8,211,053
----------- ---------- ---------- -------- -----------
Net Investment Income 42,134,434 3,376,615 1,761,796 657,300 47,930,145
----------- ---------- ---------- -------- -----------
Realized and unrealized gains (losses)
from investment activities:
Net realized losses from investment
transactions (98,858,724) (4,005,093) (1,958,573) 0 (104,822,390)
Net change in unrealized appreciation/
depreciation on investments 83,862,833 4,222,537 2,485,353 0 90,570,723
----------- ---------- ---------- -------- -----------
Net realized and unrealized gains (losses)
from investment activities (14,995,891) 217,444 526,780 0 (14,251,667)
----------- ---------- ---------- -------- -----------
Net increase in net assets resulting from
operations $27,138,543 $3,594,059 $2,288,576 $657,300 $33,678,478
=========== ========== ========== ======== ===========
</TABLE>
See Notes to Pro Forma Combined Financial Statements
<TABLE>
Pro Forma Capitalization
as of May 31, 1995
(Unaudited)
<CAPTION>
PaineWebber MH/KP MH/KP PaineWebber
U.S. Government Government Intermediate U.S. Government
Income Income Fixed Income Income
Fund Fund Fund Fund (as adjusted)(1)
--------------- ---------- ------------- ---------------------
<S> <C> <C> <C> <C>
Shareholders' Equity:
Beneficial interest shares (or
shares of capital stock) of $0.001
par value per share (unlimited amount
authorized) 824,095,702 54,658,183 23,207,030 901,960,915(2)(3)
62,732,831 shares outstanding PW U.S.
Government Income Fund (Actual) 3,239,876
shares of MH/KP Government Income Fund
(Actual) 1,753,453 shares of MH/KP
Intermediate Fixed Income Fund (Actual)
70,235,849 shares of PW U.S. Government
Income Fund (As adjusted) Undistributed
(distribution in excess of) net invest-
ment income (1,927,892) (1,927,892)
Accumulated net realized losses from
investment, option and futures trans-
actions (283,268,438) (10,006,702) (2,624,456) (295,899,596)
Net unrealized appreciation/depreciation
of investments 22,288,353 1,271,045 659,553 24,218,951
------------ ----------- ----------- ------------
Net Assets $561,187,725 $45,922,526 $21,242,127 $628,352,378
------------ ----------- ----------- ------------
<FN>
---------------
(1) The adjusted balances are presented as if the Reorganization involving all Funds
was effective as of May 31, 1995 for information purposes only. The actual effective
time of the Reorganization is expected to be October 1995, at which time the results
would be reflective of the actual composition of shareholders' equity at that date.
(2) Assumes the beneficial interest holders of U.S. Government Income remain unchanged.
Assumes the issuance of 5,130,082 shares in exchange for the net assets applicable
to beneficial interest holders of MH/KP Government Income.
Assumes the issuance of 2,372,934 shares in exchange for the net assets applicable
to beneficial interest holders of MH/KP Intermediate Fixed Income.
The exchange is based on the net asset values for U.S. Government Income Class A,
B, C, and D and the net assets applicable to beneficial interest holders of
MH/KP Intermediate Fixed Income and stockholders of MH/KP Government Income as of
May 31, 1995.
(3) Does not include the impact of estimated Reorganization costs of $250,000.
(4) Assumes MH/KP Government Income Fund's and MH/KP Intermediate Fixed Income Fund's net
realized losses from investment transactions carry forward into PW U.S. Government
Income Fund.
</TABLE>
<PAGE>
Notes to Pro Forma Combined Financial Statements
(unaudited)
Basis or Presentation:
Subject to approval of the Plan of Reorganizations by the shareholders of
Mitchell Hutchins/Kidder, Peabody Intermediate Fixed Income Fund ("MH/KP
Intermediate Income Fund"), Mitchell Hutchins/Kidder, Peabody Government Income
Fund ("MH/KP Government Income Fund, Inc."), and PaineWebber U.S. Government
Income Fund ("PW U.S. Government Income Fund") PW U.S. Government Income Fund
would acquire the assets of MH/KP Intermediate Income Fund and MH/KP Government
Income Fund in exchange solely for shares of beneficial interest or shares of
capital stock in PW U.S. Government Fund and the assumption by PW U.S.
Government Income Fund of MH/KP Intermediate Income's and MH/KP Government
Income's liabilities.
Shares of PW U.S. Government Income Fund will be distributed to MH/KP
Intermediate Income Fund and MH/KP Government Income Fund shareholders at the
net asset value per share of PW U.S. Government Income Fund for the value
acquired, and MH/KP Intermediate Income Fund and MH/KP Government Income Fund
will be terminated as soon as practicable thereafter. Each shareholder of MH/KP
Intermediate Income Fund and MH/KP Government Income Fund will receive the
number of full and fractional shares of each Class of shares of PW U.S.
Government Income Fund equal in value to such shareholder's holdings in the
corresponding Class of shares of MH/KP Intermediate Income Fund and MH/KP
Government Income Fund as of the closing date of the merger.
The pro forma combined financial statements reflect the financial position of PW
U.S. Government Income Fund, MH/KP Intermediate Income Fund and MH/KP Government
Income Fund at May 31, 1995 and the combined results of operations of PW U.S.
Government Income Fund, MH/KP Intermediate Income Fund and MH/KP Government
Income Fund for the twelve months ended May 31, 1995. Due to differences in
class structures, MH/KP Intermediate Income's and MH/KP Government Income's
Class B shares are considered to be part of PW U.S. Government Income Fund's
Class D shares for combined pro forma results.
As a result of the Reorganization, investment advisory and administration fees
for MH/KP Intermediate Income Fund and MH/KP Government Income Fund will
decrease due to a lower fee schedule applicable to PW U.S. Government Income
Fund. Other expenses will also be reduced due to duplication of expenses. In
addition, the pro forma combined statement of assets and liabilities has not
been adjusted as a result of the proposed transaction because such adjustment
would not be material. It is estimated that costs of approximately $250,000
associated with the merger will be charged to the combined Fund.
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 Reorganizations occurred at May 31,
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 INVESTMENTS TRUST
PART C
OTHER INFORMATION
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, director, 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
("Contract") with Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins") provides that Mitchell Hutchins shall not be liable for any error
of judgment or mistake of law or for any loss suffered by any series of 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 Mitchell Hutchins 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 Trust or any series under the Contract and that Mitchell
Hutchins 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 each Distribution Contract provides that the Trust will
indemnify Mitchell Hutchins and 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
C-1
<PAGE>
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 Mitchell Hutchins to the Trust 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 misfeasance; 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 of each
Distribution Contract also provides that Mitchell Hutchins agrees to
indemnify, defend and hold the Trust, 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
Mitchell Hutchins for use in the Registration Statement or arising out of an
agreement between Mitchell Hutchins and any retail dealer, or arising out of
supplementary literature or advertising used by Mitchell Hutchins in
connection with the Contract.
Section 9 of each Exclusive Dealer Agreement contains provisions similar
to Section 9 of the Distribution Contract, with respect to PaineWebber
Incorporated ("PaineWebber").
Section 6 of the Service Contract provides that PaineWebber shall be
indemnified and held harmless by the Trust against all liabilities, except
those arising out of bad faith, gross negligence, willful misfeasance or
reckless disregard of its duties under the Contract.
Section 10 of each Distribution Contract and Section 7 of the Service
Contract contain provisions similar to Section 10 of the Investment Advisory
and Administration Contract, with respect to Mitchell Hutchins and
PaineWebber, as appropriate.
Insofar as indemnification for liability arising under the Securities Act
of 1933, as amended, may be permitted to Trustees, officers and controlling
persons of the Trust, pursuant to the foregoing provisions or otherwise, the
Trust 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 Trust
of expenses incurred or paid by a Trustee, officer or controlling person of
the Trust in connection with the successful defense of any action, suit or
proceeding or payment pursuant to any insurance policy) is asserted against
the Trust by such Trustee, officer or controlling person in connection with
the securities being registered, the Trust will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
ITEM 16. EXHIBITS:
<TABLE>
<CAPTION>
<S> <C>
(1) (a) Declaration of Trust (1)
(b) Amendment effective January 28, 1988 to Declaration of Trust (2)
(c) Amendment effective July 1, 1990 to Declaration of Trust (5)
(d) Amendment effective March 21, 1991 to Declaration of Trust (6)
(e) Amendment effective April 1, 1991 to Declaration of Trust (7)
(f) Amendment effective July 1, 1991 to Declaration of Trust (10)
(g) Amendment effective February 26, 1992 to Declaration of Trust (9)
(h) Amendment effective January 25, 1993 to Declaration of Trust (11)
C-2
<PAGE>
(i) Amendment effective May 25, 1993 to Declaration of Trust (12)
(j) Amendment effective July 30, 1993 to Declaration of Trust (12)
(k) Amendment effective November 13, 1993 to Declaration of Trust (14)
(2) (a) By-Laws (1)
(b) Amendment effective March 19, 1991 to By-Laws (6)
(c) Amendment effective September 28, 1994 to By-Laws (14)
(3) Voting trust agreement -- None
(4) Agreement and Plan of Reorganization and Termination
(a) MHKP Intermediate Fixed Income Fund (filed herewith)
(b) MHKP Government Income Fund, Inc. (filed herewith)
(5) All Instruments Defining the Rights of Holders -- None
(6) (a) Investment Advisory and Administration Contract (3)
(7) (a) Distribution Contract with respect to Class A shares (13)
(b) Distribution Contract with respect to Class B shares (13)
(c) Distribution Contract with respect to Class C shares (8)
(d) Distribution Contract with respect to Class D shares (13)
(e) Exclusive Dealer Agreement with respect to Class A shares (13)
(f) Exclusive Dealer Agreement with respect to Class B shares (13)
(g) Exclusive Dealer Agreement with respect to Class C shares (8)
(h) Exclusive Dealer Agreement with respect to Class D shares (13)
(8) Bonus, Profit Sharing, Pension or Other Similar Contracts --None
(9) Custodian Agreement (2)
(10) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to Class A Shares (8)
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to Class B Shares (8)
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to Class D Shares (11)
(d) Plan of Distribution pursuant to Rule 18f-3 with respect to Multiple Class Shares (filed
herewith)
(11) Opinion and Consent of Kirkpatrick & Lockhart LLP regarding the legality of the securities being
registered (filed herewith)
(a) Opinion and Consent of Kirkpatrick & Lockhart LLP regarding certain tax matters with respect
(12) to PW U.S. Government Income Fund and MH/KP Intermediate Fixed Income Fund (filed herewith)
(b) Opinion and Consent of Kirkpatrick & Lockhart LLP regarding certain tax matters with respectz
to PW U.S. Government Income Fund and MH/KP Government Income Fund (filed herewith)
C-3
<PAGE>
(c) Opinion and Consent of Willkie, Farr & Gallagher regarding certain tax matters with respect to
MHKP Intermediate Fixed Income Fund (filed herewith)
(d) Opinion and Consent of Sullivan & Cromwell regarding certain tax matters with respect to MHKP
Government Income Fund (filed herewith)
(13) (a) Transfer Agency and Service Contract (5)
(b) Service Contract (4)
(14) (a) Consent of Ernst & Young LLP (filed herewith)
(b) Consent of Deloitte & Touche LLP (filed herewith)
(15) Financial Statements Omitted from Part B -- None
(16) Copies of manually signed Powers of Attorney -- [not applicable]
(17) Additional Exhibits
(a) Original Election under Rule 24f-2 (filed herewith)
(b) Election filed pursuant to Rule 24f-2 Notice as filed on January 25, 1995 (filed herewith)
(c) Proxy Cards (filed herewith)
</TABLE>
---------------
1 Incorporated by Reference from Post-Effective Amendment No. 5 to the
registration statement, SEC File No. 2-91362, filed January 30, 1987.
2 Incorporated by Reference from Post-Effective Amendment No. 8 to the
registration statement, SEC File No. 2-91362, filed March 31, 1988.
3 Incorporated by Reference from Post-Effective Amendment No. 10 to the
registration statement, SEC File No. 2-91362, filed March 16, 1989.
4 Incorporated by Reference from Post-Effective Amendment No. 12 to the
registration statement, SEC File No. 2-91362, filed January 31, 1990.
5 Incorporated by Reference from Post-Effective Amendment No. 15 to the
registration statement, SEC File No. 2-91392, filed January 31, 1991.
6 Incorporated by Reference from Post-Effective Amendment No. 16 to the
registration statement, SEC File No. 2-91392, filed March 28, 1991.
7 Incorporated by Reference from Post-Effective Amendment No. 18 to the
registration statement, SEC File No. 2-91362, filed May 2, 1991.
8 Incorporated by Reference from Post-Effective Amendment No. 19 to the
registration statement, SEC File No. 2-91362, filed March 2, 1992.
9 Incorporated by Reference from Post-Effective Amendment No. 20 to the
registration statement, SEC File No. 2-91362, filed April 1, 1992.
10 Incorporated by Reference from Post-Effective Amendment No. 21 to the
registration statement, SEC File No. 2-91362 filed May 1, 1992.
11 Incorporated by Reference from Post-Effective Amendment No. 23 to the
registration statement, SEC File No. 2-91362, filed January 26, 1993.
12 Incorporated by Reference from Post-Effective Amendment No. 25 to the
registration statement, SEC File No. 2-91362, filed August 10, 1993.
13 Incorporated by Reference from Post-Effective Amendment No. 26 to the
registration statement, SEC File No. 2-91362, filed October 4, 1993.
14 Incorporated by Reference from Post-Effective Amendment No. 34 to the
registration statement, SEC File No. 2-91362, filed January 27, 1995.
C-4
<PAGE>
ITEM 17. UNDERTAKINGS
(1) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through the use of the prospectus which is a
part of this Registration Statement by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(c) of the Securities Act of
1933, the reoffering prospectus will contain the information called for by
the applicable registration form for reoffering by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new Registration Statement
for the securities offered therein, and the offering of the securities at
that time shall be deemed to be the initial bona fide offering of them.
C-5
<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 this 8th day of August, 1995.
PAINEWEBBER MANAGED INVESTMENTS TRUST
By: /s/ Dianne E. O'Donnell
-------------------------------
Dianne E. O'Donnell
Vice President, Secretary
Each of the undersigned trustees and officers of PaineWebber Managed
Investments 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 Trust, and all instruments necessary or desirable in
connection therewith, filed with the Securities and Exchange Commission,
hereby ratifying and confirming our signatures as they may be signed by said
attorney to any and all amendments to said Registration Statement.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------------------------ ----------------------------- ------------------
<S> <C> <C>
/s/ Margo N. Alexander President August 8, 1995
------------------------------ (Chief Executive Officer)
Margo N. Alexander
/s/ E. Garrett Bewkes, Jr. Trustee and Chairman of the August 8, 1995
------------------------------ Board of Trustees
E. Garrett Bewkes, Jr.
/s/ Meyer Feldberg Trustee August 8, 1995
------------------------------
Meyer Feldberg
/s/ George W. Gowen Trustee August 8, 1995
------------------------------
George W. Gowen
/s/ Frederic V. Malek Trustee August 8, 1995
------------------------------
Frederic V. Malek
/s/ Frank P. L. Minard Trustee August 8, 1995
------------------------------
Frank P. L. Minard
/s/ Judith Davidson Moyers Trustee August 8, 1995
------------------------------
Judith Davidson Moyers
/s/ Thomas F. Murray Trustee August 8, 1995
------------------------------
Thomas F. Murray
/s/ Julian F. Sluyters Vice President and Treasurer August 8, 1995
------------------------------ (Principal Financial and
Julian F. Sluyters Accounting Officer)
</TABLE>
C-6
<PAGE>
PAINEWEBBER MANAGED INVESTMENTS TRUST
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER PAGE
-------------- ----
<S> <C> <C>
(1) (a) Declaration of Trust(1)
(b) Amendment effective January 28, 1988 to Declaration of Trust(2)
(c) Amendment effective July 1, 1990 to Declaration of Trust(5)
(d) Amendment effective March 21, 1991 to Declaration of Trust(6)
(e) Amendment effective April 1, 1991 to Declaration of Trust(7)
(f) Amendment effective July 1, 1991 to Declaration of Trust(10)
(g) Amendment effective February 26, 1992 to Declaration of Trust(9)
(h) Amendment effective January 25, 1993 to Declaration of Trust(11)
(i) Amendment effective May 25, 1993 to Declaration of Trust(12)
(j) Amendment effective July 30, 1993 to Declaration of Trust(12)
(k) Amendment effective November 13, 1993 to Declaration of Trust(14)
(2) (a) By-Laws(1)
(b) Amendment effective March 19, 1991to By-Laws(6)
(c) Amendment effective September 28, 1994to By-Laws(14)
(3) Voting trust agreement -- None
(4) Agreement and Plan of Reorganization and Termination
(a) MH/KP Intermediate Fixed Income Fund (filed herewith)
(b) MH/KP Government Income Fund, Inc. (filed herewith)
(5) All Instruments Defining the Rights of Holders -- None
(6) (a) Investment Advisory and Administration Contract(3)
(7) (a) Distribution Contract with respect to Class A shares(13)
(b) Distribution Contract with respect to Class B shares(13)
(c) Distribution Contract with respect to Class C shares(8)
(d) Distribution Contract with respect to Class D shares(13)
(e) Exclusive Dealer Agreement with respect to Class A shares(13)
(f) Exclusive Dealer Agreement with respect to Class B shares(13)
(g) Exclusive Dealer Agreement with respect to Class C shares(8)
(h) Exclusive Dealer Agreement with respect to Class D shares(13)
(8) Bonus, Profit Sharing, Pension or Other Similar Contracts --None
(9) Custodian Agreement(2)
(10) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to Class A Shares(8)
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to Class B Shares(8)
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to Class D Shares(11)
(d) Plan of Distribution pursuant to Rule 18f-3 with respect to Multiple Class Shares
(filed herewith)
(11) Opinion and Consent of Kirkpatrick & Lockhart LLP regarding the legality of the
securities being registered (filed herewith)
<PAGE>
<CAPTION>
EXHIBIT NUMBER PAGE
-------------- ----
(12) (a) Opinion and Consent of Kirkpatrick & Lockhart LLP regarding certain tax matters with
respect to PW U.S. Government Income Fund and MH/KP Intermediate Fund (filed herewith)
(b) Opinion and Consent of Kirkpatrick & Lockhart LLP regarding certain tax matters with
respect to PW U.S. Government Income Fund and MH/KP government Income Fund (filed herewith)
(c) Opinion and Consent of Willkie, Farr & Gallagher regarding certain tax matters with
respect to MH/KP Intermediate Fixed Income Fund (filed herewith)
(d) Opinion and Consent of Sullivan & Cromwell regarding certain tax matters with
respect to MH/KP Government Income Fund (filed herewith)
(13) (a) Transfer Agency and Service Contract(5)
(b) Service Contract(4)
(14) (a) Consent of Ernst & Young LLP (filed herewith)
(b) Consent of Deloitte & Touche LLP (filed herewith)
(15) Financial Statements Omitted from Part B -- None
(16) Copies of manually signed Powers of Attorney -- [not applicable]
(17) Additional Exhibits
(a) Original Election under Rule 24f-2 (filed herewith)
(b) Election filed pursuant to Rule 24f-2 Notice as filed on January 25, 1995 (filed
herewith)
(c) Proxy Cards (filed herewith)
</TABLE>
---------------
1 Incorporated by Reference from Post-Effective Amendment No. 5 to the
registration statement, SEC File No. 2-91362, filed January 30, 1987.
2 Incorporated by Reference from Post-Effective Amendment No. 8 to the
registration statement, SEC File No. 2-91362, filed March 31, 1988.
3 Incorporated by Reference from Post-Effective Amendment No. 10 to the
registration statement, SEC File No. 2-91362, filed March 16, 1989.
4 Incorporated by Reference from Post-Effective Amendment No. 12 to the
registration statement, SEC File No. 2-91362, filed January 31, 1990.
5 Incorporated by Reference from Post-Effective Amendment No. 15 to the
registration statement, SEC File No. 2-91392, filed January 31, 1991.
6 Incorporated by Reference from Post-Effective Amendment No. 16 to the
registration statement, SEC File No. 2-91392, filed March 28, 1991.
7 Incorporated by Reference from Post-Effective Amendment No. 18 to the
registration statement, SEC File No. 2-91362, filed May 2, 1991.
8 Incorporated by Reference from Post-Effective Amendment No. 19 to the
registration statement, SEC File No. 2-91362, filed March 2, 1992.
9 Incorporated by Reference from Post-Effective Amendment No. 20 to the
registration statement, SEC File No. 2-91362, filed April 1, 1992.
10 Incorporated by Reference from Post-Effective Amendment No. 21 to the
registration statement, SEC File No. 2-91362, filed May 1, 1992.
11 Incorporated by Reference from Post-Effective Amendment No. 23 to the
registration statement, SEC File No. 2-91362, filed January 26, 1993.
12 Incorporated by Reference from Post-Effective Amendment No. 25 to the
registration statement, SEC File No. 2-91362, filed August 10, 1993.
13 Incorporated by Reference from Post-Effective Amendment No. 26 to the
registration statement, SEC File No. 2-91362, filed October 4, 1993.
14 Incorporated by Reference from Post-Effective Amendment No. 34 to the
registration statement, SEC File No. 2-91362, filed January 27, 1995.
EXHIBIT 4(a)
AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
THIS AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION ("Agreement") is
made as of August 8, 1995, between PaineWebber Managed Investments Trust, a
Massachusetts business trust ("PW Trust"), on behalf of PaineWebber U.S.
