As filed with the Securities and Exchange Commission on August 14, 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:
ROBERT A. WITTIE, ESQ.
BRIAN F. MCNALLY, 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 13,
1995 pursuant to Rule 488.
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
Letter to Shareholders
Notice of Special Meeting
Part A - Prospectus/Proxy Statement
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
PAINEWEBBER MANAGED INVESTMENTS TRUST
Form N-14 Cross Reference Sheet
Part A Item No. Prospectus/Proxy
and Caption Statement Caption
--------------- -----------------
1. Beginning of Registration Statement Cover Page
and Outside Front Cover Page of
Prospectus
2. Beginning and Outside Back Cover Table of Contents
Page of Prospectus
3. Synopsis Information and Risk Synopsis; Comparison of Principal
Factors Risk Factors
4. Information About the Transaction Synopsis; The Proposed Transaction
5. Information About the Registrant Synopsis; Comparison of Principal
Risk Factors; Additional Information
About PW Fund; Miscellaneous; See
also, the Prospectus for PaineWebber
Short-Term U.S. Government Income
Fund, dated April 1, 1995, previously
filed on EDGAR, Accession Number
0000950130-95-000634
6. Information About the Company Being Synopsis; Comparison of Principal
Acquired Risk Factors; Miscellaneous; See also,
the Prospectus for Mitchell Hutchins/
Kidder, Peabody Adjustable Rate
Government Fund, dated December 29,
1994, as supplemented June 22, 1995,
both previously filed on EDGAR,
Accession Number 0000950117-95-000237
7. Voting Information Voting Information
8. Interest of Certain Persons and Not Applicable
Experts
9. Additional Information Required for Not Applicable
Re-offering 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 Statement of Additional Information
Registrant of PaineWebber Short-Term U.S.
Government Income Fund, dated April
1, 1995, previously filed on EDGAR,
Accession Number 0000950130-95-000634
13. Additional Information About the Statement of Additional Information of
Company Being Acquired Mitchell Hutchins/Kidder, Peabody
Adjustable Rate Government Fund
14. Financial Statements Annual Reports of PaineWebber
Short-Term U.S. Government Income Fund
for Fiscal Year Ended November 30,
1994; Mitchell Hutchins/Kidder, Peabody
Adjustable Rate Government Fund for
Fiscal Year Ended August 31, 1994
Semi-Annual Reports of PaineWebber
Short-Term U.S. Government Income
Fund for Six Months Ended May 31,
1995, previously filed on EDGAR,
Accession Number 0000950130-95-
001454; Mitchell Hutchins/Kidder,
Peabody Adjustable Rate Government
Fund for Six Months Ended February
28, 1995, previously filed on EDGAR,
Accession Number 0000950112-95-002037
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.
PAINEWEBBER MANAGED INVESTMENTS TRUST
PART A
MITCHELL HUTCHINS/KIDDER, PEABODY ADJUSTABLE RATE GOVERNMENT 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 Adjustable Rate Government Fund ("MH/KP Fund")
reorganize and become part of PaineWebber Short-Term U.S. Government Income Fund
("PW Fund"). If the proposal is approved and implemented, each shareholder of
MH/KP Fund will automatically become a shareholder of PW Fund.
Your board of trustees recommends a vote FOR the reorganization
proposal. The board believes that combining the two Funds will benefit MH/KP
Fund's shareholders by providing them with a portfolio that has an investment
objective that is substantially identical to that of MH/KP Fund, that has a
similar investment strategy and that, before taking into account voluntary fee
waivers and expense reimbursements, will have lower operating expenses as a
percentage of net assets. The attached proxy materials provide more information
about the proposed reorganization and the two Funds.
Your vote is important no matter how many shares you own. Voting your
shares early will permit MH/KP Fund to avoid costly follow-up mail and telephone
solicitation. After reviewing the attached materials, please complete, date and
sign your proxy card and mail it in the enclosed return envelope today.
Very truly yours,
MARGO N. ALEXANDER
President
Mitchell Hutchins/Kidder, Peabody
Adjustable Rate Government Fund
MITCHELL HUTCHINS/KIDDER, PEABODY
ADJUSTABLE RATE GOVERNMENT 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 Adjustable Rate Government Fund ("MH/KP Fund"), a
series of Mitchell Hutchins/Kidder, Peabody Investment Trust, will be held on
October 16, 1995, at 10:00 a.m., eastern time, at 1285 Avenue of the Americas,
38th Floor, New York, New York 10019, for the following purposes:
(1) To consider an Agreement and Plan of Reorganization and Termination
under which PaineWebber Short-Term U.S. Government Income Fund ("PW Fund"), a
series of PaineWebber Managed Investments Trust, would acquire the assets of
MH/KP Fund in exchange solely for shares of beneficial interest in PW Fund and
the assumption by PW Fund of MH/KP Fund's liabilities, followed by the
distribution of those shares to the shareholders of MH/KP Fund, all as described
in the accompanying Prospectus/Proxy Statement; and
(2) To transact such other business as may properly come before the
Meeting or any adjournment thereof.
You are entitled to vote at the Meeting and any adjournment thereof if
you owned shares of MH/KP 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 PROPOSAL
NOTICED ABOVE. In order to avoid the additional expense of further solicitation,
we ask your cooperation in mailing in your proxy card promptly. Unless proxy
cards submitted by corporations and partnerships are signed by the appropriate
persons as indicated in the voting instructions on the proxy card, they will not
be voted.
-----------------------------------------------------------------------------
PAINEWEBBER SHORT-TERM U.S. GOVERNMENT INCOME FUND
(a series of PaineWebber Managed Investments Trust)
MITCHELL HUTCHINS/KIDDER, PEABODY
ADJUSTABLE RATE GOVERNMENT FUND
(a series of Mitchell Hutchins/
Kidder, Peabody Investment Trust)
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 Adjustable Rate Government
Fund ("MH/KP Fund"), a series of Mitchell Hutchins/Kidder, Peabody Investment
Trust ("MH/KP Trust"), in connection with the solicitation of proxies by MH/KP
Trust's board of trustees for use at a special meeting of MH/KP Fund
shareholders to be held on October 16, 1995, at 10:00 a.m., eastern time, and at
any adjournment thereof ("Meeting").
As more fully described in this Proxy Statement, the primary purpose of
the Meeting is to vote on a proposed reorganization ("Reorganization"). Under
the Reorganization, PaineWebber Short-Term U.S. Government Income Fund ("PW
Fund"), a series of PaineWebber Managed Investments Trust ("PW Trust"), would
acquire the assets of MH/KP Fund, in exchange solely for shares of beneficial
interest in PW Fund and the assumption by PW Fund of MH/KP Fund's liabilities.
Those PW Fund shares then would be distributed to the shareholders of MH/KP
Fund, by class, so that each shareholder of MH/KP Fund would receive a number of
full and fractional shares of the applicable class of PW Fund having an
aggregate value that, on the effective date of the Reorganization, is equal to
the aggregate net asset value of the shareholder's shares of the corresponding
class in MH/KP Fund. As soon as practicable following the distribution, MH/KP
Fund will be terminated.
PW Fund is a diversified series of PW Trust, which is an open-end
management investment company. PW Fund's investment objective is to achieve the
highest level of income consistent with the preservation of capital and low
volatility of net asset value. PW Fund seeks to achieve its investment objective
by investing primarily in U.S. government securities, including mortgage-backed
securities that are issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Concurrently with the consummation of the Reorganization, PW
Fund will be renamed the "PaineWebber Low Duration U.S. Government Income Fund."
This Proxy Statement, which should be retained for future reference,
sets forth concisely the information about the Reorganization and PW Fund that a
shareholder should know before voting on the Reorganization. A Statement of
Additional Information, dated September __, 1995, relating to the Reorganization
and including historical financial statements ("Statement of Additional
Information"), has been filed with the Securities and Exchange Commission
("SEC") and is incorporated herein by reference. A Prospectus ("PW Fund
Prospectus") and a Statement of Additional Information ("PW Fund SAI") for PW
Fund, each dated April 1, 1995, and PW Fund's Annual Report to Shareholders for
the fiscal year ended November 30, 1994 ("PW Fund Annual Report"), have been
filed with the SEC and are incorporated herein by reference. A Prospectus for
MH/KP Fund, dated December 29, 1994 (as supplemented June 22, 1995) ("MH/KP Fund
Prospectus"), and a Statement of Additional Information for MH/KP Fund, dated
December 29, 1994 ("MH/KP Fund SAI"), have been filed with the SEC and also are
incorporated herein by this reference. A copy of the PW Fund Prospectus and of
the PW Fund Annual Report accompany this Prospectus/Proxy Statement. Copies of
the other referenced documents, as well as MH/KP Fund's annual report and each
Fund's semi-annual report may be obtained without charge, and further inquiries
may
be made, by contacting your PaineWebber Incorporated ("PaineWebber") investment
executive or PaineWebber's correspondent firms or by calling toll-free
[1-800-647-1568].
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
VOTING INFORMATION....................................................... 1
SYNOPSIS ................................................................ 2
COMPARISON OF PRINCIPAL RISK FACTORS ....................................11
THE PROPOSED TRANSACTION.................................................13
ADDITIONAL INFORMATION ABOUT PW FUND.....................................18
MISCELLANEOUS ...........................................................21
APPENDIX A - AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION...... A-1
APPENDIX B - BENEFICIAL OWNERSHIP OF SHARES OF PW FUND AND MH/KP FUND.. B-1
MITCHELL HUTCHINS/KIDDER, PEABODY
ADJUSTABLE RATE GOVERNMENT FUND
(a series of Mitchell Hutchins/
Kidder, Peabody Investment Trust)
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 Adjustable Rate Government
Fund ("MH/KP Fund"), a series of Mitchell Hutchins/Kidder, Peabody Investment
Trust ("MH/KP Trust"), in connection with the solicitation of proxies by its
board of trustees for use at a special meeting of shareholders to be held on
October 16, 1995, 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 Fund's outstanding shares on September
5, 1995, represented in person or by proxy, must be present for the transaction
of business at the Meeting. If a quorum is not present at the Meeting or a
quorum is present but sufficient votes to approve the proposal are not received,
the persons named as proxies may propose one or more adjournments of the Meeting
to permit further solicitation of proxies. Any such adjournment will require the
affirmative vote of a majority of those shares represented at the Meeting in
person or by proxy. The persons named as proxies will vote those proxies that
they are entitled to vote FOR any such proposal in favor of such an adjournment
and will vote those proxies required to be voted AGAINST any such proposal
against such adjournment. A shareholder vote may be taken on one or more of the
proposals in this Prospectus/Proxy Statement prior to any such adjournment if
sufficient votes have been received and it is otherwise appropriate.
Broker non-votes are shares held in street name for which the broker
indicates that instructions have not been received from the beneficial owners or
other persons entitled to vote and for which the broker does not have
discretionary voting authority. Abstentions and broker non-votes will be counted
as shares present for purposes of determining whether a quorum is present but
will not be voted for or against any adjournment or proposal. Accordingly,
abstentions and broker non-votes effectively will be a vote against adjournment
or against any proposal where the required vote is a percentage of the shares
present or outstanding. Abstentions and broker non-votes will not be counted,
however, as votes cast for purposes of determining whether sufficient votes have
been received to approve a proposal.
The individuals named as proxies on the enclosed proxy card will vote
in accordance with your direction as indicated thereon if your proxy card is
received properly executed by you or by your duly appointed agent or
attorney-in-fact. If you sign, date and return the proxy card, but give no
voting instructions, your shares will be voted in favor of approval of the
Agreement and Plan of Reorganization and Termination, dated as of August 8, 1995
("Reorganization Plan"), which is attached to this Proxy Statement as Appendix
A. Under the Reorganization Plan, PaineWebber Short-Term U.S. Government Income
Fund ("PW Fund"), a series of PaineWebber Managed Investments Trust ("PW
Trust"), would acquire the assets of MH/KP Fund in exchange solely for shares of
beneficial interest in PW Fund and the assumption by PW Fund of MH/KP Fund's
liabilities; those PW Fund shares then would be constructively distributed to
MH/KP Fund's shareholders. (These transactions are collectively referred to
herein as the "Reorganization," and MH/KP Fund and PW Fund may be referred to
herein individually as a "Fund" or, collectively, as "Funds".) After completion
of the Reorganization, MH/KP Fund will be terminated.
In addition, if you sign, date and return the 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 prior to
the Meeting and must indicate your name and account number. 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 September 5, 1995 ("Record Date"), MH/KP Fund had _______ shares
of beneficial interest outstanding. The solicitation of proxies, the cost of
which will be borne by Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins"), will be made primarily by mail but also may include telephone or
oral communications by representatives of Mitchell Hutchins, who will not
receive any compensation therefor from the Funds, or by Shareholder
Communications Corporation, professional proxy solicitors retained by [the
Funds], who will be paid fees and expenses of up to approximately $1,000 for
soliciting services [by Mitchell Hutchins]. [Except as set forth on Appendix A,
management does not know of any person who owns beneficially 5% or more of the
shares of MH/KP Fund or PW Fund. Trustees and officers of MH/KP Trust own in the
aggregate less than 1% of the shares of MH/KP Fund.]
Approval of the Reorganization Plan requires the affirmative vote of a
majority of the outstanding voting securities of MH/KP Fund. As defined in the
Investment Company Act of 1940 ("1940 Act"), "majority of the outstanding voting
securities" means the lesser of (1) 67% of MH/KP Fund's shares present at a
meeting of shareholders if the owners of more than 50% of MH/KP Fund's shares
then outstanding are present in person or by proxy or (2) more than 50% of MH/KP
Fund's outstanding shares. Each outstanding full share of MH/KP Fund is entitled
to one vote, and each outstanding fractional share thereof is entitled to a
proportionate fractional share of one vote. If the Reorganization Plan is not
approved by the requisite vote of shareholders of MH/KP Fund, the persons named
as proxies may propose one or more adjournments of the Meeting to permit further
solicitation of proxies. Although the shareholders of MH/KP Fund may exchange or
redeem out of the 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.
SYNOPSIS
The following is a summary of certain information contained elsewhere
in this Proxy Statement, the prospectus for MH/KP Fund, which is incorporated
herein by this reference, and the Reorganization Plan. Shareholders should read
this Prospectus/Proxy Statement carefully. As discussed more fully below, MH/KP
Trust's board of trustees believes that the Reorganization will benefit MH/KP
Fund's shareholders. PW Fund has an investment objective that is substantially
identical to the investment objective of MH/KP Fund and has a similar investment
strategy. It is anticipated that, following the Reorganization, the total
operating expenses for the combined Fund, before taking into account voluntary
fee waivers and expense reimbursements, will be lower as a percentage of net
assets than has been experienced by MH/KP Fund.
The Proposed Reorganization
MH/KP Trust's board of trustees approved the Reorganization Plan at a
meeting held on July 20, 1995. The Reorganization Plan provides for the
acquisition of the assets of MH/KP Fund by PW Fund, in exchange solely for
shares of PW Fund and the assumption by PW Fund of the liabilities of MH/KP
Fund. MH/KP Fund will then
2
distribute those shares of PW Fund to its shareholders, by class, so that each
MH/KP Fund shareholder will receive the number of full and fractional shares of
the PW Fund class 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 MH/KP Fund as of the Closing Date (defined
below). MH/KP Fund then will be terminated as soon as practicable thereafter.
The exchange of MH/KP Fund's assets for PW Fund shares and PW Fund's
assumption of its liabilities will occur as of 4:00 pm., eastern time, on
October 20, 1995, or on a later date when the conditions to the closing are
satisfied ("Closing Date").
PW Fund currently offers for sale three classes of shares (each a
"Class" and collectively, "Classes"), designated as Class A, Class B and Class D
shares. In connection with the Reorganization, PW Fund will issue Class C
shares. MH/KP Fund has three classes of shares, designated as Class A, Class B
and Class C shares. In the Reorganization, shareholders of MH/KP Fund Class A,
Class B and Class C will receive Class A, Class D and Class C shares,
respectively, of PW Fund. The following table shows which Class of shares of PW
Fund will be received by shareholders of each Class of shares of MH/KP Fund:
MH/KP Fund PW Fund
---------- -------
Class A Class A
Class B Class D
Class C Class C
For the reasons set forth below under "The Proposed Transaction --
Reasons for the Reorganization," MH/KP Trust's board of trustees, including the
trustees who are not "interested persons" of MH/KP Trust or PW Trust as that
term is defined in the 1940 Act ("Independent Trustees"), has determined that
the Reorganization is in the best interests of MH/KP Fund, that the terms of the
Reorganization are fair and reasonable and that the interests of MH/KP Fund's
shareholders will not be diluted as a result of the Reorganization. Accordingly,
MH/KP Trust's board of trustees recommends approval of the transaction. In
addition, PW Trust's board of trustees, including its Independent Trustees, has
determined that the Reorganization is in the best interests of PW Fund, that the
terms of the Reorganization are fair and reasonable, and that the interests of
PW Fund's shareholders will not be diluted as a result of the Reorganization.
Comparative Fee Table
Certain fees and expenses that MH/KP Fund's shareholders pay, directly
or indirectly, are different from those incurred by PW Fund shareholders. MH/KP
Fund's Class A shares are sold with a maximum initial sales charge of up to
2.25% of the public offering price. PW Fund's Class A shares normally are sold
with a maximum sales charge of up to 3% of the public offering price. However,
the Class A shares of PW Fund that will be distributed to shareholders of MH/KP
Fund as part of the Reorganization will not be subject to an initial sales
charge. Following the Reorganization, new purchases of Class A shares of PW Fund
will be subject to an initial sales charge of up to 3%.
The Class A and Class B shares of MH/KP Fund pay 12b-1 fees that are
identical to those paid by the Class A and Class D shares, respectively, of PW
Fund. No 12b-1 fees are paid by the Class C shareholders of either Fund, but
Class C shareholders of either Fund who hold their Class C shares through the
INSIGHT Investment Advisory Program(sm) ("INSIGHT program") must pay to
PaineWebber an annual investment advisory fee of up to 1.50% of the average
daily value of the shares.
3
Shareholders of MH/KP Fund are not charged a fee for exchanges of the
Fund's shares for shares of a corresponding class of other PaineWebber or
Mitchell Hutchins/Kidder, Peabody ("MH/KP") mutual funds. PW Fund shareholders
pay a $5.00 fee for each exchange. PW Fund pays PaineWebber Incorporated
("PaineWebber") an annual fee of $4.00 per active shareholder account held at
PaineWebber for certain services not provided by the Fund's transfer agent.
MH/KP Fund does not pay this fee.
The following tables show (1) shareholder transaction expenses
currently incurred by Class A, Class B and Class C shares of MH/KP Fund, and
shareholder transaction expenses that each Class issued by PW Fund will incur
after giving effect to the Reorganization; (2) the current fees and expenses
incurred by the Class A, Class B and Class C shares of MH/KP Fund and Class A
and Class D shares of PW Fund for the twelve months ended May 31, 1995
(unaudited), and (3) pro forma fees for PW Fund's Class A, Class D and Class C
shares after giving effect to the Reorganization.
Shareholder Transaction Expenses
<TABLE>
<CAPTION>
MH/KP Fund Combined Fund
---------- -------------
Class A Class B(1) 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 3.00% NONE NONE
Exchange fee NONE NONE NONE $5.00 $5.00 N/A(2)
Maximum contingent deferred NONE NONE NONE NONE NONE NONE
sales charge (as a percentage of
redemption proceeds)
</TABLE>
<TABLE>
<CAPTION> Combined Fund
MH/KP Fund PW Fund (Estimated)
---------- ------- -----------
Class Class Class Class Class Class Class Class
A B(1) C(3) A D A D C
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Fees
12b-1 Fees 0.25% 0.75% 0.00% 0.25% 0.75% 0.25% 0.75% 0.00%
Other
Expenses 0.48% 0.48% 0.48% 0.26% 0.32% 0.25% 0.31% 0.29%
----- ----- ----- ----- ----- ----- ----- -----
Total Fund
Operating
Expenses(4) 1.23% 1.73% 0.98% 1.01% 1.57% 1.00% 1.56% 0.79%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
----------------------------------
(1) Class B shares of MH/KP Fund will be exchanged for Class D shares of
PW Fund.
(2) Class C shares of the combined Fund will not be exchangeable for
shares of other PaineWebber or MH/KP mutual funds.
4
(3) Maximum annual 1.50% advisory fee is payable by shareholders holding
MH/KP Fund Class C shares through the INSIGHT program.
(4) The ratios of total operating expenses as a percentage of average net
assets were 1.08%, 1.58% and 0.83% for Class A, Class B and Class C,
respectively, of MH/KP Fund for the fiscal year ended August 31,
1994, and were 0.88% and 1.39% for Class A and Class D, respectively,
of PW Fund for the fiscal year ended November 30, 1994. During those
periods, certain fees and expenses were waived and/or reimbursed for
MH/KP Fund and PW Fund. After giving effect to those waivers and
reimbursements, the total fund operating expenses for those periods
were 0.88% for Class A, 1.38% for Class B and 0.63% for Class C of
MH/KP Fund, and 0.84% and 1.36% for Class A and Class D,
respectively, of PW Fund.
Example of Effect on Fund Expenses
The following illustrates the expenses on a $1,000 investment under
the existing and estimated fees and expenses stated in the table above,
assuming a 5% annual return. The fees shown below reflect an initial sales
charge of up to 2.25% of the public offering price that normally is charged in
connection with the sale of MH/KP Fund's Class A shares and an initial sales
charge of up to 3.0% of the public offering price that normally is charged in
connection with the sale of PW Fund's Class A shares. Amounts shown for PW
Fund and combined Fund Class A Shares are higher than for MH/KP Fund Class A
shares due to the higher initial sales charge normally charged on PW Fund
Class A shares. However, no initial sales charges will be charged in
connection with the Reorganization in connection with Class A shares of PW
Fund distributed to Class A shareholders of MH/KP Fund as part of the
Reorganization.
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
MH/KP Fund
Class A shares(1)................. $35 $61 $89 $168
Class B shares.................... $18 $54 $94 $204
Class C shares(2)................. $10 $31 $54 $120
PW Fund
Class A shares(3)................. $40 $61 $84 $150
Class D shares.................... $16 $50 $86 $187
Combined Fund
Class A shares(3)................. $40 $61 $84 $149
Class D shares.................... $16 $49 $85 $186
Class C shares(2)................. $8 $25 $44 $98
</TABLE>
------------------------------
(1) Assumes deduction at the time of purchase of the maximum 2.25% initial
sales charge.
(2) Does not include advisory fees payable by shareholders holding Class C
shares through the INSIGHT program.
(3) Assumes deduction at the time of purchase of the maximum 3% initial
sales charge.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by the National Association of
Securities Dealers, Inc. rules regarding investment companies. 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.
5
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.
Forms of Organization
PW Trust and MH/KP Trust (each a "Trust" and, collectively, "Trusts")
are open-end management investment companies organized as Massachusetts business
trusts. PW Fund, a diversified series of PW Trust, commenced operations on May
3, 1993. MH/KP Fund, a diversified series of MH/KP Trust, commenced operations
on November 10, 1992. The Trusts are not required to (and do not) hold annual
shareholder meetings.
Neither Fund currently issues share certificates.
Shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable for its obligations. However, the
Declaration of Trust of each Trust expressly disclaims, and provides
indemnification against, such liability. Accordingly, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which a Fund itself would be unable to meet its
obligations, a possibility that Mitchell Hutchins, the investment adviser of
each Fund, believes is remote and thus does not pose a material risk.
Investment Advisers
Mitchell Hutchins is the investment adviser and administrator for both
Funds. In such capacities, Mitchell Hutchins supervises all aspects of each
Fund's operations and makes and implements all investment decisions for MH/KP
Fund. In the case of PW Fund, Mitchell Hutchins supervises the activities of
Pacific Investment Management Company ("PIMCO"), which acts as PW Fund's
investment sub-adviser and makes and implements all investment decisions for PW
Fund. PIMCO is one of the largest fixed income management firms in the nation.
Each Fund pays Mitchell Hutchins a monthly investment advisory and
administration fee, computed daily and paid monthly, at an annual rate of 0.50%
of the Fund's average daily net assets. Mitchell Hutchins, not PW Fund, pays
PIMCO a fee for its services as sub-adviser for that Fund in the amount of 0.25%
of PW Fund's average daily net assets. Following the Reorganization, Mitchell
Hutchins will be the investment adviser and administrator, and PIMCO will be the
sub-adviser, of the combined Fund. William C. Powers, a managing director of
PIMCO, who currently is the portfolio manager for PW Fund and who has been
primarily responsible for the day-to-day portfolio management of PW Fund since
October 1994, will continue as the portfolio manager of PW Fund. Mr. Powers has
been a senior member of the fixed income portfolio management group at PIMCO
since 1991. He was previously associated with Salomon Brothers and Bear Stearns
as a Senior Managing Director.