Government Income Fund, a segregated portfolio of assets ("series") thereof
("Acquiring Fund"), and Mitchell Hutchins/Kidder, Peabody Investment Trust, a
Massachusetts business trust ("MH/KP Trust"), on behalf of its Mitchell
Hutchins/Kidder, Peabody Intermediate Fixed Income Fund series ("Target").
(Acquiring Fund and Target are sometimes referred to herein individually as a
"Fund" and collectively as the "Funds," and PW Trust and MH/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
transactions are referred to herein as the "Reorganization." All agreements,
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 MH/KP Trust on behalf of
Target.
Acquiring Fund's shares are divided into four classes, designated Class A,
Class B, Class C, and Class D shares ("Class A Acquiring Fund Shares," "Class
B Acquiring Fund Shares," "Class C Acquiring Fund Shares," and "Class D
Acquiring Fund Shares," respectively). Except as noted in the following
sentence, these classes differ only with respect to the sales charges imposed
on the purchase of shares and the fees ("12b-1 fees") payable by each class
pursuant to plans adopted under Rule 12b-1 promulgated under the Investment
Company Act of 1940 ("1940 Act"), as follows: (1) Class A Acquiring Fund
Shares are offered at net asset value ("NAV") plus a sales charge, if
applicable, and are subject to a 12b-1 service fee at the annual rate of
0.25% of the average daily net assets attributable to the class ("class
assets"); (2) Class B Acquiring Fund Shares are offered at NAV without
imposition of any sales charge and are subject to a contingent deferred sales
charge and 12b-1 service and distribution fees at the respective annual rates
of 0.25% and 0.75% of class assets; (3) Class C Acquiring Fund Shares are and
will be offered to a limited class of offerees (currently only the trustee of
the PaineWebber Savings Investment Plan on behalf of that plan) at NAV
without imposition of any sales charge and are not subject to any 12b-1 fee;
and (4) Class D Acquiring Fund Shares are offered at NAV without imposition
of any sales charge and are subject to 12b-1 service and distribution fees at
the respective annual rates of 0.25% and 0.50% of class assets. These classes
also may differ from one another with respect to the allocation of certain
class-specific expenses other than 12b-1 fees. Only Classes A, C, and D
Acquiring Fund Shares are involved in the Reorganization.
Target's shares are divided into three classes, designated Class A, Class
B, and Class C shares ("Class A Target Shares," "Class B Target Shares," and
"Class C Target Shares," respectively). These classes are substantially
similar to the Class A, Class D, and Class C Acquiring Fund Shares,
respectively (though Class A Target Shares and Class A Acquiring Fund Shares
are subject to different maximum initial sales charges).
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--
<PAGE>
(a) to issue and deliver to Target the number of full and fractional
(i) Class A Acquiring Fund Shares determined by dividing the net value of
Target (computed as set forth in paragraph 2.1) ("Target Value")
attributable to the Class A Target Shares by the NAV (computed as set
forth in paragraph 2.2) of a Class A Acquiring Fund Share, (ii) Class D
Acquiring Fund Shares determined by dividing the Target Value attributable
to the Class B Target Shares by the NAV (as so computed) of a Class D
Acquiring Fund Share, and (iii) Class C Acquiring Fund Shares determined
by dividing the Target Value attributable to the Class C Target Shares by
the NAV (as so computed) of a Class C Acquiring Fund Share; and
(b) to assume all of Target's liabilities described in paragraph 1.3
("Liabilities").
Such transactions shall take place at the Closing (as defined in paragraph
3.1).
1.2. The Assets shall include, without limitation, all cash, cash
equivalents, securities, receivables (including interest and dividends
receivable), claims and rights of action, rights to register shares under
applicable securities laws, books and records, deferred and prepaid expenses
shown as assets on Target's books, and other property owned by Target at the
Effective Time (as defined in paragraph 3.1).
1.3. The Liabilities shall include (except as otherwise provided herein)
all of Target's liabilities, debts, obligations, and duties of whatever kind
or nature, whether absolute, accrued, contingent, or otherwise, whether or
not arising in the ordinary course of business, whether or not determinable
at the Effective Time, and whether or not specifically referred to in this
Agreement, including without limitation Target's share of the expenses
described in paragraph 7.2. Notwithstanding the foregoing, Target agrees to
use its best efforts to discharge all of its known Liabilities prior to the
Effective Time.
1.4. At or immediately before the Effective Time, Target shall declare and
pay to its shareholders a dividend and/or other distribution 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 realized net capital
gain, if any, for the current taxable year through the Effective Time.
1.5. At the Effective Time (or as soon thereafter as is reasonably
practicable), Target shall constructively distribute the Acquiring Fund
Shares received by it pursuant to paragraph 1.1 to Target's shareholders of
record, determined as of the Effective Time (collectively "Shareholders" and
individually a "Shareholder"), in exchange for their Target Shares. Such
distribution shall be accomplished by the Funds' transfer agent ("Transfer
Agent") opening accounts on Acquiring Fund's share transfer books in the
Shareholders' names and transferring such Acquiring Fund Shares thereto. Each
Shareholder's account shall be credited with the respective pro rata number
of full and fractional (rounded to the third decimal place) Acquiring Fund
Shares due that Shareholder, by class (i.e., the account for a Shareholder of
Class A Target Shares shall be credited with the respective pro rata number
of Class A Acquiring Fund Shares due that Shareholder, the account for a
Shareholder of Class B Target Shares shall be credited with the respective
pro rata number of Class D Acquiring Fund Shares due that Shareholder, and
the account for a Shareholder of Class C Target Shares shall be credited with
the respective pro rata number of Class C Acquiring Fund Shares due that
Shareholder). All outstanding Target Shares, including any represented by
certificates, shall simultaneously be canceled on Target's share transfer
records. Acquiring Fund shall not issue certificates representing the
Acquiring Fund Shares in connection with the Reorganization.
1.6. As soon as reasonably practicable after distribution of the Acquiring
Fund Shares pursuant to paragraph 1.5, Target shall be terminated as a series
of MH/KP Trust and any further actions shall be taken in connection therewith
as required by applicable law.
<PAGE>
1.7. Any reporting responsibility of Target to a public authority is and
shall remain its responsibility up to and including the date on which it is
terminated.
1.8. Any transfer taxes payable upon issuance of Acquiring Fund Shares in
a name other than that of the registered holder on Target's books of the
Target Shares constructively exchanged therefor shall be paid by the person
to whom such Acquiring Fund Shares are to be issued, as a condition of such
transfer.
2. VALUATION
2.1. For purposes of paragraph 1.1(a), Target's net value shall be (a) the
value of the Assets computed as of 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 statement of additional information less (b) the amount of the
Liabilities as of the Valuation Time.
2.2. For purposes of paragraph 1.1(a), the NAV of a Class A Acquiring Fund
Share, a Class C Acquiring Fund Share, and a Class D Acquiring Fund Share
shall be computed as of the Valuation Time, using the valuation procedures
set forth in Acquiring Fund's then-current prospectus and statement of
additional information.
2.3. All computations pursuant to paragraphs 2.1 and 2.2 shall be made by
or under the direction of Mitchell Hutchins Asset Management Inc.
3. CLOSING AND EFFECTIVE TIME
3.1. The Reorganization, together with related acts necessary to
consummate the same ("Closing"), shall occur at the Funds' principal office
on October 20, 1995, or at such other place and/or on such other date as the
parties may agree. All acts taking place at the Closing shall be deemed to
take place simultaneously as of 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. MH/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 stating that (a) the Assets held by the custodian will be
transferred to Acquiring Fund at the Effective Time and (b) all necessary
taxes in conjunction with the delivery of the Assets, including all
applicable federal and state stock transfer stamps, if any, have been paid or
provision for payment has been made.
3.3. MH/KP Trust shall deliver to PW Trust at the Closing a list of the
names and addresses of the Shareholders and the number (by class) of
outstanding Target Shares owned by each Shareholder, all as of the Effective
Time, certified by the Secretary or Assistant Secretary of MH/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 MH/KP Trust
evidencing the Acquiring Fund Shares (by class) to be credited to Target at
the Effective Time or provide evidence satisfactory to MH/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 certificates, receipts, or other
documents as the other party or its counsel may reasonably request.
<PAGE>
3.4. Each Investment Company shall deliver to the other at the Closing a
certificate executed in its name by its President or a Vice President in form
and substance satisfactory to the recipient and dated the Effective Time, to
the effect that the representations and warranties it made in this Agreement
are true and correct at the Effective Time except as they may be affected by
the transactions contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1. Target represents and warrants as follows:
4.1.1. MH/KP Trust is an unincorporated voluntary association with
transferable shares organized as a business trust under a written
instrument ("Business Trust"); it is duly organized, validly existing, and
in good standing under the laws of the Commonwealth of Massachusetts; and
a copy of its Declaration of Trust is on file with the Secretary of the
Commonwealth of Massachusetts;
4.1.2. MH/KP Trust is duly registered as an open-end management
investment company under the 1940 Act, and such registration will be in
full force and effect at the Effective Time;
4.1.3. Target is a duly established and designated series of MH/KP
Trust;
4.1.4. At the Closing, Target will have good and marketable title to
the Assets and full right, power, and authority to sell, assign, transfer,
and deliver the Assets free of any liens or other encumbrances; and upon
delivery and payment for the Assets, Acquiring Fund will acquire good and
marketable title thereto;
4.1.5. 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 thereunder and do not include any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading;
4.1.6. Target is not in violation of, and the execution and delivery
of this Agreement and consummation of the transactions contemplated hereby
will not conflict with or violate, Massachusetts law or any provision of
MH/KP Trust's Declaration of Trust or By-Laws or of any agreement,
instrument, lease, or other undertaking to which Target is a party or by
which it is bound or result in the acceleration of any obligation, or the
imposition of any penalty, under any agreement, judgment, or decree to
which Target is a party or by which it is bound, except as previously
disclosed in writing to and accepted by PW Trust;
4.1.7. 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 contracts, including options, futures,
and forward contracts) will be terminated, or provision for discharge of
any liabilities of Target thereunder will be made, at or prior to the
Effective Time, without either Fund's incurring any liability or penalty
with respect thereto and without diminishing or releasing any rights
Target may have had with respect to actions taken or omitted to be taken
by any other party thereto prior to the Closing;
4.1.8. Except as otherwise disclosed in writing to and accepted by PW
Trust, no litigation, administrative proceeding, or investigation of or
before any court or governmental body is presently pending or (to Target's
knowledge) threatened against MH/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 litigation, proceeding, or investigation and is
not a party to or subject to the provisions of any order, decree, or
judgment of any court or governmental body that materially or adversely
affects its business or its ability to consummate the transactions
contemplated hereby;
<PAGE>
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 MH/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
Target's shareholders and receipt of any necessary exemptive relief or
no-action assurances requested from the Securities and Exchange Commission
("SEC") or its staff with respect to sections 17(a) and 17(d) of the 1940
Act, this Agreement will constitute a valid and legally binding obligation
of Target, enforceable in accordance with its terms, except as the same
may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium, and similar laws relating to or affecting
creditors' rights and by general principles of equity;
4.1.10. 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, authorizations, or
filings are required under the 1933 Act, the Securities Exchange Act of
1934 ("1934 Act"), or the 1940 Act for the execution or performance of
this Agreement by MH/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 amendment thereto
("Registration Statement"), including therein a prospectus/proxy statement
("Proxy Statement"), (b) receipt of 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 Statement, at the
time of the shareholders' meeting referred to in paragraph 5.2, and at the
Effective Time, the Proxy Statement will (a) comply in all material
respects with the applicable provisions of the 1933 Act, the 1934 Act, and
the 1940 Act and the regulations thereunder and (b) not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which such statements were made, not misleading;
provided that the foregoing shall not apply to statements in or omissions
from the Proxy Statement made in reliance on and in conformity with
information furnished by 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 regulated investment company ("RIC")
under Subchapter M of the Code for each past taxable year since it
commenced operations and will continue to meet all the requirements for
such qualification for its current taxable year; and it has no earnings
and profits accumulated in any taxable year in which the provisions of
Subchapter M did not apply to it. The Assets shall be invested at all
times through the Effective Time in a manner that ensures compliance with
the foregoing;
4.1.15. 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 securities) is invested
in the stock and securities of any one issuer, and not more than 50% of
the value of such assets is invested in the stock and securities of five
or fewer issuers; and
4.1.17. Target will be terminated as soon as reasonably practicable
after the Reorganization, but in all events within six months after the
Effective Time.
<PAGE>
4.2. Acquiring Fund represents and warrants as follows:
4.2.1. PW Trust is a Business Trust; it is duly organized, validly
existing, and in good standing under the laws of the Commonwealth of
Massachusetts; and a copy of its Declaration of Trust is on file with the
Secretary of the Commonwealth of Massachusetts;
4.2.2. PW Trust is duly registered as an open-end management
investment company under the 1940 Act, and such registration will be in
full force and effect at the Effective Time;
4.2.3. Acquiring Fund is a duly established and designated series of
PW Trust;
4.2.4. No consideration other than Acquiring Fund Shares (and
Acquiring Fund's assumption of the Liabilities) will be issued in exchange
for the Assets in the Reorganization;
4.2.5. The Acquiring Fund Shares to be issued and delivered to Target
hereunder will, at the Effective Time, have been duly authorized and, when
issued and delivered as provided herein, will be duly and validly issued
and outstanding shares of Acquiring Fund, fully paid and non-assessable,
except to the extent that under Massachusetts law shareholders of a
Business Trust may, under certain circumstances, be held personally liable
for its obligations. Except as contemplated by this Agreement, Acquiring
Fund does not have outstanding any options, warrants, or other rights to
subscribe for or purchase any of its shares, nor is there outstanding any
security convertible into any of its shares;
4.2.6. Acquiring Fund's current prospectus and statement of additional
information conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and
regulations thereunder and do not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
4.2.7. Acquiring Fund is not in violation of, and the execution and
delivery of this Agreement and consummation of the transactions
contemplated hereby will not conflict with or violate, Massachusetts law
or any provision of PW Trust's Declaration of Trust or By-Laws or of any
provision of any agreement, instrument, lease, or other undertaking to
which Acquiring Fund is a party or by which it is bound or result in the
acceleration of any obligation, or the imposition of any penalty, under
any agreement, judgment, or decree to which Acquiring Fund is a party or
by which it is bound, except as previously disclosed in writing to and
accepted by MH/KP Trust;
4.2.8. Except as otherwise disclosed in writing to and accepted by
MH/KP Trust, no litigation, administrative proceeding, or investigation of
or before any court or governmental body is presently pending or (to
Acquiring Fund's knowledge) threatened against PW Trust with respect to
Acquiring Fund or any of its properties or assets that, if adversely
determined, would materially and adversely affect Acquiring Fund's
financial condition or the conduct of its business; Acquiring Fund knows
of no facts that might form the basis for the institution of any such
litigation, proceeding, or investigation and is not a party to or subject
to the provisions of any order, decree, or judgment of any court or
governmental body that materially or adversely affects its business or its
ability to consummate the transactions contemplated hereby;
4.2.9. The execution, delivery, and performance of this Agreement has
been duly authorized as of the date hereof by all necessary action on the
part of PW Trust's board of trustees, which has made the determinations
required by Rule 17a-8(a) under the 1940 Act; and, subject to receipt of
any necessary exemptive relief or no-action assurances requested from the
SEC or its staff with respect to sections 17(a)
<PAGE>
and 17(d) of the 1940 Act, this Agreement will constitute a valid and
legally binding obligation of Acquiring Fund, enforceable in accordance
with its terms, except as the same may be limited by bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium, and similar
laws relating to or affecting creditors' rights and by general principles
of equity;
4.2.10. No governmental consents, approvals, authorizations, or
filings are required under the 1933 Act, the 1934 Act, or the 1940 Act for
the execution or performance of this Agreement by PW Trust, except for (a)
the filing with the SEC of the Registration Statement and a post-effective
amendment to PW Trust's registration statement, (b) receipt of the
exemptive relief referenced in subparagraph 4.2.9, and (c) such consents,
approvals, authorizations, and filings as have been made or received or as
may be required subsequent to the Effective Time;
4.2.11. On the effective date of the Registration Statement, at the
time of the shareholders' meeting referred to in paragraph 5.2, and at the
Effective Time, the Proxy Statement will (a) comply in all material
respects with the applicable provisions of the 1933 Act, the 1934 Act, and
the 1940 Act and the regulations thereunder and (b) not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which such statements were made, not misleading;
provided that the foregoing shall not apply to statements in or omissions
from the Proxy Statement made in reliance on and in conformity with
information furnished by MH/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 under Subchapter M of the
Code for each past taxable year since it commenced operations and will
continue to meet all the requirements for such qualification for its
current taxable year; Acquiring Fund intends to continue to meet all such
requirements for the next taxable year; and it has no earnings and profits
accumulated in any taxable year in which the provisions of Subchapter M
did not apply to it;
4.2.13. Acquiring Fund has no plan or intention to issue additional
Acquiring Fund Shares following the Reorganization except for shares
issued in the ordinary course of its business as a series of an open-end
investment company; nor does Acquiring Fund have any plan or intention to
redeem or otherwise reacquire any Acquiring Fund Shares issued to the
Shareholders pursuant to the Reorganization, other than through
redemptions arising in the ordinary course of that business;
4.2.14. Acquiring Fund (a) will actively continue Target's business in
substantially the same manner that Target conducted that business
immediately before the Reorganization, (b) has no plan or intention to
sell or otherwise dispose of any of the Assets, except for dispositions
made in the ordinary course of that business and dispositions necessary to
maintain its status as a RIC 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 dispositions thereof to maintain such status;
4.2.15. There is no plan or intention for Acquiring Fund to be
dissolved or merged into another corporation or business trust or any
"fund" thereof (within the meaning of section 851(h)(2) of the Code)
following the Reorganization;
4.2.16. Immediately after the Reorganization, (a) not more than 25% of
the value of Acquiring Fund's total assets (excluding cash, cash items,
and U.S. government securities) will be invested in the stock and
securities of any one issuer and (b) not more than 50% of the value of
such assets will be invested in the stock and securities of five or fewer
issuers; and
<PAGE>
4.2.17. Acquiring fund does not own, directly or indirectly, nor at
the Effective Time will it own, directly or indirectly, nor has it owned,
directly or indirectly, at any time during the past five years, any shares
of Target.
4.3. Each Fund represents and warrants as follows:
4.3.1. The fair market value of the Acquiring Fund Shares, when
received by the Shareholders, will be approximately equal to the fair
market value of their Target Shares constructively surrendered in exchange
therefor;
4.3.2. Its management (a) is unaware of any plan or intention of
Shareholders to redeem or otherwise dispose of any portion of the
Acquiring Fund Shares to be received by them in the Reorganization and (b)
does not anticipate dispositions of those Acquiring Fund Shares at the
time of or soon after the Reorganization to exceed the usual rate and
frequency of dispositions of shares of Target as 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;
4.3.3. The Shareholders will pay their own expenses, if any, incurred
in connection with the Reorganization;
4.3.4. Immediately following consummation of the Reorganization,
Acquiring Fund will hold substantially the same assets and be subject to
substantially the same liabilities that Target held or was subject to
immediately prior thereto, plus any liabilities and expenses of the
parties incurred in connection with the Reorganization;
4.3.5. The fair market value on a going concern basis of the Assets
will equal or exceed the Liabilities to be assumed by Acquiring Fund and
those to which the Assets are subject;
4.3.6. There is no intercompany indebtedness between the Funds that
was issued or acquired, or will be settled, at a discount;
4.3.7. Pursuant to the Reorganization, Target will transfer to
Acquiring Fund, and Acquiring Fund will acquire, at least 90% of the fair
market value of the net assets, and at least 70% of the fair market value
of the gross assets, held by Target immediately before the Reorganization.
For the purposes of this representation, any amounts used by Target to pay
its Reorganization expenses and redemptions and distributions made by it
immediately before the Reorganization (except for (a) distributions made
to conform to its policy of distributing all or substantially all of its
income and gains to avoid the obligation to pay federal income tax and/or
the excise tax under section 4982 of the Code and (b) redemptions not made
as part of the Reorganization) will be included as assets thereof held
immediately before the Reorganization;
4.3.8. None of the compensation received by any Shareholder who is an
employee of Target will be separate consideration for, or allocable to,
any of the Target Shares held by such Shareholder-employee; none of the
Acquiring Fund Shares received by any such Shareholder-employee will be
separate consideration for, or allocable to, any employment agreement; and
the consideration paid to any such Shareholder-employee will be for
services actually rendered and will be commensurate with amounts paid to
third parties bargaining at arm's-length for similar services; and
4.3.9. Immediately after the Reorganization, the Shareholders will not
own shares constituting "control" of Acquiring Fund within the meaning of
section 304(c) of the Code.
<PAGE>
5. COVENANTS
5.1. Each Fund covenants to operate its respective business in the
ordinary course between the date hereof and the Closing, it being understood
that (a) such ordinary course will include declaring and paying customary
dividends and other distributions and such changes in operations as are
contemplated by each Fund's normal business activities and (b) each Fund will
retain exclusive control of the composition of its portfolio until the
Closing; provided that Target shall not dispose of more than an insignificant
portion of its historic business assets during such period without Acquiring
Fund's prior consent.
5.2. Target covenants to call a shareholders' meeting to consider and act
upon this Agreement and to take all other action necessary to obtain approval
of the transactions contemplated hereby.