Investment Objectives and Policies
The Funds have substantially identical investment objectives and
similar investment strategies. There can be no assurance that either Fund will
achieve its investment objective, and each Fund's net asset value fluctuates
based upon changes in the value of its portfolio securities.
The investment objective of PW Fund is to achieve the highest level of
income consistent with the preservation of capital and low volatility of net
asset value. The investment objective of MH/KP Fund is to provide high current
income while limiting the degree of fluctuation of its net asset values
resulting from movements in interest rates. Normally, each Fund invests at least
65% of its assets in securities that are issued or guaranteed by the U.S.
government, its agencies or instrumentalities ("Government Securities")
including, among other things, mortgage-backed securities ("U.S. government
mortgage-backed securities") and repurchase agreements based on
6
such securities. The MH/KP Fund also normally invests at least 65% of its net
assets in adjustable rate securities ("Adjustable Rate Securities"), which may
also be Government Securities and which consist primarily of mortgage-and
asset-backed securities. The PW Fund also invests in Adjustable Rate Securities,
but it is not required to normally maintain any specific portion of its assets
invested in such securities.
Up to 35% of PW Fund's total assets may be invested in privately issued
mortgage- and asset-backed securities that at the time of purchase have been
rated AAA by Standard & Poor's ("S&P") or Aaa by Moody's Investors Service, Inc.
("Moody's"), have an equivalent rating from another nationally recognized
statistical rating organization ("NRSRO") or, if unrated, have been determined
by PIMCO to be of comparable quality. The Fund may also invest in money market
instruments. As a matter of fundamental policy, the Fund normally concentrates
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.
Up to 35% of MH/KP Fund's assets may be invested in securities that are
not Government Securities or Adjustable Rate Securities. In addition to
Government Securities, the Fund's assets consist of fixed rate and adjustable
rate mortgage- and asset-backed securities that are rated AAA by S&P or Aaa by
Moody's and money market instruments, including bank obligations, of a
comparable short-term rating.
PW Fund currently seeks to limit the volatility of its net asset value
per share by maintaining a dollar-weighted average portfolio maturity not in
excess of three years. However, concurrently with the consummation of the
Reorganization, PW Fund intends to change this policy to one of maintaining an
overall average portfolio duration of from one to three years and to change the
name of the PW Fund to "PaineWebber Low Duration U.S. Government Income Fund."
See "-- Operations of PW Fund Following the Reorganization."
MH/KP Fund seeks to achieve low volatility of net asset value by
investing in a diversified portfolio of securities that Mitchell Hutchins
believes, in the aggregate, is resistant to significant fluctuations in market
value. In selecting securities for the Fund, Mitchell Hutchins takes into
account various factors that will affect the volatility of the Fund's assets,
such as the time to the next coupon reset date for the securities, the payment
characteristics of the securities and the dollar weighted average life of the
securities.
Both Funds may invest in classes of mortgage-backed securities that
receive differing proportions of the interest and principal distributions on a
pool of mortgage assets than one or more other classes of securities supported
by the same mortgage pool. MH/KP Fund refers to such securities as "stripped
MBSs" or "SMBSs". In the most extreme case, SMBSs may be structured as
interest-only ("IO") or principal-only ("PO") classes. MH/KP Fund is limited to
investing only up to 10% of its net assets in SMBSs. PW Fund has no overall
limitation on the portion of its assets that may be invested in all types of
SMBSs, but PW Fund is limited to investing no more than 5% of its net assets in
any combination of IOs, POs and inverse floating rate securities.
Each Fund may invest up to 15% of its net assets in illiquid securities
and, subject to certain limitations, may enter into dollar roll and reverse
repurchase transactions, lend portfolio securities (up to 331/3% of assets in
the case of MH/KP Fund and 10% of assets in the case of PW Fund), engage in
when-issued and delayed delivery securities transactions, make short sales of
securities against-the-box (or otherwise in the case of MH/KP Fund) and engage
in interest rate swaps, caps, floors and, in the case of PW Fund, collars for
hedging purposes. PW Fund may enter into options and futures contracts that
approximate (but do not exceed) the full value of its portfolio, but under
normal circumstances, the aggregate amount of the Fund's outstanding positions
in such contracts generally will be much smaller.
Operations of PW Fund Following the Reorganization
Duration. Concurrently with the consummation of the Reorganization,
PW Fund will change its name to "PaineWebber Low Duration U.S. Government
Income Fund" and will change its investment policy of maintaining
7
a dollar-weighted average portfolio maturity not in excess of three years to one
of maintaining an overall average portfolio duration of from one to three years.
Duration is a measure of the expected life of a fixed income security that was
developed as a more precise alternative to the concept of "term to maturity."
Duration incorporates a bond's yield, coupon interest payments, final maturity
and call features into one measure and is one of the fundamental tools used by
PIMCO in portfolio selection for PW Fund.
Traditionally, a debt security's "term to maturity" has been used as a
proxy for the sensitivity of the security's price to changes in interest rates
(which is the "interest rate risk" or "volatility" of the security). However,
"term to maturity" measures only the time until a debt security provides its
final payment, taking no account of the pattern of the security's payments prior
to maturity. Duration is a measure of the expected life of a fixed income
security on a present value basis. Duration takes the length of the time
intervals between the present time and the time that the interest and principal
payments are scheduled or, in the case of a callable bond, expected to be
received, and weights them by the present values of the cash to be received at
each future point in time. For any fixed income security with interest payments
occurring prior to the payment of principal, duration is always less than
maturity.
Futures, options and options on futures have durations which, in
general, are closely related to the duration of the securities which underlie
them. Holding long futures or call option positions (backed by a segregated
account of cash and cash equivalents) will lengthen PW Fund's duration by
approximately the same amount as would holding an equivalent amount of the
underlying securities. Short futures or put option positions have durations
roughly equal to the negative duration of the securities that underlie these
positions, and have the effect of reducing portfolio duration by approximately
the same amount as would selling an equivalent amount of the underlying
securities.
There are some situations in which the standard duration calculation
does not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by the standard duration calculation is the case of mortgage-backed
securities. The stated final maturity of such securities is generally 30 years,
but current prepayment rates are more critical in determining the securities'
interest rate exposure. In these and other similar situations, PIMCO will use
more sophisticated analytical techniques that incorporate the economic life of a
security into the determination of its duration and, therefore, its interest
rate exposure.
Other Operations and Policies. Following the Reorganization, the
trustees and officers of PW Trust and PW Fund's investment adviser, distributor,
exclusive dealer and other outside agents will continue to serve PW Fund in
their current capacities. Mitchell Hutchins does not expect PW Fund to revise
its investment objective or policies following the Reorganization to reflect
those of MH/KP Fund. Mitchell Hutchins believes that most, if not all, of the
assets held by MH/KP Fund will be consistent with the investment policies of PW
Fund and thus could be trans-ferred to and held by PW Fund if the Reorganization
is approved. However, if the Reorganization is approved, MH/KP Fund will sell
any assets that are inconsistent with PW Fund's investment policies prior to the
effective time of the Reorganization. The proceeds of any such sales will be
held in temporary investments or reinvested in assets that qualify to be held by
PW Fund. The possible need for MH/KP Fund to dispose of assets prior to the
effective time of the Reorganization could result in selling securities at a
disadvantageous time and could result in MH/KP Fund realizing losses that would
not otherwise have been realized.
Effective on or about November 1, 1995, PW Fund's Class C and Class D
shares will be renamed Class Y and Class C shares, respectively. Also, a
contingent deferred sales charge ("CDSC") will be applicable to Class A and
Class D (to be renamed as Class C) shares of PW Fund that (1) are purchased
after November 1, 1995, (2) in the case of Class A shares, are purchased without
an initial sales charge due to a sales charge waiver for purchases of $1 million
or more, and (3) are held less than one year. That CDSC will be equal to 1% of
the lower of (1) the net asset value of the shares at the time of purchase, or
(2) the net asset value of the shares at the time
8
of redemption. Class A and D shares in PW Fund that are issued to MH/KP Fund
shareholders as part of the Reorganization will not be subject to that CDSC.
Purchases
Shares of PW Fund are available through PaineWebber and its
correspondent firms or, for investors who are not clients of PaineWebber,
through PFPC Inc., the Fund's transfer agent ("Transfer Agent"). The minimum
investment for initial and subsequent purchases of PW Fund shares is $100.
Purchases through PaineWebber investment executives or correspondent firms may
be made in person or by mail, by telephone or, for purchases of $1 million or
more, by 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.
PW Fund's Class A shares normally are sold with a maximum initial sales
charge of up to 3% of the public offering price. The PW Fund Class A shares that
will be distributed to shareholders of MH/KP Fund as part of the Reorganization
will not be subject to an initial sales charge. However, following the
Reorganization, new purchases of Class A shares of PW Fund will be subject to an
initial sales charge up to 3%, and any Class B or Class D shares of PW Fund that
are purchased by former MH/KP Fund shareholders will be subject to their
respective terms.
PW Fund's Class B shares are sold subject to a maximum CDSC of 3% of
redemption proceeds, which declines to zero after four years. Class B shares
automatically convert into Class A shares after approximately six years. Class D
shares of PW Fund currently are sold without an initial sales charge or CDSC but
are subject to higher ongoing expenses than Class A shares and do not convert to
another Class. As noted above, Class D shares purchased after November 1, 1995
(when they will have been renamed as Class C shares) will be subject to a 1%
CDSC if they are held for less than one year.
Class C shares of PW Fund will be issued to holders of Class C shares
in MH/KP Fund in connection with the Reorganization. Effective November 1, 1995,
PW 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 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. PW Fund is authorized to sell
Class C shares to employee benefit plans and retirement plans of Paine Webber
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 Fund Class
C shares. PW Fund Class C shares will be sold to eligible investors at net asset
value, without any initial sales charge or CDSC, and without any 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 the INSIGHT program, a total portfolio asset allocation
program sponsored by PaineWebber, and thus become eligible to purchase PW Fund
Class C shares. The INSIGHT program 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 the
INSIGHT program 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 program 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 the INSIGHT program. INSIGHT program clients
9
may elect to have their INSIGHT program fees charged to their PaineWebber
accounts (by the automatic redemption of money market fund shares) or another of
their PaineWebber accounts or billed separately.
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' net asset value
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 8950, Wilmington,
Delaware 19899. A redemption request will be executed at the net asset value
next computed after it is received in "good order," and redemption proceeds will
be paid within seven days of the receipt of the request. "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. Shareholders are responsible for ensuring
that a request for redemption is received in "good order."
A shareholder 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 net asset value below the lesser of $500 or the
current minimum for initial purchasers. 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 net asset value per share.
If the Reorganization is approved, shares of MH/KP Fund will cease to
be offered on October 16, 1995, so that shares of MH/KP Fund will no longer be
available for purchase or exchange starting on October 17, 1995 (the next
Business Day). If the Meeting is adjourned and the Reorganization is approved on
a later date, MH/KP Fund shares will no longer be available for purchase or
exchange on the Business Day following the date on which the Reorganization is
approved and all contingencies have been met. Redemptions of MH/KP Fund's shares
and exchanges of such shares for shares of any other PaineWebber or MH/KP mutual
fund may be effected through the Closing Date.
10
Exchanges
Class A, B and D shares of PW Fund and Class A and B shares of MH/KP
Fund may be exchanged for shares of the Corresponding Class of other PaineWebber
and MH/KP mutual funds, and Class A, B and D shares of PW Fund and Class A and B
shares of MH/KP Fund may be acquired through an exchange of shares of the
Corresponding Class of other PaineWebber and MH/KP mutual funds, as provided in
each Fund's prospectus. No initial sales charge is imposed on the shares being
acquired, and no CDSC is 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 Fund for shares of any other
PaineWebber or MH/KP mutual funds will continue to be imposed following the
Reorganization.
Dividends and Other Distributions
PW Fund distributes substantially all of its net investment income and
realized net gains to shareholders each year. Dividends are declared daily and
paid monthly and may be accompanied by distributions of net realized short-term
capital gains. PW Fund also distributes, at least annually, substantially all of
its net capital gain (the excess of net long-term capital gain over net
short-term capital loss) and any undistributed net short-term capital gain.
Dividends from net investment income of MH/KP Fund are declared daily and
distributed monthly, and distributions of any net realized capital gains of that
Fund are distributed annually after the close of the fiscal year in which they
are earned. Both Funds may make additional distributions if necessary to avoid a
4% excise tax on certain undistributed income and capital gain.
PW Fund's dividends and other distributions are paid in additional
shares of the applicable Class at net asset value unless the shareholder has
requested cash payments. Shareholders who wish to receive dividends and/or other
distributions in cash, either mailed to the shareholder by check or credited to
the shareholder's PaineWebber account, should contact their PaineWebber
investment executives or correspondent firms.
On or before the Closing Date, MH/KP 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 continue to maintain its tax status
as a regulated investment company. MH/KP Fund will pay these distributions only
in cash. On or before the Closing Date, PW Fund also may declare and distribute
as a dividend substantially all of any previously undistributed net investment
income. PW Fund also will pay these dividends only in cash.
Federal Income Tax Consequences of the Reorganization
PW Trust has received an opinion of Kirkpatrick & Lockhart LLP, its
counsel, and MH/KP Trust has received an opinion of Willkie Farr & Gallagher,
its counsel, each to the effect that the Reorganization will constitute a
tax-free reorganization within the meaning of section 368(a)(1)(C) of the
Internal Revenue Code of 1986, as amended ("Code"). Accordingly, no gain or loss
will be recognized to either Fund or its shareholders as a result of the
Reorganization. See "The Proposed Transaction -- Federal Income Tax
Considerations."
COMPARISON OF PRINCIPAL RISK FACTORS
Since the investment policies of each Fund are similar, the investment
risks presented by the two Funds are also similar. Certain differences are
identified below. See the PW Fund Prospectus for a more detailed discussion of
the investment risks of PW Fund, and see the MH/KP Fund Prospectus for a more
detailed discussion of the investment risks of MH/KP Fund.
11
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 net asset value per share, will rise when interest rates
decline. Conversely, when interest rates rise, the value of fixed income
securities, and thus the Fund's net asset value per share, may be expected to
decline.
The Funds attempt to limit (but not eliminate) the sensitivity of their
portfolios to changes in market interest rates in somewhat different ways. MH/KP
Fund normally invests at least 65% of its net assets in Adjustable Rate
Securities, but it is not limited with respect to the average portfolio
maturity. PW Fund also invests in Adjustable Rate Securities, but it is not
required to normally maintain any specific portion of its assets invested in
such securities. However, PW Fund currently seeks to maintain a dollar weighted
average portfolio maturity not in excess of three years. Concurrently with the
consummation of the Reorganization, PW Fund intends to change this policy to one
of maintaining an overall average portfolio duration of from one to three years.
There can be no assurance that either Fund will succeed in limiting its
portfolio's interest rate sensitivity.
Mortgage- and Asset-Backed Securities. Each Fund invests in mortgage-
and asset-backed securities, including mortgage-backed securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, and
privately issued mortgage- and asset-backed securities rated in the highest
rating category by an NRSRO (or in the case of PW Fund, that have been
determined to be of comparable quality by PIMCO).
As a matter of fundamental policy, PW Fund normally concentrates 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.
Investing in mortgage- and asset-backed securities involves special
risks, such as those relating to the prepayment of principal on the underlying
obligations, in addition to the risks present in the case of other types of debt
securities. During 1994, the value and the liquidity of many mortgage-backed
securities, including securities held by the Funds, declined sharply due
primarily to increases in short-term interest rates. There can be no assurance
that such declines will not recur. The value and the liquidity of many
mortgage-backed securities, including the IOs and POs in which both Funds may
invest, can be extremely volatile, and such securities may become illiquid.
MH/KP Fund is limited to investing only up to 10% of its net assets in
SMBSs (including IOs and POs). PW Fund has no overall limitation on the portion
of its assets that may be invested in all types of SMBSs, but PW Fund is limited
to investing no more than 5% of its net assets in any combination of IOs, POs
and inverse floating rate securities.
Adjustable Rate Securities. Each Fund may invest in Adjustable Rate
Securities, but MH/KP Fund normally must invest at least 65% of its net assets
in Adjustable Rate Securities, while PW Fund has no such policy. The interest
rate reset feature of Adjustable Rate Securities generally reduces the effect on
a Fund's net asset value caused by changes in interest rates. However, the
market value of Adjustable Rate Securities, and therefore a Fund's net asset
value, may vary to the extent that the current interest rates on those
securities differs from market interest rates during periods between applicable
interest rate reset dates. Also a Fund and its shareholders do not benefit from
increases in market interest rates once those rates rise to the point at which
they cause the rates on the Adjustable Rate Securities to exceed their maximum
adjustment rate or annual or lifetime caps. Because of their interest rate
adjustment feature, Adjustable Rate Securities are not an effective means of
"locking-in" attractive rates for periods in excess of the adjustment period.
12
Hedging Strategies. Each Fund may engage in interest rate swaps, caps
and floors to attempt to hedge its portfolio. PW Fund also may engage in
interest rate collars for hedging purposes and may enter into options (both
exchange-traded and over-the-counter) and futures contracts to attempt to
enhance income and to reduce the overall risk of its portfolio. The use of
options and futures contracts solely to enhance income may be considered a form
of speculation. The use of these instruments 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 hedging
transactions and the possible inability of a Fund to close out or to liquidate
its hedged position. There can be no assurance, however, that any hedging
strategy will succeed. If PIMCO (or Mitchell Hutchins, with respect to MH/KP
Fund) incorrectly forecasts interest rates, market values or other economic
factors in utilizing a hedging strategy for a Fund, the Fund might have been in
a better position had the Fund not hedged at all.
THE PROPOSED TRANSACTION
Reorganization Plan
The terms and conditions under which the proposed transaction may be
consummated are set forth in the Reorganization Plan. Significant provisions of
the Reorganization Plan are summarized below; however, this summary is qualified
in its entirety by reference to the Reorganization Plan, which is attached as
Appendix A to this Prospectus/Proxy Statement.
The Reorganization Plan contemplates: (a) PW Fund's acquiring on the
Closing Date the assets of MH/KP Fund in exchange solely for PW Fund shares and
the assumption by PW Fund of MH/KP Fund's liabilities, and (b) the constructive
distribution of PW Fund shares to the shareholders of MH/KP Fund.
The assets of MH/KP Fund to be acquired by PW Fund include all cash,
cash equivalents, securities, receivables and other property owned by MH/KP
Fund. PW Fund will assume from MH/KP Fund all debts, liabilities, obligations
and duties of MH/KP Fund of whatever kind or nature; provided, however, that
MH/KP Fund will use its best efforts, to the extent practicable, to discharge
all of its known debts, liabilities, obligations and duties prior to the Closing
Date. PW Fund also will deliver to MH/KP Fund shares of PW Fund, which then will
be constructively distributed to MH/KP Fund's shareholders.
The value of MH/KP Fund's assets to be acquired, and the amount of its
liabilities to be assumed, by PW Fund and the net asset value of a Class A,
Class C and Class D share of PW Fund will be determined as of the close of
regular trading on the New York Stock Exchange, Inc. on the Closing Date. 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 MH/KP
Trust's board of trustees (with respect to MH/KP Fund) or PW Trust's board of
trustees (with respect to PW 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 each Trust's board of
trustees, as applicable.
13
On, or as soon as practicable after, the Closing Date, MH/KP Fund will
distribute to its shareholders of record the shares of PW Fund it received, by
Class, so that each shareholder of MH/KP Fund will receive a number of full and
fractional shares of the Corresponding Class of PW Fund equal in value to the
shareholder's holdings in MH/KP Fund; MH/KP Fund will be terminated as soon as
practicable thereafter. Such distribution will be accomplished by opening
accounts on the books of PW Fund in the names of MH/KP Fund shareholders and by
transferring thereto the shares of each Class previously credited to the account
of MH/KP Fund on those books. Fractional shares in each Corresponding Class of
PW Fund will be rounded to the third decimal place.
Accordingly, immediately after the Reorganization, each former
shareholder of MH/KP Fund will own shares of the Corresponding Class of PW Fund
that will equal the value of that shareholder's shares in the Corresponding
Class of MH/KP Fund immediately prior to the Reorganization. Moreover, because
shares of each Class of PW Fund will be issued at net asset value in exchange
for the net assets applicable to the Corresponding Class of MH/KP Fund, the
aggregate value of shares of each Class of PW Fund so issued will equal the
aggregate value of the shares of the Corresponding Class of MH/KP Fund. The net
asset value per share of PW Fund will be unchanged by the transactions. Thus,
the Reorganization will not result in a dilution of any shareholder interest.
Any transfer taxes payable upon issuance of shares of PW Fund in a name
other than that of the registered holder of the shares on the books of MH/KP
Fund shall be paid by the person to whom such shares are to be issued as a
condition of such transfer. Any reporting responsibility of MH/KP Fund will
continue to be its responsibility up to and including the Closing Date and such
later date on which MH/KP Fund is terminated.
The cost of the Reorganization, including professional fees and the
cost of soliciting proxies for the Meeting, consisting principally of printing
and mailing expenses, together with the cost of any supplementary solicitation,
will be borne by Mitchell Hutchins.
The consummation of the Reorganization is subject to a number of
conditions set forth in the Reorganization Plan, some of which may be waived by
each Trust. In addition, the Reorganization Plan may be amended in any mutually
agreeable manner, except that no amendment may be made subsequent to the Meeting
that has a material adverse effect on the shareholders' interests.
Reasons for the Reorganization
MH/KP Trust's board of trustees, including a majority of its
Independent Trustees, has determined that the Reorganization is in the best
interests of MH/KP Fund, that the terms of the Reorganization are fair and
reason-able, and that the interests of the shareholders of MH/KP Fund will not
be diluted as a result of the Reorganization. PW Trust's board of trustees,
including a majority of its Independent Trustees, has determined that the
Reorgan-ization is in the best interests of PW Fund, that the terms of the
Reorganization are fair and reasonable, and that the interests of the
shareholders of PW Fund will not be diluted as a result of the Reorganization.
In considering the Reorganization, the boards of trustees made an
extensive inquiry into a number of factors, including the following:
(1) the compatibility of the investment objectives, policies and
restrictions of the Funds; (2) the effect of the Reorganization on the
expected investment performance of the Funds; (3) the effect of the
Reorganization on the expense ratio of PW Fund relative to each Fund's
current expense ratio; (4) the costs to be incurred by each Fund as a
result of the Reorganization; (5) the tax consequences of the
Reorganization; (6) possible alternatives to the Reorganization,
including continuing to operate on a stand-alone basis or liquidation;
and
14
(7) potential benefits of the Reorganization to other persons,
especially Mitchell Hutchins and PaineWebber.
The Reorganization was recommended to the boards of trustees by
Mitchell Hutchins at meetings of the boards of trustees held on July 20, 1995.
In approving the Reorganization, the boards of trustees took into account the
fact that the Funds' investment objectives are substantially identical, that
their investment policies are similar, and that Mitchell Hutchins did not
consider there to be a need to offer both Funds to investors. The boards
recognized that, as the larger of the two Funds, PW Fund was the logical
survivor in any combination and that PIMCO, the sub-adviser for PW Fund, is one
of the largest fixed income management firms in the nation.
The boards' approval of the Reorganization was also based on the fact
that, due to PW Fund's larger size and lower operating expenses, each class of
shares of the combined Fund that would be received by MH/KP Fund shareholders in
the Reorganization is expected to have lower operating expenses as a percentage
of net assets than that of the comparable class of MH/KP Fund, standing alone.
The boards were advised by Mitchell Hutchins that combining the two Funds would
eliminate duplicative expenses and achieve other economies of scale in
connection with custody fees, state registration fees, printing expenses,
trustees fees and legal and audit expenses.
The boards recognized that the reduction in operating expenses would
not be immediately apparent to MH/KP Fund shareholders because Mitchell Hutchins
(like the previous adviser to the MH/KP Fund) has been voluntarily providing
MH/KP Fund with certain fee waivers and expense reimbursements since February,
1995. The boards also recognized, however, that Mitchell Hutchins is under no
obligation to continue to provide such waivers and reimbursements and had
undertaken to provide them due to MH/KP Fund's small size and until MH/KP Fund
could be combined with a larger fund.
THE BOARD OF TRUSTEES RECOMMENDS THAT THE
SHAREHOLDERS OF MH/KP FUND VOTE "FOR" THE
REORGANIZATION
Description of Securities to be Issued
PW Trust is registered with the SEC as an open-end management
investment company. Its trustees are authorized to issue an unlimited number of
shares of beneficial interest of separate series (par value $.001 per share).
The trustees have established PW Fund as one of PW Trust's five series and have
authorized the public offering of four Classes of shares of PW Fund. A separate
filing will be made prior to the Closing Date for the purpose of registering
additional Class C shares with the SEC. Each share in a Class represents an
equal proportionate interest in PW Fund with each other share in that Class.
Shares of PW 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,
if any.
On the Closing Date, PW 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 Reorganization. Each
Class represents interests in the same assets of the Fund. The Classes currently
differ as follows: (1) Class A, Class B and Class D shares, unlike Class C
shares, bear certain fees under plans of distribution and have exclusive voting
rights on matters pertaining to those plans; (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 D shares are subject to
neither an initial sales charge nor a CDSC, bear ongoing distribution fees and
do not convert into another Class; (5) Class C shares are subject to neither an
initial sales charge or a CDSC nor ongoing service or distribution fees; and (6)
each Class may bear differing amounts of certain Class-specific expenses. Each
share of
15
each Class of PW Fund is entitled to participate equally in dividends and other
distributions and the proceeds of any liquidation, except that, due to the
differing expenses borne by the four Classes, such dividends and proceeds are
likely to be lower for the other Classes than for the Class C shares. Dividends
on each Class also might be affected differently by the allocation of other
Class-specific expenses.
PW Trust does not hold annual meetings of shareholders. There will
normally be no meetings of shareholders for the purpose of electing trustees
unless fewer than a majority of the trustees holding office has been elected by
shareholders, at which time the trustees then in office will call a
shareholders' meeting for the election of trustees. Under the 1940 Act,
shareholders of record of at least two-thirds of the outstanding shares of an
investment company may remove a trustee by votes cast in person or by proxy at a
meeting called for that purpose. The trustees are required to call a meeting of
shareholders for the purpose of voting upon the question of removal of any
trustee when requested in writing to do so by the shareholders of record holding
at least 10% of PW Trust's outstanding shares.
Federal Income Tax Considerations
The exchange of MH/KP Fund's assets for PW Fund shares and PW Fund's
assumption of MH/KP Fund's liabilities is intended to qualify for federal income
tax purposes as a tax-free reorganization under section 368(a)(1)(C) of the
Code. PW Trust has received an opinion of Kirkpatrick & Lockhart LLP, its
counsel, and MH/KP Trust has received an opinion of Willkie Farr & Gallagher,
its counsel, each substantially to the effect that:
(i) PW Fund's acquisition of MH/KP Fund's assets in exchange solely for
PW Fund shares and PW Fund's assumption of MH/KP Fund's liabilities,
followed by MH/KP Fund's distribution of those shares to its
shareholders constructively in exchange for their MH/KP Fund shares,
will constitute a "reorganization" within the meaning of section
368(a)(1)(C) of the Code, and each Fund will be "a party to a
reorganization" within the meaning of section 368(b) of the Code;
(ii) No gain or loss will be recognized to MH/KP Fund on the transfer
to PW Fund of its assets in exchange solely for PW Fund shares and PW
Fund's assumption of MH/KP Fund's liabilities or on the subsequent
distribution of those shares to MH/KP Fund's shareholders in
constructive exchange for their MH/KP Fund shares;
(iii) No gain or loss will be recognized to PW Fund on its receipt of
the transferred assets in exchange solely for PW Fund shares and its
assumption of MH/KP Fund's liabilities;
(iv) PW Fund's basis for the transferred assets will be the same as the
basis thereof in MH/KP Fund's hands immediately prior to the
Reorganization, and PW Fund's holding period for those assets will
include MH/KP Fund's holding period therefor;
(v) An MH/KP Fund shareholder will recognize no gain or loss on the
constructive exchange of all its MH/KP Fund shares solely for PW Fund
shares pursuant to the Reorganization; and
(vi) An MH/KP Fund shareholder's basis for the PW Fund shares to be
received by it in the Reorganization will be the same as the basis for
its MH/KP Fund shares to be constructively surrendered in exchange for
those PW Fund shares, and its holding period for those PW Fund shares
will include its holding period for those MH/KP Fund shares, provided
they are held as capital assets by the shareholder on the Closing Date.
Each such opinion may state that no opinion is expressed as to the effect of the
Reorganization on the Funds or any shareholder with respect to any asset
(including certain options, futures and forward contracts) as to which any
16
unrealized gain or loss is required to be recognized for federal income tax
purposes at the end of a taxable year (or on the termination or transfer
thereof) under a mark-to-market system of accounting.
Utilization by PW Fund after the Reorganizations of pre-Reorganization
capital losses realized by MH/KP Fund could be subject to limitation in future
years under the Code.
Shareholders of MH/KP Fund should consult their tax advisers regarding
the effect, if any, of the Reorganization in light of their individual
circumstances. Because the foregoing discussion only relates to the federal
income tax consequences of the Reorganization, those shareholders also should
consult their tax advisers as to state and local tax consequences, if any, of
the Reorganization.
Capitalization
The following table shows the capitalization of each Fund at May 31,
1995 (unaudited) and on a pro forma combined basis (unaudited) giving effect to
the Reorganization:
<TABLE>
<CAPTION>
Pro Forma
PW Fund MH/KP Fund Combined
------- ---------- --------
<S> <C> <C> <C>
Net Assets
Class A ........ $132,662,498 $ 25,849,468 $158,511,966
Class B(1) ..... 10,240,903 2,693,596 10,240,903
Class C ........ __ 626,513 626,513
Class D ........ 216,381,087 __ 219,074,683
Net Asset Value Per Share
Class A ........ $ 2.32 $ 11.61 $ 2.32
Class B(1) ..... 2.32 11.61 2.32
Class C ........ __ 11.62 2.32
Class D ........ 2.32 __ 2.32
Shares Outstanding
Class A ........ 57,187,885 2,226,210 68,328,531
Class B(1) ..... 4,415,142 231,988 4,415,142
Class C ........ __ 53,936 270,145
Class D ........ 93,328,825 __ 94,489,765
</TABLE>
(1) Class B shares of MH/KP Fund will be exchanged for Class D shares
of PW Fund.
17
ADDITIONAL INFORMATION ABOUT PW FUND
Financial Highlights
The table below provides selected per share data and ratios for one
Class A share and one Class D share for the periods shown. (No Class B shares of
PW Fund will be issued in the Reorganization.) This information is supplemented
by the financial statements and accompanying notes appearing in PW Fund's Annual
Report to Shareholders for the fiscal year ended November 30, 1994, and the
unaudited financial statements and accompanying notes in PW Fund's Semi-Annual
Report to Shareholders for the six month period 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
table below, insofar as it relates to the periods ended November 30, 1993 and
November 30, 1994, respectively, 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.
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------------------------------------
For the Period
May 3, 1993
For the Six Months For the Year (commencement of
Ended May 31, 1995 Ended operations)
(unaudited) November 30, 1994 to November 30, 1993
----------- ----------------- --------------------
<S> <C> <C> <C>
Net asset value, beginning of
period ........................... $ 2.25 $ 2.48 $ 2.50
------- -------- -------
Net increase (decrease) from
investment operations:
Net investment income ............ 0.07 0.12 0.07
Net realized and unrealized losses
from investment, futures and
options transactions ............. 0.07 (0.29) (0.02)
------- -------- -------
Net increase (decrease) in net
asset value from operations ...... 0.14 (0.17) 0.05
------- -------- -------
Less distributions:
Dividends from net investment
income ........................... (0.07) (0.12) (0.07)
------- -------- -------
Contribution to capital from
adviser .......................... -- 0.06 --
------- -------- -------
Net asset value, end of period ... $ 2.32 $ 2.25 $ 2.48
======= ======== =======
Total investment return(1) ....... 6.20% (4.50)%** 1.88%
======= ======== =======
Ratios/Supplemental data:
Net assets, end of period
(000's omitted) ............. $132,662 $158,712 $551,243
Ratio of expenses to average
net assets(2) ............... 1.07%* 0.84% 0.81%*
Ratios of net investment
income to average net
assets(2) ................... 5.95%* 5.16% 4.85%*
Portfolio turnover rate ..... 64.81% 246.34% 96.60%
</TABLE>
18
----------------------------
* Annualized.
** During the year ended November 30, 1994, PaineWebber and Mitchell
Hutchins took actions affecting PW Fund and its shareholders.
Mitchell Hutchins made payments aggregating approximately $33
million for the benefit of shareholders of the Fund who held Fund
shares on or after April 28, 1994, pursuant to a settlement of
certain class action lawsuits filed against the Fund, PaineWebber,
Mitchell Hutchins and related parties. The payments equated to
$0.06 per share for each Fund share outstanding on May 6, 1994 or
issued from that date through June 7, 1994, plus certain additional
amounts. If such payments had not been made, the total investment
return would have been (7.02)% for Class A, (7.74)% for Class B and
(7.50)% for Class D.
(1) Total investment return is calculated assuming a $1,000 investment
on the first day of each period reported, reinvestment of all
dividends 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 for Class A and Class B would be
lower if sales charges were included. Total investment returns for
periods less than one year have not been annualized.
(2) During the year ended November 30, 1994 Mitchell Hutchins waived a
portion of its advisory and administration fees. If such waivers had
not been made, the annualized ratios of expenses to average net
assets, and net investment income to average net assets,
respectively, would have been 0.88% and 5.12% for Class A.
19
<TABLE>
<CAPTION>
Class D
-----------------------------------------------------------------------------------
For the Period
May 3, 1993
For the Six Months For the Year (commencement of
Ended May 31, 1995 Ended operations)
(unaudited) November 30, 1994 to November 30, 1993
----------- ----------------- --------------------
<S> <C> <C> <C>
Net asset value, beginning of
period ........................... $ 2.25 $ 2.47 $ 2.50
------- -------- -------
Net increase (decrease) from
investment operations:
Net investment income ............ 0.06 0.11 0.06
Net realized and unrealized losses
from investment, futures and
options transactions ............. 0.07 (0.28) (0.03)
------- -------- -------
Net increase (decrease) in net
asset value from operations ...... 0.13 (0.17) 0.03
------- -------- -------
Less distributions:
Dividends from net investment
income ........................... (0.06) (0.11) (0.06)
------- -------- -------
Contribution to capital from
adviser .......................... -- 0.06 --
------- -------- -------
Net asset value, end of period ... $ 2.32 $ 2.25 $ 2.47
======= ======== =======
Total investment return(1) ....... 5.90% (4.99)%** 1.20%
======= ======== =======
Ratios/Supplemental data:
Net assets, end of period
(000's omitted) ............. $216,381 $296,182 $1,186,181
Ratio of expenses to average
net assets(2) ............... 1.67%* 1.36% 1.35%*
Ratios of net investment
income to average net
assets(2) ................... 5.38%* 4.65% 4.52%*
Portfolio turnover rate ..... 64.81% 246.34% 96.60%
</TABLE>
-------------
* Annualized.
** During the year ended November 30, 1994, PaineWebber and Mitchell
Hutchins took actions affecting PW Fund and its shareholders.
Mitchell Hutchins made payments aggregating approximately $33
million for the benefit of shareholders of the Fund who held Fund
shares on or after April 28, 1994, pursuant to a settlement of
certain class action lawsuits filed against the Fund, PaineWebber,
Mitchell Hutchins and related parties. The payments equated to
$0.06 per share for each Fund share outstanding on May 6, 1994 or
issued from that date through June 7, 1994, plus certain additional
amounts. If such payments had not been made, the total investment
return would have been (7.02)% for Class A, (7.74)% for Class B and
(7.50)% for Class D.
(1) Total investment return is calculated assuming a $1,000 investment
on the first day of each period reported, reinvestment of all
dividends 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 for Class A and
20
Class B would be lower if sales charges were included. Total
investment returns for periods less than one year have not been
annualized.
(2) During the year ended November 30, 1994 Mitchell Hutchins waived a
portion of its advisory and administration fees. If such waivers had
not been made, the annualized ratios of expenses to average net
assets, and net investment income to average net assets,
respectively, would have been 1.39% and 4.61% for Class D.
MISCELLANEOUS
Available Information
MH/KP Trust and PW Trust 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. 20459 at
prescribed rates.
Legal Matters
Certain legal matters in connection with the issuance of PW Fund
shares as part of the Reorganization will be passed upon by Kirkpatrick &
Lockhart LLP, counsel to PW Trust.
Experts
The audited financial statements of PW Fund and MH/KP Fund,
incorporated by reference herein or in the Statement of Additional Information,
have been audited by Ernst & Young LLP and Deloitte & Touche LLP, independent
auditors, respectively, whose reports thereon are included in the Funds' Annual
Report to Shareholders for the fiscal years ended November 30, 1994 and August
31, 1994, respectively, and in MH/KP Fund's semi-annual report to shareholders
for the six-month period ended February 28, 1995. The financial statements
audited by Ernst & Young LLP and Deloitte & Touche LLP have been incorporated by
reference herein or in the Statement of Additional Information in reliance on
their reports given on their authority as experts in auditing and accounting.
21
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 Short-Term 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 Adjustable Rate Government
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 transac-tions 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). (Acquiring Fund is establishing Class C
expressly for the purpose of facilitating the Reorganization -- Class C
Acquiring Fund Shares are to be exchanged, in effect, for Class C Target Shares
(defined below) as part of the Reorganization.) 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
distri-bution fees at the respective annual rates of 0.25% and 0.75% of class
assets; (3) Class C Acquiring Fund Shares will be offered to a limited class of
offerees at NAV without imposition of any sales charge and will not be 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).
A-1
In consideration of the mutual promises herein, the parties covenant
and agree as follows:
1. PLAN OF REORGANIZATION AND TERMINATION OF TARGET
1.1. Target agrees to assign, sell, convey, transfer, and deliver
all of its assets described in paragraph 1.2 ("Assets") to Acquiring Fund.
Acquiring Fund agrees in exchange therefor --
(a) to issue and deliver to Target the number of full and
fractional (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
A-2
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.
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 con-junction
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
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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.
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 mar-ketable 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
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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;
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 state-ment ("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 provi-sions 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;
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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.
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. Acquiring Fund is establishing Class C (which was
authorized previously) expressly for the purpose of facilitating the
Reorganization, and only one Class C Acquiring Fund Share will be
outstanding immediately before the Effective Time. 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 mate-rial fact required to be
stated therein or necessary to make the statements therein, in light
of the circum-stances 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 agree-ment, 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
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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, 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 bank-ruptcy, 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 other-wise 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;
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4.2.15. There is no plan or intention for Acquiring Fund to be
dissolved or merged into another corporation or business trust or any
"fund" thereof (within the meaning of section 851(h)(2) of the Code)
following the Reorganization;
4.2.16. Immediately after the Reorganization, (a) not more
than 25% of the value of Acquiring Fund's total assets (excluding
cash, cash items, and U.S. government securities) will be invested in
the stock and securities of any one issuer and (b) not more than 50%
of the value of such assets will be invested in the stock and
securities of five or fewer issuers; and
4.2.17. Acquiring fund does not own, directly or indirectly,
nor at the Effective Time will it own, directly or indirectly, nor has
it owned, directly or indirectly, at any time during the past five
years, any shares of Target.
4.3. Each Fund represents and warrants as follows:
4.3.1. The fair market value of the Acquiring Fund Shares,
when received by the Shareholders, will be approximately equal to the
fair market value of their Target Shares constructively surrendered in
exchange therefor;
4.3.2. Its management (a) is unaware of any plan or intention
of Shareholders to redeem or otherwise dispose of any portion of the
Acquiring Fund Shares to be received by them in the Reorgani-zation
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;
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4.3.8. None of the compensation received by any Shareholder
who is an employee of Target will be separate consideration for, or
allocable to, any of the Target Shares held by such
Shareholder-employee; none of the Acquiring Fund Shares received by
any such Shareholder-employee will be separate consideration for, or
allocable to, any employment agreement; and the consideration paid to
any such Shareholder-employee will be for services actually rendered
and will be commensurate with amounts paid to third parties bargaining
at arm's-length for similar services; and
4.3.9. Immediately after the Reorganization, the Shareholders
will not own shares constituting "control" of Acquiring Fund within
the meaning of section 304(c) of the Code.
5. COVENANTS
5.1. Each Fund covenants to operate its respective business in the
ordinary course between the date hereof and the Closing, it being understood
that (a) such ordinary course will include declaring and paying customary
dividends and other distributions and such changes in operations as are
contemplated by each Fund's normal business activities and (b) each Fund will
retain exclusive control of the composition of its portfolio until the Closing;
pro-vided 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.
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6. CONDITIONS PRECEDENT
Each Fund's obligations hereunder shall be subject to (a) performance
by the other Fund of all the obliga-tions 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.
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 Massa-chusetts 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
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or any provision of any agreement (known to such counsel, without any
independent inquiry or investiga-tion) to which PW Trust (with respect
to Acquiring Fund) is a party or by which it is bound or (to the
knowledge of such counsel, without any independent inquiry or
investigation) result in the acceleration of any obligation, or the
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 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 re-quired 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, sub-stantially 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 busi-ness 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
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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;
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 reorgani-zation 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;
A-12
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 in-clude Target's holding period therefor;
6.6.5. A Shareholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for Acquiring
Fund Shares pursuant to the Reorganization; and
6.6.6. A Shareholder's basis for the Acquiring Fund Shares to
be received by it in the Reorganization will be the same as the basis
for its Target Shares to be constructively surrendered in exchange for
those Acquiring Fund Shares, and its holding period for those
Acquiring Fund Shares will include its holding period for those Target
Shares, provided they are held as capital assets by the Shareholder at
the Effective Time.
Notwithstanding 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 Mitchell Hutchins Asset Management Inc.
Such expenses include: (a) expenses incurred in connection with entering into
and carrying out the provisions of this Agreement; (b) expenses associated with
the preparation and filing of the Registration Statement; (c) registration or
qualification fees and expenses of preparing and filing such forms as are
necessary under applicable state securities laws to qualify the Acquiring Fund
Shares to be issued in connection herewith in each state in which Target's
shareholders are resident as of the date of the mailing of the Proxy Statement
to such shareholders; (d) printing and postage expenses; (e) legal and
accounting fees; and (f) solicitation costs.
A-13
8. ENTIRE AGREEMENT; SURVIVAL
Neither party has made any representation, warranty, or covenant not
set forth herein, and this Agreement constitutes the entire agreement between
the parties. The representations, warranties, and covenants contained herein or
in any document delivered pursuant hereto or in connection herewith shall
survive the Closing.
9. TERMINATION OF AGREEMENT
This Agreement may be terminated at any time at or prior to the
Effective Time, whether before or after approval by Target's shareholders:
9.1. By either Fund (a) in the event of the other Fund's material
breach of any representation, warranty, or covenant contained herein to be
performed at or prior to the Effective Time, (b) if a condition to its
obligations has not been met and it reasonably appears that such condition will
not or cannot be met, or (c) if the Closing has not occurred on or before March
31, 1996; or
9.2. By the parties' mutual agreement.
In the event of termination under paragraphs 9.1.(c) or 9.2, there shall be no
liability for damages on the part of either Fund, or the trustees or officers of
either Investment Company, to the other Fund.
10. AMENDMENT
This Agreement may be amended, modified, or supplemented at any time,
notwithstanding approval thereof by Target's shareholders, in such manner as may
be mutually agreed upon in writing by the parties; provided that following such
approval no such amendment shall have a material adverse effect on the
Shareholders' interests.
11. MISCELLANEOUS
11.1. This Agreement shall be governed by and construed in accordance
with the internal laws of the Commonwealth of Massachusetts; provided that, in
the case of any conflict between such laws and the federal securities laws, the
latter shall govern.
11.2. Nothing expressed or implied herein is intended or shall be
construed to confer upon or give any person, firm, trust, or corporation other
than the parties and their respective successors and assigns any rights or
remedies under or by reason of this Agreement.
11.3. The parties acknowledge that each Investment Company is a
Business Trust. Notice is hereby given that this instrument is executed on
behalf of each Investment Company's trustees solely in their capacity as
trustees, and not individually, and that each Investment Company's obligations
under this instrument are not binding on or enforceable against any of its
trustees, officers, or shareholders, but are only binding on and enforceable
against the respective Funds' assets and property. Each Fund agrees that, in
asserting any rights or claims under this Agreement, it shall look only to the
other Fund's assets and property in settlement of such rights or claims and not
to such trustees or shareholders.
A-14
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 SHORT-TERM 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
ADJUSTABLE RATE GOVERNMENT FUND
By: /s/ S.H. John /s/ Scott Griff
-------------------- ------------------------
Assistant Secretary Vice President
A-15
APPENDIX B
BENEFICIAL OWNERSHIP OF SHARES OF PW FUND AND MH/KP FUND
Number
Name Address (and Percentage) of Shares
Beneficially Owned
------------------
B-1
PAINEWEBBER MANAGED INVESTMENTS TRUST
PART B
PAINEWEBBER SHORT-TERM U.S. GOVERNMENT INCOME FUND
(a series of PaineWebber Managed Investments Trust)
MITCHELL HUTCHINS/KIDDER, PEABODY
ADJUSTABLE RATE GOVERNMENT FUND
(a series of Mitchell Hutchins/
Kidder, Peabody Investment Trust)
1285 Avenue of the Americas
New York, New York 10019
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information relates specifically to the
proposed Reorganization whereby PaineWebber Short-Term U.S. Government Income
Fund ("PW Fund") would acquire the assets of Mitchell Hutchins/Kidder, Peabody
Adjustable Rate Government Fund ("MH/KP Fund") in exchange solely for shares of
beneficial interest in PW Fund and the assumption by PW Fund of MH/KP Fund's
liabilities. This Statement of Additional Information consists of this cover
page and the following described documents, each of which is incorporated by
reference herein:
(1) The Statement of Additional Information of PW Fund, dated
April 1, 1995, previously filed on EDGAR, Accession Number
0000950130-95-000634.
(2) The Statement of Additional Information of MH/KP Fund, dated
December 29, 1994.
(3) The Annual Report to Shareholders of PW Fund for the fiscal
year ended November 30, 1994.
(4) The Annual Report to Shareholders of MH/KP Fund for the fiscal
year ended August 31, 1994.
(5) The Semi-Annual Report to Shareholders of PW Fund for the
six-month period ended May 31, 1995, previously filed on
EDGAR, Accession Number 0000950130-95-001454.
(6) The Semi-Annual Report to Shareholders of MH/KP Fund for the
six-month period ended February 28, 1995, previously filed on
EDGAR, Accession Number 0000950112-95-002037.
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 matter. A copy of the
Prospectus/Proxy Statement may be obtained by calling any PaineWebber investment
executive or correspondent firm or by calling toll-free [1-800-852-4750]. This
Statement of Additional Information is dated September __, 1995.
1
Statement of Additional Information December 29, 1994
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Kidder, Peabody Adjustable Rate Government 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 Adjustable Rate
Government 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 AND INVESTMENT ADVISER
Kidder Peabody Asset Management, Inc.
DISTRIBUTOR
Kidder, Peabody & Co. Incorporated
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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.
ADJUSTABLE RATE SECURITIES
The Fund will invest at least 65% of its total assets in adjustable rate
securities ('Adjustable Rate Securities'), consisting principally of
mortgage-backed and asset-backed securities. The collateral backing
mortgage-backed securities ('MBSs') and asset-backed securities ('ABSs') is
usually held by an independent bailee, custodian or trustee on behalf of the
holders of the related MBSs or ABSs. The holder of the related MBSs or ABSs
(such as the Fund) will have either an ownership interest or security interest
in the underlying collateral and can exercise its rights to it through the
bailee, custodian or trustee.
INDEXES. The key determinant of the interest rates paid on Adjustable Rate
Securities is the interest rate index chosen (and the spread relating to the
securities). Certain indices are tied to interest rates paid on specified
securities, such as one-, three- or five-year U.S. Treasury securities, whereas
other indexes are more general. A prominent example of a general type of index
is the cost of funds for member institutions (that is, savings and loan
associations and savings banks) for the Federal Home Loan Bank (the 'FHLB') of
San Francisco (the 'COFI').
A number of factors may affect the COFI and cause it to behave differently
from indices tied to specific types of securities. The COFI is dependent upon,
among other things, the origination dates and maturities of the member
institutions' liabilities. Consequently, the COFI may not reflect the average
prevailing market interest rates on new liabilities of similar maturities. No
assurance can be given that the COFI will necessarily move in the same direction
as prevailing interest rates since as longer term deposits or borrowings mature
and are renewed at market interest rates the COFI will rise or fall depending
upon the differential between the prior and the new rates on the deposits and
borrowings. In addition, associations in the thrift industry in recent years
have caused and may continue to cause the cost of funds of thrift institutions
to change for reasons unrelated to changes in general interest rate levels. Any
movement in the COFI as compared to other indices based upon specific interest
rates may be affected by changes instituted by the FHLB of San Francisco in the
method used to calculate the COFI. To the extent that the COFI may reflect
interest changes on a more delayed basis than other indices, in a period of
rising interest rates any increase may produce a higher yield later than would
be produced by such other indices. In a period of declining interest rates, the
COFI may remain higher than other market interest rates, which may result in a
higher level of principal prepayments on mortgage loans that adjust in
accordance with the COFI than mortgage or other loans that adjust in accordance
with other indices. In addition, to the extent that COFI may lag behind other
indices in a period of rising interest rates, securities based on COFI may have
a lower market value than would result from use of other indices. In a period of
declining interest rates, securities based on COFI may reflect a higher market
value than would securities based on other indices.