5.3. Target covenants that the Acquiring Fund Shares to be delivered
hereunder are not being acquired for the purpose of making any distribution
thereof, other than in accordance with the terms hereof.
5.4. Target covenants that it will assist PW Trust in obtaining such
information as PW Trust reasonably requests concerning the beneficial
ownership of Target Shares.
5.5. Target covenants that Target's books and records (including all books
and records required to be maintained under the 1940 Act and the rules and
regulations thereunder) will be turned over to PW Trust at the Closing.
5.6. Each Fund covenants to cooperate in preparing the Proxy Statement in
compliance with applicable federal securities laws.
5.7. Each Fund covenants that it will, from time to time, as and when
requested by the other Fund, execute and deliver or cause to be executed and
delivered all such assignments and other instruments, and will take or cause
to be taken such further action, as the other Fund may deem necessary or
desirable in order to vest in, and confirm to, (a) Acquiring Fund, title to
and possession of all the Assets, and (b) Target, title to and possession of
the Acquiring Fund Shares to be delivered hereunder, and otherwise to carry
out the intent and purpose hereof.
5.8. PW Trust covenants to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act, and such
state securities laws it may deem appropriate in order to continue its
operations after the Effective Time.
5.9. Subject to this Agreement, each Fund covenants to take or cause to be
taken all actions, and to do or cause to be done all things reasonably
necessary, proper, or advisable to consummate and effectuate the transactions
contemplated hereby.
6. CONDITIONS PRECEDENT
Each Fund's obligations hereunder shall be subject to (a) performance by
the other Fund of all the obligations to be performed hereunder at or before
the Effective Time, (b) all representations and warranties of the other Fund
contained herein being true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions
contemplated hereby, as of the Effective Time, with the same force and effect
as if made at and as of the Effective Time, and (c) the following further
conditions that, at or before the Effective Time:
6.1. This Agreement and the transactions contemplated hereby shall have
been duly adopted and approved by MH/KP Trust's board of trustees and shall
have been approved by Target's shareholders in accordance with applicable
law.
<PAGE>
6.2. All necessary filings shall have been made with the SEC and state
securities authorities, and no order or directive shall have been received
that any other or further action is required to permit the parties to carry
out the transactions contemplated hereby. The Registration Statement shall
have become effective under the 1933 Act, no stop orders suspending the
effectiveness thereof shall have been issued, and the SEC shall not have
issued an unfavorable report with respect to the Reorganization under section
25(b) of the 1940 Act nor instituted any proceedings seeking to enjoin
consummation of the transactions contemplated hereby under section 25(c) of
the 1940 Act. All consents, orders, and permits of federal, state, and local
regulatory authorities (including the SEC and state securities authorities)
deemed necessary by either Fund to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain same would not involve a risk of a material
adverse effect on the assets or properties of either Fund, provided that
either Fund may for itself waive any of such conditions.
6.3. At the Effective Time, no action, suit, or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or to obtain damages or other relief in connection
with, the transactions contemplated hereby.
6.4. MH/KP Trust shall have received an opinion of Kirkpatrick & Lockhart
LLP, counsel to PW Trust, substantially to the effect that:
6.4.1. Acquiring Fund is a duly established series of PW Trust, a
Business Trust duly organized and validly existing under the laws of the
Commonwealth of Massachusetts with power under its Declaration of Trust to
own all of its properties and assets and, to the knowledge of such
counsel, to carry on its business as presently conducted;
6.4.2. This Agreement (a) has been duly authorized, executed, and
delivered by PW Trust on behalf of Acquiring Fund and (b) assuming due
authorization, execution, and delivery of this Agreement by MH/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 distributed to the
Shareholders under this Agreement, assuming their due delivery as
contemplated by this Agreement, will be duly authorized and validly issued
and outstanding and fully paid and non-assessable, except to the extent
that under Massachusetts law shareholders of a Business Trust may, under
certain circumstances, be held personally liable for its obligations, and
no shareholder of Acquiring Fund has any preemptive right to subscribe for
or purchase such shares;
6.4.4. The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate PW Trust's Declaration of Trust or By-Laws or any provision of any
agreement (known to such counsel, without any independent inquiry or
investigation) to which PW Trust (with respect to Acquiring Fund) is a
party or by which it is bound or (to the knowledge of such counsel,
without any independent inquiry or investigation) result in the
acceleration of any obligation, or the imposition of any penalty, under
any agreement, judgment, or decree to which PW Trust (with respect to
Acquiring Fund) is a party or by which it is bound, except as set forth in
such opinion or as previously disclosed in writing to and accepted by
MH/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
<PAGE>
consummation by PW Trust on behalf of Acquiring Fund of the transactions
contemplated herein, except such as have been obtained under the 1933 Act,
the 1934 Act, and the 1940 Act and such as may be required under state
securities laws;
6.4.6. PW Trust is registered with the SEC as an investment company,
and to the knowledge of such counsel no order has been issued or
proceeding instituted to suspend such registration; and
6.4.7. To the knowledge of such counsel (without any independent
inquiry or investigation), (a) no litigation, administrative proceeding,
or investigation of or before any court or governmental body is pending or
threatened as to PW Trust (with respect to Acquiring Fund) or any of its
properties or assets attributable or allocable to Acquiring Fund and (b)
PW Trust (with respect to Acquiring Fund) is not a party to or subject to
the provisions of any order, decree, or judgment of any court or
governmental body that materially and adversely affects Acquiring Fund's
business, except as set forth in such opinion or as otherwise disclosed in
writing to and accepted by MH/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 documents and copies thereof without
independent verification thereof, (iii) limit such opinion to applicable
federal and state law, and (iv) define the word "knowledge" and related terms
to mean the knowledge of attorneys then with such firm who have devoted
substantive attention to matters directly related to this Agreement and the
Reorganization.
6.5. PW Trust shall have received an opinion of Willkie Farr & Gallagher,
counsel to MH/KP Trust, substantially to the effect that:
6.5.1. Target is a duly established series of MH/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, executed, and
delivered by MH/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
MH/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 MH/KP Trust's Declaration of Trust or By-Laws or any provision of
any agreement (known to such counsel, without any independent inquiry or
investigation) to which MH/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 MH/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
MH/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;
<PAGE>
6.5.5. MH/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 independent
inquiry or investigation), (a) no litigation, administrative proceeding,
or investigation of or before any court or governmental body is pending or
threatened as to MH/KP Trust (with respect to Target) or any of its
properties or assets attributable or allocable to Target and (b) MH/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 documents and copies thereof without
independent verification thereof, (iii) limit such opinion to applicable
federal and state law, and (iv) define the word "knowledge" and related terms
to mean the knowledge of attorneys then with such firm who have devoted
substantive attention to matters directly related to this Agreement and the
Reorganization.
6.6. PW Trust shall have received an opinion of Kirkpatrick & Lockhart
LLP, its counsel, addressed to and in form and substance satisfactory to it,
and MH/KP Trust shall have received an opinion of Willkie Farr & Gallagher,
its counsel, addressed to and in form and substance satisfactory to it, each
as to the federal income tax consequences mentioned below (each a "Tax
Opinion"). In rendering its Tax Opinion, each such counsel may rely as to
factual matters, exclusively and without independent verification, on the
representations made in this Agreement (or in separate letters addressed to
such counsel) and the certificates delivered pursuant to paragraph 3.4. Each
Tax Opinion shall be substantially to the effect that, based on the facts and
assumptions stated therein, for federal income tax purposes:
6.6.1. Acquiring Fund's acquisition of the Assets in exchange solely
for Acquiring Fund Shares and Acquiring Fund's assumption of the
Liabilities, followed by Target's distribution of those shares to the
Shareholders constructively in exchange for the Shareholders' Target
Shares, will constitute a reorganization within the meaning of section
368(a)(1)(C) of the Code, and each Fund will be "a party to a
reorganization" within the meaning of section 368(b) of the Code;
6.6.2. No gain or loss will be recognized to Target on the transfer to
Acquiring Fund of the Assets in exchange solely for Acquiring Fund Shares
and Acquiring Fund's assumption of the Liabilities or on the subsequent
distribution of those shares to the Shareholders in constructive exchange
for their Target Shares;
6.6.3. No gain or loss will be recognized to Acquiring Fund on its
receipt of the Assets in exchange solely for Acquiring Fund Shares and its
assumption of the Liabilities;
6.6.4. Acquiring Fund's basis for the Assets will be the same as the
basis thereof in Target's hands immediately before the Reorganization, and
Acquiring Fund's holding period for the Assets will include Target's
holding period therefor;
6.6.5. A Shareholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for Acquiring Fund
Shares pursuant to the Reorganization; and
6.6.6. A Shareholder's basis for the Acquiring Fund Shares to be
received by it in the Reorganization will be the same as the basis for its
Target Shares to be constructively surrendered in exchange for those
<PAGE>
Acquiring Fund Shares, and its holding period for those Acquiring Fund
Shares will include its holding period for those Target Shares, provided
they are held as capital assets by the Shareholder at the Effective Time.
Notwithstanding paragraphs 6.6.2 and 6.6.4, each Tax Opinion may state that
no opinion is expressed as to the effect of the Reorganization on the Funds
or any Shareholder with respect to any asset (including certain options,
futures, and forward contracts included in the Assets) as to which any
unrealized gain or loss is required to be recognized for federal income tax
purposes at the end of a taxable year (or on the termination or transfer
thereof) under a mark-to-market system of accounting.
At any time before the Closing, (a) Acquiring Fund may waive any of the
foregoing conditions if, in the judgment of PW Trust's board of trustees,
such waiver will not have a material adverse effect on its shareholders'
interests, and (b) Target may waive any of the foregoing conditions if, in
the judgment of MH/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)
expenses incurred in connection with entering into and carrying out the
provisions of this Agreement; (b) expenses associated with the preparation
and filing of the Registration Statement; (c) registration or qualification
fees and expenses of preparing and filing such forms as are necessary under
applicable state securities laws to qualify the Acquiring Fund Shares to be
issued in connection herewith in each state in which Target's shareholders
are resident as of the date of the mailing of the Proxy Statement to such
shareholders; (d) printing and postage expenses; (e) legal and accounting
fees; and (f) solicitation costs.
8. ENTIRE AGREEMENT; SURVIVAL
Neither party has made any representation, warranty, or covenant not set
forth herein, and this Agreement constitutes the entire agreement between the
parties. The representations, warranties, and covenants contained herein or
in any document delivered pursuant hereto or in connection herewith shall
survive the Closing.
9. TERMINATION OF AGREEMENT
This Agreement may be terminated at any time at or prior to the Effective
Time, whether before or after approval by Target's shareholders:
9.1. By either Fund (a) in the event of the other Fund's material breach
of any representation, warranty, or covenant contained herein to be performed
at or prior to the Effective Time, (b) if a condition to its obligations has
not been met and it reasonably appears that such condition will not or cannot
be met, or (c) if the Closing has not occurred on or before March 31, 1996;
or
9.2. By the parties' mutual agreement.
In the event of termination under paragraphs 9.1.(c) or 9.2, there shall be
no liability for damages on the part of either Fund, or the trustees or
officers of either Investment Company, to the other Fund.
<PAGE>
10. AMENDMENT
This Agreement may be amended, modified, or supplemented at any time,
notwithstanding approval thereof by Target's shareholders, in such manner as
may be mutually agreed upon in writing by the parties; provided that
following such approval no such amendment shall have a material adverse
effect on the Shareholders' interests.
11. MISCELLANEOUS
11.1. This Agreement shall be governed by and construed in accordance with
the internal laws of the Commonwealth of Massachusetts; provided that, in the
case of any conflict between such laws and the federal securities laws, the
latter shall govern.
11.2. Nothing expressed or implied herein is intended or shall be
construed to confer upon or give any person, firm, trust, or corporation
other than the parties and their respective successors and assigns any rights
or remedies under or by reason of this Agreement.
11.3. The parties acknowledge that each Investment Company is a Business
Trust. Notice is hereby given that this instrument is executed on behalf of
each Investment Company's trustees solely in their capacity as trustees, and
not individually, and that each Investment Company's obligations under this
instrument are not binding on or enforceable against any of its trustees,
officers, or shareholders, but are only binding on and enforceable against
the respective Funds' assets and property. Each Fund agrees that, in
asserting any rights or claims under this Agreement, it shall look only to
the other Fund's assets and property in settlement of such rights or claims
and not to such trustees or shareholders.
IN WITNESS WHEREOF, each party has caused this Agreement to be executed by
its duly authorized officer.
ATTEST:
PAINEWEBBER MANAGED INVESTMENTS TRUST,
on behalf of its series,
PAINEWEBBER U.S. GOVERNMENT INCOME FUND
By: /s/ Ilene Shore /s/ Dianne E. O'Donnell
----------------------- -------------------------------------
Assistant Secretary Vice President
ATTEST:
MITCHELL HUTCHINS/KIDDER, PEABODY
INVESTMENT TRUST, on behalf of its series,
MITCHELL HUTCHINS/KIDDER, PEABODY
INTERMEDIATE FIXED INCOME FUND
By: /s/ Stephanie Johnson /s/ Scott Griff
----------------------- -------------------------------------
Assistant Secretary Vice President
<PAGE>
EXHIBIT 4(b)
AGREEMENT AND PLAN OF REORGANIZATION AND DISSOLUTION
THIS AGREEMENT AND PLAN OF REORGANIZATION AND DISSOLUTION ("Agreement") is
made as of August 8, 1995, between PaineWebber Managed Investments Trust, a
Massachusetts business trust ("PW Trust"), on behalf of PaineWebber U.S.
Government Income Fund, a segregated portfolio of assets ("series") thereof
("Acquiring Fund"), and Mitchell Hutchins/Kidder, Peabody Government Income
Fund, Inc., a Maryland corporation ("Target"). (Acquiring Fund and Target are
sometimes referred to herein individually as a "Fund" and collectively as the
"Funds," and PW Trust and Target are sometimes referred to herein
individually as an "Investment Company" and collectively as the "Investment
Companies.")
This Agreement is intended to be, and is adopted as, a plan of a
reorganization described in section 368(a)(1)(C) of the Internal Revenue Code
of 1986, as amended ("Code"). The reorganization will involve the transfer to
Acquiring Fund of Target's assets solely in exchange for voting shares of
beneficial interest in Acquiring Fund ("Acquiring Fund Shares") and the
assumption by Acquiring Fund of Target's liabilities, followed by the
constructive distribution of the Acquiring Fund Shares to the holders of
shares of common stock in Target ("Target Shares") in exchange therefor, all
upon the terms and conditions set forth herein. The foregoing transactions
are referred to herein as the "Reorganization." All agreements,
representations, actions, and obligations described herein made or to be
taken or undertaken by Acquiring Fund are made and shall be taken or
undertaken by PW Trust on its behalf.
Acquiring Fund's shares are divided into four classes, designated Class A,
Class B, Class C, and Class D shares ("Class A Acquiring Fund Shares," "Class
B Acquiring Fund Shares," "Class C Acquiring Fund Shares," and "Class D
Acquiring Fund Shares," respectively). Except as noted in the following
sentence, these classes differ only with respect to the sales charges imposed
on the purchase of shares and the fees ("12b-1 fees") payable by each class
pursuant to plans adopted under Rule 12b-1 promulgated under the Investment
Company Act of 1940 ("1940 Act"), as follows: (1) Class A Acquiring Fund
Shares are offered at net asset value ("NAV") plus a sales charge, if
applicable, and are subject to a 12b-1 service fee at the annual rate of
0.25% of the average daily net assets attributable to the class ("class
assets"); (2) Class B Acquiring Fund Shares are offered at NAV without
imposition of any sales charge and are subject to a contingent deferred sales
charge and 12b-1 service and distribution fees at the respective annual rates
of 0.25% and 0.75% of class assets; (3) Class C Acquiring Fund Shares are and
will be offered to a limited class of offerees (currently only the trustee of
the PaineWebber Savings Investment Plan on behalf of that plan) at NAV
without imposition of any sales charge and are not subject to any 12b-1 fee;
and (4) Class D Acquiring Fund Shares are offered at NAV without imposition
of any sales charge and are subject to 12b-1 service and distribution fees at
the respective annual rates of 0.25% and 0.50% of class assets. These classes
also may differ from one another with respect to the allocation of certain
class-specific expenses other than 12b-1 fees. Only Classes A, C, and D
Acquiring Fund Shares are involved in the Reorganization.
Target's shares are divided into three classes, designated Class A, Class
B, and Class C shares ("Class A Target Shares," "Class B Target Shares," and
"Class C Target Shares," respectively). These classes are substantially
similar to the Class A, Class D, and Class C Acquiring Fund Shares,
respectively, except that Class A Target Shares and Class A Acquiring Fund
Shares are subject to different maximum initial sales charges and Class A
Target Shares are subject to a 12b-1 distribution fee at the annual rate of
0.25% of class assets.
In consideration of the mutual promises herein, the parties covenant and
agree as follows:
1. PLAN OF REORGANIZATION AND DISSOLUTION OF TARGET
1.1. Target agrees to assign, sell, convey, transfer, and deliver all of
its assets described in paragraph 1.2 ("Assets") to Acquiring Fund. Acquiring
Fund agrees in exchange therefor--
<PAGE>
(a) to issue and deliver to Target the number of full and fractional
(i) Class A Acquiring Fund Shares determined by dividing the net value of
Target (computed as set forth in paragraph 2.1) ("Target Value")
attributable to the Class A Target Shares by the NAV (computed as set
forth in paragraph 2.2) of a Class A Acquiring Fund Share, (ii) Class D
Acquiring Fund Shares determined by dividing the Target Value attributable
to the Class B Target Shares by the NAV (as so computed) of a Class D
Acquiring Fund Share, and (iii) Class C Acquiring Fund Shares determined
by dividing the Target Value attributable to the Class C Target Shares by
the NAV (as so computed) of a Class C Acquiring Fund Share; and
(b) to assume all of Target's liabilities described in paragraph 1.3
("Liabilities").
Such transactions shall take place at the Closing (as defined in paragraph
3.1).
1.2. The Assets shall include, without limitation, all cash, cash
equivalents, securities, receivables (including interest and dividends
receivable), claims and rights of action, rights to register shares under
applicable securities laws, books and records, deferred and prepaid expenses
shown as assets on Target's books, and other property owned by Target at the
Effective Time (as defined in paragraph 3.1).
1.3. The Liabilities shall include (except as otherwise provided herein)
all of Target's liabilities, debts, obligations, and duties of whatever kind
or nature, whether absolute, accrued, contingent, or otherwise, whether or
not arising in the ordinary course of business, whether or not determinable
at the Effective Time, and whether or not specifically referred to in this
Agreement, including without limitation Target's share of the expenses
described in paragraph 7.2. Notwithstanding the foregoing, Target agrees to
use its best efforts to discharge all of its known Liabilities prior to the
Effective Time.
1.4. At or immediately before the Effective Time, Target shall declare and
pay to its shareholders a dividend and/or other distribution 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 realized net capital
gain, if any, for the current taxable year through the Effective Time.
1.5. At the Effective Time (or as soon thereafter as is reasonably
practicable), Target shall constructively distribute the Acquiring Fund
Shares received by it pursuant to paragraph 1.1 to Target's shareholders of
record, determined as of the Effective Time (collectively "Shareholders" and
individually a "Shareholder"), in exchange for their Target Shares. Such
distribution shall be accomplished by the Funds' transfer agent ("Transfer
Agent") opening accounts on Acquiring Fund's share transfer books in the
Shareholders' names and transferring such Acquiring Fund Shares thereto. Each
Shareholder's account shall be credited with the respective pro rata number
of full and fractional (rounded to the third decimal place) Acquiring Fund
Shares due that Shareholder, by class (i.e., the account for a Shareholder of
Class A Target Shares shall be credited with the respective pro rata number
of Class A Acquiring Fund Shares due that Shareholder, the account for a
Shareholder of Class B Target Shares shall be credited with the respective
pro rata number of Class D Acquiring Fund Shares due that Shareholder, and
the account for a Shareholder of Class C Target Shares shall be credited with
the respective pro rata number of Class C Acquiring Fund Shares due that
Shareholder). All outstanding Target Shares, including any represented by
certificates, shall simultaneously be canceled on Target's share transfer
records. Acquiring Fund shall not issue certificates representing the
Acquiring Fund Shares in connection with the Reorganization.
1.6. As soon as reasonably practicable after distribution of the Acquiring
Fund Shares pursuant to paragraph 1.5, Target shall be dissolved and any
further actions shall be taken in connection therewith as required by
applicable law.
<PAGE>
1.7. Any reporting responsibility of Target to a public authority is and
shall remain its responsibility up to and including the date on which it is
dissolved.
1.8. Any transfer taxes payable upon issuance of Acquiring Fund Shares in
a name other than that of the registered holder on Target's books of the
Target Shares constructively exchanged therefor shall be paid by the person
to whom such Acquiring Fund Shares are to be issued, as a condition of such
transfer.
2. VALUATION
2.1. For purposes of paragraph 1.1(a), Target's net value shall be (a) the
value of the Assets computed as of 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 statement of additional information less (b) the amount of the
Liabilities as of the Valuation Time.
2.2. For purposes of paragraph 1.1(a), the NAV of a Class A Acquiring Fund
Share, a Class C Acquiring Fund Share, and a Class D Acquiring Fund Share
shall be computed as of the Valuation Time, using the valuation procedures
set forth in Acquiring Fund's then-current prospectus and statement of
additional information.