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PRIVATELY ISSUED MBSS AND ABSS -- CREDIT ENHANCEMENTS. Credit enhancements
for certain privately issued MBSs and ABSs typically are provided by external
entities such as banks or financial insurance companies or by the structure of a
transaction itself. Examples of credit support arising out of the structure of
the transaction include 'senior-subordinated securities' (multiple class
securities with one or more classes subordinated to other classes as to the
payment of principal and interest with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of 'reserve funds' (in which case cash or investments, sometimes funded
from a portion of the payments on the underlying assets, are held in reserve
against future losses) and 'overcollateralization' (in which case the scheduled
payments on, or the principal amount of, the underlying assets exceeds that
required to make payment of the securities and pay any servicing or other fees).
The Fund may purchase subordinated securities that, as noted above, may serve as
a form of credit support for senior securities purchased by other investors.
GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities ('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, 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 U.S. Government is not obligated
by law to provide support to an instrumentality that it sponsors, the Fund
invests in obligations issued by an instrumentality of the U.S. Government only
if Kidder Peabody Asset Management, Inc. ('KPAM'), the Fund's manager and
investment adviser, determines that the instrumentality's credit risk does not
make its securities unsuitable for investment by the Fund.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. GNMA is a wholly-owned corporate
instrumentality of the U.S. Government within the Department of Housing and
Urban Development. The National Housing Act of 1934, as amended (the 'Housing
Act'), authorizes GNMA to guarantee the timely payment of the principal of and
interest on securities that are based on and backed by a pool of specified
mortgage loans. For these types of securities to qualify for a GNMA guarantee,
the underlying mortgages must be insured by the Federal Housing Administration
under the Housing Act, or Title V of the Housing Act of 1949 ('FHA Loans'), or
be guaranteed by the Veterans' Administration under the Servicemen's
Readjustment Act of 1944, as amended ('VA Loans'), or be pools of other eligible
mortgage loans. The Housing Act provides that the full faith and credit of the
U.S. Government is pledged to the payment of all amounts that may be required to
be paid under any guarantee. In order to meet its obligations
3
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under such guarantee, GNMA is authorized to borrow from the U.S. Treasury with
no limitations as to amount.
GNMA pass-through MBSs may represent a proportionate interest in one or
more pools of the following types of mortgage loans, among others: (1) fixed
rate level payment mortgage loans; (2) fixed rate graduated payment mortgage
loans; (3) fixed rate growing equity mortgage loans; (4) fixed rate mortgage
loans secured by manufactured (mobile) homes; (5) mortgage loans on multifamily
residential properties under construction; (6) mortgage loans on completed
multifamily projects; (7) fixed rate mortgage loans as to which escrowed funds
are used to reduce the borrower's monthly payments during the early years of the
mortgage loans ('buydown' mortgage loans); (8) mortgage loans that provide for
adjustments on payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (9) mortgage-backed serial notes.
FEDERAL NATIONAL MORTGAGE ASSOCIATION. FNMA is a federally chartered and
privately owned corporation established under the Federal National Mortgage
Association Charter Act. FNMA was originally organized in 1938 as a U.S.
Government agency to add greater liquidity to the mortgage market. FNMA was
transformed into a private sector corporation by legislation enacted in 1968.
FNMA provides funds to the mortgage market primarily by purchasing home mortgage
loans from local lenders, thereby providing them with funds for additional
lending. FNMA acquires funds to purchase loans from investors that may not
ordinarily invest in mortgage loans directly, thereby expanding the total amount
of funds available for housing.
Each FNMA pass-through MBS represents a proportionate interest in one or
more pools of FHA Loans, VA Loans or conventional mortgage loans (that is,
mortgage loans that are not insured or guaranteed by any governmental agency).
The loans contained in those pools consist of: (1) fixed rate level payment
mortgage loans; (2) fixed rate growing equity mortgage loans; (3) fixed rate
graduated payment mortgage loans; (4) variable rate mortgage loans; (5) other
adjustable rate mortgage loans; and (6) fixed rate mortgage loans secured by
multifamily projects.
FEDERAL HOME LOAN MORTGAGE CORPORATION. FHLMC is a corporate
instrumentality of the U.S. Government established by the Emergency Home Finance
Act of 1970, as amended (the 'FHLMC Act'). FHLMC was organized primarily for the
purpose of increasing the availability of mortgage credit to finance needed
housing. The operations of FHLMC currently consist primarily of the purchase of
first lien, conventional, residential mortgage loans and participation interests
in mortgage loans and the resale of the mortgage loans in the form of
mortgage-backed securities.
The mortgage loans underlying the FHLMC MBSs typically consist of fixed
rate or adjustable rate mortgage loans with original terms to maturity of
between 10 and 30 years, substantially all of which are secured by first liens
on one- to four-family residential properties or multifamily projects. Each
mortgage loan must meet the applicable standards set out in the FHLMC Act.
Mortgage loans underlying FHLMC MBSs may include whole loans, participation
interests in whole loans and undivided interests in whole loans and
participations in another FHLMC MBS.
4
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INVESTMENT TECHNIQUES AND STRATEGIES
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, 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.
INTEREST RATE HEDGING TRANSACTIONS AND ASSOCIATED RISK FACTORS. The Fund
enters into interest rate transactions primarily to hedge its portfolio of
Adjustable Rate Securities against fluctuations in interest rates. Typically,
the parties with which the Fund enters into interest rate transactions are
broker-dealers and other financial institutions typically called
'counter-parties.' Certain federal income tax requirements may, however, limit
the Fund's ability to engage in certain interest rate transactions. Gains from
transactions in interest rate swaps distributed to shareholders are taxable as
ordinary income or, in certain circumstances, as long-term capital gains to
shareholders.
The purchase of an interest rate cap entitles the purchaser, to the extent
that a specified index exceeds a predetermined rate, to receive payments of
interest on a notional principal amount from the party selling the cap. The
purchase of an interest rate cap therefore hedges against an increase in
interest rates above the cap on an Adjustable Rate Security held by the Fund.
Thus, for example, in the case of an Adjustable Rate Security indexed to the
COFI, if the COFI increases above the rate paid on the security, the
counter-party will pay the differential to the Fund. The opposite is true in the
case of an interest rate floor; it hedges against a decrease in the index rate
below any floor on the Adjustable Rate Security.
5
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Interest rate transactions involve the exchange by the Fund with another
party of their respective commitments to pay or receive interest, such as an
exchange of fixed rate payments for floating rate payments. If the Fund were to
hold an MBS with an interest rate that is reset only once each year, for
example, it could swap the right to receive interest at the fixed rate for the
right to receive interest at a rate that is reset every week. This swap would
enable the Fund to offset a decline in the value of the MBS due to rising
interest rates, but would also limit its ability to benefit from falling
interest rates. Conversely, if the Fund were to hold an MBS with an interest
rate that is reset every week and it desired to lock in what it believed to be a
high interest rate for one year, it could swap the right to receive interest at
this variable weekly rate for the right to receive interest at a rate that is
fixed for one year. This type of a swap would protect the Fund from a reduction
in yield due to falling interest rates, but would preclude it from taking full
advantage of rising interest rates.
The Fund enters into interest rate swap transactions on a net basis; that
is, the two payment streams are netted out, with the Fund receiving or paying
only the net amount of the two payments. Inasmuch as these transactions are
entered into for good faith hedging purposes, KPAM believes that the obligations
should not be deemed to constitute senior securities and, thus, the Fund does
not treat them as being subject to its borrowing restrictions. The net amount of
the excess, if any, of the Fund's obligations over its entitlements with respect
to each interest rate swap is accrued daily, and an amount of cash, Government
Securities or other liquid high grade debt obligations having an aggregate net
asset value at least equal to the accrued excess is maintained by the Fund in a
segregated account with its custodian or a designated sub-custodian. The Fund
will not enter into any interest rate swap transaction unless the credit quality
of the unsecured senior debt or the claims-paying ability of the other party to
the transaction is rated in one of the highest two rating categories by at least
one nationally-recognized statistical rating organization or is believed by KPAM
to be equivalent to that rating. If the other party to the transaction defaults,
the Fund will have contractual remedies pursuant to the agreements related to
the transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid in comparison with other similar instruments
traded in the interbank market.
The use of interest rate swaps is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If KPAM is incorrect in its
forecasts of market values, interest rates and other applicable factors, the
investment performance of the Fund would be lower than it would have been if
these investment techniques were not used.
Interest rate swap transactions do not involve the delivery of securities
or other underlying assets or principal. As a result, the risk of loss with
respect to interest rate swaps is limited to the net amount of interest payments
that the Fund would be contractually obligated to make. If the MBS or other
security underlying an interest rate swap were prepaid and the Fund continued to
be obligated to make payments to the other party to the swap, the Fund would
have to make the payments from another source. If the other party to an interest
rate swap were to default, the Fund's risk of loss would consist of the net
amount of interest payments that the Fund contractually was entitled to receive.
Since interest rate transactions are individually negotiated,
6
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KPAM expects to achieve an acceptable degree of correlation between the Fund's
rights to receive interest on MBSs and its rights and obligations to receive and
pay interest pursuant to interest rate swaps.
RATINGS AS INVESTMENT CRITERIA
In general, the ratings of Moody's Investors Service, Inc. ('Moody's') and
Standard & Poor's Corporation ('Standard & Poor's') represent the opinions of
those agencies as to the quality of debt obligations that they rate. These
ratings, however, are relative and subjective, are not absolute standards of
quality and do not evaluate the market risk of securities. To the extent that
the ratings change as a result of changes in rating organizations or their
rating systems or as a result of a corporate restructuring of Moody's and
Standard & Poor's, KPAM will attempt to use comparable ratings as standards for
the Fund's investments.
INVESTMENT RESTRICTIONS
Investment restrictions numbered 1 through 10 below have been adopted by the
Trust as fundamental policies with respect to the Fund. Under the Investment
Company Act of 1940, as amended (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 11
through 14 may be changed by a vote of a majority of the Trust's Board of
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, except that this limitation is not applicable to the
Fund's investments in Government Securities, and up to 25% of the value of
the Fund's total assets may be invested without regard to this 10%
limitation.
3. The Fund will not issue senior securities or borrow money, except
that the Fund may enter into interest rate transactions, reverse repurchase
agreements or dollar rolls and may borrow from banks for temporary,
extraordinary or emergency purposes.
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 value of the Fund's total assets 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, except that this
limitation is not applicable to the Fund's investment in Government
Securities, Adjustable Rate Securities, MBSs and ABSs.
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
7
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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 futures contracts and related options 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 Securities Act of 1933.
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 make investments for the purpose of exercising
control of management.
13. 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 KPAM individually owns more than .5% of the
outstanding securities of the company and together they own beneficially
more than 5% of the securities.
14. 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.
Notwithstanding investment restrictions 6 and 8, the Fund has no present
intention of entering into futures contracts or options thereon and will not do
so absent prior disclosure to investors. 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.
PORTFOLIO TRANSACTIONS AND TURNOVER
Decisions to buy and sell securities for the Fund are made by KPAM, subject to
review by the Trust's Board of Trustees. The Fund's portfolio securities
ordinarily are purchased from and sold
8
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to parties acting as either principal or agent. Newly issued securities
ordinarily are purchased directly from the issuer or from an underwriter; other
purchases and sales usually are placed with those dealers from which it appears
that the best price or execution will be obtained. Usually no brokerage
commissions, as such, are paid by the Fund for purchases and sales undertaken
through principal transactions, although the price paid usually includes an
undisclosed compensation to the dealer acting as agent. The prices paid to
underwriters of newly issued securities usually include a concession paid by the
issuer to the underwriter, and purchases of after-market securities from dealers
ordinarily are executed at a price between the bid and asked price.
In selecting brokers or dealers to execute securities transactions on
behalf of the Fund, KPAM seeks the best overall terms available. In assessing
the best overall terms available for any transaction, KPAM 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 management and
investment advisory agreement between the Trust and KPAM relating to the Fund
authorizes KPAM, 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 KPAM or its affiliates exercise investment
discretion. The fees under the management and investment advisory agreement are
not reduced by reason of the Fund's receiving brokerage and research services.
The Trustees periodically reviews 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 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 year ended August 31,
1994, 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.
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*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., a
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 & 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 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.
John F. Green, Jr., Executive Vice President and Chief Investment Officer.
Senior Vice President of Kidder, Peabody and KPAM. Prior to June 1992, Senior
Vice President and Director of Nomura Mortgage Fund Management Corp.
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.
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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.
Robert A. Lee, Assistant Vice President and Investment Officer. Assistant
Vice President of the Structured Products Group of KPAM. Prior to July 1993,
Analyst of the Portfolio Strategies Group of the Fixed Income Research
Department of The First Boston Corporation. Prior to June 1991, student at The
Wharton School, University of Pennsylvania.
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 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, Turner Falls, Massachusetts 01376; Mr.
Hewitt, P.O. Box 2359, Princeton, New Jersey 08543-2359; Mr. Jordan, 200 Park
Avenue, New York, New York 10166; and Mr. Schafer, P.O. Box 1164, Princeton, New
Jersey 08542. The address of Mr. Grune and Mr. Johnson and the other officers
listed above is 60 Broad Street, New York, New York 10004-2350.
By virtue of the responsibilities assumed by KPAM under its management and
investment advisory agreement with 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 Trust, as a group, owned
7.99% of the outstanding, Class C shares as of December 1, 1994 and owned less
than 1% of the outstanding Class A shares and Class B shares as of December 1,
1994. The Trust pays each Trustee who is not an officer, director or employee of
KPAM, or any of its affiliates, an annual retainer of $1,000, and $375 for each
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, or any of its affiliates, receives any compensation from the
Trust for serving as an officer or Trustee of the Trust. For the fiscal period
ended August 31, 1994, the Trust paid $57,907 in Trustees' fees and
out-of-pocket expenses, of which $11,875 was allocated to the Fund.
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MANAGER AND INVESTMENT ADVISER
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 and investment
adviser.
Under its management and investment advisory agreement with the Trust
relating to the Fund (the '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.
The Management 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 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 Trustees, including a
majority of the Trustees who are not 'interested persons,' voted to continue the
Management Agreement 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 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 compensation for KPAM's services rendered to the Fund, the Trust pays a
fee, computed daily and paid monthly, at the annual rate of .50% of the Fund's
average daily net assets. For the fiscal year ended August 31, 1994 and for the
period November 10, 1992 (commencement of operations) through August 31, 1993,
the Trust accrued $820,271 and $581,242, respectively, to KPAM with respect to
the Fund. However, during these periods KPAM voluntarily waived a portion of its
management fees and reimbursed the Trust for a portion of the Fund's expenses in
the amount of $328,801 and $405,838, respectively.
DISTRIBUTOR
Kidder, Peabody, located at 10 Hanover Square, New York, New York 10005-3592,
serves as the distributor of the Fund's shares on a best efforts basis.
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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 $387,953 from the Fund, of which it is estimated
that $167,584 was spent on commission credits to branch offices for payments of
shareholder servicing compensation to Investment Executives and $220,364 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 $62,574 from the Fund, of which it is estimated
that $5,239 was spent on advertising, $2,197 was spent on printing and mailing
of prospectuses to other than current shareholders, $29,745 was spent on
commission credits to branch offices for payments of commissions and shareholder
servicing compensation to Investment Executives and $25,393 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 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 TRANSFER, DIVIDEND AND RECORDKEEPING 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
and custodian and recordkeeping 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. As
custodian and recordkeeping agent, IFTC maintains custody of the
13
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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, IFTC is authorized to appoint one or more
banking institutions as sub-custodians of assets owned by the Fund.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, located at 2 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 on
December 1, 1994:
Wilmington Savings Fund Society, 833 Market Street, Wilmington,
Delaware 19801-4931, owned 14.45% of the Class' outstanding shares.
First FSB Lacrosse/Madison, 605 State Street, Lacrosse, Wisconsin
54601-3345, owned 13.43% of the Class' outstanding shares.
GUPTA Corporation, 1060 Marsh Road, Menlo Park, California 94025-1065,
owned 9.71% 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 B's shares of beneficial interest on
December 1, 1994:
Richard N. Kleaveland, MD, 1st Trust & Co. FBO 850512 0001, IRA
Standard, East 1321 Overbluff Road, Spokane, Washington 99203-3454, owned
8.72% of the Class' outstanding shares.
David G. Staggs, 106 Interpromontory Road, Great Falls, Virginia
22066-3217, owned 5.83% 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 on
December 1, 1994:
Nancy Quinn, 49 Briarhollow #2103, Houston, Texas 77027-9310, owned
15.73% of the Class' outstanding shares.
Donald M. Graubart and Anne P. Graubart, 1000 Louisiana, Suite 5800,
Houston, Texas 77002-5013, owned 13.41% of the Class' outstanding shares.
Sarah Louise Luce, 2521 Westminster Heath, Atlanta, Georgia
30327-1449, owned 10.94% of the Class' outstanding shares.
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George V. Grune, Jr., 60 Broad Street, New York, New York 10004, owned
7.99% of the Class' outstanding shares.
Dr. John Stumbo and Helen Rhea Stumbo, 305 Knoxville Street, Fort
Valley, Georgia 31030-3485, owned 7.94% 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 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.
DETERMINATION OF NET ASSET VALUE
As noted in the Prospectus, net asset value will not be 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.
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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 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.
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 Intermediate Fixed Income Fund, a series of the Trust,
seeks maximum total return through an actively managed portfolio
consisting primarily of intermediate term, fixed income securities rated
in the three highest grades by recognized rating agencies.
Kidder, Peabody Municipal Bond Fund, a series of Trust II, seeks as high a
level of current interest income that is exempt from Federal income
taxation as is consistent with prudent
16
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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.
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 is treated as a separate entity for federal income tax purposes. The
Fund's net investment income, capital gains and distributions is determined for
each Class of shares separately from any other series or Class that the Trust
may designate.
The Fund qualified for the fiscal year ended August 31, 1994 as a
'regulated investment company' under the Internal Revenue Code of 1986, as
amended (the 'Code'), and intends to qualify for this treatment in 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
17
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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.
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
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 six months or less, 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 distribution of short- or
long-term capital gains should be aware that the amount of the forthcoming
distribution payment will be a taxable 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.
18
--------------------------------------------------------------------------------
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.
For the purposes of determining the interest earned (variable 'a' in the
formula) on debt obligations that were purchased by the Fund, 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 annual 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 reinvestment 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.
19
--------------------------------------------------------------------------------
Each Class' 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 a Class' performance for any specified period in the future.
In addition, because a Class' performance will fluctuate, it may not provide a
basis for comparing an investment in a Class 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 ............. 4.34% 3.94% 4.68%
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
------------------------------------------------------------
MAXIMUM SALES CHARGE
----------------------
INCLUDED EXCLUDED
-------- --------
<S> <C> <C> <C> <C>
1 year ended August 31, 1994............... (.70)% 1.60% 1.09% 1.94%
Inception (November 10, 1992) to August 31,
1994 .................................... 2.03% 3.34%
May 10, 1993 to August 31, 1994 ........... 1.91% 2.74%
<CAPTION>
ANNUAL TOTAL RETURN
------------------------------------------------------------
MAXIMUM SALES CHARGE
----------------------
YEAR ENDED AUGUST 31 INCLUDED EXCLUDED
------------------------------------------- -------- --------
<S> <C> <C> <C> <C>
Inception (November 10, 1992) through
1993 .................................... 2.07% 4.45%
May 10, 1993 through 1993 ................. 1.40% 1.64%
1994....................................... (.70) 1.60 1.09 1.94
<CAPTION>
AGGREGATE TOTAL RETURN
------------------------------------------------------------
MAXIMUM SALES CHARGE
----------------------
INCLUDED EXCLUDED
-------- --------
<S> <C> <C> <C> <C>
Inception (November 10, 1992) to August 31,
1994 .................................... 3.69% 6.11%
May 10, 1993 to August 31, 1994 ........... 2.51% 3.60%
</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'). 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
20
--------------------------------------------------------------------------------
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.
21
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
--------------------------------------------------------
Contents
--------------------------------------------------------
Investment Objective and Policies 2
--------------------------------------------------------
Management of the Fund 9
--------------------------------------------------------
Principal Shareholders 14
--------------------------------------------------------
Redemption of Shares 15
--------------------------------------------------------
Determination of Net Asset Value 15
--------------------------------------------------------
Exchange Privilege 16
--------------------------------------------------------
Taxes (See in the Prospectus 'Dividends,
Distributions and Taxes') 17
--------------------------------------------------------
Determination of Performance (See in
the Prospectus 'Performance
Information') 18
--------------------------------------------------------
General Information 20
--------------------------------------------------------
Financial Statements 22
--------------------------------------------------------
Kidder,
Peabody
Adjustable
Rate
Government
Fund
Statement of
Additional
Information
December 29, 1994
RECENT PERFORMANCE RESULTS-(unaudited)
Net Asset Value Total Return(1)
-------------------------- -----------------------------
12 Months 6 Months
11/30/94 05/31/94 11/30/93 Ended 11/30/94 Ended 11/30/94
-----------------------------------------------------------------------
Class A Shares $2.25 $2.30 $2.48 -4.50% 0.46%
-----------------------------------------------------------------------
Class B Shares 2.25 2.30 2.48 -5.24% 0.06%
-----------------------------------------------------------------------
Class D Shares 2.25 2.30 2.47 -4.99% 0.19%
-----------------------------------------------------------------------
Performance Summary Class A Shares
<TABLE>
<CAPTION>
Net Asset Value Capital Gains Dividends Paid Total
---------------- Distributed Return(1)
Period Covered Beginning Ending
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------
05/03/93 - 12/31/93 $2.50 $2.48 - $0.0812 2.48%
------------------------------------------------------------------------------------
01/01/94 - 11/30/94 2.48 2.25 - .1059 -5.06%
------------------------------------------------------------------------------------
Total: $0.0000 $0.1871
------------------------------------------------------------------------------------
Cumulative Total Return as of 11/30/94: -2.70%
------------------------------------------------------------------------------------
</TABLE>
Performance Summary Class B Shares
<TABLE>
<CAPTION>
Net Asset Value Capital Gains Dividends Paid Total
---------------- Distributed Return(1)
Period Covered Beginning Ending
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------
05/03/93 - 12/31/93 $2.50 $2.48 - $0.0687 1.97%
------------------------------------------------------------------------------------
01/01/94 - 11/30/94 2.48 2.25 - 0.0900 -5.70%
------------------------------------------------------------------------------------
Total: $0.0000 $0.1587
------------------------------------------------------------------------------------
Cumulative Total Return as of 11/30/94: -3.85%
------------------------------------------------------------------------------------
</TABLE>
Performance Summary Class D Shares
<TABLE>
<CAPTION>
Net Asset Value Capital Gains Dividends Paid Total
---------------- Distributed Return(1)
Period Covered Beginning Ending
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------
05/03/93 - 12/31/93 $2.50 $2.48 - $0.0730 2.14%
------------------------------------------------------------------------------------
01/01/94 - 11/30/94 2.48 2.25 - 0.0954 -5.49%
------------------------------------------------------------------------------------
Total: $0.0000 $0.1684
------------------------------------------------------------------------------------
Cumulative Total Return as of 11/30/94: -3.46%
------------------------------------------------------------------------------------
</TABLE>
1 Figures assume reinvestment of all dividends at net asset value on the
payable dates, and do not include sales charges; results would be lower for
Class A and Class B if sales charges were included.