2.3. All computations pursuant to paragraphs 2.1 and 2.2 shall be made by
or under the direction of Mitchell Hutchins Asset Management Inc.
3. CLOSING AND EFFECTIVE TIME
3.1. The Reorganization, together with related acts necessary to
consummate the same ("Closing"), shall occur at the Funds' principal office
on October 20, 1995, or at such other place and/or on such other date as the
parties may agree. All acts taking place at the Closing shall be deemed to
take place simultaneously as of 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. Target shall deliver to PW Trust at the Closing a schedule of the
Assets as of the Effective Time, which shall set forth for all portfolio
securities included therein their adjusted tax basis and holding period by
lot. Target's custodian shall deliver at the Closing a certificate of an
authorized officer stating that (a) the Assets held by the custodian will be
transferred to Acquiring Fund at the Effective Time and (b) all necessary
taxes in conjunction with the delivery of the Assets, including all
applicable federal and state stock transfer stamps, if any, have been paid or
provision for payment has been made.
3.3. Target shall deliver to PW Trust at the Closing a list of the names
and addresses of the Shareholders and the number (by class) of outstanding
Target Shares owned by each Shareholder, all as of the Effective Time,
certified by the Secretary or Assistant Secretary of Target. The Transfer
Agent shall deliver at the Closing a certificate as to the opening on
Acquiring Fund's share transfer books of accounts in the Shareholders' names.
PW Trust shall issue and deliver a confirmation to Target evidencing the
Acquiring Fund Shares (by class) to be credited to Target at the Effective
Time or provide evidence satisfactory to Target that such Acquiring Fund
Shares have been credited to Target's account on Acquiring Fund's books. At
the Closing, each party shall deliver to the other such bills of sale,
checks, assignments, stock certificates, receipts, or other documents as the
other party or its counsel may reasonably request.
<PAGE>
3.4. Each Investment Company shall deliver to the other at the Closing a
certificate executed in its name by its President or a Vice President in form
and substance satisfactory to the recipient and dated the Effective Time, to
the effect that the representations and warranties it made in this Agreement
are true and correct at the Effective Time except as they may be affected by
the transactions contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1. Target represents and warrants as follows:
4.1.1. Target is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland, and a copy of
its Articles of Incorporation is on file with the Department of
Assessments and Taxation of Maryland;
4.1.2. Target is duly registered as an open-end management investment
company under the 1940 Act, and such registration will be in full force
and effect at the Effective Time;
4.1.3. At the Closing, Target will have good and marketable title to
the Assets and full right, power, and authority to sell, assign, transfer,
and deliver the Assets free of any liens or other encumbrances; and upon
delivery and payment for the Assets, Acquiring Fund will acquire good and
marketable title thereto;
4.1.4. Target's current prospectus and statement of additional
information conform in all material respects to the applicable
requirements of the Securities Act of 1933 ("1933 Act") and the 1940 Act
and the rules and regulations thereunder and do not include any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading;
4.1.5. Target is not in violation of, and the execution and delivery
of this Agreement and consummation of the transactions contemplated hereby
will not conflict with or violate, Maryland law or any provision of
Target's Articles of Incorporation or By-Laws or of any agreement,
instrument, lease, or other undertaking to which Target is a party or by
which it is bound or result in the acceleration of any obligation, or the
imposition of any penalty, under any agreement, judgment, or decree to
which Target is a party or by which it is bound, except as previously
disclosed in writing to and accepted by PW Trust;
4.1.6. Except as disclosed in writing to and accepted by PW Trust, all
material contracts and other commitments of or applicable to Target (other
than this Agreement and investment contracts, including options, futures,
and forward contracts) will be terminated, or provision for discharge of
any liabilities of Target thereunder will be made, at or prior to the
Effective Time, without either Fund's incurring any liability or penalty
with respect thereto and without diminishing or releasing any rights
Target may have had with respect to actions taken or omitted to be taken
by any other party thereto prior to the Closing;
4.1.7. Except as otherwise disclosed in writing to and accepted by PW
Trust, no litigation, administrative proceeding, or investigation of or
before any court or governmental body is presently pending or (to Target's
knowledge) threatened against Target or any of its properties or assets
that, if adversely determined, would materially and adversely affect
Target's financial condition or the conduct of its business; Target knows
of no facts that might form the basis for the institution of any such
litigation, proceeding, or investigation and is not a party to or subject
to the provisions of any order, decree, or judgment of any court or
governmental body that materially or adversely affects its business or its
ability to consummate the transactions contemplated hereby;
4.1.8. The execution, delivery, and performance of this Agreement has
been duly authorized as of the date hereof by all necessary action on the
part of Target's board of directors, which has made the
<PAGE>
determinations required by Rule 17a-8(a) under the 1940 Act; and, subject
to approval by Target's shareholders, shareholders, and receipt of any
necessary exemptive relief or no-action assurances requested from the
Securities and Exchange Commission ("SEC") or its staff with respect to
sections 17(a) and 17(d) of the 1940 Act, this Agreement will constitute a
valid and legally binding obligation of Target, enforceable in accordance
with its terms, except as the same may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium, and similar laws relating
to or affecting creditors' rights and by general principles of equity;
4.1.9. At the Effective Time, the performance of this Agreement shall
have been duly authorized by all necessary action by Target's
shareholders;
4.1.10. No governmental consents, approvals, authorizations, or
filings are required under the 1933 Act, the Securities Exchange Act of
1934 ("1934 Act"), or the 1940 Act for the execution or performance of
this Agreement by Target, except for (a) the filing with the Securities
and Exchange Commission ("SEC.") of a registration statement by PW Trust
on Form N-14 relating to the Acquiring Fund Shares issuable hereunder, and
any supplement or amendment thereto ("Registration Statement"), including
therein a prospectus/proxy statement ("Proxy Statement"), (b) receipt of the
exemptive relief referenced in subparagraph 4.1.8, and (c) such
consents, approvals, authorizations, and filings as have been made or
received or as may be required subsequent to the Effective Time;
4.1.11. On the effective date of the Registration Statement, at the
time of the shareholders' meeting referred to in paragraph 5.2, and at the
Effective Time, the Proxy Statement will (a) comply in all material
respects with the applicable provisions of the 1933 Act, the 1934 Act, and
the 1940 Act and the regulations thereunder and (b) not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which such statements were made, not misleading;
provided that the foregoing shall not apply to statements in or omissions
from the Proxy Statement made in reliance on and in conformity with
information furnished by PW Trust for use therein;
4.1.12. The Liabilities were incurred by Target in the ordinary course
of its business;
4.1.13. Target qualified for treatment as a regulated investment
company ("RIC") under Subchapter M of the Code for each past taxable year
since it commenced operations and will continue to meet all the
requirements for such qualification for its current taxable year; and it
has no earnings and profits accumulated in any taxable year in which the
provisions of Subchapter M did not apply to it. The Assets shall be
invested at all times through the Effective Time in a manner that ensures
compliance with the foregoing;
4.1.14. Target is not under the jurisdiction of a court in a
proceeding under Title 11 of the United States Code or similar case within
the meaning of section 368(a)(3)(A) of the Code;
4.1.15. Not more than 25% of the value of Target's total assets
(excluding cash, cash items, and U.S. government securities) is invested
in the stock and securities of any one issuer, and not more than 50% of
the value of such assets is invested in the stock and securities of five
or fewer issuers; and
4.1.16. Target will be dissolved as soon as reasonably practicable
after the Reorganization, but in all events within six months after the
Effective Time.
<PAGE>
4.2. Acquiring Fund represents and warrants as follows:
4.2.1. PW Trust is an unincorporated voluntary association with
transferable shares organized as a business trust under a written
instrument ("Business Trust"); it is duly organized, validly existing, and
in good standing under the laws of the Commonwealth of Massachusetts; and
a copy of its Declaration of Trust is on file with the Secretary of the
Commonwealth of Massachusetts;
4.2.2. PW Trust is duly registered as an open-end management
investment company under the 1940 Act, and such registration will be in
full force and effect at the Effective Time;
4.2.3. Acquiring Fund is a duly established and designated series of
PW Trust;
4.2.4. No consideration other than Acquiring Fund Shares (and
Acquiring Fund's assumption of the Liabilities) will be issued in exchange
for the Assets in the Reorganization;
4.2.5. The Acquiring Fund Shares to be issued and delivered to Target
hereunder will, at the Effective Time, have been duly authorized and, when
issued and delivered as provided herein, will be duly and validly issued,
and outstanding shares of Acquiring Fund, fully paid and non-assessable,
except to the extent that under Massachusetts law shareholders of a Business
Trust may, under certain circumstances, be held personally liable for its
obligations. Except as contemplated by this Agreement, Acquiring Fund does
not have outstanding any options, warrants, or other rights to subscribe for
or purchase any of its shares, nor is there outstanding any security
convertible into any of its shares;
4.2.6. Acquiring Fund's current prospectus and statement of additional
information conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and
regulations thereunder and do not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
4.2.7. Acquiring Fund is not in violation of, and the execution and
delivery of this Agreement and consummation of the transactions
contemplated hereby will not conflict with or violate, Massachusetts law
or any provision of PW Trust's Declaration of Trust or By-Laws or of any
provision of any agreement, instrument, lease, or other undertaking to
which Acquiring Fund is a party or by which it is bound or result in the
acceleration of any obligation, or the imposition of any penalty, under
any agreement, judgment, or decree to which Acquiring Fund is a party or
by which it is bound, except as previously disclosed in writing to and
accepted by Target;
4.2.8. Except as otherwise disclosed in writing to and accepted by
Target, no litigation, administrative proceeding, or investigation of or
before any court or governmental body is presently pending or (to
Acquiring Fund's knowledge) threatened against PW Trust with respect to
Acquiring Fund or any of its properties or assets that, if adversely
determined, would materially and adversely affect Acquiring Fund's
financial condition or the conduct of its business; Acquiring Fund knows
of no facts that might form the basis for the institution of any such
litigation, proceeding, or investigation and is not a party to or subject
to the provisions of any order, decree, or judgment of any court or
governmental body that materially or adversely affects its business or its
ability to consummate the transactions contemplated hereby;
4.2.9. The execution, delivery, and performance of this Agreement has
been duly authorized as of the date hereof by all necessary action on the
part of PW Trust's board of trustees, which has made the determinations
required by Rule 17a-8(a) under the 1940 Act; and subject to receipt of any
necessary exemptive relief or no action assurances requested from the SEC or
its staff with respect to sections 17(a) and 17(d) of the 1940 Act,
<PAGE>
this Agreement will constitute a valid and legally binding obligation of
Acquiring Fund, enforceable in accordance with its terms, except as the same
may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium, and similar laws relating to or affecting
creditors' rights and by general principles of equity;
4.2.10. No governmental consents, approvals, authorizations, or
filings are required under the 1933 Act, the 1934 Act, or the 1940 Act for
the execution or performance of this Agreement by PW Trust, except for (a)
the filing with the SEC of the Registration Statement and a post-effective
amendment to PW Trust's registration statement, (b) receipt of the exemptive
relief referenced in subparagraph 4.2.9, and (c) such consents, approvals,
authorizations, and filings as have been made or received or as
may be required subsequent to the Effective Time;
4.2.11. On the effective date of the Registration Statement, at the
time of the shareholders' meeting referred to in paragraph 5.2, and at the
Effective Time, the Proxy Statement will (a) comply in all material
respects with the applicable provisions of the 1933 Act, the 1934 Act, and
the 1940 Act and the regulations thereunder and (b) not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which such statements were made, not misleading;
provided that the foregoing shall not apply to statements in or omissions
from the Proxy Statement made in reliance on and in conformity with
information furnished by Target for use therein;
4.2.12. Acquiring Fund is a "fund" as defined in section 851(h)(2) of
the Code; it qualified for treatment as a RIC under Subchapter M of the
Code for each past taxable year since it commenced operations and will
continue to meet all the requirements for such qualification for its
current taxable year; Acquiring Fund intends to continue to meet all such
requirements for the next taxable year; and it has no earnings and profits
accumulated in any taxable year in which the provisions of Subchapter M
did not apply to it;
4.2.13. Acquiring Fund has no plan or intention to issue additional
Acquiring Fund Shares following the Reorganization except for shares
issued in the ordinary course of its business as a series of an open-end
investment company; nor does Acquiring Fund have any plan or intention to
redeem or otherwise reacquire any Acquiring Fund Shares issued to the
Shareholders pursuant to the Reorganization, other than through
redemptions arising in the ordinary course of that business;
4.2.14. Acquiring Fund (a) will actively continue Target's business in
substantially the same manner that Target conducted that business
immediately before the Reorganization, (b) has no plan or intention to
sell or otherwise dispose of any of the Assets, except for dispositions
made in the ordinary course of that business and dispositions necessary to
maintain its status as a RIC 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 dispositions thereof to maintain such status;
4.2.15. There is no plan or intention for Acquiring Fund to be
dissolved or merged into another corporation or business trust or any
"fund" thereof (within the meaning of section 851(h)(2) of the Code)
following the Reorganization;
4.2.16. Immediately after the Reorganization, (a) not more than 25% of
the value of Acquiring Fund's total assets (excluding cash, cash items,
and U.S. government securities) will be invested in the stock and
securities of any one issuer and (b) not more than 50% of the value of
such assets will be invested in the stock and securities of five or fewer
issuers; and
<PAGE>
4.2.17. Acquiring Fund does not own, directly or indirectly, nor at
the Effective Time will it own, directly or indirectly, nor has it owned,
directly or indirectly, at any time during the past five years, any shares
of Target.
4.3. Each Fund represents and warrants as follows:
4.3.1. The fair market value of the Acquiring Fund Shares, when
received by the Shareholders, will be approximately equal to the fair
market value of their Target Shares constructively surrendered in exchange
therefor;
4.3.2. Its management (a) is unaware of any plan or intention of
Shareholders to redeem or otherwise dispose of any portion of the
Acquiring Fund Shares to be received by them in the Reorganization and (b)
does not anticipate dispositions of those Acquiring Fund Shares at the
time of or soon after the Reorganization to exceed the usual rate and
frequency of dispositions of shares of Target as an open-end investment
company. Consequently, its management expects that the percentage of
Shareholder interests, if any, that will be disposed of as a result of or
at the time of the Reorganization will be de minimis. Nor does its
management anticipate that there will be extraordinary redemptions of
Acquiring Fund Shares immediately following the Reorganization;
4.3.3. The Shareholders will pay their own expenses, if any, incurred
in connection with the Reorganization;
4.3.4. Immediately following consummation of the Reorganization,
Acquiring Fund will hold substantially the same assets and be subject to
substantially the same liabilities that Target held or was subject to
immediately prior thereto, plus any liabilities and expenses of the
parties incurred in connection with the Reorganization;
4.3.5. The fair market value on a going concern basis of the Assets
will equal or exceed the Liabilities to be assumed by Acquiring Fund and
those to which the Assets are subject;
4.3.6. There is no intercompany indebtedness between the Funds that
was issued or acquired, or will be settled, at a discount;
4.3.7. Pursuant to the Reorganization, Target will transfer to
Acquiring Fund, and Acquiring Fund will acquire, at least 90% of the fair
market value of the net assets, and at least 70% of the fair market value
of the gross assets, held by Target immediately before the Reorganization.
For the purposes of this representation, any amounts used by Target to pay
its Reorganization expenses and redemptions and distributions made by it
immediately before the Reorganization (except for (a) distributions made
to conform to its policy of distributing all or substantially all of its
income and gains to avoid the obligation to pay federal income tax and/or
the excise tax under section 4982 of the Code and (b) redemptions not made
as part of the Reorganization) will be included as assets thereof held
immediately before the Reorganization;
4.3.8. None of the compensation received by any Shareholder who is an
employee of Target will be separate consideration for, or allocable to,
any of the Target Shares held by such Shareholder-employee; none of the
Acquiring Fund Shares received by any such Shareholder-employee will be
separate consideration for, or allocable to, any employment agreement; and
the consideration paid to any such Shareholder-employee will be for
services actually rendered and will be commensurate with amounts paid to
third parties bargaining at arm's-length for similar services; and
4.3.9. Immediately after the Reorganization, the Shareholders will not
own shares constituting "control" of Acquiring Fund within the meaning of
section 304(c) of the Code.
<PAGE>
5. COVENANTS
5.1. Each Fund covenants to operate its respective business in the
ordinary course between the date hereof and the Closing, it being understood
that (a) such ordinary course will include declaring and paying customary
dividends and other distributions and such changes in operations as are
contemplated by each Fund's normal business activities and (b) each Fund will
retain exclusive control of the composition of its portfolio until the
Closing; provided that Target shall not dispose of more than an insignificant
portion of its historic business assets during such period without Acquiring
Fund's prior consent.
5.2. Target covenants to call a shareholders' meeting to consider and act
upon this Agreement and to take all other action necessary to obtain approval
of the transactions contemplated hereby.
5.3. Target covenants that the Acquiring Fund Shares to be delivered
hereunder are not being acquired for the purpose of making any distribution
thereof, other than in accordance with the terms hereof.
5.4. Target covenants that it will assist PW Trust in obtaining such
information as PW Trust reasonably requests concerning the beneficial
ownership of Target Shares.
5.5. Target covenants that Target's books and records (including all books
and records required to be maintained under the 1940 Act and the rules and
regulations thereunder) will be turned over to PW Trust at the Closing.
5.6. Each Fund covenants to cooperate in preparing the Proxy Statement in
compliance with applicable federal securities laws.
5.7. Each Fund covenants that it will, from time to time, as and when
requested by the other Fund, execute and deliver or cause to be executed and
delivered all such assignments and other instruments, and will take or cause
to be taken such further action, as the other Fund may deem necessary or
desirable in order to vest in, and confirm to, (a) Acquiring Fund, title to
and possession of all the Assets, and (b) Target, title to and possession of
the Acquiring Fund Shares to be delivered hereunder, and otherwise to carry
out the intent and purpose hereof.
5.8. PW Trust covenants to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act, and such
state securities laws it may deem appropriate in order to continue its
operations after the Effective Time.
5.9. Subject to this Agreement, each Fund covenants to take or cause to be
taken all actions, and to do or cause to be done all things reasonably
necessary, proper, or advisable to consummate and effectuate the transactions
contemplated hereby.
6. CONDITIONS PRECEDENT
Each Fund's obligations hereunder shall be subject to (a) performance by
the other Fund of all the obligations to be performed hereunder at or before
the Effective Time, (b) all representations and warranties of the other Fund
contained herein being true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions
contemplated hereby, as of the Effective Time, with the same force and effect
as if made at and as of the Effective Time, and (c) the following further
conditions that, at or before the Effective Time:
6.1. This Agreement and the transactions contemplated hereby shall have
been duly adopted and approved by Target's board of directors and shall have
been approved by Target's shareholders in accordance with applicable law.
<PAGE>
6.2. All necessary filings shall have been made with the SEC and state
securities authorities, and no order or directive shall have been received
that any other or further action is required to permit the parties to carry
out the transactions contemplated hereby. The Registration Statement shall
have become effective under the 1933 Act, no stop orders suspending the
effectiveness thereof shall have been issued, and the SEC shall not have
issued an unfavorable report with respect to the Reorganization under section
25(b) of the 1940 Act nor instituted any proceedings seeking to enjoin
consummation of the transactions contemplated hereby under section 25(c) of
the 1940 Act. All consents, orders, and permits of federal, state, and local
regulatory authorities (including the SEC and state securities authorities)
deemed necessary by either Fund to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain same would not involve a risk of a material
adverse effect on the assets or properties of either Fund, provided that
either Fund may for itself waive any of such conditions.
6.3. At the Effective Time, no action, suit, or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or to obtain damages or other relief in connection
with, the transactions contemplated hereby.
6.4. Target shall have received an opinion of Kirkpatrick & Lockhart LLP,
counsel to PW Trust, substantially to the effect that:
6.4.1. Acquiring Fund is a duly established series of PW Trust, a
Business Trust duly organized and validly existing under the laws of the
Commonwealth of Massachusetts with power under its Declaration of Trust to
own all of its properties and assets and, to the knowledge of such
counsel, to carry on its business as presently conducted;
6.4.2. This Agreement (a) has been duly authorized, executed, and
delivered by PW Trust on behalf of Acquiring Fund and (b) assuming due
authorization, execution, and delivery of this Agreement by Target, is a
valid and legally binding obligation of PW Trust with respect to Acquiring
Fund, enforceable in accordance with its terms, except as the same may be
limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium, and similar laws relating to or affecting creditors' rights
and by general principles of equity;
6.4.3. The Acquiring Fund Shares to be issued and distributed to the
Shareholders under this Agreement, assuming their due delivery as
contemplated by this Agreement, will be duly authorized and validly issued
and outstanding and fully paid and non-assessable, except to the extent
that under Massachusetts law shareholders of a Business Trust may, under
certain circumstances, be held personally liable for its obligations, and
no shareholder of Acquiring Fund has any preemptive right to subscribe for
or purchase such shares;
6.4.4. The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate PW Trust's Declaration of Trust or By-Laws or any provision of any
agreement (known to such counsel, without any independent inquiry or
investigation) to which PW Trust (with respect to Acquiring Fund) is a
party or by which it is bound or (to the knowledge of such counsel,
without any independent inquiry or investigation) result in the
acceleration of any obligation, or the imposition of any penalty, under
any agreement, judgment, or decree to which PW Trust (with respect to
Acquiring Fund) is a party or by which it is bound, except as set forth in
such opinion or as previously disclosed in writing to and accepted by
Target;
6.4.5. To the knowledge of such counsel (without any independent
inquiry or investigation), no consent, approval, authorization, or order
of any court or governmental authority is required for the
<PAGE>
consummation by PW Trust on behalf of Acquiring Fund of the transactions
contemplated herein, except such as have been obtained under the 1933 Act,
the 1934 Act, and the 1940 Act and such as may be required under state
securities laws;
6.4.6. PW Trust is registered with the SEC as an investment company,
and to the knowledge of such counsel no order has been issued or
proceeding instituted to suspend such registration; and
6.4.7. To the knowledge of such counsel (without any independent
inquiry or investigation), (a) no litigation, administrative proceeding,
or investigation of or before any court or governmental body is pending or
threatened as to PW Trust (with respect to Acquiring Fund) or any of its
properties or assets attributable or allocable to Acquiring Fund and (b)
PW Trust (with respect to Acquiring Fund) is not a party to or subject to
the provisions of any order, decree, or judgment of any court or
governmental body that materially and adversely affects Acquiring Fund's
business, except as set forth in such opinion or as otherwise disclosed in
writing to and accepted by Target.
In rendering such opinion, such counsel may (i) rely, as to matters governed
by the laws of the Commonwealth of Massachusetts, on an opinion of competent
Massachusetts counsel, (ii) make assumptions regarding the authenticity,
genuineness, and/or conformity of documents and copies thereof without
independent verification thereof, (iii) limit such opinion to applicable
federal and state law, and (iv) define the word "knowledge" and related terms
to mean the knowledge of attorneys then with such firm who have devoted
substantive attention to matters directly related to this Agreement and the
Reorganization.
6.5. PW Trust shall have received an opinion of Sullivan & Cromwell,
counsel to Target, substantially to the effect that:
6.5.1. Target is a corporation duly organized and validly existing
under the laws of the State of Maryland with power under its Articles of
Incorporation to own all of its properties and assets and, to the
knowledge of such counsel, to carry on its business as presently
conducted;
6.5.2. This Agreement (a) has been duly authorized, executed, and
delivered by Target and (b) assuming due authorization, execution, and
delivery of this Agreement by PW Trust on behalf of Acquiring Fund, is a
valid and legally binding obligation of Target 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 Target's Articles of Incorporation or By-Laws or any provision of
any agreement (known to such counsel, without any independent inquiry or
investigation) to which Target (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 Target is a party or by which it is bound, except as set
forth in such opinion or as previously disclosed in writing to and accepted
by PW Trust;
6.5.4. To the knowledge of such counsel (without any independent
inquiry or investigation), no consent, approval, authorization, or order
of any court or governmental authority is required for the consummation by
Target of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act, and the 1940 Act and such as
may be required under state securities laws;
6.5.5. Target is registered with the SEC as an investment company, and
to the knowledge of such counsel no order has been issued or proceeding
instituted to suspend such registration; and
<PAGE>
6.5.6. To the knowledge of such counsel (without any independent
inquiry or investigation), (a) no litigation, administrative proceeding,
or investigation of or before any court or governmental body is pending or
threatened as to Target or any of its properties or assets and (b) Target
is not a party to or subject to the provisions of any order, decree, or
judgment of any court or governmental body that materially and adversely
affects its business, except as set forth in such opinion or as otherwise
disclosed in writing to and accepted by PW Trust.
In rendering such opinion, such counsel may (i) rely, as to matters governed
by the laws of the State of Maryland, on an opinion of competent Maryland
counsel, (ii) make assumptions regarding the authenticity, genuineness,
and/or conformity of documents and copies thereof without independent
verification thereof, (iii) limit such opinion to applicable federal and
state law, and (iv) define the word "knowledge" and related terms to mean the
knowledge of attorneys then with such firm who have devoted substantive
attention to matters directly related to this Agreement and the
Reorganization.
6.6. PW Trust shall have received an opinion of Kirkpatrick & Lockhart
LLP, its counsel, addressed to and in form and substance satisfactory to it,
and Target shall have received an opinion of Sullivan & Cromwell, its
counsel, addressed to and in form and substance satisfactory to it, each as
to the federal income tax consequences mentioned below (each a "Tax
Opinion"). In rendering its Tax Opinion, each such counsel may rely as to
factual matters, exclusively and without independent verification, on the
representations made in this Agreement (or in separate letters addressed to
such counsel) and the certificates delivered pursuant to paragraph 3.4. Each
Tax Opinion shall be substantially to the effect that, based on the facts and
assumptions stated therein, for federal income tax purposes:
6.6.1. Acquiring Fund's acquisition of the Assets in exchange solely
for Acquiring Fund Shares and Acquiring Fund's assumption of the
Liabilities, followed by Target's distribution of those shares to the
Shareholders constructively in exchange for the Shareholders' Target
Shares, will constitute a reorganization within the meaning of section
368(a)(1)(C) of the Code, and each Fund will be "a party to a
reorganization" within the meaning of section 368(b) of the Code;
6.6.2. No gain or loss will be recognized to Target on the transfer to
Acquiring Fund of the Assets in exchange solely for Acquiring Fund Shares
and Acquiring Fund's assumption of the Liabilities or on the subsequent
distribution of those shares to the Shareholders in constructive exchange
for their Target Shares;
6.6.3. No gain or loss will be recognized to Acquiring Fund on its
receipt of the Assets in exchange solely for Acquiring Fund Shares and its
assumption of the Liabilities;
6.6.4. Acquiring Fund's basis for the Assets will be the same as the
basis thereof in Target's hands immediately before the Reorganization, and
Acquiring Fund's holding period for the Assets will include Target's
holding period therefor;
6.6.5. A Shareholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for Acquiring Fund
Shares pursuant to the Reorganization; and
6.6.6. A Shareholder's basis for the Acquiring Fund Shares to be
received by it in the Reorganization will be the same as the basis for its
Target Shares to be constructively surrendered in exchange for those
Acquiring Fund Shares, and its holding period for those Acquiring Fund
Shares will include its holding period for those Target Shares, provided
they are held as capital assets by the Shareholder at the Effective Time.
<PAGE>
Notwithstanding paragraphs 6.6.2 and 6.6.4, each Tax Opinion may state that
no opinion is expressed as to the effect of the Reorganization on the Funds
or any Shareholder with respect to any asset (including certain options,
futures, and forward contracts included in the Assets) as to which any
unrealized gain or loss is required to be recognized for federal income tax
purposes at the end of a taxable year (or on the termination or transfer
thereof) under a mark-to-market system of accounting.
At any time before the Closing, (a) Acquiring Fund may waive any of the
foregoing conditions if, in the judgment of PW Trust's board of trustees,
such waiver will not have a material adverse effect on its shareholders'
interests, and (b) Target may waive any of the foregoing conditions if, in
the judgment of its board of directors, such waiver will not have a material
adverse effect on the Shareholders' interests.
7. BROKERAGE FEES AND EXPENSES
7.1. Each Investment Company represents and warrants to the other that
there are no brokers or finders entitled to receive any payments in
connection with the transactions provided for herein.
7.2. Except as otherwise provided herein, all expenses incurred in
connection with the transactions contemplated by this Agreement (whether or
not they are consummated) will be borne by the Funds proportionately, as
follows: each such expense will be borne by the Funds in proportion to their
respective net assets as of the close of business on the last business day of
the month in which such expense was incurred. Such expenses include: (a)
expenses incurred in connection with entering into and carrying out the
provisions of this Agreement; (b) expenses associated with the preparation
and filing of the Registration Statement; (c) registration or qualification
fees and expenses of preparing and filing such forms as are necessary under
applicable state securities laws to qualify the Acquiring Fund Shares to be
issued in connection herewith in each state in which Target's shareholders
are resident as of the date of the mailing of the Proxy Statement to such
shareholders; (d) printing and postage expenses; (e) legal and accounting
fees; and (f) solicitation costs.
8. ENTIRE AGREEMENT; SURVIVAL
Neither party has made any representation, warranty, or covenant not set
forth herein, and this Agreement constitutes the entire agreement between the
parties. The representations, warranties, and covenants contained herein or
in any document delivered pursuant hereto or in connection herewith shall
survive the Closing.
9. TERMINATION OF AGREEMENT
This Agreement may be terminated at any time at or prior to the Effective
Time, whether before or after approval by Target's shareholders:
9.1. By either Fund (a) in the event of the other Fund's material breach
of any representation, warranty, or covenant contained herein to be performed
at or prior to the Effective Time, (b) if a condition to its obligations has
not been met and it reasonably appears that such condition will not or cannot
be met, or (c) if the Closing has not occurred on or before March 31, 1996;
or
9.2. By the parties' mutual agreement.
In the event of termination under paragraphs 9.1.(c) or 9.2, there shall
be no liability for damages on the part of either Fund, or the
trustees/directors or officers of either Investment Company, to the other Fund.
10. AMENDMENT
This Agreement may be amended, modified, or supplemented at any time,
notwithstanding approval thereof by Target's shareholders, in such manner as
may be mutually agreed upon in writing by the parties; provided that
following such approval no such amendment shall have a material adverse
effect on the Shareholders' interests.
<PAGE>
11. MISCELLANEOUS
11.1. This Agreement shall be governed by and construed in accordance with
the internal laws of the Commonwealth of Massachusetts; provided that, in the
case of any conflict between such laws and the federal securities laws, the
latter shall govern.
11.2. Nothing expressed or implied herein is intended or shall be
construed to confer upon or give any person, firm, trust, or corporation
other than the parties and their respective successors and assigns any rights
or remedies under or by reason of this Agreement.
11.3. The parties acknowledge that PW Trust is a Business Trust. Notice is
hereby given that this instrument is executed on behalf of PW Trust's
trustees solely in their capacity as trustees, and not individually, and that
PW Trust's obligations under this instrument are not binding on or
enforceable against any of its trustees, officers, or shareholders, but are
only binding on and enforceable against Acquiring Fund's assets and property.
Target agrees that, in asserting any rights or claims under this Agreement,
it shall look only to Acquiring 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 INVESTMENTS TRUST,
on behalf of its series,
PAINEWEBBER U.S. GOVERNMENT INCOME FUND
By: /s/ Ilene Shore /s/ Dianne E. O'Donnell
--------------------------- ------------------------------------
Assistant Secretary Vice President
ATTEST:
MITCHELL HUTCHINS/KIDDER, PEABODY
GOVERNMENT INCOME FUND, INC.
By: /s/ Stephanie Johnson /s/ Scott Griff
--------------------------- ------------------------------------
Assistant Secretary Vice President
Exhibit 10(d)
PAINEWEBBER MANAGED INVESTMENTS TRUST
MULTIPLE CLASS PLAN PURSUANT TO RULE 18f-3
PaineWebber Managed Investments Trust hereby adopts this
Multiple Class Plan pursuant to Rule 18f-3 under the Investment
Company Act of 1940, as amended (the "1940 Act") on behalf of its
current operating series, PaineWebber U.S. Government Income
Fund, PaineWebber Investment Grade Income Fund, PaineWebber High
Income Fund, PaineWebber Utility Income Fund and PaineWebber
Short-Term U.S. Government Income Fund, and any series that may
be established in the future (referred to hereinafter
collectively as the "Funds" and individually as a "Fund").
A. GENERAL DESCRIPTION OF CLASSES THAT ARE OFFERED:
-----------------------------------------------
1. Class A Shares. Class A shares of each Fund are sold
to the general public subject to an initial sales charge. The
initial sales charge for each Fund is waived for certain eligible
purchasers and reduced or waived for certain large volume
purchases.
The maximum sales charge is 3% of the public offering price
for Class A shares of PaineWebber Short-Term U.S. Government
Income Fund and 2.5% of the public offering price for Class A
shares of PaineWebber Short-Term U.S. Government Income Fund for
Credit Unions.
The maximum sales charge is 4% of the public offering price
for Class A shares of any other Fund that invests primarily in
debt securities.
The maximum sales charge is 4.5% of the public offering
price for Class A shares of a Fund that invests primarily in
equity securities or a combination of equity and debt securities.
Class A shares of each Fund are subject to an annual service
fee of .25% of the average daily net assets of the Class A shares
of each Fund paid pursuant to a plan of distribution adopted
pursuant to Rule 12b-1 under the 1940 Act.
Class A shares of each Fund issued on or after November 1,
1995 will be subject to a contingent deferred sales charge
("CDSC") on redemptions of shares (i) purchased without an
initial sales charge due to a sales charge waiver for purchases
of $1 million or more and (ii) held less than one year. The
Class A CDSC is equal to 1% of the lower of: (i) the net asset
value of the shares at the time of purchase or (ii) the net asset
value of the shares at the time of redemption. Class A shares of
each Fund held one year or longer and Class A shares of each Fund
acquired through reinvestment of dividends or capital gains
distributions on shares otherwise subject to a Class A CDSC are
not subject to the CDSC. The CDSC for Class A shares of each
Fund will be waived under certain circumstances.
2. Class B Shares. Class B shares of each Fund are sold
to the general public subject to a CDSC, but without imposition
of an initial sales charge.
With the exception noted below, the maximum CDSC for Class B
shares of PaineWebber Short-Term U.S. Government Income Fund is
equal to 3% of the lower of: (i) the net asset value of the
shares at the time of purchase or (ii) the net asset value of the
shares at the time of redemption. The higher CDSC described
below applies if the shares being redeemed were acquired through
an exchange with a fund that has a higher CDSC.
The maximum CDSC for Class B shares of each other Fund is
equal to 5% of the lower of: (i) the net asset value of the
shares at the time of purchase or (ii) the net asset value of the
shares at the time of redemption.
Class B shares of each Fund held six years or longer (four
years or longer for Class B shares of PaineWebber Short-Term U.S.
Government Income Fund unless acquired through an exchange with a
fund that has a higher CDSC) and Class B shares of each Fund
acquired through reinvestment of dividends or capital gains
distributions are not subject to the CDSC.
Class B shares of each Fund are subject to an annual service
fee of .25% of average daily net assets and a distribution fee of
.75% of average daily net assets of the Class B shares of each
Fund, each paid pursuant to a plan of distribution adopted
pursuant to Rule 12b-1 under the 1940 Act.
Class B shares of each Fund convert to Class A shares
approximately six years after issuance at relative net asset
value.
3. Class C Shares. Class C shares are sold without
imposition of an initial sales charge or CDSC and are not subject
to any service or distribution fees.
Class C shares of each Fund are available for purchase only
by: (i) employee benefit and retirement plans, other than
individual retirement accounts and self-employed retirement
plans, of Paine Webber Group Inc. and its affiliates; (ii)
certain unit investment trusts sponsored by PaineWebber
Incorporated; (iii) participants in certain wrap fee investment
advisory programs that are currently or in the future sponsored
by PaineWebber Incorporated and that may invest in PaineWebber
proprietary funds, provided that shares are purchased through or
in connection with those programs; and (iv) the holders of Class
C shares of any Mitchell Hutchins/Kidder Peabody ("MH/KP") mutual
fund provided that such shares are issued in connection with the
reorganization of a MH/KP mutual fund into that Fund.
4. Class D Shares. Class D shares of each Fund are sold
to the general public without imposition of a sales charge.
Class D shares of PaineWebber Short-Term U.S. Government
Income Fund for Credit Unions are subject to an annual service
fee of .25% of average daily net assets and a distribution fee of
.25% of average daily net assets of Class D shares of that Fund,
each pursuant to a plan of distribution adopted pursuant to Rule
12b-1 under the 1940 Act.
Class D shares of any other Fund that invests primarily in
debt securities are subject to an annual service fee of .25% of
average daily net assets and a distribution fee of .50% of
average daily net assets of Class D shares of such Fund, each
pursuant to a plan of distribution adopted pursuant to Rule 12b-1
under the 1940 Act.
Class D shares of a Fund that invests primarily in equity
securities or a combination of equity and debt securities are
subject to an annual service fee of .25% of average daily net
assets and a distribution fee of .75% of average daily net assets
of Class D shares of such Fund, each pursuant to a plan of
distribution adopted pursuant to Rule 12b-1 under the 1940 Act.
Class D shares of a Fund that invests primarily in debt
securities will be subject to a CDSC on redemptions of Class D
shares held less than one year equal to .75% of the lower of:
(i) the net asset value of the shares at the time of purchase or
(ii) the net asset value of the shares at the time of redemption;
provided that such CDSC shall apply only to Class D shares issued
on or after November 1, 1995.
Class D shares of a Fund that invests primarily in equity
securities or in a combination of equity and debt securities will
be subject to a CDSC on redemptions of Class D shares held less
than one year equal to 1% of the lower of: (i) the net asset
value of the shares at the time of purchase or (ii) the net asset
value of the shares at the time of redemption; provided that such
CDSC shall apply only to Class D shares issued on or after
November 1, 1995.
Class D shares of each Fund held one year or longer and
Class D shares of each Fund acquired through reinvestment of
dividends or capital gains distributions are not subject to the
CDSC. The CDSC for Class D shares of each Fund will be waived
under certain circumstances.
B. EXPENSE ALLOCATIONS OF EACH CLASS:
---------------------------------
Certain expenses may be attributable to a particular Class
of shares of each Fund ("Class Expenses"). Class Expenses are
charged directly to the net assets of the particular Class and,
thus, are borne on a pro rata basis by the outstanding shares of
that Class.
In addition to the distribution and service fees described
above, each Class may also pay a different amount of the
following other expenses:
(1) printing and postage expenses related to
preparing and distributing materials such as
shareholder reports, prospectuses, and
proxies to current shareholders of a specific
Class;
(2) Blue Sky registration fees incurred by a specific
Class of shares;
(3) SEC registration fees incurred by a specific Class
of shares;
(4) expenses of administrative personnel and services
required to support the shareholders of a specific
Class of shares;
(5) Trustees" fees incurred as a result of issues
relating to a specific Class of shares;
(6) litigation expenses or other legal expenses
relating to a specific Class of shares; and
(7) transfer agent fees identified as being
attributable to a specific Class.
C. EXCHANGE PRIVILEGES:
--------------------
Class A, Class B and Class D shares of each Fund may be
exchanged for shares of the corresponding Class of other
PaineWebber mutual funds and MH/KP mutual funds, or may be
acquired through an exchange of shares of the corresponding Class
of those funds. Class C shares of the Funds are not
exchangeable.
These exchange privileges may be modified or terminated by a
Fund, and exchanges may only be made into funds that are legally
registered for sale in the investor's state of residence.
D. CLASS DESIGNATION:
------------------
Subject to approval by the Board of Trustees of PaineWebber
Managed Investments Trust, a Fund may alter the nomenclature for
the designations of one or more of its classes of shares.
E. ADDITIONAL INFORMATION:
-----------------------
This Multiple Class Plan is qualified by and subject to the
terms of the then current prospectus for the applicable Classes;
provided, however, that none of the terms set forth in any such
prospectus shall be inconsistent with the terms of the Classes
contained in this Plan. The prospectus for each Fund contains
additional information about the Classes and each Fund's multiple
class structure.
F. DATE OF EFFECTIVENESS:
----------------------
This Multiple Class Plan is effective as of the date hereof,
provided that the CDSC imposed on the Class A shares and Class D
shares of each Fund shall apply only to Class A shares and Class
D shares issued on or after November 1, 1995, and further
provided that this Plan shall not become effective with respect
to any Fund unless such action has first been approved by the
vote of a majority of the Board and by vote of a majority of
those trustees of the Fund who are not interested persons of
PaineWebber Managed Investments Trust.
July 20, 1995
Exhibit 11
August 14, 1995
PaineWebber Managed Investments Trust
1285 Avenue of the Americas
New York, New York 10019
Dear Sir or Madam:
You have requested our opinion as to certain matters regarding the
issuance by PaineWebber Managed Investments Trust ("PW Trust") of Class A,
Class C and Class D shares of beneficial interest (the "Shares") of PaineWebber
U.S. Government Income Fund ("PW U.S. Government Income Fund"), a series of PW
Trust, pursuant to an Agreement and Plan of Reorganization and Termination
between PW Trust, on behalf of PW U.S. Government Income Fund and Mitchell
Hutchins/Kidder, Peabody Intermediate Fixed Income Fund ("MH/KP Intermediate
Income Fund"), a series of Mitchell Hutchins/Kidder, Peabody Investment Trust
("MH/KP Trust"), and pursuant to an Agreement and Plan of Reorganization and
Dissolution between PW Trust, on behalf of PW U.S. Government Income Fund and
Mitchell Hutchins/Kidder, Peabody Government Income Fund, Inc. ("MH/KP
Government Income Fund") ("Corporation"), (each a "Plan," and collectively, the
"Plans").
Under the Plans, PW U.S. Government Income Fund would acquire the assets
of each of MH/KP Intermediate Income Fund and MH/KP Government Income Fund (each
an "Acquired Fund," and collectively, the "Acquired Funds") in exchange for the
Shares and the assumption by PW U.S. Government Income Fund of the Acquired
Funds' liabilities. In connection with the Plans, the PW Trust is about to file
a Registration Statement on Form N-14 (the "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
each Trust's Declaration of Trust and By-Laws, the Corporation's Articles of
Incorporation and By-Laws, minutes of meetings of each Trust's board of
trustees, and the Corporation's board of directors, the Plans, 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 N-14 may be issued in accordance with the Plan
and each Trust's Declaration of Trust and By-Laws, and the Corporation's
Articles of Incorporation and By-Laws, subject to compliance with the 1933 Act,
the Investment Company Act of 1940, as amended, and applicable state laws
regulating the distribution of securities, and when so issued, those Shares will
be legally issued, fully paid and non-assessable.