SHORT-TERM U.S. GOVERNMENT INCOME FUND
Paine Webber
1
PORTFOLIO OF INVESTMENTS
November 30, 1994
<TABLE>
<CAPTION>
Principal
Amount
(000) Maturity Dates Interest Rates Value
------------------------------------------------------------ -------------------- --------------- ------------
<S> <C> <C> <C>
Government National Mortgage Association Certificates - 8.70%
$ 260 GNMA................................................ 02/15/23 8.000% $246,694
25,331 GNMA................................................ 01/15/16 10.500 27,341,932
11,867 GNMA................................................ 01/15/18 11.500 13,168,204
------------
Total Government National Mortgage Association Certificates
(cost - $42,322,892)........................................ 40,756,830
------------
Federal Home Loan Mortgage Corporation Certificates - 21.45%
7,029 FHLMC............................................... 08/01/20 9.500 7,185,353
14,800 FHLMC............................................... 05/15/21 9.500 15,331,305
3,542 FHLMC............................................... 11/01/19 11.000 3,816,398
6,259 FHLMC............................................... 08/01/16 11.500 6,865,617
24,736 FHLMC ARM........................................... 07/01/24 4.527 23,877,830
22,809 FHLMC ARM........................................... 01/01/23 5.929 22,669,683
15,103 FHLMC ARM........................................... 08/01/23 5.885 14,664,330
1,518 FHLMC Gold.......................................... 10/01/20 10.500 1,623,209
4,070 FHLMC Gold.......................................... 12/01/20 11.000 4,416,100
------------
Total Federal Home Loan Mortgage Corporation Certificates
(cost - $102,112,743)....................................... 100,449,825
------------
Federal National Mortgage Association Certificates - 3.12%
2,196 FNMA................................................ 01/01/18 10.250 2,312,997
4,765 FNMA................................................ 09/01/17 10.500 5,016,200
6,701 FNMA................................................ 10/01/15 11.000 7,304,123
------------
Total Federal National Mortgage Association Certificates
(cost - $15,260,942)........................................ 14,633,320
------------
Collateralized Mortgage Obligations - 36.69%
25,586 FHLMC, Series 35, Class PA.......................... 06/17/06 6.750 25,274,158
12,476 FHLMC, Series 1312, Class HA........................ 12/15/20 10.500 13,747,614
22,213 FNMA, REMIC Trust 1992-213, Class A................. 04/25/18 7.000 21,879,778
6,769 FNMA, REMIC Trust 1993-164, Class A................. 03/25/08 5.250 6,194,726
7,124 Bear Stearns, Series 1989-1, Class D................ 06/01/17 9.000 7,221,786
13,000 Capstead Securities Corp., Series 1991-5, Class VG.. 10/25/21 9.500 13,014,219
Collateralized Mortgage Obligation Trust, Series 28,
3,780 Class C............................................. 12/01/10 8.500 3,776,546
Greenwich Capital Acceptance Corp., Series 94,
19,464 Class A-1........................................... 08/25/24 5.752* 19,780,338
2,830 Prudential Bache Mortgage Trust II, Class C......... 06/01/18 9.200 2,880,188
7,235 Resolution Trust Corp., Series 1994A, Class 2A...... 06/25/26 6.800 7,185,723
7,114 Ryland Mortgage Acceptance Corp., Series 76B........ 08/01/18 9.000 7,054,341
Saxon Mortgage Securities Corp., Series 1994-5,
24,886 Class A1............................................ 05/25/24 5.818* 24,765,073
Saxon Mortgage Securities Corp., Series 1994-6,
19,083 Class A............................................. 06/25/24 5.988* 19,014,746
------------
Total Collateralized Mortgage Obligations
(cost - $173,786,933)....................................... 171,789,236
------------
Agency Backed Obligations - 20.40%
24,535 Federal Home Loan Bank Consolidated Bonds........... 03/25/96 to 12/30/96 9.500 to 9.800 25,349,348
69,295 Federal National Mortgage Association Debentures.... 02/12/96 to 03/10/98 7.700 to 9.350 70,179,823
------------
Total Agency Backed Obligations
(cost - $97,876,332)........................................ 95,529,171
------------
</TABLE>
Paine Webber
SHORT-TERM U.S. GOVERNMENT INCOME FUND
2
PORTFOLIO OF INVESTMENTS (concluded)
November 30, 1994
<TABLE>
<CAPTION>
Principal
Amount
(000) Maturity Dates Interest Rates Value
------------------------------------------------------------ -------------------- --------------- ------------
<S> <C> <C> <C>
Treasury Bills - 8.20%
$40,000 United States Treasury Bills (cost - $38,539,913).... 07/27/95 5.280 to 6.018 $38,377,455
-------------
Commercial Paper - 4.90%
17,000 Motorola Inc. ....................................... 12/07/94 5.450 16,984,558
3,000 American Telephone & Telegraph....................... 01/10/95 5.700 2,981,000
3,000 Wisconsin Gas Co. ................................... 02/06/95 5.800 2,967,617
-------------
Total Commercial Paper (cost - $22,933,175).................. 22,933,175
-------------
Repurchase Agreement - 0.71%
Repurchase Agreement dated 11/30/94, with State
Street Bank & Trust Co., collateralized by $3,215,000
Treasury Bond, 8.500% due 02/15/20; proceeds
3,342 $3,342,478 (Cost - $3,342,000)....................... 12/01/94 5.150% 3,342,000
-------------
Total Investments (cost - $496,174,930) - 104.17%............ 487,811,012
-------------
Liabilities in excess of other assets - (4.17%).............. (19,535,410)
-------------
Net Assets - 100.00%......................................... $468,275,602
=============
</TABLE>
---------------
* Floating rate mortgage backed security.
ARM - Adjustable Rate Mortgage Security
REMIC - Real Estate Mortgage Investment Conduit
See accompanying notes to financial statements
Paine Webber
SHORT-TERM U.S. GOVERNMENT INCOME FUND
3
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1994
<TABLE>
<CAPTION>
Assets
<S> <C>
Investments in securities, at value (cost - $496,174,930)........................................ $487,811,012
Cash............................................................................................. 434,798
Receivable for investments sold.................................................................. 50,343,750
Interest receivable.............................................................................. 5,666,294
Receivable for shares of beneficial interest sold................................................ 239,271
Deferred organizational costs.................................................................... 161,603
Other assets..................................................................................... 39,981
--------------
Total assets..................................................................................... 544,696,709
--------------
Liabilities
Payable for investments purchased................................................................ 63,204,496
Payable for shares of beneficial interest repurchased............................................ 11,641,719
Dividends payable................................................................................ 1,095,287
Payable to affiliates............................................................................ 452,509
Accrued expenses and other liabilities........................................................... 27,096
--------------
Total liabilities................................................................................ 76,421,107
--------------
Net Assets
Beneficial interest - $0.001 par value (unlimited amount authorized)............................. 597,349,370
Overdistributed net investment income............................................................ (1,179,228)
Accumulated net realized losses from investment transactions..................................... (119,530,622)
Net unrealized depreciation of investments....................................................... (8,363,918)
--------------
Net assets applicable to shares outstanding...................................................... $468,275,602
==============
Class A:
Net assets....................................................................................... $158,711,891
--------------
Shares outstanding............................................................................... 70,456,247
--------------
Net asset and redemption value per share......................................................... $2.25
==============
Maximum offering price per share (net asset value plus sales charge of 3.00% of offering price).. $2.32
==============
Class B:
Net assets....................................................................................... $13,382,019
--------------
Shares outstanding............................................................................... 5,941,456
--------------
Net asset value and offering price per share..................................................... $2.25
==============
Class D:
Net assets....................................................................................... $296,181,692
--------------
Shares outstanding............................................................................... 131,558,800
--------------
Net asset value, offering price and redemption value per share................................... $2.25
==============
</TABLE>
See accompanying notes to financial statements
Paine Webber
SHORT-TERM U.S. GOVERNMENT INCOME FUND
4
STATEMENT OF OPERATIONS
For the Year Ended November 30, 1994
<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Interest........................................................... $67,242,683
---------------
Expenses:
Investment advisory and administration............................. 5,598,491
Service fees - Class A............................................. 899,441
Service and distribution fees - Class B............................ 258,627
Service and distribution fees - Class D............................ 5,505,447
Custody and accounting............................................. 483,839
Transfer agency and service fees................................... 438,558
Legal and audit.................................................... 130,273
Reports and notices to shareholders................................ 187,785
Federal and state registration fees................................ 75,598
Amortization of organizational expense............................. 47,000
Trustees' fees..................................................... 11,042
Other expenses..................................................... 175,571
---------------
13,811,672
Less: Fee waivers from adviser..................................... (400,611)
---------------
Net expenses....................................................... 13,411,061
---------------
Net investment income.............................................. 53,831,622
---------------
Realized and unrealized losses from investment activities:
Net realized losses from investment transactions................... (122,429,696)
Net change in unrealized appreciation/depreciation of investments.. (10,439,486)
---------------
Net realized and unrealized losses from investment activities...... (132,869,182)
---------------
Net decrease in net assets resulting from operations............... $(79,037,560)
===============
</TABLE>
See accompanying notes to financial statements
SHORT-TERM U.S. GOVERNMENT INCOME FUND
Paine Webber
5
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Period
May 3, 1993
(commencement
For the Year Ended of operations) to
November 30, 1994 November 30, 1993
------------------ -----------------
<S> <C> <C>
From operations:
Net investment income.............................................. $53,831,622 $32,286,982
Net realized losses from investment transactions, futures and
options............................................................ (122,429,696) (17,912,716)
Net change in unrealized appreciation/depreciation of investments.. (10,439,486) 2,075,568
------------------ -----------------
Net increase (decrease) in net assets resulting from operations.... (79,037,560) 16,449,834
------------------ -----------------
Dividends to shareholders from:
Net investment income - Class A.................................... (18,507,294) (7,461,841)
Net investment income - Class B.................................... (1,132,692) (529,816)
Net investment income - Class D.................................... (34,050,034) (24,295,325)
------------------ -----------------
(53,690,020) (32,286,982)
------------------ -----------------
From beneficial interest transactions:
Net proceeds from the sale of beneficial interest.................. 659,981,986 2,679,186,026
Cost of beneficial interest repurchased............................ (1,881,729,023) (916,208,664)
Proceeds from dividends reinvested................................. 37,606,736 21,989,249
------------------ -----------------
Net increase (decrease) in net assets from beneficial interest
transactions....................................................... (1,184,140,301) 1,784,966,611
------------------ -----------------
Contribution to capital from adviser............................... 16,014,012 -
------------------ -----------------
Net increase (decrease) in net assets.............................. (1,300,853,869) 1,769,129,463
Net assets:
Beginning of period................................................ 1,769,129,471 8
------------------ -----------------
End of period...................................................... $468,275,602 $1,769,129,471
================== =================
</TABLE>
See accompanying notes to financial statements
SHORT-TERM U.S. GOVERNMENT INCOME FUND
Paine Webber
6
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
PaineWebber Short-Term U.S. Government Income Fund (the "Fund"), a series of
PaineWebber Managed Investments Trust (the "Trust"), is registered with the
Securities and Exchange Commission under the Investment Company Act of 1940, as
amended, as an open-end, diversified investment company. The Trust is a series
mutual fund with six funds: the Fund, as well as PaineWebber U.S. Government
Income Fund, PaineWebber Investment Grade Income Fund, PaineWebber High Income
Fund, PaineWebber Short-Term U.S. Government Income Fund for Credit Unions, and
PaineWebber Utility Income Fund, which are not presented in these financial
statements.
Organizational Matters - Prior to commencing its operations, the Fund had no
activities other than organizational matters and activities related to the
initial public offering and the issuance, at net asset value, of 1 Class A
share, 1 Class B share and 1 Class D share of the Fund to Mitchell Hutchins
Asset Management Inc. ("Mitchell Hutchins"), a wholly owned subsidiary of
PaineWebber Incorporated ("PaineWebber") and investment adviser and
administrator of the Fund. Costs of $235,000 incurred by the Fund in connection
with its organization and the registration of its shares have been deferred and
are being amortized, using the straight-line method over a period not to exceed
five years from the commencement of operations of the Fund.
On May 3, 1993 the Fund commenced operations for Class A, B and D shares. Each
class represents interests in the same assets of the Fund and the classes are
identical except for differences in their sales charge structures, ongoing
distribution charges and certain transfer agency expenses. In addition, Class B
shares and all corresponding dividend reinvested shares automatically convert
to Class A shares approximately six years after issuance. All classes of shares
have equal voting privileges, except that each class has exclusive voting
rights with respect to its distribution plan.
Valuation of Investments - Where market quotations are readily available,
portfolio securities are valued thereon, provided such quotations adequately
reflect, in the judgment of Mitchell Hutchins, the fair value of the
securities. When market quotations are not readily available, securities are
valued based upon appraisals derived from information concerning those
securities or similar securities received from recognized dealers in those
securities. All other securities are valued at fair value as determined in good
faith by or under the direction of the Trust's board of trustees. The amortized
cost method of valuation, which approximates market value, is used to value
debt obligations with 60 days or less remaining to maturity, unless the Trust's
board of trustees determines that this does not represent fair value.
The ability of the issuers of the debt securities held by the Fund to meet
their obligations may be affected by economic developments, including those
particular to a specific industry or region.
NOTES TO FINANCIAL STATEMENTS
Paine Webber
7
Investment Transactions and Investment Income - Investment transactions are
recorded on the trade date. Realized gains and losses from investment
transactions are calculated using the identified cost method. Interest income
is recorded on an accrual basis. Discounts are accreted and premiums are
amortized as adjustments to interest income and the identified cost of
investments. The Fund may enter into transactions in which the Fund sells
securities for delivery in the current month and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity) securities on
a specified future date (the "roll period"). During the roll period the Fund
foregoes principal and interest paid on the securities. The Fund is compensated
by the interest earned on the cash proceeds of the initial sale and by fee
income or a lower repurchase price.
Income, expenses (excluding class-specific expenses) and realized/unrealized
gains/losses are allocated proportionately to each class of shares based upon
the relative net asset value of outstanding shares (or the value of
dividend-eligible shares, as appropriate) of each class at the beginning of the
day (after adjusting for current capital share activity of the respective
classes). Class-specific expenses are charged directly to the applicable class
of shares.
Futures Contracts - Upon entering into a financial futures contract, the Fund
is required to pledge to a broker an amount of cash and/or U.S. Government
securities equal to a certain percentage of the contract amount. This amount is
known as the "initial margin." Subsequent payments, known as "variation
margin," are made or received by the Fund each day, depending on the daily
fluctuations in the value of the underlying financial futures contracts. Such
variation margin is recorded for financial statement purposes on a daily basis
as unrealized gain or loss until the financial futures contract is closed, at
which time the net gain or loss is reclassified to realized.
Using financial futures contracts involves various market risks. The maximum
amount at risk from the purchase of a futures contract is the contract value.
The Fund is subject to a number of guidelines which reduce this risk by seeking
to ensure that financial futures contracts are used for hedging purposes as
well as to manage the average duration of the Fund's portfolio and not for
leverage. However, imperfect correlations between futures contracts and the
portfolio securities being hedged, or market disruptions, do not normally
permit full control of these risks at all times.
Option Writing - When the Fund writes a call or a put option, an amount equal
to the premium received by the Fund is included in the Fund's Statement of
Assets and Liabilities as an asset and as 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 either
expires on its stipulated expiration date or the Fund enters into a closing
purchase transaction, the Fund realizes a gain (or loss if the cost of a
closing purchase transaction exceeds the premium received when the option was
written) without regard to any unrealized gain or loss on the underlying
security, and the liability related to such option is extinguished. If a call
option which the Fund has written is exercised, the Fund realizes a capital
gain or loss (long-term or short-term, depending on the holding period of the
underlying security) from the sale of the
NOTES TO FINANCIAL STATEMENTS-(continued)
Paine Webber
8
underlying security and the proceeds from the sale are increased by the premium
originally received. If a put option which a Fund has written is exercised, the
amount of the premium originally received reduces the cost of the security
which the Fund purchases upon exercise of the option. At November 30, 1994 the
Fund held no unexpired options.
Repurchase Agreements - The Fund's custodian takes possession of the collateral
pledged for investments in repurchase agreements. The underlying collateral is
valued daily on a mark-to-market basis to ensure that the value, including
accrued interest, is at least equal to the repurchase price. In the event of
default of the obligation to repurchase, the Fund has the right to liquidate
the collateral and apply the proceeds in satisfaction of the obligation. Under
certain circumstances, in the event of default or bankruptcy by the other party
to the agreement, realization and/or retention of the collateral may be subject
to legal proceedings.
Federal Tax Status - The Fund intends to distribute all of its taxable income
and to comply with the other requirements of the Internal Revenue Code
applicable to regulated investment companies. Accordingly, no provision for
federal income taxes is required. In addition, by distributing during each
calendar year substantially all of its net investment income, capital gains and
certain other amounts, if any, the Fund intends not to be subject to a federal
excise tax.
Dividends and Distributions to Shareholders - Dividends and distributions to
shareholders are recorded on the ex-dividend date. The Fund declares dividends
on a daily basis from net investment income. During the year ended November 30,
1994, the Fund adopted Statement of Position 93-2, "Determination, Disclosure,
and Financial Statement Presentation of Income, Capital Gain, and Return of
Capital Distributions by Investment Companies". Accordingly, the amount of
dividends and distributions are determined in accordance with federal income
tax regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
INVESTMENT ADVISER AND ADMINISTRATOR
The Trust's board of trustees has approved an Investment Advisory and
Administration Contract ("Advisory Contract") with Mitchell Hutchins, under
which Mitchell Hutchins serves as investment adviser and administrator of the
Fund. In
NOTES TO FINANCIAL STATEMENTS-(continued)
Paine Webber
9
accordance with the Advisory Contract, the Fund pays Mitchell Hutchins an
investment advisory and administration fee, which is accrued daily and paid
monthly, at the annual rate of 0.50% of the Fund's average daily net assets. At
November 30, 1994, the Fund owed Mitchell Hutchins $203,774 in investment
advisory and administration fees. For the year ended November 30, 1994,
Mitchell Hutchins voluntarily waived $400,611 in investment advisory and
administration fees.
In compliance with applicable state securities laws, Mitchell Hutchins will
reimburse the Fund if and to the extent that the aggregate operating expenses
in any fiscal year, exclusive of taxes, distribution fees, interest, brokerage
fees and extraordinary expenses, exceed limitations imposed by various state
regulations. Currently, the most restrictive limitation applicable to the Fund
is 2.5% of the first $30 million of average daily net assets, 2.0% of the next
$70 million and 1.5% of any excess over $100 million. For the year ended
November 30, 1994, no reimbursements were required pursuant to the above
limitation for the Fund.
On October 19, 1994 shareholders of the Fund approved Pacific Investment
Management Company ("PIMCO") as sub-adviser to the Fund. Under a separate
contract with Mitchell Hutchins, Mitchell Hutchins (not the Fund) will pay
PIMCO a fee, computed weekly and payable monthly, in an amount equal to
one-half of the advisory fee received by Mitchell Hutchins from the Fund.
DISTRIBUTION PLANS
Mitchell Hutchins is the distributor of the Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. Under
separate plans of distribution pertaining to the Class A, Class B, and Class D
shares, the Fund pays Mitchell Hutchins monthly service fees at the annual rate
of 0.25% of the average daily net assets of each Class of shares and monthly
distribution fees at the annual rate of 0.75% and 0.50% of the average daily
net assets of Class B shares and Class D shares, respectively. At November 30,
1994, the Fund owed Mitchell Hutchins $241,001 in service and distribution
fees.
Mitchell Hutchins also receives the proceeds of the initial sales charges paid
by the shareholders upon the purchase of Class A shares and the contingent
deferred sales charges paid by the shareholders upon certain redemptions of
Class B shares. Mitchell Hutchins has informed the Fund that for the year ended
November 30, 1994, it earned the following amounts in sales charges:
Initial sales charges - Class A.............. $892,216
Contingent deferred sales charges - Class B.. $251,254
TRANSFER AGENCY SERVICE FEES
The Fund pays PaineWebber an annual fee of $4.00 per active PaineWebber
shareholder account for certain services not provided by the Fund's transfer
agent. For these services for the year ended November 30, 1994, PaineWebber
earned $139,291 and was owed $7,734 at November 30, 1994 in shareholder service
fees from the Fund.
NOTES TO FINANCIAL STATEMENTS-(continued)
Paine Webber
10
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at November 30,
1994 was substantially the same as the cost of securities for financial
statement purposes.
At November 30, 1994, the components of the net unrealized depreciation of
investments were as follows:
Gross depreciation (investments having an excess of cost
over value).................................................... $(8,698,532)
Gross appreciation (investments having an excess of value
over cost)..................................................... 334,614
-----------
Net unrealized depreciation of investments....................... $(8,363,918)
===========
For the year ended November 30, 1994, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were as follows:
Purchases.. $2,584,255,735
Sales...... $3,691,173,531
FEDERAL INCOME TAX STATUS
At November 30, 1994, the Fund had a net capital loss carryforward of
$119,530,622. The loss carryforward is available as a reduction, to the extent
provided in the regulations, of future net realized capital gains, and will
expire between November 30, 2001 and November 30, 2002.
At November 30, 1993, the cumulative effect of permanent book/tax
reclassifications resulted in increases (decreases) to the components of net
assets as follows:
Beneficial interest.................... $(1,721,048)
Overdistributed net investment income.. (3,076,730)
Accumulated net realized losses........ 4,797,778
For the year ended November 30, 1994, the reclassification arising from
permanent book/tax differences resulted in increases (decreases) to the
components of net assets as follows:
Beneficial interest.................... $(17,769,912)
Overdistributed net investment income.. 1,755,900
Accumulated net realized losses........ 16,014,012
NOTES TO FINANCIAL STATEMENTS-(concluded)
Paine Webber
11
SHARES OF BENEFICIAL INTEREST
There is an unlimited amount of $0.001 par value shares of beneficial interest
authorized. Transactions in shares of beneficial interest, were as follows:
<TABLE>
<CAPTION>
Class A Class B Class D
----------------------------- -------------------------- -----------------------------
For the For the For the
For the Year Period May 3, For the Year Period May For the Year Period May 3,
Ended 1993~ to Ended 3, 1993~ to Ended 1993~ to
November 30, November 30, November November November 30, November 30,
1994 1993 30, 1994 30, 1993 1994 1993
-------------- -------------- ------------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold.... 110,055,565 330,216,040 6,067,397 17,947,153 152,025,632 726,137,751
Shares
repurchased.... (266,619,181) (109,145,183) (13,249,406) (5,271,802) (511,209,002) (253,596,948)
Dividends
reinvested in
additional
shares......... 4,302,214 1,646,791 315,736 132,377 11,154,830 7,046,536
-------------- -------------- ------------- ------------ -------------- --------------
Net decrease in
shares
outstanding.... (152,261,402) 222,717,648 (6,866,273) 12,807,728 (348,028,540) 479,587,339
============== ============== ============= ============ ============== ==============
</TABLE>
~ Commencement of operations
CAPITAL CONTRIBUTION FROM MITCHELL HUTCHINS
On September 23, 1994, the Fund recorded a capital contribution from Mitchell
Hutchins in the amount of $16.0 million or $0.06 per Fund share. An additional
$16.8 million that was paid directly to certain shareholders who had redeemed
Fund shares prior to September 23, 1994. These amounts were paid by Mitchell
Hutchins in connection with the settlement of certain class action litigation.
The payments reflected losses that had been incurred by the Fund by reason of
its investments in non-planned amortization class interest-only and
principal-only (I/O and P/O) securities.
AFFILIATED TRANSACTIONS
PaineWebber Capital Inc., a wholly owned subsidiary of PaineWebber Group Inc.,
purchased certain of the Fund's I/O and P/O securities on June 8, 1994 for an
aggregate purchase price of $50.4 million and purchased the Fund's certain
structured floating rate securities on August 25, 1994 for an aggregate
purchase price of $179.7 million. The purchases of those securities by
PaineWebber Capital Inc. were made at prices equal to the securities' then
current fair values, and thus did not affect the Fund's net asset value.
NOTES TO FINANCIAL STATEMENTS-(concluded)
Paine Webber
12
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each
period is presented below:
<TABLE>
<CAPTION>
Class A Class B Class D
---------------------------- ---------------------------- ----------------------------
For the For the For the
Period May 3, Period May 3, Period May 3,
For the 1993 For the 1993 For the 1993
Year (commencement Year (commencement Year (commencement
Ended of operations) Ended of operations) Ended of operations)
November to November November to November November to November
30, 1994 30, 1993 30, 1994 30, 1993 30, 1994 30, 1993
------------- -------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period.......................... $2.48 $2.50 $2.48 $2.50 $2.47 $2.50
------------- -------------- ------------- -------------- ------------- --------------
Net increase (decrease) from
investment operations:
Net investment income........... 0.12 0.07 0.10 0.06 0.11 0.06
Net realized and unrealized
losses from investment, futures
and options transactions........ (0.29) (0.02) (0.29) (0.02) (0.28) (0.03)
------------- -------------- ------------- -------------- ------------- --------------
Net increase (decrease) in net
asset value from operations..... (0.17) 0.05 (0.19) 0.04 (0.17) 0.03
------------- -------------- ------------- -------------- ------------- --------------
Less distributions:
Dividends from net investment
income.......................... (0.12) (0.07) (0.10) (0.06) (0.11) (0.06)
------------- -------------- ------------- -------------- ------------- --------------
Contribution to capital from
adviser......................... .06 - .06 - .06 -
------------- -------------- ------------- -------------- ------------- --------------
Net asset value, end of period.. $2.25 $2.48 $2.25 $2.48 $2.25 $2.47
============= ============== ============= ============== ============= ==============
Total investment return(1)...... (4.50%)** 1.88% (5.24%)** 1.47% (4.99%)** 1.20%
============= ============== ============= ============== ============= ==============
Ratios/Supplemental data:
Net assets, end of period (000
omitted)........................ $158,712 $551,243 $13,382 $31,706 $296,182 $1,186,181
Ratio of expenses to average
net assets(2)................... 0.84% 0.81%* 1.62% 1.62%* 1.36% 1.35%*
Ratio of net investment income
to average net assets(2)........ 5.16% 4.85%* 4.40% 4.31%* 4.65% 4.52%*
Portfolio turnover rate......... 246.34% 96.60% 246.34% 96.60% 246.34% 96.60%
</TABLE>
--------
* Annualized
** Net of $0.06 contribution of capital from adviser. If such contribution had
not been made the total investment returns would have been (7.02)% for Class
A, (7.74)% for Class B and (7.50)% for Class D.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends 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 for Class A and Class B would be lower if sales charges were
included. Total investment returns for periods less than one year have not
been annualized.