Each Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust or a
series of the Trust ("Series"). Each 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. Each Trust's
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
PW 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/ Susan M. Casey
Susan M. Casey
Exhibit 12(a)
[Kirkpatrick & Lockhart LLP Letterhead]
August 11, 1995
PaineWebber Managed Investments Trust
1285 Avenue of the Americas
New York, NY 10019
Ladies and Gentlemen:
PaineWebber Managed Investments Trust ("PW Trust"), on behalf of
PaineWebber U.S. Government Income 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
Mitchell Hutchins/Kidder, Peabody Intermediate Fixed Income Fund ("Target"), a
series of Mitchell Hutchins/Kidder, Peabody Investment Trust ("MH/KP Trust"),1/
pursuant to an Agreement and Plan of Reorganization and Termination between them
dated as of August 8, 1995 ("Plan"), attached as an exhibit to the
prospectus/proxy statement to be furnished in connection with the solicitation
of proxies by MH/KP Trust's board of trustees for use at a special meeting of
Target shareholders ("Special Meeting") to be held on October 16, 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 transaction 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),
----------
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 MH/KP
Trust are referred to herein individually either by such names or as an
"Investment Company" and collectively as the "Investment Companies."
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").
(2) that Target, the Shareholders, and Acquiring Fund will recognize no
gain or loss upon the Reorganization, and
(3) regarding the basis and holding period after the Reorganization of
the transferred assets and the shares of Acquiring Fund issued pursuant thereto.
In rendering this opinion, we have examined (1) Target's currently
effective prospectus dated December 29, 1994, as supplemented June 22, 1995, and
statement of additional information ("SAI") dated December 29, 1994, and
Acquiring Fund's currently effective prospectus and SAI, both dated April 1,
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 August 31, 1984. MH/KP Trust is a
Massachusetts business trust formed pursuant to a Declaration of Trust dated
March 28, 1991; Target commenced operations as a series thereof on March 12,
1992. Each Investment Company is registered with the SEC as an open-end
management investment company under the Investment Company Act of 1940 ("1940
Act"). Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly
owned subsidiary of PaineWebber Incorporated, serves as administrator to each
Fund, investment manager to Target, and investment adviser to Acquiring Fund and
is the distributor of each Fund's shares.
Target currently offers for sale three classes of shares, designated
Class A, Class B, and Class C shares ("Class A Target Shares," "Class B Target
Shares," and "Class C Target Shares," respectively). Apart from differences in
certain ancillary class-specific expenses, these classes differ only with
respect to the sales charges imposed on the purchase of shares and the fees
("12b-1 fees") payable by each class pursuant to plans adopted under Rule 12b-1
promulgated under the 1940 Act.
Acquiring Fund's shares are divided into four classes, designated Class
A, Class B, Class C, and Class D shares ("Class A Acquiring Fund Shares," "Class
B Acquiring Fund Shares," "Class C Acquiring Fund Shares," and "Class D
Acquiring Fund Shares," respectively). Except for possible differences with
respect to the allocation of class-specific expenses other than 12b-1 fees,
these classes differ only with respect to the sales charges imposed on the
purchase of shares and the 12b-1 fees payable by each class. Only Classes A, C,
and D Acquiring Fund Shares are involved in the Reorganization.
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 October 20, 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 and/or other distribution 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 realized net capital
gain, if any, for the current taxable year through the Effective Time.
The Funds' investment objectives, which are generally similar, and their
investment policies are described in the Proxy and their respective prospectuses
and SAIs. Unlike Acquiring Fund, however, Target may invest in corporate debt;
to facilitate the Reorganization, PW Trust's board of trustees has approved a
change in Acquiring Fund's investment policies to permit that Fund to invest up
to 5% of its total assets in corporate debt. Although there are some
differences in the Funds' objectives and policies, it is not expected that
Acquiring Fund will revise them further following the Reorganization to reflect
those of Target. If the Reorganization is approved, however, Target will sell
any assets that are inconsistent with Acquiring Fund's investment policies prior
to the Effective Time, and the proceeds thereof will be held in temporary
investments or reinvested in assets that qualify to be held by Acquiring Fund.
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 (i) Class A Acquiring Fund
Shares determined by dividing the net value of Target ("Target Value")
attributable to the Class A Target Shares by the net asset value ("NAV") of a
Class A Acquiring Fund Share, (ii) Class D Acquiring Fund Shares determined by
dividing the Target Value attributable to the Class B Target Shares by the NAV
of a Class D Acquiring Fund Share, and (iii) Class C Acquiring Fund Shares
determined by dividing the Target Value attributable to the Class C Target
Shares by the NAV of a Class C 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, by class. 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 MH/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;
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 Shareholders will pay their own expenses, if any,
incurred in connection with the Reorganization;
4. Immediately following consummation of the Reorganization,
Acquiring Fund will hold substantially the same assets and be subject to
substantially the same liabilities that Target held or was subject to
immediately prior thereto, plus any liabilities and expenses of the parties
incurred in connection with the Reorganization;
5. The fair market value on a going concern basis of the Assets
will equal or exceed the Liabilities to be assumed by Acquiring Fund and those
to which the Assets are subject;
6. There is no intercompany indebtedness between the Funds that
was issued or acquired, or will be settled, at a discount;
7. Pursuant to the Reorganization, Target will transfer to
Acquiring Fund, and Acquiring Fund will acquire, at least 90% of the fair market
value of the net assets, and at least 70% of the fair market value of the gross
assets, held by Target immediately before the Reorganization. For the purposes
of this representation, any amounts used by Target to pay its Reorganization
expenses and redemptions and distributions made by it immediately before the
Reorganization (except for (a) distributions made to conform to its policy of
distributing all or substantially all of its income and gains to avoid the
obligation to pay federal income tax and/or the excise tax under section 4982
and (b) redemptions not made as part of the Reorganization) will be included as
assets thereof held immediately before the Reorganization;
8. None of the compensation received by any Shareholder who is
an employee of Target will be separate consideration for, or allocable to, any
of the Target Shares held by such Shareholder-employee; none of the Acquiring
Fund Shares received by any such Shareholder-employee will be separate
consideration for, or allocable to, any employment agreement; and the
consideration paid to any such Shareholder-employee will be for services
actually rendered and will be commensurate with amounts paid to third parties
bargaining at arm's-length for similar services; and
9. Immediately after the Reorganization, the Shareholders will
not own shares constituting "control" of Acquiring Fund within the meaning of
section 304(c).
MH/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 accumulated in any taxable year in which the
provisions of Subchapter M did not apply to it;
2. Acquiring Fund has no plan or intention to issue additional
Acquiring Fund Shares following the Reorganization except for shares issued in
the ordinary course of its business as a series of an open-end investment
company; nor does Acquiring Fund have any plan or intention to redeem or
otherwise reacquire any Acquiring Fund Shares issued to the Shareholders
pursuant to the Reorganization, other than through redemptions arising in the
ordinary course of that business;
3. Acquiring Fund (a) will actively continue Target's business
in substantially the same manner that Target conducted that business immediately
before the Reorganization, (b) has no plan or intention to sell or otherwise
dispose of any of the Assets, except for dispositions made in the ordinary
course of that business and dispositions necessary to maintain its status as a
RIC under Subchapter M, and (c) expects to retain substantially all the Assets
in the same form as it receives them in the Reorganization, unless and until
subsequent investment circumstances suggest the desirability of change or it
becomes necessary to make dispositions thereof to maintain such status;
4. There is no plan or intention for Acquiring Fund to be
dissolved or merged into another corporation or business trust or any "fund"
thereof (within the meaning of section 851(h)(2)) following the Reorganization;
5. Immediately after the Reorganization, (a) not more than 25%
of the value of Acquiring Fund's total assets (excluding cash, cash items, and
U.S. government securities) will be invested in the stock and securities of any
one issuer and (b) not more than 50% of the value of such assets will be
invested in the stock and securities of five or fewer issuers; and
6. Acquiring fund does not own, directly or indirectly, nor at
the Effective Time will it own, directly or indirectly, nor has it owned,
directly or indirectly, at any time during the past five years, any shares of
Target.
OPINION
Based solely on the facts set forth above, and conditioned on (1) the
Representations being true at the time of Closing and (2) the Reorganization
being consummated in accordance with the Plan, our opinion (as explained more
fully in the next section of this letter) is as follows:
1. Acquiring Fund's acquisition of the Assets solely in
exchange 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 solely in exchange 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 (section 1223(2));
5. A Shareholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for Acquiring Fund Shares
pursuant to the Reorganization (section 354(a)); and
6. A Shareholder's basis for the Acquiring Fund Shares to be
received by it in the Reorganization will be the same as the basis for its
Target Shares to be constructively surrendered in exchange for those Acquiring
Fund Shares (section 358(a)), and its holding period for those Acquiring Fund
Shares will include its holding period for those Target Shares, provided they
are held as capital assets by the Shareholder on the Closing Date (section
1223(1)).
The foregoing opinion (1) is based on, and is conditioned on the
continued applicability of, the provisions of the Code and the Regulations,
judicial decisions, and rulings and other pronouncements of the Internal Revenue
Service ("Service") in existence on the date hereof and (2) is applicable only
to the extent each Fund is solvent. We express no opinion about the tax
treatment of the transactions described herein if either Fund is insolvent.
ANALYSIS
I. The Reorganization Will Be a Reorganization under Section 368(a)(1)(C),
and Each Fund Will Be a Party to a Reorganization.
A. Each Fund Is a Separate Corporation.
A reorganization under section 368(a)(1)(C) (a "C reorganization")
involves the acquisition by one corporation, in exchange solely for all or a
part of its voting stock, of substantially all of the properties of another
corporation. For the transaction to qualify under that section, therefore, both
entities involved therein must be corporations (or associations taxable as
corporations). Each Investment Company, however, is a Massachusetts business
trust, not a corporation, and 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 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 each be a separate corporation, and each Fund's
shares will be treated as shares of corporate stock, for purposes of section
368(a)(1)(C).
B. Satisfaction of Section 368(a)(2)(F).
Under section 368(a)(2)(F), if two or more parties to a transaction
described in section 368(a)(1) (other than subparagraph (E) thereof) are
"investment companies," the transaction will not be considered a reorganization
with respect to any such investment company or its shareholders unless, among
other things, the investment company is a RIC or --
(1) not more than 25% of the value of its total assets is invested
in the stock and securities of any one issuer and
(2) not more than 50% of the value of its total assets is invested
in the stock and securities of five or fewer issuers.
Each Fund will meet the requirements for qualification and treatment as a RIC
for its respective current taxable year, and the foregoing percentage tests will
be satisfied by each Fund. Accordingly, we believe that section 368(a)(2)(F)
will not cause the Reorganization to fail to qualify as a C reorganization with
respect to either Fund.
C. Transfer of "Substantially All" of the Properties.
For an acquisition to qualify as a C reorganization, the acquiring
corporation must acquire "substantially all of the properties" of the transferor
corporation solely in exchange for all or part of the acquiring corporation's
stock. For purposes of issuing private letter rulings, the Service considers
the transfer of at least 70% of the transferor's gross assets, and at least 90%
of its net assets, held immediately before the reorganization to satisfy the
"substantially all" requirement. Rev. Proc. 77-37, 1977-2 C.B. 568. The
Reorganization will involve such a transfer. Accordingly, we believe that the
Reorganization will involve the transfer to Acquiring Fund of substantially all
of Target's properties.
D. Qualifying Consideration.
For an acquisition to qualify as a C reorganization, the acquiring
corporation must acquire at least 80% (by fair market value) of the transferor's
property solely in exchange for voting stock. Section 368(a)(2)(B)(iii). The
assumption of liabilities by the acquiring corporation or its acquisition of
property subject to liabilities normally are disregarded (section 368(a)(1)(C)),
but the amount of any such liabilities will be treated as money paid for the
transferor's property if the acquiring corporation exchanges any money or
property (other than its voting stock) therefor. Section 368(a)(2)(B). Because
Acquiring Fund will exchange only the Acquiring Fund Shares, and no money or
other property, for the Assets, we believe that the Reorganization will satisfy
the solely-for-voting-stock requirement to qualify as a C reorganization.
E. Requirements of Continuity.
Treasury Regulation section 1.368-1(b) sets forth two prerequisites to a
valid reorganization: (1) a continuity of the business enterprise under the
modified corporate form ("continuity of business") and (2) a continuity of
interest therein on the part of those persons who, directly or indirectly, were
the owners of the enterprise prior to the reorganization ("continuity of
interest").
1. Continuity of Business.
The continuity of business enterprise test as set forth in Treas. Reg.
Section 1.368-1(d)(2) requires that the acquiring corporation must either (i)
continue the acquired corporation's historic business ("business continuity") or
(ii) use a significant portion of the acquired corporation's historic business
assets in a business ("asset continuity").
While there is no authority that deals directly with the requirement of
continuity of business in the context of a transaction such as the
Reorganization, Rev. Rul. 87-76, 1987-2 C.B. 84, deals with a somewhat similar
situation. In that ruling, P was a RIC that invested exclusively in municipal
securities. P acquired the assets of T in exchange for P common stock in a
transaction that was intended to qualify as a C reorganization. Prior to the
exchange, T sold its entire portfolio of corporate securities and purchased a
portfolio of municipal bonds. The Service held that this transaction did not
qualify as a reorganization for the following reasons: (1) because T had sold
its historic assets prior to the exchange, there was no asset continuity; and
(2) the failure of P to engage in the business of investing in corporate
securities after the exchange caused the transaction to lack business continuity
as well.
The Funds' investment objectives are generally similar, and their
investment policies are 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. Accordingly, there will be asset continuity as
well.
For all the foregoing reasons, we believe that the Reorganization will
meet the continuity of business requirement.
2. Continuity of Interest.
For purposes of issuing private letter rulings, the Service considers
the continuity of interest requirement of Treas. Reg. Section 1.368-1(b)
satisfied if ownership in an acquiring corporation on the part of a transferor
corporation's former shareholders is equal in value to at least 50% of the value
of all the formerly outstanding shares of the transferor corporation. Rev.
Proc. 77-37, supra; but see Rev. Rul. 56-345, 1956-2 C.B. 206 (continuity of
interest was held to exist in a reorganization of two RICs where immediately
after the reorganization 26% of the shares were redeemed in order to allow
investment in a third RIC); also see Reef Corp. v. Commissioner, 368 F.2d 125
(5th Cir. 1966), cert. denied, 386 U.S. 1018 (1967) (a redemption of 48% of a
transferor corporation's stock was not a sufficient shift in proprietary
interest to disqualify a transaction as a reorganization under section
368(a)(2)(F) ("F Reorganization"), even though only 52% of the transferor's
shareholders would hold all the transferee's stock); Aetna Casualty and Surety
Co. v. U.S., 568 F.2d 811, 822-23 (2d Cir. 1976) (redemption of a 38.39%
minority interest did not prevent a transaction from qualifying as an F
Reorganization); Rev. Rul. 61-156, 1961-2 C.B. 62 (a transaction qualified as an
F Reorganization even though the transferor's shareholders acquired only 45% of
the transferee's stock, while the remaining 55% of that stock was issued to new
shareholders in a public underwriting immediately after the transfer).
No minimum holding period for shares of an acquiring corporation is
imposed under the Code on the acquired corporation's shareholders. Rev. Rul.
66-23, 1966-1 C.B. 67, provides generally that "unrestricted rights of ownership
for a period of time sufficient to warrant the conclusion that such ownership is
definite and substantial" will suffice and that "ordinarily, the Service will
treat five years of unrestricted . . . ownership as a sufficient period" for
continuity of interest purposes.
A preconceived plan or arrangement by or among an acquired corporation's
shareholders to dispose of more than 50% of an acquiring corporation's shares
could be problematic. Shareholders with no such preconceived plan or
arrangement, however, are basically free to sell any part of the shares received
by them in the reorganization without fear of breaking continuity of interest,
because the subsequent sale will be treated as an independent transaction from
the reorganization.
Neither Fund (1) is aware of any plan or intention of Shareholders to
dispose of any portion of the Acquiring Fund Shares to be received by them in
the Reorganization or (2) anticipates dispositions thereof at the time of or
soon after the Reorganization to exceed the usual rate and frequency of
dispositions of shares of Target as a series of an open-end investment company.
Consequently, each Fund expects that the percentage of Shareholder interests, if
any, that will be disposed of as a result of or at the time of the
Reorganization will be de minimis. Accordingly, we believe that the
Reorganization will meet the continuity of interest requirement of Treas. Reg.
Section 1.368-1(b).
F. Distribution by Target.
Section 368(a)(2)(G)(i) provides that a transaction will not qualify as
a C reorganization unless the corporation whose properties are acquired
distributes the stock it receives and its other property in pursuance of the
plan of reorganization. Under the Plan -- which we believe constitutes a "plan
of reorganization" within the meaning of Treas. Reg. Section 1.368-2(g) --
Target will distribute all the Acquiring Fund Shares to its shareholders in
constructive exchange for their Target Shares; as soon as is reasonably
practicable thereafter, Target will be 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. Section Section 1.368-
1(b), -1(c), and -2(g) (the last of which provides that, to qualify as a
reorganization, a transaction must be "undertaken for reasons germane to the
continuance of the business of a corporation a party to the reorganization").
Under that doctrine, a transaction must have a bona fide business purpose (and
not a purpose to avoid federal income tax) to constitute a valid reorganization.
The substantial business purposes of the Reorganization are described in the
Proxy. Accordingly, we believe that the Reorganization is being undertaken for
bona fide business purposes (and not a purpose to avoid federal income tax) and
therefore meets the requirements of the business purpose doctrine.
For all the foregoing reasons, we believe that the Reorganization will
constitute a reorganization within the meaning of section 368(a)(1)(C).
H. Both Funds are Parties to the Reorganization.
Section 368(b)(2) and Treas. Reg. Section 1.368-1(f) provide that if
one corporation transfers substantially all of its properties to a second
corporation in exchange for all or a part of the voting stock of the second
corporation, then both corporations are parties to a reorganization. Target is
transferring substantially all of its properties to Acquiring Fund in exchange
for Acquiring Fund Shares. Accordingly, we believe that each Fund will be "a
party to a reorganization."
II. No Gain or Loss Will Be Recognized to Target.
Under sections 361(a) and (c), no gain or loss will be recognized to a
corporation that is a party to a reorganization (1) on the exchange of property,
pursuant to the plan of reorganization, solely for stock or securities in
another corporate party to the reorganization or (2) on the distribution to its
shareholders, pursuant to that plan, of stock in such other corporation that was
received by the distributing corporation in the exchange. (Such a distribution
is required by section 368(a)(2)(G)(i) for a reorganization to qualify as a C
reorganization.) Section 361(c)(4) provides that specified provisions requiring
recognition of gain on certain distributions shall not apply to a distribution
described in (2) above.
Section 357(a) provides in pertinent part that, except as provided in
section 357(b), if a taxpayer receives property that would be permitted to be
received under section 361 without recognition of gain if it were the sole
consideration and, as part of the consideration, another party to the exchange
assumes a liability of the taxpayer or acquires from the taxpayer property
subject to a liability, then that assumption or acquisition shall not be treated
as money or other property and shall not prevent the exchange from being within
section 361. Section 357(b) applies where the principal purpose of the
assumption or acquisition was a tax avoidance purpose or not a bona fide
business purpose.
As noted above, the Reorganization will constitute a C reorganization,
each Fund will be a party to a reorganization, and the Plan constitutes a plan
of reorganization. Target will exchange the Assets solely for the Acquiring
Fund Shares and Acquiring Fund's assumption of the Liabilities and then will be
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 (including certain options, futures, and forward contracts included
in the Assets) as to which any unrealized gain or loss is required to be
recognized for federal income tax purposes at the end of a taxable year (or on
the termination or transfer thereof) under a mark-to-market system of
accounting.
III. No Gain or Loss Will Be Recognized to Acquiring Fund.
Section 1032(a) provides that no gain or loss will be recognized to a
corporation on the receipt by it of money or other property in exchange for its
shares. Acquiring Fund will issue the Acquiring Fund Shares to Target in
exchange for the Assets, which consist of money and securities. Accordingly, we
believe that no gain or loss will be recognized to Acquiring Fund on the
Reorganization.
IV. Acquiring Fund's Basis for the Assets Will Be a Carryover Basis, and Its
Holding Period Will Include Target's Holding Period.
Section 362(b) provides that property acquired by a corporation in
connection with a reorganization will have the same basis in that corporation's
hands as the basis of the property in the transferor corporation's hands
immediately before the exchange, increased by any gain recognized to the
transferor on the transfer. As noted above, the Reorganization will constitute
a C reorganization and Target will recognize no gain on the Reorganization under
section 361(a). Accordingly, we believe that Acquiring Fund's basis for the
Assets will be the same as the basis thereof in Target's hands immediately
before the Reorganization.
Section 1223(2) provides that where property acquired in an exchange has
a carryover basis, the property will have a holding period in the hands of the
acquiror that includes the holding period of the property in the transferor's
hands. As stated above, Acquiring Fund's basis for the Assets will be a
carryover basis. Accordingly, we believe that Acquiring Fund's holding period
for the Assets will include Target's holding period therefor.
V. No Gain or Loss Will Be Recognized to a Shareholder.
Under section 354(a), no gain or loss is recognized to a shareholder who
exchanges shares for other shares pursuant to a plan of reorganization, where
the shares exchanged, as well as the shares received, are those of a corporation
that is a party to the reorganization. As stated above, the Reorganization will
constitute a C reorganization, the Plan constitutes a plan of reorganization,
and each Fund will be a party to a reorganization. Accordingly, we believe that
under section 354 a Shareholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for Acquiring Fund Shares
pursuant to the Reorganization.
VI. A Shareholder's Basis for Acquiring Fund Shares Will Be a Substituted
Basis, and its Holding Period therefor Will Include its Holding Period for its
Target Shares.
Section 358(a)(1) provides, in part, that in the case of an exchange to
which section 354 applies, the basis of any shares received in the transaction
without the recognition of gain is the same as the basis of the property
transferred in exchange therefor, decreased by, among other things, the fair
market value of any other property and the amount of any money received in the
transaction and increased by the amount of any gain recognized on the exchange
by the shareholder.
As noted above, the Reorganization will constitute a C reorganization
and under section 354 no gain or loss will be recognized to a Shareholder on the
constructive exchange of its Target Shares for Acquiring Fund Shares in the
Reorganization. No property will be distributed to the Shareholders other than
the Acquiring Fund Shares, and no money will be distributed to them pursuant to
the Reorganization. Accordingly, we believe that a Shareholder's basis for the
Acquiring Fund Shares to be received by it in the Reorganization will be the
same as the basis for its Target Shares to be constructively surrendered in
exchange for those Acquiring Fund Shares.
Under section 1223(1), the holding period of property received in an
exchange includes the holding period of the property exchanged therefor if the
acquired property has, for the purpose of determining gain or loss, the same
basis in the holder's hands as the property exchanged therefor ("substituted
basis") and such property was a capital asset. As noted above, a Shareholder
will have a substituted basis for the Acquiring Fund Shares it receives in the
Reorganization; accordingly, provided that the Shareholder held its Target
Shares as capital assets on the Closing Date, we believe its holding period for
those Acquiring Fund Shares will include its holding period for those Target
Shares.
We hereby consent to this opinion accompanying the Registration
Statement and to the references to our firm under the captions "Approval of the
Reorganizations -- Synopsis -- Federal Income Tax Consequences of the
Reorganizations" and "The Proposed Transactions -- Federal Income Tax
Considerations" in the Proxy.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By:
Theodore L. Press
Exhibit 12(b)
[Kirkpatrick & Lockhart LLP Letterhead]
August 11, 1995
PaineWebber Managed Investments Trust
1285 Avenue of the Americas
New York, NY 10019
Ladies and Gentlemen:
PaineWebber Managed Investments Trust ("PW Trust"), on behalf of
PaineWebber U.S. Government Income 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
Mitchell Hutchins/Kidder, Peabody Government Income Fund, Inc. ("Target"),1/
pursuant to an Agreement and Plan of Reorganization and Dissolution between them
dated as of August 8, 1995 ("Plan"), attached as an exhibit to the
prospectus/proxy statement to be furnished in connection with the solicitation
of proxies by Target's board of directors for use at a special meeting of Target
shareholders ("Special Meeting") to be held on October 16, 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 common stock in Target ("Target Shares") (such
transaction sometimes being referred to herein as the "Reorganization"), will
constitute a "reorganization" within the meaning of section 368(a)(1)(C)2/ and
that each Fund will be a "party to a reorganization" within the meaning of
section 368(b),
----------
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 Target
are referred to herein individually either by such names or as an "Investment
Company" and collectively as the "Investment Companies."
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").
(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
May 31, 1995), and Acquiring Fund's currently effective prospectus and SAI, both
dated April 1, 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 August 31, 1984. Target is a
Maryland corporation and commenced operations on November 22, 1985. Each
Investment Company is registered with the SEC as an open-end management
investment company under the Investment Company Act of 1940 ("1940 Act").
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
subsidiary of PaineWebber Incorporated, serves as administrator to each Fund,
investment manager to Target, and investment adviser to Acquiring Fund and is
the distributor of each Fund's shares.
Target currently offers for sale three classes of shares, designated
Class A, Class B, and Class C shares ("Class A Target Shares," "Class B Target
Shares," and "Class C Target Shares," respectively). Apart from differences in
certain ancillary class-specific expenses, these classes differ only with
respect to the sales charges imposed on the purchase of shares and the fees
("12b-1 fees") payable by each class pursuant to plans adopted under Rule 12b-1
promulgated under the 1940 Act.
Acquiring Fund's shares are divided into four classes, designated Class
A, Class B, Class C, and Class D shares ("Class A Acquiring Fund Shares," "Class
B Acquiring Fund Shares," "Class C Acquiring Fund Shares," and "Class D
Acquiring Fund Shares," respectively). Except for possible differences with
respect to the allocation of class-specific expenses other than 12b-1 fees,
these classes differ only with respect to the sales charges imposed on the
purchase of shares and the 12b-1 fees payable by each class. Only Classes A, C,
and D Acquiring Fund Shares are involved in the Reorganization.
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 October 20, 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 and/or other distribution 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 realized net capital
gain, if any, for the current taxable year through the Effective Time.
The Funds' investment objectives, which are generally similar, and their
investment policies are described in the Proxy and their respective prospectuses
and SAIs. Although there are some differences in the Funds' objectives and
policies, it is not expected that Acquiring Fund will revise them following the
Reorganization to reflect those of Target. If the Reorganization is approved,
however, Target will sell any assets that are inconsistent with Acquiring Fund's
investment policies prior to the Effective Time, and the proceeds thereof will
be held in temporary investments or reinvested in assets that qualify to be held
by Acquiring Fund.
The Reorganization was recommended by Mitchell Hutchins to each
Investment Company's board of trustees/directors (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 (i) Class A Acquiring Fund
Shares determined by dividing the net value of Target ("Target Value")
attributable to the Class A Target Shares by the net asset value ("NAV") of a
Class A Acquiring Fund Share, (ii) Class D Acquiring Fund Shares determined by
dividing the Target Value attributable to the Class B Target Shares by the NAV
of a Class D Acquiring Fund Share, and (iii) Class C Acquiring Fund Shares
determined by dividing the Target Value attributable to the Class C Target
Shares by the NAV of a Class C 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 dissolution 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, by class. All outstanding
Target Shares, including any represented by certificates, simultaneously will be
canceled on Target's share transfer records.
REPRESENTATIONS
The representations enumerated below have been made to us by appropriate
officers of each Investment Company.
Each of PW Trust, on behalf of Acquiring Fund, and Target has
represented and warranted to us as follows:
1. The fair market value of the Acquiring Fund Shares, when
received by the Shareholders, will be approximately equal to the fair market
value of their Target Shares constructively surrendered in exchange therefor;
2. Its management (a) is unaware of any plan or intention of
Shareholders to redeem or otherwise dispose of any portion of the Acquiring Fund
Shares to be received by them in the Reorganization and (b) does not anticipate
dispositions of those Acquiring Fund Shares at the time of or soon after the
Reorganization to exceed the usual rate and frequency of dispositions of shares
of Target as an open-end investment company. Consequently, its management
expects that the percentage of Shareholder interests, if any, that will be
disposed of as a result of or at the time of the Reorganization will be de
minimis. Nor does its management anticipate that there will be extraordinary
redemptions of Acquiring Fund Shares immediately following the Reorganization;
3. The Shareholders will pay their own expenses, if any,
incurred in connection with the Reorganization;
4. Immediately following consummation of the Reorganization,
Acquiring Fund will hold substantially the same assets and be subject to
substantially the same liabilities that Target held or was subject to
immediately prior thereto, plus any liabilities and expenses of the parties
incurred in connection with the Reorganization;
5. The fair market value on a going concern basis of the Assets
will equal or exceed the Liabilities to be assumed by Acquiring Fund and those
to which the Assets are subject;
6. There is no intercompany indebtedness between the Funds that
was issued or acquired, or will be settled, at a discount;
7. Pursuant to the Reorganization, Target will transfer to
Acquiring Fund, and Acquiring Fund will acquire, at least 90% of the fair market
value of the net assets, and at least 70% of the fair market value of the gross
assets, held by Target immediately before the Reorganization. For the purposes
of this representation, any amounts used by Target to pay its Reorganization
expenses and redemptions and distributions made by it immediately before the
Reorganization (except for (a) distributions made to conform to its policy of
distributing all or substantially all of its income and gains to avoid the
obligation to pay federal income tax and/or the excise tax under section 4982
and (b) redemptions not made as part of the Reorganization) will be included as
assets thereof held immediately before the Reorganization;
8. None of the compensation received by any Shareholder who is
an employee of Target will be separate consideration for, or allocable to, any
of the Target Shares held by such Shareholder-employee; none of the Acquiring
Fund Shares received by any such Shareholder-employee will be separate
consideration for, or allocable to, any employment agreement; and the
consideration paid to any such Shareholder-employee will be for services
actually rendered and will be commensurate with amounts paid to third parties
bargaining at arm's-length for similar services; and
9. Immediately after the Reorganization, the Shareholders will
not own shares constituting "control" of Acquiring Fund within the meaning of
section 304(c).
Target also has represented and warranted to us as follows:
1. The Liabilities were incurred by Target in the ordinary
course of its business;
2. Target qualified for treatment as a regulated investment
company ("RIC") under Subchapter M of the Code ("Subchapter M") for each past
taxable year since it commenced operations and will continue to meet all the
requirements for such qualification for its current taxable year; and it has no
earnings and profits accumulated in any taxable year in which the provisions of
Subchapter M did not apply to it;
3. Target is not under the jurisdiction of a court in a
proceeding under Title 11 of the United States Code or similar case within the
meaning of section 368(a)(3)(A);
4. Not more than 25% of the value of Target's total assets
(excluding cash, cash items, and U.S. government securities) is invested in the
stock and securities of any one issuer, and not more than 50% of the value of
such assets is invested in the stock and securities of five or fewer issuers;
and
5. Target will be dissolved as soon as reasonably practicable
after the Reorganization, but in all events within six months after the
Effective Time.
PW Trust also has represented and warranted to us on behalf of Acquiring
Fund as follows:
1. Acquiring Fund is a "fund" as defined in section 851(h)(2);
it qualified for treatment as a RIC under Subchapter M for each past taxable
year since it commenced operations and will continue to meet all the
requirements for such qualification for its current taxable year; Acquiring Fund
intends to continue to meet all such requirements for the next taxable year; and
it has no earnings and profits accumulated in any taxable year in which the
provisions of Subchapter M did not apply to it;
2. Acquiring Fund has no plan or intention to issue additional
Acquiring Fund Shares following the Reorganization except for shares issued in
the ordinary course of its business as a series of an open-end investment
company; nor does Acquiring Fund have any plan or intention to redeem or
otherwise reacquire any Acquiring Fund Shares issued to the Shareholders
pursuant to the Reorganization, other than through redemptions arising in the
ordinary course of that business;
3. Acquiring Fund (a) will actively continue Target's business
in substantially the same manner that Target conducted that business immediately
before the Reorganization, (b) has no plan or intention to sell or otherwise
dispose of any of the Assets, except for dispositions made in the ordinary
course of that business and dispositions necessary to maintain its status as a
RIC under Subchapter M, and (c) expects to retain substantially all the Assets
in the same form as it receives them in the Reorganization, unless and until
subsequent investment circumstances suggest the desirability of change or it
becomes necessary to make dispositions thereof to maintain such status;
4. There is no plan or intention for Acquiring Fund to be
dissolved or merged into another corporation or business trust or any "fund"
thereof (within the meaning of section 851(h)(2)) following the Reorganization;
5. Immediately after the Reorganization, (a) not more than 25%
of the value of Acquiring Fund's total assets (excluding cash, cash items, and
U.S. government securities) will be invested in the stock and securities of any
one issuer and (b) not more than 50% of the value of such assets will be
invested in the stock and securities of five or fewer issuers; and
6. Acquiring fund does not own, directly or indirectly, nor at
the Effective Time will it own, directly or indirectly, nor has it owned,
directly or indirectly, at any time during the past five years, any shares of
Target.
OPINION
Based solely on the facts set forth above, and conditioned on (1) the
Representations being true at the time of Closing and (2) the Reorganization
being consummated in accordance with the Plan, our opinion (as explained more
fully in the next section of this letter) is as follows:
1. Acquiring Fund's acquisition of the Assets solely in
exchange 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 solely in exchange 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 (section 1223(2));
5. A Shareholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for Acquiring Fund Shares
pursuant to the Reorganization (section 354(a)); and
6. A Shareholder's basis for the Acquiring Fund Shares to be
received by it in the Reorganization will be the same as the basis for its
Target Shares to be constructively surrendered in exchange for those Acquiring
Fund Shares (section 358(a)), and its holding period for those Acquiring Fund
Shares will include its holding period for those Target Shares, provided they
are held as capital assets by the Shareholder on the Closing Date (section
1223(1)).
The foregoing opinion (1) is based on, and is conditioned on the
continued applicability of, the provisions of the Code and the Regulations,
judicial decisions, and rulings and other pronouncements of the Internal Revenue
Service ("Service") in existence on the date hereof and (2) is applicable only
to the extent each Fund is solvent. We express no opinion about the tax
treatment of the transactions described herein if either Fund is insolvent.
ANALYSIS
I. The Reorganization Will Be a Reorganization under Section 368(a)(1)(C),
and Each Fund Will Be a Party to a Reorganization.
A. Acquiring 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). PW Trust, however, is a Massachusetts business trust, not a
corporation, and Acquiring Fund is a separate series of PW Trust.
Treasury Regulation section 301.7701-4(b) provides that certain
arrangements known as trusts (because legal title is conveyed to trustees for
the benefit of beneficiaries) will not be classified as trusts for purposes of
the Code because they are not simply arrangements to protect or conserve the
property for the beneficiaries. These "business or commercial trusts" are
created simply as devices to carry on profit-making businesses that normally
would have been carried on through corporations or partnerships. Treasury
Regulation section 301.7701-4(c) further provides that an "`investment' trust
will not be classified as a trust if there is a power under the trust agreement
to vary the investment of the certificate holders." See Commissioner v. North
American Bond Trust, 122 F.2d 545 (2d Cir. 1941), cert. denied, 314 U.S. 701
(1942).
Based on these criteria, PW Trust does not qualify as a trust for
federal income tax purposes. While PW Trust is an "investment trust," it does
not have a fixed pool of assets -- Acquiring Fund has been a managed portfolio
of securities, and its investment adviser has had the authority to buy and sell
securities for it. PW Trust is not simply an arrangement to protect or conserve
property for the beneficiaries, but 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 PW Trust. See Hecht v. Malley, 265
U.S. 144 (1924). Accordingly, we believe that PW Trust will be treated as a
corporation for federal income tax purposes.
PW Trust as such, however, is not participating in the Reorganization,
but rather a series thereof is the participant. Ordinarily, a transaction
involving a segregated pool of assets (such as Acquiring Fund) could not qualify
as a reorganization, because the pool would not be a corporation. Under section
851(h), however, Acquiring Fund is treated as a separate corporation for all
purposes of the Code save the definitional requirement of section 851(a) (which
is satisfied by PW Trust). Thus, we believe that Acquiring Fund will be a
separate corporation, and its shares will be treated as shares of corporate
stock, for purposes of section 368(a)(1)(C).
B. Satisfaction of Section 368(a)(2)(F).
Under section 368(a)(2)(F), if two or more parties to a transaction
described in section 368(a)(1) (other than subparagraph (E) thereof) are
"investment companies," the transaction will not be considered a reorganization
with respect to any such investment company or its shareholders unless, among
other things, the investment company is a RIC or --
(1) not more than 25% of the value of its total assets is invested
in the stock and securities of any one issuer and
(2) not more than 50% of the value of its total assets is invested
in the stock and securities of five or fewer issuers.
Each Fund will meet the requirements for qualification and treatment as a RIC
for its respective current taxable year, and the foregoing percentage tests will
be satisfied by each Fund. Accordingly, we believe that section 368(a)(2)(F)
will not cause the Reorganization to fail to qualify as a C reorganization with
respect to either Fund.
C. Transfer of "Substantially All" of the Properties.
For an acquisition to qualify as a C reorganization, the acquiring
corporation must acquire "substantially all of the properties" of the transferor
corporation solely in exchange for all or part of the acquiring corporation's
stock. For purposes of issuing private letter rulings, the Service considers
the transfer of at least 70% of the transferor's gross assets, and at least 90%
of its net assets, held immediately before the reorganization to satisfy the
"substantially all" requirement. Rev. Proc. 77-37, 1977-2 C.B. 568. The
Reorganization will involve such a transfer. Accordingly, we believe that the
Reorganization will involve the transfer to Acquiring Fund of substantially all
of Target's properties.
D. Qualifying Consideration.
For an acquisition to qualify as a C reorganization, the acquiring
corporation must acquire at least 80% (by fair market value) of the transferor's
property solely in exchange for voting stock. Section 368(a)(2)(B)(iii). The
assumption of liabilities by the acquiring corporation or its acquisition of
property subject to liabilities normally are disregarded (section 368(a)(1)(C)),
but the amount of any such liabilities will be treated as money paid for the
transferor's property if the acquiring corporation exchanges any money or
property (other than its voting stock) therefor. Section 368(a)(2)(B). Because
Acquiring Fund will exchange only the Acquiring Fund Shares, and no money or
other property, for the Assets, we believe that the Reorganization will satisfy
the solely-for-voting-stock requirement to qualify as a C reorganization.
E. Requirements of Continuity.
Treasury Regulation section 1.368-1(b) sets forth two prerequisites to a
valid reorganization: (1) a continuity of the business enterprise under the
modified corporate form ("continuity of business") and (2) a continuity of
interest therein on the part of those persons who, directly or indirectly, were
the owners of the enterprise prior to the reorganization ("continuity of
interest").
1. Continuity of Business.
The continuity of business enterprise test as set forth in Treas. Reg.
Section 1.368-1(d)(2) requires that the acquiring corporation must either (i)
continue the acquired corporation's historic business ("business continuity") or
(ii) use a significant portion of the acquired corporation's historic business
assets in a business ("asset continuity").
While there is no authority that deals directly with the requirement of
continuity of business in the context of a transaction such as the
Reorganization, Rev. Rul. 87-76, 1987-2 C.B. 84, deals with a somewhat similar
situation. In that ruling, P was a RIC that invested exclusively in municipal
securities. P acquired the assets of T in exchange for P common stock in a
transaction that was intended to qualify as a C reorganization. Prior to the
exchange, T sold its entire portfolio of corporate securities and purchased a
portfolio of municipal bonds. The Service held that this transaction did not
qualify as a reorganization for the following reasons: (1) because T had sold
its historic assets prior to the exchange, there was no asset continuity; and
(2) the failure of P to engage in the business of investing in corporate
securities after the exchange caused the transaction to lack business continuity
as well.
The Funds' investment objectives are generally similar and their
investment policies are 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. Accordingly, there will be asset continuity as
well.
For all the foregoing reasons, we believe that the Reorganization will
meet the continuity of business requirement.
2. Continuity of Interest.
For purposes of issuing private letter rulings, the Service considers
the continuity of interest requirement of Treas. Reg. Section 1.368-1(b)
satisfied if ownership in an acquiring corporation on the part of a transferor
corporation's former shareholders is equal in value to at least 50% of the value
of all the formerly outstanding shares of the transferor corporation. Rev.
Proc. 77-37, supra; but see Rev. Rul. 56-345, 1956-2 C.B. 206 (continuity of
interest was held to exist in a reorganization of two RICs where immediately
after the reorganization 26% of the shares were redeemed in order to allow
investment in a third RIC); also see Reef Corp. v. Commissioner, 368 F.2d 125
(5th Cir. 1966), cert. denied, 386 U.S. 1018 (1967) (a redemption of 48% of a
transferor corporation's stock was not a sufficient shift in proprietary
interest to disqualify a transaction as a reorganization under section
368(a)(2)(F) ("F Reorganization"), even though only 52% of the transferor's
shareholders would hold all the transferee's stock); Aetna Casualty and Surety
Co. v. U.S., 568 F.2d 811, 822-23 (2d Cir. 1976) (redemption of a 38.39%
minority interest did not prevent a transaction from qualifying as an F
Reorganization); Rev. Rul. 61-156, 1961-2 C.B. 62 (a transaction qualified as an
F Reorganization even though the transferor's shareholders acquired only 45% of
the transferee's stock, while the remaining 55% of that stock was issued to new
shareholders in a public underwriting immediately after the transfer).
No minimum holding period for shares of an acquiring corporation is
imposed under the Code on the acquired corporation's shareholders. Rev. Rul.
66-23, 1966-1 C.B. 67, provides generally that "unrestricted rights of ownership
for a period of time sufficient to warrant the conclusion that such ownership is
definite and substantial" will suffice and that "ordinarily, the Service will
treat five years of unrestricted . . . ownership as a sufficient period" for
continuity of interest purposes.
A preconceived plan or arrangement by or among an acquired corporation's
shareholders to dispose of more than 50% of an acquiring corporation's shares
could be problematic. Shareholders with no such preconceived plan or
arrangement, however, are basically free to sell any part of the shares received
by them in the reorganization without fear of breaking continuity of interest,
because the subsequent sale will be treated as an independent transaction from
the reorganization.
Neither Fund (1) is aware of any plan or intention of Shareholders to
dispose of any portion of the Acquiring Fund Shares to be received by them in
the Reorganization or (2) anticipates dispositions thereof at the time of or
soon after the Reorganization to exceed the usual rate and frequency of
dispositions of shares of Target as an open-end investment company.