(2) During the year ended November 30, 1994 Mitchell Hutchins waived a portion
of its advisory and administration fees. If such waivers had not been made
the annualized ratios of expenses to average net assets, and net investment
income to average net assets, respectively, would have been 0.88% and 5.12%
for Class A, 1.66% and 4.35% for Class B, and 1.39% and 4.61% for Class D.
SHORT-TERM U.S. GOVERNMENT INCOME FUND
Paine Webber
13
Report of Ernst & Young LLP,
Independent Auditors
The Board of Trustees and Shareholders
PaineWebber Managed Investments Trust
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of PaineWebber Short-Term U.S. Government Income
Fund (one of the portfolios of PaineWebber Managed Investments Trust) (the
"Fund") as of November 30, 1994, and the related statement of operations for
the year then ended, the statement of changes in net assets, and the financial
highlights for the year ended November 30, 1994 and the period May 3, 1993
(commencement of operations) to November 30, 1993. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
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 investments owned at
November 30, 1994 by correspondence with the custodian and others. 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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
PaineWebber Short-Term U.S. Government Income Fund at November 30, 1994, and
the results of its operations for the year then ended, the changes in its net
assets, and the financial highlights for the indicated periods, in conformity
with generally accepted accounting principles.
New York, New York
January 20, 1995
Paine Webber
TAX INFORMATION
We are required by Subchapter M of the Internal Revenue Code of 1986, as
amended, to advise you within 60 days of the Fund's fiscal year end (November
30, 1994) as to the federal tax status of distributions received by
shareholders during such fiscal year from the Fund. Accordingly, we are
advising you that all of the distributions paid by the Short-Term U.S.
Government Income Fund during the period were derived from net investment
income and are taxable as ordinary income.
Dividends received by tax-exempt recipients (e.g., IRAs and Keoghs) need not be
reported as taxable income. Some retirement trusts (e.g., corporate, Keogh and
403(b)(7) plans) may need this information for their annual reporting.
Because the Fund's fiscal year is not the calendar year, another notification
will be sent in respect of calendar year 1994. The second notification, which
will reflect the amounts to be used by calendar year taxpayers on their federal
income tax returns, will be made in conjunction with Form 1099 DIV and is
mailed in January 1995. Shareholders are advised to consult their own tax
advisers with respect to the tax consequences of their investment in the Fund.
SHORT-TERM U.S. GOVERNMENT INCOME FUND
Paine Webber
Dear Shareholder
------------------------------------------------------------------------------
We are pleased to provide you with this annual report on the Kidder, Peabody
Adjustable Rate Government Fund. This 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(1)
Class A Class B Class C
--------- --------- ---------
Past 6 Months + 0.25% + 0.00% + 0.38%
Past 12 Months + 1.60% + 1.09% + 1.94%
The KP Adjustable Rate Government Fund (Class A shares) achieved a total
return of 0.25% over the past 6-month period and 1.60% over the past 12-month
period vs. (0.09)% and 0.80% respectively posted by the Lehman Brothers
Adjustable Rate Mortgage Index for the same time period. The Fund outperformed
the index primarily because it avoided heavy investment in lagging adjustable
rate instruments and maintained a conservative investment approach in what we
believe was a worst case scenario market.
The Fund declared and paid total per share and capital gains distributions of
$0.48 for Class A, $0.42 for Class B, and $0.51 for Class C for the six months
ended on August 31, 1994. 30-day SEC yields as of August 31, 1994 were 4.01%
for Class A, 3.60% for Class B, and 4.34% for Class C.(2) Please review the
pages that follow for complete performance information, including SEC-required
data, which reflects deduction of the initial sales charge on Class A shares.
Market Report
There is no question that the last year has been one of the most tumultuous in
recent history for all fixed income markets, including the adjustable rate
mortgage sector. Fortunately, the KP Adjustable Rate Government Fund was able
to avoid many of the problems suffered by competitors. Our conservative
approach protected Fund assets during a difficult period.
The most relevant aspect of an ARM security is its ability to adjust its
coupon periodically to new market rates, an inherent feature that creates
price stability. However, there are limits to the adjustability of ARMs. Some
adjust monthly, but most adjust only once or twice a year. In addition, many
feature caps that limit the amount a rate can be raised at any one time to a
specific percentage, usually 2%. In an unusually rising interest rate
environment -- such as the one over the past year when short-term rates rose
approximately 3% -- ARMs tend to lag behind other cash equivalents and money
market instruments because of the time it takes to adjust to new rates or
because of these upward caps. In addition, the inability of some ARMs to fully
adjust upward hurts their value. Because of all of these factors, some ARM
funds suffered a decline in NAV, leading to large shareholder redemptions.
This, of course, forced many bonds back on the market and increased supply to
the point where market value suffered.
The good news for the KP Adjustable Rate Government Fund was twofold. First,
our ability to generate income during this difficult period helped us offset
lost value and allowed us to post a positive return in a declining market.
Second, because we limited derivatives use to conservative instruments for
hedging purposes only -- and even then committed only 2% to 3% of portfolio
funds for that purpose -- we did not suffer the losses that might have
occurred if the Fund had been invested in esoteric and illiquid derivatives.
(continued)
1 Data is based on historic investment results and is not indicative of future
performance. Total returns are not annualized and include the reinvestment
of all dividend 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%
maximum 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.
Looking Ahead
Looking ahead, we are happy to report a more positive environment developing.
We see interest rates moving upward at a 1% to 1 1/2% rate over the next six
months. This slow rise is good news for ARMs as they are designed to weather a
moderately increasing interest rate environment. Not only does the slowed
growth give ARMs time to adjust to higher rates, but most are also able to
make up lost ground from prior cap situations, bringing their rates more in
line with current yields. Finally, we have identified two trends that bode
well for the ARM market. Market volatility is decreasing, which should lead to
spread tightening, and a flattening yield curve is emerging. Both factors
should increase the value base of the ARM market in the months ahead.
In the meantime, we will continue to focus on providing maximum returns with
minimum volatility. Thank you for your participation in the Kidder, Peabody
Adjustable Rate Government 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. John F. Green, Jr.
Chairman Chief Investment Officer
New York, New York
October 14, 1994
Average Annual Total Returns
------------------------------------------------------------------------------
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. Keep in
mind that past performance is not indicative 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.
Inception One Life of
Date Year the Fund
--------- --------- ---------
Class A 11/10/92 (0.27)% 1.96%
Class B 5/10/93 1.54% 1.86%
Class C 5/10/93 2.39% 2.70%
Kidder, Peabody Adjustable Rate Government Fund -- Results of a $10,000
Investment (Unaudited)
------------------------------------------------------------------------------
The following graphs present an example of how $10,000 grew between the Fund's
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
Class B
Class C
About the Index
------------------------------------------------------------------------------
The Lehman ARM Index is a broad market capitalization index of the government
agency adjustable rate mortgage (ARM) market. It consists of government agency
guaranteed securities such as FNMA, FHLMC, and GNMA securities. The index is
unmanaged and does not reflect the deduction of management fees and fund
costs.
Kidder, Peabody Adjustable Rate Government 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>
Mortgage-Backed Securities
Federal Home Loan Mortgage Corporation (FHLMC)
5.903%, 12/01/2018 ARM(a)......................... $ 2,678,931 $ 2,732,499 $ 2,750,913 3.7%
5.642%, 06/01/2022................................ 8,382,962 8,617,806 8,608,212 11.7
5.744%, 10/01/2022 ARM(a)......................... 4,504,024 4,610,528 4,653,197 6.3
5.846%, 05/01/2022 ARM(a)......................... 5,072,895 5,248,962 5,253,592 7.1
5.800%, 01/01/2023................................ 3,834,074 3,996,875 4,020,985 5.5
------------- ------------- ---------
Total FHLMC............................... 25,206,670 25,286,899 34.3
------------- ------------- ---------
Federal National Mortgage Association (FNMA) Certificates
10.100%, 03/25/2012............................... 1,560,384 1,560,384 1,585,678 2.1
6.352%, 07/01/2019 ARM(a)......................... 5,063,702 5,217,982 5,209,284 7.1
5.798%, 11/01/2019 ARM(a)......................... 3,280,144 3,329,645 3,351,881 4.5
6.634%, 02/01/2022................................ 6,655,716 6,870,904 6,896,986 9.4
------------- ------------- ---------
Total FNMA................................ 16,978,915 17,043,829 23.1
------------- ------------- ---------
Total Mortgage-Backed Securities.......... 42,185,585 42,330,728 57.4
------------------------------------------------------------------------------
Collateralized Mortgage Obligations
Capstead 5.429%, 5/25/2022........................ 9,266,696 9,532,941 9,399,904 12.7
------------- ------------- ---------
Donaldson, Lufkin & Jenrette Mtg Assoc. (DLJMA)
2.113%, 7/25/2023(b).............................. 31,909,543 2,179,861 1,874,686 2.6
------------- ------------- ---------
Housing Securities, Inc. 5.752%, 04/25/2023....... 6,455,541 6,605,604 6,516,062 8.8
------------- ------------- ---------
Resolution Trust Corporation (RTC)
6.092%, 08/25/2022................................ 8,542,408 8,542,853 8,622,493 11.7
6.553%, 11/25/2022................................ 2,076,735 2,076,843 2,110,482 2.9
------------- ------------- ---------
Total RTC................................. 10,619,696 10,732,975 14.6
------------- ------------- ---------
Total Collateralized Mortgage
Obligations............................. 28,938,102 28,523,627 38.7
------------------------------------------------------------------------------
Repurchase Agreement
Morgan Stanley Repurchase Agreement, 4.78%,
acquired 8/31/94 due 9/01/94, to be repurchased
at $2,100,279 (collateralized by U.S. Treasury
Notes, 7.500%, due 01/31/96)(c)................. 2,100,000 2,100,000 2,100,000 2.8
------------------------------------------------------------------------------
Total Investments................................. $ 73,223,687 72,954,355 98.9
-------------
-------------
Other Assets Less Liabilities..................... 842,957 1.1
------------- ---------
Net Assets........................................ $ 73,797,312 100.0%
------------- ---------
------------- ---------
</TABLE>
Notes to Schedule of Investments:
(a) Adjustable rate mortgage.
(b) Adjustable Rate Mortgage Interest Only.
(c) Value of collateral is $2,144,660
See Notes to Financial Statements.
Kidder, Peabody Adjustable Rate Government Fund
------------------------------------------------------------------------------
Statement of Assets and Liabilities as of August 31, 1994
------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Assets
Investments, at value (identified cost-$73,223,687) (Note 1a).............. $72,954,355
Cash....................................................................... 189,710
Receivables:
Shares sold............................................................ $ 144,506
Interest............................................................... 469,261
Paydowns............................................................... 210,322
Due from manager....................................................... 24,850
---------
848,939
Prepaid expenses (Note 1d)................................................. 181,405
-----------
Total assets.......................................... 74,174,409
-----------
Liabilities
Payables:
Shares redeemed........................................................ 307,826
Dividends (Note 1b).................................................... 18,606
Service fees (Note 2).................................................. 16,317
Distribution fees (Note 2)............................................. 3,355 346,104
---------
Accrued expenses........................................................... 30,993
-----------
Total liabilities..................................... 377,097
-----------
Net Assets
At value................................................................... $73,797,312
-----------
-----------
Net assets were comprised of:
Aggregate paid-in-capital.............................................. $76,116,045
Net unrealized depreciation on investments............................. (269,332)
Accumulated net realized capital losses................................ (1,795,237)
Overdistribution of net investment income.............................. (254,164)
-----------
Net assets................................................................. $73,797,312
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
----------- ---------- ----------
<S> <C> <C> <C>
Net assets................................................... $64,419,190 $7,746,124 $1,631,998
Outstanding shares of beneficial interest, ($.001 par
value)..................................................... 5,448,645 655,186 137,979
Net asset values per share................................... $11.82 $11.82 $11.83
Maximum offering price per share for Class A
($11.82[div].9775)......................................... $12.09 N/A N/A
</TABLE>
See Notes to Financial Statements.
Kidder, Peabody Adjustable Rate Government Fund
------------------------------------------------------------------------------
Statement of Operations for the Year Ended August 31, 1994
------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Investment Income
Interest income (net of $1,557,589, amortization of
premiums)................................................. $ 7,784,886
Expenses
Investment advisory (Note 2)................................ $ 820,271
Servicing (Note 2):
Class A................................................. $ 357,332
Class B................................................. 21,426 378,758
---------
Interest.................................................... 152,769
Federal and state registration.............................. 123,407
Professional................................................ 81,551
Amortization of organization expenses (Note 1d)............. 47,905
Distribution -- Class B (Note 2)............................ 42,853
Prospectus and shareholders' reports........................ 35,808
Transfer agent.............................................. 29,870
Pricing..................................................... 28,800
Miscellaneous............................................... 15,405
Custodian................................................... 13,435
Trustees' fees and expenses (Note 2)........................ 10,875
-------------
Total expenses......................... 1,781,707
Expenses absorbed by manager (Note 2)....................... (328,801)
-------------
Net expenses........................... 1,452,906
-----------
Net Investment Income....................................... 6,331,980
Realized and Unrealized Loss on Investments (Note 3)
Realized loss from investment transactions (excluding
short-term
securities):
Proceeds from sales..................................... 179,636,811
Cost of securities sold................................. (181,134,446)
-------------
Net realized loss on investment transactions................ (1,497,635)
Change in unrealized depreciation on securities............. (1,903,033)
-----------
Net Increase in Net Assets
Resulting from operations................................... $ 2,931,312
-----------
-----------
</TABLE>
See Notes to Financial Statements.
Kidder, Peabody Adjustable Rate Government Fund
------------------------------------------------------------------------------
Statements of Changes in Net Assets
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
AUGUST 31, AUGUST 31,
1993 1994
---------------------------
<S> <C> <C>
Increase (Decrease) in Net Assets from Operations
Net investment income................................................ $ 4,785,155 $ 6,331,980
Net realized loss on investment transactions......................... (297,602) (1,497,635)
Change in unrealized appreciation (depreciation) on securities....... 1,633,701 (1,903,033)
---------------------------
Net increase in net assets resulting from operations......... 6,121,254 2,931,312
---------------------------
Distributions to Shareholders from Net Investment Income (Note 1e)
Class A`D'........................................................... (4,719,261) (5,505,980)
Class B*............................................................. (30,408) (289,641)
Class C*............................................................. (35,486) (536,359)
---------------------------
Total distributions from net investment income............... (4,785,155) (6,331,980)
---------------------------
Distributions in Excess of Net Investment Income
Class A.............................................................. -- (214,243)
Class B.............................................................. -- (11,365)
Class C.............................................................. -- (28,556)
---------------------------
Total distributions in excess of net investment income....... -- (254,164)
---------------------------
Capital Share Transactions (Note 4)
Net proceeds from sale of shares..................................... 298,457,300 123,641,670
Net asset value of shares issued to shareholders in connection with
the reinvestment of dividends...................................... 3,889,417 5,776,858
Cost of shares redeemed.............................................. (76,754,915) (278,899,289)
---------------------------
Net increase (decrease) in net assets derived from capital
share transactions......................................... 225,591,802 (149,480,761)
---------------------------
Total increase (decrease) in net assets...................... 226,927,901 (153,135,593)
Net Assets
Beginning of period.................................................. 5,004 226,932,905
---------------------------
End of period........................................................ $226,932,905 $ 73,797,312
---------------------------
---------------------------
</TABLE>
`D' From November 10, 1992 (Commencement of Operations) to August 31, 1993.
* From May 10, 1993 (Commencement of Class Operations) to August 31, 1993.
See Notes to Financial Statements.
Kidder, Peabody Adjustable Rate Government Fund
------------------------------------------------------------------------------
Financial Highlights
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------
CLASS A
PERIOD YEAR CLASS B CLASS C
ENDED ENDED PERIOD YEAR PERIOD YEAR
AUGUST AUGUST ENDED ENDED ENDED ENDED
31, 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1993`D' 1994 1993`D'`D' 1994 1993`D'`D' 1994
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period........... $ 12.00 $ 12.11 $ 12.07 $ 12.11 $ 12.07 $ 12.11
------------------------------------------------------------------------
Income from Investment Operations:
Net investment income.......................... 0.42 0.44 0.13 0.40 0.16 0.30
Net realized and unrealized gains (losses) on
investments.................................. 0.11 (0.25) 0.04 (0.27) 0.04 (0.07)
------------------------------------------------------------------------
Total from investment operations............... 0.53 0.19 0.17 0.13 0.20 0.23
Distributions to Shareholders from (Note 1e):
Net investment income.......................... (0.42) (0.48) (0.13) (0.42) (0.16) (0.51)
------------------------------------------------------------------------
Net asset value, end of period................. $ 12.11 $ 11.82 $ 12.11 $ 11.82 $ 12.11 $ 11.83
------------------------------------------------------------------------
------------------------------------------------------------------------
Total return#.................................. 4.45% 1.60% 1.40% 1.09% 1.64% 1.94%
Ratios/Supplemental Data:
Net assets, end of period (in thousands)....... $ 218,405 $ 64,419 $ 5,906 $ 7,746 $ 2,622 $ 1,632
Ratios to Average Net Assets:
Expenses, excluding distribution fees, net of
reimbursement................................ 0.29%* 0.63% 0.29%* 0.63% 0.29%* 0.63%
Expenses, including distribution fees, net of
reimbursement................................ 0.53%* 0.88% 0.99%* 1.38% 0.29%* 0.63%
Expenses, before reimbursement from manager.... 0.92%* 1.08% 1.35%* 1.58% 0.65%* 0.83%
Net investment income.......................... 4.00%* 3.88% 3.54%* 3.38% 4.24%* 4.13%
Portfolio turnover rate........................ 14.03% 25.90% 14.03% 25.90% 14.03% 25.90%
</TABLE>
`D' From November 10, 1992 (Commencement of Operations) to August 31, 1993.
`D'`D' From May 10, 1993 (Commencement of Class Operations) to August 31,
1993.
# Total return does not reflect the effects of a sales charge, and is
calculated by giving effect to the reinvestment of dividends on the
dividend payment date.
* Annualized.
See Notes to Financial Statements.
Kidder, Peabody Adjustable Rate Government 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
management company. The Fund commenced operations on November 10, 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 Systemsm. The System
offers three classes of shares having identical voting, dividend, 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 bear a service fee of .25% per annum and a distribution fee of .50% 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 primarily traded on a stock exchange is valued at the last sale price
on that exchange or, if no sales occurred during the day, at the quoted bid
price. In carrying out the Trustees' valuation policies, the Fund may consult
with an independent pricing service.
(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 of its taxable income to its shareholders. The
method of distribution for purposes of maintaining regulated investment
company status is made on a Fund level rather than a class level. Therefore,
no Federal income tax provision is required.
(c) Security transactions are recorded on a trade date basis. Interest
income is earned from settlement date and is recognized on an accrual basis.
Distributions to shareholders are recorded on the ex-dividend dates. The Fund
amortizes premium and accretes discount using the interest method. 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) 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 from 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. At August
31, 1994, the Fund had net accumulated capital losses of $1,795,237 for book
purposes.
2. The Fund has entered into a Management and Advisory 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, has a 100% interest in
Kidder, Peabody Group Inc., the parent company of KP. KPAM is responsible for
the management of the Fund's portfolio and provides the necessary personnel,
facilities, equipment, and other services necessary to the operations of the
Fund. Fees paid by the Fund for such services are payable monthly, calculated
and accrued daily by applying an annual rate of .50 of 1% to the net assets of
the Fund as determined as of the close of business each day. Total annual
expenses of the Fund, exclusive of taxes, interest, all brokers' commissions
and other normal charges incidental to the purchase and sale of portfolio
securities, but including fees paid to KPAM, are
Kidder, Peabody Adjustable Rate Government Fund
------------------------------------------------------------------------------
Notes to Financial Statements
------------------------------------------------------------------------------
not expected to exceed the limits prescribed by any state in which the Fund's
shares are offered for sale, and KPAM will reimburse the Fund for any expenses
in excess of such limits. No expense reimbursement was required for the year
ended August 31, 1994, however, KPAM voluntarily reimbursed the Fund for a
portion of its expenses.
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. Each Trustee who is not an 'affiliated person' 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 $41,818,310 and
$179,636,811, respectively. As of August 31, 1994 net unrealized depreciation,
based on cost for Federal income tax purposes, aggregated $269,332, of which
$276,714 related to appreciated securities and $546,046 related to depreciated
securities. The aggregate cost of securities at August 31, 1994, for book and
Federal income tax purposes, was $73,223,687.
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 $123,641,670 from net proceeds from sale of shares,
$278,899,289 representing cost of shares repurchased and $5,776,858
reinvestment of dividends for the year ended August 31, 1994 were as follows
for each class:
CLASS A SHARES AMOUNT
---------------------------------------------------
For the period November
10, 1993 to August
31, 1993:
Shares sold............ 23,939,533 $ 288,408,987
Shares issued to
shareholders in
connection with the
reinvestment of
dividends............ 317,055 3,828,061
Shares redeemed........ (6,223,194) (75,149,575)
--------------------------
Net increase....... 18,033,394 $ 217,087,473
--------------------------
--------------------------
Year ended
August 31, 1994:
Shares sold............ 6,973,355 $ 84,134,009
Shares issued to
shareholders in
connection with the
reinvestment of
dividends............ 414,976 4,983,789
Shares redeemed........ (19,973,497) (240,056,825)
--------------------------
Net decrease....... (12,585,166) $(150,939,027)
--------------------------
--------------------------
CLASS B SHARES AMOUNT
-----------------------------------------------
For the period
May 10, 1993 to
August 31, 1993:
Shares sold............ 568,742 $ 6,870,825
Shares issued to
shareholders in
connection with the
reinvestment of
dividends............ 2,364 28,606
Shares redeemed........ (83,444) (1,008,360)
----------------------
Net increase....... 487,662 $ 5,891,071
----------------------
----------------------
Year ended
August 31, 1994:
Shares sold............ 932,828 $11,232,555
Shares issued to
shareholders in
connection with the
reinvestment of
dividends............ 23,925 286,345
Shares redeemed........ (789,229) (9,457,145)
----------------------
Net increase....... 167,524 $ 2,061,755
----------------------
----------------------
Kidder, Peabody Adjustable Rate Government Fund
------------------------------------------------------------------------------
Notes to Financial Statements
------------------------------------------------------------------------------
CLASS C SHARES AMOUNT
---------------------------------------------------
For the period May 10,
1993 to August 31,
1993:
Shares sold............. 263,189 $ 3,177,488
Shares issued to
shareholders in
connection with the
reinvestment of
dividends............. 2,709 32,750
Shares redeemed......... (49,409) (596,980)
-------------------------
Net increase........ 216,489 $ 2,613,258
-------------------------
-------------------------
Year ended
August 31, 1994:
Shares sold............. 2,346,864 $ 28,275,106
Shares issued to
shareholders in
connection with the
reinvestment of
dividends............. 42,294 506,724
Shares redeemed......... (2,467,668) (29,385,319)
-------------------------
Net decrease........ (78,510) $ (603,489)
-------------------------
-------------------------
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 Adjustable Rate Government 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 Kidder, Peabody Adjustable Rate
Government 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 financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of August 31, 1994 by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Kidder, Peabody
Adjustable Rate Government Fund as of August 31, 1994, the results of its
operations, the changes in its net assets and the financial highlights for the
periods presented in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
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
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.
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
Seeks long-term capital growth by investing primarily in non-U.S. securities.
Kidder, Peabody Small Cap Equity Fund
Seeks long-term capital appreciation by investing primarily in the stocks of
small-capitalization companies.
Bond Funds
----------------------------------------------
Kidder, Peabody Adjustable Rate Government Fund
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
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.
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
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
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
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.