Consequently, each Fund expects that the percentage of Shareholder interests, if
any, that will be disposed of as a result of or at the time of the
Reorganization will be de minimis. Accordingly, we believe that the
Reorganization will meet the continuity of interest requirement of Treas. Reg.
Section 1.368-1(b).
F. Distribution by Target.
Section 368(a)(2)(G)(i) provides that a transaction will not qualify as
a C reorganization unless the corporation whose properties are acquired
distributes the stock it receives and its other property in pursuance of the
plan of reorganization. Under the Plan -- which we believe constitutes a "plan
of reorganization" within the meaning of Treas. Reg. Section 1.368-2(g) --
Target will distribute all the Acquiring Fund Shares to its shareholders in
constructive exchange for their Target Shares; as soon as is reasonably
practicable thereafter, Target will be dissolved. Accordingly, we believe that
the requirements of section 368(a)(2)(G)(i) will be satisfied.
G. Business Purpose.
All reorganizations must meet the judicially imposed requirements of the
"business purpose doctrine," which was established in Gregory v. Helvering, 293
U.S. 465 (1935), and is now set forth in Treas. Reg. Section Section 1.368-
1(b), -1(c), and -2(g) (the last of which provides that, to qualify as a
reorganization, a transaction must be "undertaken for reasons germane to the
continuance of the business of a corporation a party to the reorganization").
Under that doctrine, a transaction must have a bona fide business purpose (and
not a purpose to avoid federal income tax) to constitute a valid reorganization.
The substantial business purposes of the Reorganization are described in the
Proxy. Accordingly, we believe that the Reorganization is being undertaken for
bona fide business purposes (and not a purpose to avoid federal income tax) and
therefore meets the requirements of the business purpose doctrine.
For all the foregoing reasons, we believe that the Reorganization will
constitute a reorganization within the meaning of section 368(a)(1)(C).
H. Both Funds are Parties to the Reorganization.
Section 368(b)(2) and Treas. Reg. Section 1.368-1(f) provide that if
one corporation transfers substantially all of its properties to a second
corporation in exchange for all or a part of the voting stock of the second
corporation, then both corporations are parties to a reorganization. Target is
transferring substantially all of its properties to Acquiring Fund in exchange
for Acquiring Fund Shares. Accordingly, we believe that each Fund will be "a
party to a reorganization."
II. No Gain or Loss Will Be Recognized to Target.
Under sections 361(a) and (c), no gain or loss will be recognized to a
corporation that is a party to a reorganization (1) on the exchange of property,
pursuant to the plan of reorganization, solely for stock or securities in
another corporate party to the reorganization or (2) on the distribution to its
shareholders, pursuant to that plan, of stock in such other corporation that was
received by the distributing corporation in the exchange. (Such a distribution
is required by section 368(a)(2)(G)(i) for a reorganization to qualify as a C
reorganization.) Section 361(c)(4) provides that specified provisions requiring
recognition of gain on certain distributions shall not apply to a distribution
described in (2) above.
Section 357(a) provides in pertinent part that, except as provided in
section 357(b), if a taxpayer receives property that would be permitted to be
received under section 361 without recognition of gain if it were the sole
consideration and, as part of the consideration, another party to the exchange
assumes a liability of the taxpayer or acquires from the taxpayer property
subject to a liability, then that assumption or acquisition shall not be treated
as money or other property and shall not prevent the exchange from being within
section 361. Section 357(b) applies where the principal purpose of the
assumption or acquisition was a tax avoidance purpose or not a bona fide
business purpose.
As noted above, the Reorganization will constitute a C reorganization,
each Fund will be a party to a reorganization, and the Plan constitutes a plan
of reorganization. Target will exchange the Assets solely for the Acquiring
Fund Shares and Acquiring Fund's assumption of the Liabilities and then will
dissolve 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/
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.
----------
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 (including certain options, futures, and forward contracts included
in the Assets) 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.
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, wherethe
shares exchanged, as well as the shares received, are those of a corporation
that is a party to the reorganization. As stated above, the Reorganization will
constitute a C reorganization, the Plan constitutes a plan of reorganization,
and each Fund will be a party to a reorganization. Accordingly, we believe that
under section 354 a Shareholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for Acquiring Fund Shares
pursuant to the Reorganization.
VI. A Shareholder's Basis for Acquiring Fund Shares Will Be a Substituted
Basis, and its Holding Period therefor Will Include its Holding Period for its
Target Shares.
Section 358(a)(1) provides, in part, that in the case of an exchange to
which section 354 applies, the basis of any shares received in the transaction
without the recognition of gain is the same as the basis of the property
transferred in exchange therefor, decreased by, among other things, the fair
market value of any other property and the amount of any money received in the
transaction and increased by the amount of any gain recognized on the exchange
by the shareholder.
As noted above, the Reorganization will constitute a C reorganization
and under section 354 no gain or loss will be recognized to a Shareholder on the
constructive exchange of its Target Shares for Acquiring Fund Shares in the
Reorganization. No property will be distributed to the Shareholders other than
the Acquiring Fund Shares, and no money will be distributed to them pursuant to
the Reorganization. Accordingly, we believe that a Shareholder's basis for the
Acquiring Fund Shares to be received by it in the Reorganization will be the
same as the basis for its Target Shares to be constructively surrendered in
exchange for those Acquiring Fund Shares.
Under section 1223(1), the holding period of property received in an
exchange includes the holding period of the property exchanged therefor if the
acquired property has, for the purpose of determining gain or loss, the same
basis in the holder's hands as the property exchanged therefor ("substituted
basis") and such property was a capital asset. As noted above, a Shareholder
will have a substituted basis for the Acquiring Fund Shares it receives in the
Reorganization; accordingly, provided that the Shareholder held its Target
Shares as capital assets on the Closing Date, we believe its holding period for
those Acquiring Fund Shares will include its holding period for those Target
Shares.
We hereby consent to this opinion accompanying the Registration
Statement and to the references to our firm under the captions "Approval of the
Reorganizations -- Synopsis -- Federal Income Tax Consequences of the
Reorganizations" and "The Proposed Transactions -- Federal Income Tax
Considerations" in the Proxy.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By:
Theodore L. Press
Exhibit 12(c)
August 14, 1995
Mitchell Hutchins/Kidder, Peabody
Investment Trust, on behalf of
Mitchell Hutchins/Kidder, Peabody
Intermediate Fixed Income Fund
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
You have asked us for our opinion concerning certain federal income tax
consequences to (a) Mitchell Hutchins/Kidder, Peabody Intermediate Fixed Income
Fund (the "Acquired Fund"), a series of Mitchell Hutchins/Kidder, Peabody
Investment Trust, (b) PaineWebber U.S. Government Income Fund (the "Acquiring
Fund"), a series of PaineWebber Managed Investments Trust, and (c) holders of
shares of beneficial interest in the Acquired Fund (the "Acquired Fund
Shareholders") when the holders of Class A, Class B, and Class C shares of the
Acquired Fund receive Class A, Class D and Class C shares, respectively, of the
Acquiring Fund (all such shares of the Acquiring Fund referred to hereinafter as
the "Acquiring Fund Shares"), in liquidation of their interests in the Acquired
Fund pursuant to an acquisition by the Acquiring Fund of all or substantially
all of the assets of the Acquired Fund in exchange for the Acquiring Fund Shares
and the assumption by the Acquiring Fund of the liabilities of the Acquired Fund
and the subsequent liquidation of the Acquired Fund and distribution of the
Acquiring Fund Shares to the Acquired Fund Shareholders (the "Reorganization").
We have reviewed such documents and materials as we have considered
necessary for the purpose of rendering this opinion. In rendering this opinion,
we assume that such documents as yet unexecuted will, when executed, conform in
all material respects to the proposed forms of such documents that we have
examined. In addition, we assume the genuineness of all signatures, the capacity
of each party executing a document so to execute that document, the authenticity
of all documents submitted to us as originals and the conformity to original
documents of all documents submitted to us as certified or photostatic copies.
We have made inquiry as to the underlying facts which we considered to
be relevant to the conclusions set forth in this letter. The opinions expressed
in this letter are based upon certain factual statements relating to the
Acquired Fund and the Acquiring Fund set forth in the Registration Statement on
Form N-14 (the "Registration Statement") filed by PaineWebber Managed
Investments Trust, on behalf of the Acquiring Fund, with the Securities and
Exchange Commission and specifically upon the representations made in the
Agreement and Plan of Reorganization and Termination attached to the
Registration Statement as Appendix A. We have no reason to believe that these
representations and facts are not valid, but we have not attempted to verify
independently any of these representations and facts, and this opinion is based
upon the assumption that each of them is accurate. Capitalized terms used herein
and not otherwise defined shall have the meaning given them in the Registration
Statement.
The conclusions expressed herein are based upon the Internal Revenue
Code of 1986 (the "Code"), Treasury regulations issued thereunder, published
rulings and procedures of the Internal Revenue Service and judicial decisions,
all as in effect on the date of this letter.
Based upon the foregoing, it is our opinion that:
(1) the Acquiring Fund's acquisition of the assets of the Acquired Fund
in exchange solely for Acquiring Fund Shares and the Acquiring Fund's assumption
of the liabilities of the Acquired Fund, followed by the Acquired Fund's
distribution of those shares to the Acquired Fund Shareholders constructively in
exchange for their shares of the Acquired Fund, will constitute a reorganization
within the meaning of Section 368(a)(1)(C) of the Code, and each Fund will be a
"party to a reorganization" within the meaning of Section 368(b) of the Code;
(2) no gain or loss will be recognized by the Acquiring Fund upon its
receipt of the assets of the Acquired Fund in exchange solely for Acquiring Fund
Shares and its assumption of the liabilities of the Acquired Fund;
(3) no gain or loss will be recognized by the Acquired Fund upon the
transfer of its assets to the Acquiring Fund in exchange for Acquiring Fund
Shares and the Acquiring Fund's assumption of the liabilities of the Acquired
Fund or upon the distribution (whether actual or constructive) of Acquiring Fund
Shares to Acquired Fund Shareholders;
(4) no gain or loss will be recognized by Acquired Fund Shareholders
upon the constructive exchange of their shares of the Acquired Fund for
Acquiring Fund Shares;
(5) the aggregate tax basis of Acquiring Fund Shares received by each
Acquired Fund Shareholder pursuant to the Reorganization will be the same as the
aggregate tax basis of the shares of the Acquired Fund surrendered in exchange
therefor, and the holding period of the Acquiring Fund Shares to be received by
each Acquired Fund Shareholder will include the period during which the shares
of the Acquired Fund exchanged therefor were held by such Acquired Fund
Shareholder (provided the shares of the Acquired Fund were held as capital
assets on the date of the Reorganization); and
(6) the tax basis to the Acquiring Fund of the Acquired Fund's assets
will be the same as the tax basis of such assets to the Acquired Fund
immediately prior to the Reorganization, and the holding period of the assets of
the Acquired Fund in the hands of the Acquiring Fund will include the period
during which those assets were held by the Acquired Fund.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name and any reference to our firm
in the Registration Statement or in the Prospectus/Proxy Statement constituting
a part thereof.
Very truly yours,
Willkie Farr & Gallagher
Exhibit 12(d)
SULLIVAN & CROMWELL
[Letter Head]
August 14, 1995
Mitchell Hutchins/Kidder, Peabody
Government Income Fund, Inc.
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
We have acted as counsel to Mitchell Hutchins/Kidder, Peabody Government
Income Fund, Inc., a Maryland Corporation ("Target"), in connection with the
proposed reorganization described in the Agreement and Plan of Reorganization
and Dissolution, dated as of August 8, 1995 (the "Agreement"), between
PaineWebber Managed Investments Trust, a Massachusetts business trust ("PW
Trust") on behalf of PaineWebber U.S. Government Income Fund, a series thereof
("Acquiring Fund") and Target, and we render this opinion to you pursuant to
paragraph 6.6 of the Agreement.
Capitalized terms used but not defined herein have the meanings ascribed to
them in the Agreement.
For the purposes of the opinion set forth below, we have relied in part,
with your consent, upon the representations set forth in letters dated August
10, 1995 from each of PW Trust and Target, and upon the accuracy and
completeness of the statements and representations contained in the Agreement
and in the Prospectus/Proxy Statement which will be distributed to the
shareholders of Target in connectioni with the Reorganization. With your consent
we have not attempted to verify independently the accuracy of any information in
these documents and have assumed that the statements and representations
contained therein will be true at the Effective Time.
In connection with this opinion we have also assumed, with your consent,
that the Reorganization will be effected in accordance with the terms oof the
Agreement.
On the basis of the foregoing, and our consideration of such other matters
as we have considered relevant, we advise you that, in our opinion:
1. The Reorganizationi will constitute a reorganization within the meaning
of Section 368(a)(1)(c) of the Code, and each Fund will be "a party to a
reorganization" within the meaning of Section 368(b) of the Code;
2. Target will not recognize any gain or loss on the transfer to Acquiring
Fund of the Assets in exchange solely for Acquiring Fund Shares and Acquiring
Fund's assumption of the Liabilities or on the subsequent distribution of those
shares to the Shareholders in constructive exchange for their Target Shares;
3. Acquiring Fund will not recognize any gain or loss on its receipt of the
Assets in exchange solely for Acquiring Fund Shares and its assumption of the
Liabilities;
4. Acquiring Fund's basis for the Assets will be the same as the basis
thereof to Target immediately before the Reorganization, and Acquiring Fund's
holding period for the Assets will include Target's holding period therefor;
5. A Shareholder will not recognize any gain or loss on the constructive
exchange of all its Target Shares solely for Acquiring fund Shares pursuant to
the Reorganization; 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, and its
holding period for those Acquiring Fund Shares will include its holding period
for those Target Shares, provided they are held as capital assets by the
Shareholder at the Effective Time.
We express no opinion as to the effect of the Reorganization on the
Funds or any Shareholder in respect of any asset as to which unrealized gain or
loss is required to be recognized for U.S. Federal income tax purposes at the
end of each year under a mark-to-market system of accounting.
The tax consequences described above may not be applicable to a Target
Shareholder who acquired Target Shares pursuant to the exercise of an employee
stock option or otherwise as compensation.
We hereby consent to the reference to us under te heading "Federal
Income Tax Consequences of the Reorganization" and "The Proposed Transactions--
Federal Income Tax Considerations" in the Prospectus/Proxy Statement of Target
and to the filing of this opinion as an Exhibit to the Registration Statement
on Form N-14 of PW Trust including the Prospectus/Proxy Statement filed with the
Securities and Exchange Commission. In giving this consent we do not thereby
admit that we are within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended, or the rules or regulations
of the Securities and Exchange Commission thereunder.
Very truly your,
Sullivan & Cromwell
<PAGE>
Exhibit 14(a)
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
US Government Income Fund dated January 20, 1995, in this Registration
Statement (Form N-14) of PaineWebber Managed Investments Trust.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
New York, New York
August 9, 1995
Exhibit 14(b)
CONSENT OF INDEPENDENT AUDITORS
PaineWebber Managed Investments Trust:
We consent to the incorporation by reference in this Registration Statement on
Form N-14 of our report dated October 14, 1994 appearing in the annual report to
shareholders of Mitchell Hutchins/Kidder, Peabody Intermediate Fixed Income Fund
for the year ended August 31, 1994; our report dated March 13, 1995 appearing in
the annual report of Mitchell Hutchins/Kidder, Peabody Government Income Fund,
Inc. for the year ended January 31, 1995; our report dated April 21, 1995
appearing in the semi-annual report to shareholders for the six-month period
ended February 28, 1995 of Mitchell Hutchins/Kidder, Peabody Intermediate Fixed
Income Fund, and to the reference to us under the caption "Experts" appearing in
the Prospectus/Proxy Statement, which is a part of such Registration Statement.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
New York, New York
August 10, 1995
Exhibit 17(a)
Registration 2-91362
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. [ ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. [ ]
(Check appropriate box or boxes.)
PAINE WEBBER FIXED INCOME PORTFOLIOS, INC.
(Exact name of registrant as specified in charter)
140 Broadway
New York, New York 10005
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 437-6796
SAM SCOTT MILLER, Esq.
LAWRENCE R. BARDFELD, Esq.
Paine, Webber, Jackson & Curtis Incorporated
140 Broadway
New York, New York 10005
(Name and address of agent for service)
Copies to:
RICHARD M. PHILLIPS, Esq.
ARTHUR J. BROWN, Esq.
Kirkpatrick, Lockhart, Hill,
Christopher & Phillips
1900 M Street, N.W.
Washington, D.C. 20036
Telephone: (202) 452-7000
Approximate Date of Proposed Public Offering: As soon as practicable
after the effective date of this Registration Statement.
Pursuant to the provisions of Rule 24f-2 under the Investment
Company Act of 1940, an indefinite number of shares of capital stock
is being registered by this Registration Statement.
Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states
that this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until
the Registration Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
Exhibit 17(b)
Rule 24f-2 NOTICE FOR
PAINEWEBBER MANAGED INVESTMENTS TRUST
PAINEWEBBER U.S. GOVERNMENT INCOME FUND
PAINEWEBBER INVESTMENT GRADE INCOME FUND
PAINEWEBBER HIGH INCOME FUND
PAINEWEBBER UTILITY INCOME FUND
PAINEWEBBER SHORT-TERM U.S. GOVERNMENT FUND
PAINEWEBBER SHORT-TERM U.S. GOVERNMENT FUND
FOR CREDIT UNIONS
(1933 Act File No. 2-91362)
1. The fiscal year for which the notice is filed:
December 1, 1993 to November 30, 1994
2. The number or amount of securities of the same class or series, if any, which
had been registered under the Securities Act of 1933 other than pursuant to this
section but which remained unsold at the beginning of such fiscal year:
None
3. The number or amount of securities, if any, registered during such fiscal
year other than pursuant to this section:
$429,144,089 representing 48,711,020 shares of beneficial interest
($0.001 par value)
4. The number or amount of securities sold during such fiscal year:
$1,427,207,426 representing 351,026,537 shares of beneficial interest
($0.001 par value)
5. The number or amount of securities sold during such fiscal year in reliance
upon registration pursuant to this section:
$1,427,207,426 representing 351,026,537 shares of beneficial interest
($0.001 par value)
6. The calculation of filing fee:
(a) The total amount of registered shares of beneficial
interest ($0.001 par value) sold including sales load:
$1,427,207,426
(b) Less the total amount of registered shares of
beneficial interest ($0.001 par value) redeemed or
repurchased: (2,865,796,308)
----------------
(c) Difference (i.e., (a) less (b)):
($1,438,588,882)
================
(d) Filing fee pursuant to section 6(b) of 1933 Act
(Line (c) Amount x.00034483):
$0
================
/s/ Paul H. Schubert
---------------------------
Paul H. Schubert
Assistant Treasurer
Date: January 24, 1995
Exhibit 17(c)
PROXY
MITCHELL HUTCHINS/KIDDER, PEABODY INTERMEDIATE FIXED INCOME FUND, A SERIES OF
MITCHELL HUTCHINS/KIDDER, PEABODY INVESTMENT TRUST
SPECIAL MEETING OF SHAREHOLDERS - OCTOBER 16, 1995
The undersigned hereby appoints as proxies Dianne E. O'Donnell and Ilene Shore
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 MITCHELL HITCHINS/ KIDDER, PEABODY INTERMEDIATE
FIXED INCOME FUND, A SERIES OF MITCHELL HUTCHINS/KIDDER, PEABODY INVESTMENT
TRUST.
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"
1. Approval of an Agreement and Plan of Reorganization and Termination
under which PaineWebber U.S. Government Income Fund ("PW U.S.
Government Income Fund"), a series of PaineWebber Managed Investments
Trust, would acquire the assets of Mitchell Hutchins/Kidder, Peabody
Intermediate Fixed Income Fund ("MH/KP Intermediate Income Fund") in
exchange solely for shares of beneficial interest in PW U.S. Government
Income Fund and the assumption by PW U.S. Government Income Fund of
MH/KP Intermediate Income Fund's liabilities, followed by the
distribution of those shares to the shareholders of MH/KP Intermediate
Income Fund.
FOR AGAINST ABSTAIN
--- ------- --------
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
2. To consider and vote upon such other business as may properly come
before the meeting or any adjournments thereof.
FOR AGAINST ABSTAIN
--- ------- --------
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
--------------------------------
Exhibit 17(c)
PROXY
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
SPECIAL MEETING OF SHAREHOLDERS - OCTOBER 16, 1995
The undersigned hereby appoints as proxies Dianne E. O'Donnell and Ilene Shore
and each of them (with power of substitution) to vote for the undersigned all
shares of common stock 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
DIRECTORS OF MITCHELL HITCHINS/ KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
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
DIRECTORS RECOMMENDS A VOTE "FOR"
1. Approval of an Agreement and Plan of Reorganization and Dissolution
under which PaineWebber U.S. Government Income Fund ("PW U.S.
Government Income Fund"), a series of PaineWebber Managed Investments
Trust, would acquire the assets of Mitchell Hutchins/Kidder, Peabody
Government Income Fund, Inc. ("MH/KP Government Income Fund") in
exchange solely for shares of beneficial interest in PW U.S. Government
Income Fund and the assumption by PW U.S. Government Income Fund of
MH/KP Government Income Fund's liabilities, followed by the
distribution of those shares to the shareholders of MH/KP Government
Income Fund.
FOR AGAINST ABSTAIN
--- ------- --------
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
2. To consider and vote upon such other business as may properly come
before the meeting or any adjournments thereof.
FOR AGAINST ABSTAIN
--- ------- --------
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
--------------------------------