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
---------------------------------------
Kidder, Peabody Adjustable Rate Government 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 & Investment Adviser
------------------------------------------------
Kidder Peabody Asset Management, Inc.
60 Broad Street, New York, New York 10004
Distributor
------------------------------------------------
Kidder, Peabody & Co. Incorporated
10 Hanover Square, New York, New York 10005
Custodian, Transfer, Dividend & Recordkeeping Agent
------------------------------------------------
Investors Fiduciary Trust Company
127 West 10th Street, Kansas City, Missouri 64105
Independent Auditors
------------------------------------------------
Deloitte & Touche LLP
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 Adjustable Rate Government 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.
Kidder,
Peabody
Adjustable
Rate
Government
Fund
Annual Report
August 31, 1994
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 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; 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, the trustees shall not be liable for errors of judgment or mistakes
of fact or law, or for any act or omission in accordance with advice of counsel
or other experts, or failing to follow such advice, with respect to the meaning
and operation of the Declaration of Trust.
Article IX of the By-Laws provides that the Registrant may purchase
and maintain insurance on behalf of any person who is or was a trustee, officer
or employee of the Trust, or is or was serving at the request of the Trust as a
trustee, officer or employee of a corporation, partnership, joint venture, trust
or other enterprise against any liability asserted against him or her and
incurred by him or her in any such capacity or arising out of his or her status
as such, whether or not the Registrant would have the power to indemnify him or
her against such liability, provided that the Registrant may not acquire
insurance protecting any trustee or officer against liability to the Registrant
or its shareholders to which he or she would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his or her office.
Section 9 of the Investment Advisory and Administration Contract (the
"Contract") between Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins") and the Trust provides that Mitchell Hutchins shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the
Registrant in connection with the matters to which the Contract relates, except
for a loss resulting from 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 under the Contract and that Mitchell Hutchins shall look only to the
assets and property of the Trust in settlement of such right or claim and not to
the assets and property of the trustees.
Section 7 of the Sub-Investment Advisory Contract ("Sub-Advisory
Contract") between Mitchell Hutchins and Pacific Investment Management Company
("PIMCO") with respect to PaineWebber Short-Term U.S. Government Income Fund
("Short-Term U.S. Government Income Fund") provides that PIMCO shall not
1
be liable for any error of judgment or mistake of law or for any loss suffered
by Short-Term U.S. Government Income Fund, the Registrant, or its shareholders
or by Mitchell Hutchins in connection the matters to which that contract
relates. Section 7, however, expressly excepts from this limitation of liability
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 under the contract. Pursuant to a separate agreement between
Mitchell Hutchins and PIMCO, Mitchell Hutchins has agreed to indemnify PIMCO
with respect to third party claims relating to certain acts or omissions by
PIMCO occurring prior to the date of the Sub-Advisory Contract.
Section 9 of each Distribution Contract provides that the Trust will
indemnify Mitchell Hutchins and its officers, directors or controlling persons
against all liabilities arising from any alleged untrue statement of material
fact in the Registration Statement or from any alleged omission to state in the
Registration Statement a material fact required to be stated in it or necessary
to make the statements in it, in light of the circumstances under which they
were made, not misleading, except insofar as liability arises from untrue
statements or omissions made in reliance upon and in conformity with information
furnished by 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 each Distribution Contract.
Section 9 of each Exclusive Dealer Agreement contains provisions
similar to Section 9 of each 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 Service Contract.
Section 10 of each Distribution Contract and Section 7 of the Service
Contract contain provisions similar to that of Section 10 of the Investment
Advisory and Administration Contract, with respect to Mitchell Hutchins and
PaineWebber, as appropriate.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be provided to trustees, officers and
controlling persons of the 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
(1) (a) Declaration of Trust 1/
2
(b) Amendment to Declaration of Trust effective January 28, 1988 2/
(c) Amendment to Declaration of Trust effective July 1, 1990 5/
(d) Amendment to Declaration of Trust effective March 21, 1991 6/
(e) Amendment to Declaration of Trust effective April 1, 1991 7/
(f) Amendment to Declaration of Trust effective July 1, 1991 10/
(g) Amendment to Declaration of Trust effective February 26, 1992 9/
(h) Amendment to Declaration of Trust effective January 25, 1993 11/
(i) Amendment to Declaration of Trust effective May 25, 1993 12/
(j) Amendment to Declaration of Trust effective July 30, 1993 12/
(k) Amendment to Declaration of Trust effective November 13, 1993 14/
(2) (a) By-Laws 1/
(b) Amendment to By-Laws effective March 19, 1991 6/
(c) Amendment to By-Laws effective September 28, 1994 14/
(3) Voting trust agreement - none
(4) Agreement and Plan of Reorganization and Termination (filed herewith)
(5) All instruments defining the rights of holders -- none
(6) (a) Investment Advisory and Administration Contract 3/
(b) Investment Advisory Fee Agreement with respect to PaineWebber
Short-Term U.S. Government Income Fund 13/
(c) Sub-Investment Advisory Contract with respect to PaineWebber
Short-Term U.S. Government Income Fund 15/
(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 or pension plans - none
(9) (a) Custodian Agreement with respect to PaineWebber Short-Term U.S.
Government Income Fund 2/
(10) (a) Plan pursuant to Rule 12b-1 with respect to Class A Shares 8/
(b) Plan pursuant to Rule 12b-1 with respect to Class B Shares 8/
(c) Plan pursuant to Rule 12b-1 with respect to Class D Shares 11/
(d) Distribution Fee Addendum with respect to Class D shares of
PaineWebber Short-Term U.S. Government Income Fund 13/
(e) Rule 18f-3 Plan (filed herewith)
(11) Opinion and consent of Kirkpatrick & Lockhart LLP regarding the
legality of securities being registered (filed herewith)
(12) (a) Opinion and Consent of Kirkpatrick & Lockhart LLP regarding
certain tax matters (filed herewith)
(b) Opinion and consent of Willkie Farr & Gallagher regarding
certain tax matters (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 - none
(17) Additional Exhibits
(a) Declaration of Rule 24f-2 (filed herewith)
3
(b) Proxy Cards (filed herewith)
(27) Financial Data Schedules (filed herewith)
______________
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 6, 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. 2-91362, filed January 31, 1991.
6/ Incorporated by reference from Post-Effective Amendment No. 16 to the
registration statement, SEC File No. 2-91362, 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.
15/ Incorporated by reference from Post-Effective Amendment No. 37 to the
registration statement, SEC File No. 2-91362, filed on EDGAR on March 31,
1995.
Item 17. Undertakings
(1) The undersigned Registrant agrees that prior to any public
re-offering 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
re-offering prospectus will contain the information called for by
the applicable registration form for re-offering 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.
4
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 11th 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:
Signature Title Date
--------- ----- ----
/s/ Margo N. Alexander President August 11, 1995
---------------------------- (Chief Executive Officer)
Margo N. Alexander
/s/ E. Garrett Bewkes, Jr. Trustee and Chairman August 11, 1995
---------------------------- of the Board of Trustees
E. Garrett Bewkes, Jr.
/s/ Meyer Feldberg Trustee August 11, 1995
----------------------------
Meyer Feldberg
/s/ George W. Gowen Trustee August 11, 1995
----------------------------
George W. Gowen
/s/ Frederic V. Malek Trustee August 11, 1995
----------------------------
Frederic V. Malek
/s/ Frank P.L. Minard Trustee August 11, 1995
----------------------------
Frank P. L. Minard
/s/ Judith Davidson Moyers Trustee August 11, 1995
----------------------------
Judith Davidson Moyers
/s/ Thomas F. Murray Trustee August 11, 1995
----------------------------
Thomas F. Murray
/s/ Julian F. Sluyters Vice President and August 11, 1995
---------------------------- Treasurer (Principal
Julian F. Sluyters Financial and Accounting
Officer)
5
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS FILED WITH
FORM N-14
REGISTRATION STATEMENT UNDER |X|
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. ____
POST-EFFECTIVE AMENDMENT NO. ____
PaineWebber Managed Investments Trust
File No. 33-______
6
PAINEWEBBER MANAGED INVESTMENTS TRUST
EXHIBIT INDEX
Exhibit
Number Page
------- ----
(1) (a) Declaration of Trust 1/
(b) Amendment to Declaration of Trust effective January 28, 1988 2/
(c) Amendment to Declaration of Trust effective July 1, 1990 5/
(d) Amendment to Declaration of Trust effective March 21, 1991 6/
(e) Amendment to Declaration of Trust effective April 1, 1991 7/
(f) Amendment to Declaration of Trust effective July 1, 1991 10/
(g) Amendment to Declaration of Trust effective February 26, 1992 9/
(h) Amendment to Declaration of Trust effective January 25, 1993 11/
(i) Amendment to Declaration of Trust effective May 25, 1993 12/
(j) Amendment to Declaration of Trust effective July 30, 1993 12/
(k) Amendment to Declaration of Trust effective November 13, 1993 14/
(2) (a) By-Laws 1/
(b) Amendment to By-Laws effective March 19, 1991 6/
(c) Amendment to By-Laws effective September 28, 1994 14/
(3) Voting trust agreement - none
(4) Agreement and Plan of Reorganization and Termination (filed herewith)
(5) All instruments defining the rights of holders -- none
(6) (a) Investment Advisory and Administration Contract 3/
(b) Investment Advisory Fee Agreement with respect to PaineWebber
Short-Term U.S. Government Income Fund 13/
(c) Sub-Investment Advisory Contract with respect to PaineWebber
Short-Term U.S. Government Income Fund 15/
(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 or pension plans - none
(9) (a) Custodian Agreement with respect to PaineWebber Short-Term U.S.
Government Income Fund 2/
(10) (a) Plan pursuant to Rule 12b-1 with respect to Class A Shares 8/
(b) Plan pursuant to Rule 12b-1 with respect to Class B Shares 8/
(c) Plan pursuant to Rule 12b-1 with respect to Class D Shares 11/
(d) Distribution Fee Addendum with respect to Class D shares of
PaineWebber Short-Term U.S. Government Income Fund 13/
(e) Rule 18f-3 Plan (filed herewith)
(11) Opinion and consent of Kirkpatrick & Lockhart LLP regarding the legality
of securities being registered (filed herewith)
(12) (a) Opinion and Consent of Kirkpatrick & Lockhart LLP regarding certain
tax matters (filed herewith)
(b) Opinion and consent of Willkie Farr & Gallagher regarding certain tax
matters (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 - none
(17) Additional Exhibits
7
(a) Declaration of Rule 24f-2 (filed herewith)
(b) Proxy Cards (filed herewith)
(27) Financial Data Schedules (filed herewith)
______________
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 6, 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. 2-91362, filed January 31, 1991.
6/ Incorporated by reference from Post-Effective Amendment No. 16 to the
registration statement, SEC File No. 2-91362, 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.
15/ Incorporated by reference from Post-Effective Amendment No. 37 to the
registration statement, SEC File No. 2-91362, filed on EDGAR on March 31,
1995.
8
EXHIBIT 4
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 Short-Term U.S. Government Income
Fund, a segregated portfolio of assets ("series") thereof ("Acquir-
ing Fund"), and Mitchell Hutchins/Kidder, Peabody Investment Trust,
a Massachusetts business trust ("MH/KP Trust"), on behalf of its
Mitchell Hutchins/Kidder, Peabody Adjustable Rate Government Fund
series ("Target"). (Acquiring Fund and Target are sometimes re-
ferred to herein individually as a "Fund" and collectively as the
"Funds," and PW Trust and 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 transac-
tions are referred to herein as the "Reorganization." All agree-
ments, representations, actions, and obligations described herein
made or to be taken or undertaken by either Fund are made and shall
be taken or undertaken by PW Trust on behalf of Acquiring Fund and
by MH/KP Trust on behalf of Target.
Acquiring Fund's shares are divided into four classes, desig-
nated 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," re-
spectively). (Acquiring Fund is establishing Class C expressly for
the purpose of facilitating the Reorganization -- Class C Acquiring
Fund Shares are to be exchanged, in effect, for Class C Target
Shares (defined below) as part of the Reorganization.) 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 of-
fered at NAV without imposition of any sales charge and are subject
to a contingent deferred sales charge and 12b-1 service and distri-
bution fees at the respective annual rates of 0.25% and 0.75% of
class assets; (3) Class C Acquiring Fund Shares will be offered to
a limited class of offerees at NAV without imposition of any sales
charge and will not be 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," respec-
tively). 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) 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 attribut-
able 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 attribut-
able 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 rec-
ords, deferred and prepaid expenses shown as assets on Target's
books, and other property owned by Target at the Effective Time (as
defined in paragraph 3.1).
1.3. The Liabilities shall include (except as otherwise pro-
vided herein) all of Target's liabilities, debts, obligations, and
duties of whatever kind or nature, whether absolute, accrued, con-
tingent, or otherwise, whether or not arising in the ordinary
course of business, whether or not determinable at the Effective
Time, and whether or not specifically referred to in this Agree-
ment, including without limitation Target's share of the expenses
described in paragraph 7.2. Notwithstanding the foregoing, Target
agrees to use its best efforts to discharge all of its known Lia-
bilities prior to the Effective Time.
1.4. At or immediately before the Effective Time, Target
shall declare and pay to its shareholders a dividend and/or other
distribution in an amount large enough so that it will have distri-
buted 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 rea-
sonably practicable), Target shall constructively distribute the
Acquiring Fund Shares received by it pursuant to paragraph 1.1 to
Target's shareholders of record, determined as of the Effective
Time (collectively "Shareholders" and individually a "Share-
holder"), 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 Share-
holder, 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 Tar-
get Shares shall be credited with the respective pro rata number of
Class C Acquiring Fund Shares due that Shareholder). All outstand-
ing Target Shares, including any represented by certificates, shall
simultaneously be canceled on Target's share transfer records. Ac-
quiring Fund shall not issue certificates representing the Acquir-
ing 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.
1.7. Any reporting responsibility of Target to a public
authority is and shall remain its responsibility up to and includ-
ing the date on which it is terminated.
1.8. Any transfer taxes payable upon issuance of Acquiring
Fund Shares in a name other than that of the registered holder on
Target's books of the Target Shares constructively exchanged there-
for shall be paid by the person to whom such Acquiring Fund Shares
are to be issued, as a condition of such transfer.
2. VALUATION
2.1. For purposes of paragraph 1.1(a), Target's net value
shall be (a) the value of the Assets computed as of the close of
regular trading on the New York Stock Exchange, Inc. ("NYSE") on
the date of the Closing ("Valuation Time"), using the valuation
procedures set forth in Target's then-current prospectus and state-
ment of additional information less (b) the amount of the Liabili-
ties as of the Valuation Time.
2.2. For purposes of paragraph 1.1(a), the NAV of 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' prin-
cipal 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 stat-
ing that (a) the Assets held by the custodian will be transferred
to Acquiring Fund at the Effective Time and (b) all necessary taxes
in conjunction with the delivery of the Assets, including all
applicable federal and state stock transfer stamps, if any, have
been paid or provision for payment has been made.
3.3. 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 Assis-
tant 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 evi-
dencing 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.
3.4. Each Investment Company shall deliver to the other at
the Closing a certificate executed in its name by its President or
a Vice President in form and substance satisfactory to the recipi-
ent and dated the Effective Time, to the effect that the represen-
tations and warranties it made in this Agreement are true and cor-
rect at the Effective Time except as they may be affected by the
transactions contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1. Target represents and warrants as follows:
4.1.1. MH/KP Trust is an unincorporated voluntary asso-
ciation with transferable shares organized as a business trust
under a written instrument ("Business Trust"); it is duly
organized, validly existing, and in good standing under the
laws of the Commonwealth of Massachusetts; and a copy of its
Declaration of Trust is on file with the Secretary of the
Commonwealth of Massachusetts;
4.1.2. 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 market-
able title to the Assets and full right, power, and authority
to sell, assign, transfer, and deliver the Assets free of any
liens or other encumbrances; and upon delivery and payment for
the Assets, Acquiring Fund will acquire good and marketable
title thereto;
4.1.5. Target's current prospectus and statement of
additional information conform in all material respects to the
applicable requirements of the Securities Act of 1933 ("1933
Act") and the 1940 Act and the rules and regulations there-
under and do not include any untrue statement of a material
fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not mislead-
ing;
4.1.6. Target is not in violation of, and the execution
and delivery of this Agreement and consummation of the trans-
actions contemplated hereby will not conflict with or violate,
Massachusetts law or any provision of MH/KP Trust's Declara-
tion of Trust or By-Laws or of any agreement, instrument,
lease, or other undertaking to which Target is a party or by
which it is bound or result in the acceleration of any obli-
gation, or the imposition of any penalty, under any agreement,
judgment, or decree to which Target is a party or by which it
is bound, except as previously disclosed in writing to and
accepted by PW Trust;
4.1.7. Except as disclosed in writing to and accepted by
PW Trust, all material contracts and other commitments of or
applicable to Target (other than this Agreement and investment
contracts, including options, futures, and forward contracts)
will be terminated, or provision for discharge of any liabili-
ties 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 re-
leasing any rights Target may have had with respect to actions
taken or omitted to be taken by any other party thereto prior
to the Closing;
4.1.8. Except as otherwise disclosed in writing to and
accepted by PW Trust, no litigation, administrative proceed-
ing, or investigation of or before any court or governmental
body is presently pending or (to Target's knowledge) threat-
ened against 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 litiga-
tion, proceeding, or investigation and is not a party to or
subject to the provisions of any order, decree, or judgment of
any court or governmental body that materially or adversely
affects its business or its ability to consummate the transac-
tions contemplated hereby;
4.1.9. The execution, delivery, and performance of this
Agreement has been duly authorized as of the date hereof by
all necessary action on the part of 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, authoriza-
tions, or filings are required under the 1933 Act, the Secu-
rities Exchange Act of 1934 ("1934 Act"), or the 1940 Act for
the execution or performance of this Agreement by 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 amend-
ment 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 State-
ment, at the time of the shareholders' meeting referred to in
paragraph 5.2, and at the Effective Time, the Proxy Statement
will (a) comply in all material respects with the applicable
provisions of the 1933 Act, the 1934 Act, and the 1940 Act and
the regulations thereunder and (b) not contain any untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the state-
ments therein, in light of the circumstances under which such
statements were made, not misleading; provided that the fore-
going shall not apply to statements in or omissions from the
Proxy Statement made in reliance on and in conformity with
information furnished by PW Trust for use therein;
4.1.13. The Liabilities were incurred by Target in the
ordinary course of its business;
4.1.14. Target is a "fund" as defined in section
851(h)(2) of the Code; it qualified for treatment as a regu-
lated investment company ("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 quali-
fication for its current taxable year; and it has no earnings
and profits accumulated in any taxable year in which the pro-
visions of Subchapter M did not apply to it. The Assets shall
be invested at all times through the Effective Time in a man-
ner that ensures compliance with the foregoing;
4.1.15. Target is not under the jurisdiction of a court
in a proceeding under Title 11 of the United States Code or
similar case within the meaning of section 368(a)(3)(A) of the
Code;
4.1.16. Not more than 25% of the value of Target's total
assets (excluding cash, cash items, and U.S. government secu-
rities) is invested in the stock and securities of any one
issuer, and not more than 50% of the value of such assets is
invested in the stock and securities of five or fewer issuers;
and
4.1.17. Target will be terminated as soon as reasonably
practicable after the Reorganization, but in all events within
six months after the Effective Time.
4.2. Acquiring Fund represents and warrants as follows:
4.2.1. PW Trust is a Business Trust; it is duly organ-
ized, validly existing, and in good standing under the laws of
the Commonwealth of Massachusetts; and a copy of its Decla-
ration of Trust is on file with the Secretary of the Common-
wealth of Massachusetts;
4.2.2. PW Trust is duly registered as an open-end man-
agement investment company under the 1940 Act, and such reg-
istration will be in full force and effect at the Effective
Time;
4.2.3. Acquiring Fund is a duly established and desig-
nated series of PW Trust;
4.2.4. No consideration other than Acquiring Fund Shares
(and Acquiring Fund's assumption of the Liabilities) will be
issued in exchange for the Assets in the Reorganization;
4.2.5. Acquiring Fund is establishing Class C (which was
authorized previously) expressly for the purpose of facilitat-
ing the Reorganization, and only one Class C Acquiring Fund
Share will be outstanding immediately before the Effective
Time. 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 op-
tions, warrants, or other rights to subscribe for or purchase
any of its shares, nor is there outstanding any security con-
vertible 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 pro-
ceeding, or investigation of or before any court or govern-
mental body is presently pending or (to Acquiring Fund's
knowledge) threatened against PW Trust with respect to Acquir-
ing Fund or any of its properties or assets that, if adversely
determined, would materially and adversely affect Acquiring
Fund's financial condition or the conduct of its business;
Acquiring Fund knows of no facts that might form the basis for
the institution of any such litigation, proceeding, or inves-
tigation and is not a party to or subject to the provisions of
any order, decree, or judgment of any court or governmental
body that materially or adversely affects its business or its
ability to consummate the transactions contemplated hereby;
4.2.9. The execution, delivery, and performance of this
Agreement has been duly authorized as of the date hereof by
all necessary action on the part of PW Trust's board of
trustees, which has made the determinations required by Rule
17a-8(a) under the 1940 Act; and, subject to receipt of any
necessary exemptive relief or no-action assurances requested
from the SEC or its staff with respect to sections 17(a) and
17(d) of the 1940 Act, this Agreement will constitute a valid
and legally binding obligation of Acquiring Fund, enforceable
in accordance with its terms, except as the same may be lim-
ited by bankruptcy, insolvency, fraudulent transfer, reorgan-
ization, moratorium, and similar laws relating to or affecting
creditors' rights and by general principles of equity;
4.2.10. No governmental consents, approvals, authoriza-
tions, or filings are required under the 1933 Act, the 1934
Act, or the 1940 Act for the execution or performance of this
Agreement by PW Trust, except for (a) the filing with the SEC
of the Registration Statement and a post-effective amendment
to PW Trust's registration statement, (b) receipt of the ex-
emptive 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 State-
ment, at the time of the shareholders' meeting referred to in
paragraph 5.2, and at the Effective Time, the Proxy Statement
will (a) comply in all material respects with the applicable
provisions of the 1933 Act, the 1934 Act, and the 1940 Act and
the regulations thereunder and (b) not contain any untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the state-
ments therein, in light of the circumstances under which such
statements were made, not misleading; provided that the fore-
going shall not apply to statements in or omissions from the
Proxy Statement made in reliance on and in conformity with
information furnished by 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 tax-
able 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 pro-
visions 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 busi-
ness as a series of an open-end investment company; nor does
Acquiring Fund have any plan or intention to redeem or other-
wise reacquire any Acquiring Fund Shares issued to the Share-
holders pursuant to the Reorganization, other than through
redemptions arising in the ordinary course of that business;
4.2.14. Acquiring Fund (a) will actively continue Tar-
get's business in substantially the same manner that Target
conducted that business immediately before the Reorganization,
(b) has no plan or intention to sell or otherwise dispose of
any of the Assets, except for dispositions made in the ordi-
nary course of that business and dispositions necessary to
maintain its status as a RIC under Subchapter M of the Code,
and (c) expects to retain substantially all the Assets in the
same form as it receives them in the Reorganization, unless
and until subsequent investment circumstances suggest the
desirability of change or it becomes necessary to make dispo-
sitions thereof to maintain such status;
4.2.15. There is no plan or intention for Acquiring Fund
to be dissolved or merged into another corporation or business
trust or any "fund" thereof (within the meaning of section
851(h)(2) of the Code) following the Reorganization;
4.2.16. Immediately after the Reorganization, (a) not
more than 25% of the value of Acquiring Fund's total assets
(excluding cash, cash items, and U.S. government securities)
will be invested in the stock and securities of any one issuer
and (b) not more than 50% of the value of such assets will be
invested in the stock and securities of five or fewer issuers;
and
4.2.17. Acquiring fund does not own, directly or indi-
rectly, nor at the Effective Time will it own, directly or
indirectly, nor has it owned, directly or indirectly, at any
time during the past five years, any shares of Target.
4.3. Each Fund represents and warrants as follows:
4.3.1. The fair market value of the Acquiring Fund
Shares, when received by the Shareholders, will be approxi-
mately equal to the fair market value of their Target Shares
constructively surrendered in exchange therefor;
4.3.2. Its management (a) is unaware of any plan or
intention of Shareholders to redeem or otherwise dispose of
any portion of the Acquiring Fund Shares to be received by
them in the Reorganization and (b) does not anticipate dis-
positions of those Acquiring Fund Shares at the time of or
soon after the Reorganization to exceed the usual rate and
frequency of dispositions of shares of Target as a series of
an open-end investment company. Consequently, its management
expects that the percentage of Shareholder interests, if any,
that will be disposed of as a result of or at the time of the
Reorganization will be de minimis. Nor does its management
anticipate that there will be extraordinary redemptions of
Acquiring Fund Shares immediately following the Reorganiza-
tion;
4.3.3. The Shareholders will pay their own expenses, if
any, incurred in connection with the Reorganization;
4.3.4. Immediately following consummation of the Reor-
ganization, Acquiring Fund will hold substantially the same
assets and be subject to substantially the same liabilities
that Target held or was subject to immediately prior thereto,
plus any liabilities and expenses of the parties incurred in
connection with the Reorganization;
4.3.5. The fair market value on a going concern basis of
the Assets will equal or exceed the Liabilities to be assumed
by Acquiring Fund and those to which the Assets are subject;
4.3.6. There is no intercompany indebtedness between the
Funds that was issued or acquired, or will be settled, at a
discount;
4.3.7. Pursuant to the Reorganization, Target will
transfer to Acquiring Fund, and Acquiring Fund will acquire,
at least 90% of the fair market value of the net assets, and
at least 70% of the fair market value of the gross assets,
held by Target immediately before the Reorganization. For the
purposes of this representation, any amounts used by Target to
pay its Reorganization expenses and redemptions and distribu-
tions made by it immediately before the Reorganization (except
for (a) distributions made to conform to its policy of distri-
buting all or substantially all of its income and gains to
avoid the obligation to pay federal income tax and/or the
excise tax under section 4982 of the Code and (b) redemptions
not made as part of the Reorganization) will be included as
assets thereof held immediately before the Reorganization;
4.3.8. None of the compensation received by any Share-
holder who is an employee of Target will be separate consider-
ation for, or allocable to, any of the Target Shares held by
such Shareholder-employee; none of the Acquiring Fund Shares
received by any such Shareholder-employee will be separate
consideration for, or allocable to, any employment agreement;
and the consideration paid to any such Shareholder-employee
will be for services actually rendered and will be commensur-
ate with amounts paid to third parties bargaining at arm's-
length for similar services; and
4.3.9. Immediately after the Reorganization, the Share-
holders will not own shares constituting "control" of Acquir-
ing Fund within the meaning of section 304(c) of the Code.
5. COVENANTS
5.1. Each Fund covenants to operate its respective business
in the ordinary course between the date hereof and the Closing, it
being understood that (a) such ordinary course will include declar-
ing and paying customary dividends and other distributions and such
changes in operations as are contemplated by each Fund's normal
business activities and (b) each Fund will retain exclusive control
of the composition of its portfolio until the Closing; provided
that Target shall not dispose of more than an insignificant portion
of its historic business assets during such period without Acquir-
ing Fund's prior consent.
5.2. Target covenants to call a shareholders' meeting to
consider and act upon this Agreement and to take all other action
necessary to obtain approval of the transactions contemplated
hereby.
5.3. Target covenants that the Acquiring Fund Shares to be
delivered hereunder are not being acquired for the purpose of mak-
ing any distribution thereof, other than in accordance with the
terms hereof.
5.4. Target covenants that it will assist PW Trust in obtain-
ing such information as PW Trust reasonably requests concerning the
beneficial ownership of Target Shares.
5.5. Target covenants that Target's books and records (in-
cluding all books and records required to be maintained under the
1940 Act and the rules and regulations thereunder) will be turned
over to PW Trust at the Closing.
5.6. Each Fund covenants to cooperate in preparing the Proxy
Statement in compliance with applicable federal securities laws.
5.7. Each Fund covenants that it will, from time to time, as
and when requested by the other Fund, execute and deliver or cause
to be executed and delivered all such assignments and other instru-
ments, and will take or cause to be taken such further action, as
the other Fund may deem necessary or desirable in order to vest in,
and confirm to, (a) Acquiring Fund, title to and possession of all
the Assets, and (b) Target, title to and possession of the Acquir-
ing Fund Shares to be delivered hereunder, and otherwise to carry
out the intent and purpose hereof.
5.8. PW Trust covenants to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act,
the 1940 Act, and such state securities laws it may deem appropri-
ate in order to continue its operations after the Effective Time.
5.9. Subject to this Agreement, each Fund covenants to take
or cause to be taken all actions, and to do or cause to be done all
things reasonably necessary, proper, or advisable to consummate and
effectuate the transactions contemplated hereby.
6. CONDITIONS PRECEDENT
Each Fund's obligations hereunder shall be subject to (a) per-
formance by the other Fund of all the obligations to be performed
hereunder at or before the Effective Time, (b) all representations
and warranties of the other Fund contained herein being true and
correct in all material respects as of the date hereof and, except
as they may be affected by the transactions contemplated hereby, as
of the Effective Time, with the same force and effect as if made at
and as of the Effective Time, and (c) the following further condi-
tions that, at or before the Effective Time:
6.1. This Agreement and the transactions contemplated hereby
shall have been duly adopted and approved by MH/KP Trust's board of
trustees and shall have been approved by Target's shareholders in
accordance with applicable law.
6.2. All necessary filings shall have been made with the SEC
and state securities authorities, and no order or directive shall
have been received that any other or further action is required to
permit the parties to carry out the transactions contemplated
hereby. The Registration Statement shall have become effective
under the 1933 Act, no stop orders suspending the effectiveness
thereof shall have been issued, and the SEC shall not have issued
an unfavorable report with respect to the Reorganization under sec-
tion 25(b) of the 1940 Act nor instituted any proceedings seeking
to enjoin consummation of the transactions contemplated hereby
under section 25(c) of the 1940 Act. All consents, orders, and
permits of federal, state, and local regulatory authorities (in-
cluding the SEC and state securities authorities) deemed necessary
by either Fund to permit consummation, in all material respects, of
the transactions contemplated hereby shall have been obtained,
except where failure to obtain same would not involve a risk of a
material adverse effect on the assets or properties of either Fund,
provided that either Fund may for itself waive any of such condi-
tions.
6.3. At the Effective Time, no action, suit, or other pro-
ceeding shall be pending before any court or governmental agency in
which it is sought to restrain or prohibit, or to obtain damages or
other relief in connection with, the transactions contemplated
hereby.
6.4. MH/KP Trust shall have received an opinion of Kirk-
patrick & Lockhart LLP, counsel to PW Trust, substantially to the
effect that:
6.4.1. Acquiring Fund is a duly established series of PW
Trust, a Business Trust duly organized and validly existing
under the laws of the Commonwealth of Massachusetts with power
under its Declaration of Trust to own all of its properties
and assets and, to the knowledge of such counsel, to carry on
its business as presently conducted;
6.4.2. This Agreement (a) has been duly authorized, exe-
cuted, and delivered by PW Trust on behalf of Acquiring Fund
and (b) assuming due authorization, execution, and delivery of
this Agreement by 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 dis-
tributed to the Shareholders under this Agreement, assuming
their due delivery as contemplated by this Agreement, will be
duly authorized and validly issued and outstanding and fully
paid and non-assessable, except to the extent that under
Massachusetts law shareholders of a Business Trust may, under
certain circumstances, be held personally liable for its obli-
gations, and no shareholder of Acquiring Fund has any preemp-
tive right to subscribe for or purchase such shares;
6.4.4. The execution and delivery of this Agreement did
not, and the consummation of the transactions contemplated
hereby will not, materially violate PW Trust's Declaration of
Trust or By-Laws or any provision of any agreement (known to
such counsel, without any independent inquiry or investiga-
tion) to which PW Trust (with respect to Acquiring Fund) is a
party or by which it is bound or (to the knowledge of such
counsel, without any independent inquiry or investigation)
result in the acceleration of any obligation, or the imposi-
tion of any penalty, under any agreement, judgment, or decree
to which PW Trust (with respect to Acquiring Fund) is a party
or by which it is bound, except as set forth in such opinion
or as previously disclosed in writing to and accepted by 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 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 secu-
rities laws;
6.4.6. PW Trust is registered with the SEC as an invest-
ment company, and to the knowledge of such counsel no order
has been issued or proceeding instituted to suspend such reg-
istration; and
6.4.7. To the knowledge of such counsel (without any
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 prop-
erties 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 docu-
ments and copies thereof without independent verification thereof,
(iii) limit such opinion to applicable federal and state law, and
(iv) define the word "knowledge" and related terms to mean the
knowledge of attorneys then with such firm who have devoted sub-
stantive attention to matters directly related to this Agreement
and the Reorganization.
6.5. 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, exe-
cuted, 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 investiga-
tion) 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;
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 docu-
ments and copies thereof without independent verification thereof,
(iii) limit such opinion to applicable federal and state law, and
(iv) define the word "knowledge" and related terms to mean the
knowledge of attorneys then with such firm who have devoted sub-
stantive attention to matters directly related to this Agreement
and the Reorganization.
6.6. PW Trust shall have received an opinion of Kirkpatrick
& Lockhart LLP, its counsel, addressed to and in form and substance
satisfactory to it, and 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 represen-
tations made in this Agreement (or in separate letters addressed to
such counsel) and the certificates delivered pursuant to paragraph
3.4. Each Tax Opinion shall be substantially to the effect that,
based on the facts and assumptions stated therein, for federal
income tax purposes:
6.6.1. Acquiring Fund's acquisition of the Assets in
exchange solely for Acquiring Fund Shares and Acquiring Fund's
assumption of the Liabilities, followed by Target's distribu-
tion of those shares to the Shareholders constructively in
exchange for the Shareholders' Target Shares, will constitute
a reorganization within the meaning of section 368(a)(1)(C) of
the Code, and each Fund will be "a party to a reorganization"
within the meaning of section 368(b) of the Code;
6.6.2. No gain or loss will be recognized to Target on
the transfer to Acquiring Fund of the Assets in exchange
solely for Acquiring Fund Shares and Acquiring Fund's assump-
tion of the Liabilities or on the subsequent distribution of
those shares to the Shareholders in constructive exchange for
their Target Shares;
6.6.3. No gain or loss will be recognized to Acquiring
Fund on its receipt of the Assets in exchange solely for
Acquiring Fund Shares and its assumption of the Liabilities;
6.6.4. Acquiring Fund's basis for the Assets will be the
same as the basis thereof in Target's hands immediately before
the Reorganization, and Acquiring Fund's holding period for
the Assets will include Target's holding period therefor;
6.6.5. A Shareholder will recognize no gain or loss on
the constructive exchange of all its Target Shares solely for
Acquiring Fund Shares pursuant to the Reorganization; and
6.6.6. A Shareholder's basis for the Acquiring Fund
Shares to be received by it in the Reorganization will be the
same as the basis for its Target Shares to be constructively
surrendered in exchange for those Acquiring Fund Shares, and
its holding period for those Acquiring Fund Shares will in-
clude its holding period for those Target Shares, provided
they are held as capital assets by the Shareholder at the
Effective Time.
Notwithstanding paragraphs 6.6.2 and 6.6.4, each Tax Opinion may
state that no opinion is expressed as to the effect of the Reorgan-
ization on the Funds or any Shareholder with respect to any asset
(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
Mitchell Hutchins Asset Management Inc. 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 share-
holders; (d) printing and postage expenses; (e) legal and account-
ing fees; and (f) solicitation costs.
8. ENTIRE AGREEMENT; SURVIVAL
Neither party has made any representation, warranty, or cove-
nant not set forth herein, and this Agreement constitutes the
entire agreement between the parties. The representations, warran-
ties, and covenants contained herein or in any document delivered
pursuant hereto or in connection herewith shall survive the Clos-
ing.
9. TERMINATION OF AGREEMENT
This Agreement may be terminated at any time at or prior to
the Effective Time, whether before or after approval by Target's
shareholders:
9.1. By either Fund (a) in the event of the other Fund's
material breach of any representation, warranty, or covenant con-
tained herein to be performed at or prior to the Effective Time,
(b) if a condition to its obligations has not been met and it
reasonably appears that such condition will not or cannot be met,
or (c) if the Closing has not occurred on or before March 31, 1996;
or
9.2. By the parties' mutual agreement.
In the event of termination under paragraphs 9.1.(c) or 9.2, there
shall be no liability for damages on the part of either Fund, or
the trustees or officers of either Investment Company, to the other
Fund.
10. AMENDMENT
This Agreement may be amended, modified, or supplemented at
any time, notwithstanding approval thereof by Target's sharehold-
ers, in such manner as may be mutually agreed upon in writing by
the parties; provided that following such approval no such amend-
ment shall have a material adverse effect on the Shareholders' in-
terests.
11. MISCELLANEOUS
11.1. This Agreement shall be governed by and construed in
accordance with the internal laws of the Commonwealth of Massachu-
setts; provided that, in the case of any conflict between such laws
and the federal securities laws, the latter shall govern.
11.2. Nothing expressed or implied herein is intended or
shall be construed to confer upon or give any person, firm, trust,
or corporation other than the parties and their respective succes-
sors and assigns any rights or remedies under or by reason of this
Agreement.
11.3. The parties acknowledge that each Investment Company is
a Business Trust. Notice is hereby given that this instrument is
executed on behalf of each Investment Company's trustees solely in
their capacity as trustees, and not individually, and that each In-
vestment Company's obligations under this instrument are not bind-
ing on or enforceable against any of its trustees, officers, or
shareholders, but are only binding on and enforceable against the
respective Funds' assets and property. Each Fund agrees that, in
asserting any rights or claims under this Agreement, it shall look
only to the other Fund's assets and property in settlement of such
rights or claims and not to such trustees or shareholders.
IN WITNESS WHEREOF, each party has caused this Agreement to be
executed by its duly authorized officer.
ATTEST: PAINEWEBBER MANAGED INVESTMENTS
TRUST, on behalf of its series,
PAINEWEBBER SHORT-TERM U.S.
GOVERNMENT INCOME FUND
By: /s/ Ilene Shore /s/ Dianne O'Donnell
--------------------- ----------------------
Assistant Secretary Vice President
ATTEST: MITCHELL HUTCHINS/KIDDER, PEABODY
INVESTMENT TRUST, on behalf of
its series,
MITCHELL HUTCHINS/KIDDER,
PEABODY ADJUSTABLE RATE
GOVERNMENT FUND
By: /s/ S.H. Johnson /s/ Scott Griff
--------------------- ----------------------
Assistant Secretary Vice President
EXHIBIT 99.10(e)
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
[LETTERHEAD OF KIRKPATRICK & LOCKHART]
ELINOR W. GAMMON
(202) 778-9090
[email protected]
August 14, 1995
PaineWebber Managed Investments Trust
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
You have requested our opinion as to certain matters regarding the
issuance by PaineWebber Managed Investments Trust ("Trust") of Class A,
Class C and Class D shares of beneficial interest (the "Shares") of
PaineWebber Short-Term U.S. Government Income Fund ("PW Fund"), a series
of the Trust, pursuant to an Agreement and Plan of Reorganization and
Termination ("Plan") between the Trust, on behalf of PW Fund, and
Mitchell Hutchins/Kidder, Peabody Adjustable Rate Government Fund
("MH/KP Fund"), a series of Mitchell Hutchins/Kidder, Peabody Investment
Trust. Under the Plan, PW Fund would acquire the assets of MH/KP Fund
in exchange for the Shares and the assumption by PW Fund of MH/KP Fund's
liabilities. In connection with the Plan, the 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
the Trust's Declaration of Trust and By-Laws, minutes of meetings of the
Trust's board of trustees, the form of Plan, and such other documents
relating to the authorization and issuance of the Shares as we have
deemed relevant. Based upon that examination, we are of the opinion
that the Shares being registered by the N-14 may be issued in accordance
with the Plan and the Trust's Declaration of Trust and By-Laws, subject
to compliance with the 1933 Act, the Investment Company Act of 1940, as
amended, and applicable state laws regulating the distribution of
securities, and when so issued, those Shares will be legally issued,
fully paid and non-assessable.
The Trust is an entity of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law, Trust
shareholders could, under certain circumstances, be held
<PAGE>
PaineWebber Managed Investments Trust
August 14, 1995
Page 2
personally liable for the obligations of the Trust or a series of the
Trust, including PW Fund (each, a "Series"). The 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 the Trust or such
Series for payment. It also requires that notice of such disclaimer be
given in each note, bond, contract, certificate, undertaking or
instrument made or issued by the officers or the trustees of the Trust
on behalf of the Trust or a Series. The Declaration of Trust further
provides: (i) for indemnification from Trust or Series assets, as
appropriate, for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust or Series solely by
virtue of ownership of Shares of a Series; and (ii) for a Series to
assume the defense of any claim against the shareholder for any act or
obligation of the Series. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to
circumstances in which the Trust or a Series would be unable to meet its
obligations.
We hereby consent to this opinion accompanying the Form N-14 that
the Trust plans to file with the Securities and Exchange Commission and
to the reference to our firm under the caption "Miscellaneous -- Legal
Matters" in the Prospectus/Proxy Statement filed as part of the Form
N-14.
Sincerely yours,
KIRKPATRICK & LOCKHART LLP
By: /s/ Elinor W. Gammon
-------------------------
Elinor W. Gammon
EXHIBIT 12(a)
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 Short-Term U.S. Government Income Fund, a segregated
portfolio of assets ("series") thereof ("Acquiring Fund"), has re-
quested our opinion as to certain federal income tax consequences
of the proposed acquisition by Acquiring Fund of Mitchell Hutch-
ins/Kidder, Peabody Adjustable Rate Government Fund ("Target"), a
series of Mitchell Hutchins/Kidder, Peabody Investment Trust
("MH/KP Trust"),/1/ pursuant to an Agreement and Plan of Reorganiza-
tion 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 Tar-
get'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
------------
/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."
PaineWebber Managed
Investments Trust
August 11, 1995
Page 2
in Target ("Target Shares") (such transaction sometimes
being referred to herein as the "Reorganization"), will
constitute a "reorganization" within the meaning of sec-
tion 368(a)(1)(C)/2/ and that each Fund will be a "party
to a reorganization" within the meaning of section
368(b),
(2) that Target, the Shareholders, and Acquiring
Fund will recognize no gain or loss upon the Reorganiza-
tion, 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 supple-
mented June 22, 1994, 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, exclu-
sively and without independent verification, on statements of
responsible officers of each Investment Company and the representa-
tions 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 May 3, 1993. 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
November 10, 1992. Each Investment Company is registered with the
SEC as an open-end management investment company under the Invest-
ment 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, in-
------------
/2/ All section references are to the Internal Revenue Code of 1986, as
amended ("Code"), and all "Treas. Reg. Section" references are to the
regulations under the Code ("Regulations").
PaineWebber Managed
Investments Trust
August 11, 1995
Page 3
vestment 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," re-
spectively). 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, desig-
nated 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," re-
spectively). 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 par-
ties 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 tax-
able income (computed without regard to any deduction for dividends
paid) and realized net capital gain, if any, for the current tax-
able year through the Effective Time.
The Funds' investment objectives, which are substantially
identical, and their investment policies, which are similar, are
described in the Proxy and their respective prospectuses and SAIs.
Although there are differences in those policies, it is not ex-
pected that Acquiring Fund will revise its investment policies
following the Reorganization to reflect Target's. Mitchell Hutch-
ins believes that most, if not all, of Target's assets will be
consistent with Acquiring Fund's investment policies and thus can
be transferred to and held by Acquiring Fund pursuant to the Reor-
ganization. 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.
PaineWebber Managed
Investments Trust
August 11, 1995
Page 4
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 Reor-
ganization, 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 pur-
poses of the Reorganization). Pursuant thereto, each board ap-
proved 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' inter-
ests 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 in-
terest and dividends receivable), claims and rights of
action, rights to register shares under applicable secu-
rities laws, books and records, deferred and prepaid ex-
penses shown as assets on Target's books, and other prop-
erty 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 Acquir-
ing 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
PaineWebber Managed
Investments Trust
August 11, 1995
Page 5
the Effective Time, and whether or not speci-
fically referred to in the Plan, including
without limitation Target's share of the ex-
penses incurred in connection with the Reor-
ganization (collectively "Liabilities") (Tar-
get having agreed in the Plan to use its best
efforts to discharge all of its known liabili-
ties 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 out-
standing 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 inten-
tion 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 dis-
positions 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
PaineWebber Managed
Investments Trust
August 11, 1995
Page 6
disposed of as a result of or at the time of the Reorganiza-
tion 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 Reorganiza-
tion, 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 con-
nection 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 pur-
poses of this representation, any amounts used by Target to
pay its Reorganization expenses and redemptions and distribu-
tions made by it immediately before the Reorganization (except
for (a) distributions made to conform to its policy of distri-
buting all or substantially all of its income and gains to
avoid the obligation to pay federal income tax and/or the
excise tax under section 4982 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 commensur-
ate with amounts paid to third parties bargaining at arm's-
length for similar services; and
PaineWebber Managed
Investments Trust
August 11, 1995
Page 7
9. Immediately after the Reorganization, the Sharehold-
ers 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 ordi-
nary 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 prof-
its 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 secu-
rities) is invested in the stock and securities of any one
issuer, and not more than 50% of the value of such assets is
invested in the stock and securities of five or fewer issuers;
and
5. Target will be terminated as soon as reasonably prac-
ticable 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 Subchap-
ter M for each past taxable year since it commenced operations
and will continue to meet all the requirements for such quali-
fication 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
PaineWebber Managed
Investments Trust
August 11, 1995
Page 8
except for shares issued in the ordinary course of its busi-
ness as a series of an open-end investment company; nor does
Acquiring Fund have any plan or intention to redeem or other-
wise reacquire any Acquiring Fund Shares issued to the Share-
holders pursuant to the Reorganization, other than through
redemptions arising in the ordinary course of that business;
3. Acquiring Fund (a) will actively continue Target's
business in substantially the same manner that Target con-
ducted that business immediately before the Reorganization,
(b) has no plan or intention to sell or otherwise dispose of
any of the Assets, except for dispositions made in the ordi-
nary course of that business and dispositions necessary to
maintain its status as a RIC under Subchapter M, and (c) ex-
pects 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
PaineWebber Managed
Investments Trust
August 11, 1995
Page 9
assumption of the Liabilities, followed by Target's distribu-
tion of those shares pro rata to the Shareholders construc-
tively 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 surren-
dered 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 Share-
holder 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 pronounce-
ments 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.
PaineWebber Managed
Investments Trust
August 11, 1995
Page 10
ANALYSIS
I. The Reorganization Will Be a Reorganization under Section
368(a)(1)(C), and Each Fund Will Be a Party to a Reorganiza-
tion.
A. Each Fund Is a Separate Corporation.
A reorganization under section 368(a)(1)(C) (a "C reorganiza-
tion") 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 corpora-
tions). Each Investment Company, however, is a Massachusetts busi-
ness trust, not a corporation, and each Fund is a separate series
thereof.
Treasury Regulation section 301.7701-4(b) provides that cer-
tain arrangements known as trusts (because legal title is conveyed
to trustees for the benefit of beneficiaries) will not be classi-
fied as trusts for purposes of the Code because they are not simply
arrangements to protect or conserve the property for the benefici-
aries. 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. Treas-
ury Regulation section 301.7701-4(c) further provides that an "`in-
vestment' trust will not be classified as a trust if there is a
power under the trust agreement to vary the investment of the cer-
tificate 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 secu-
rities 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
PaineWebber Managed
Investments Trust
August 11, 1995
Page 11
of assets (such as the Funds) could not qualify as a reorganiza-
tion, 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 sec-
tion 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 trans-
action 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 invest-
ment 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 treat-
ment as a RIC for its respective current taxable year, and the
foregoing percentage tests will be satisfied by each Fund. Accord-
ingly, we believe that section 368(a)(2)(F) will not cause the Re-
organization 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 ac-
quiring corporation must acquire "substantially all of the proper-
ties" 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. Accord-
ingly, we believe that the Reorganization will involve the transfer
to Acquiring Fund of substantially all of Target's properties.
PaineWebber Managed
Investments Trust
August 11, 1995
Page 12
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 ex-
changes any money or property (other than its voting stock) there-
for. 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 reorganiza-
tion.
E. Requirements of Continuity.
Treasury Regulation section 1.368-1(b) sets forth two pre-
requisites 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 inter-
est").
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
busi- ness ("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 re-
quirement 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 ex-
change, 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 fol-
lowing 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
PaineWebber Managed
Investments Trust
August 11, 1995
Page 13
after the exchange caused the transaction to lack business continu-
ity as well.
The Funds' investment objectives are substantially identical,
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 busi-
ness, 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 neces-
sary 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 cir-
cumstances suggest the desirability of change or it becomes neces-
sary to make dispositions thereof to maintain such status. Al-
though there are some differences in the Funds' investment poli-
cies, Mitchell Hutchins believes that most, if not all, of Target's
assets will be consistent with Acquiring Fund's investment policies
and thus can be transferred to and held by Acquiring Fund pursuant
to the Reorganization. Accordingly, there will be asset continuity
as well.
For all the foregoing reasons, we believe that the Reorganiza-
tion 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.
PaineWebber Managed
Investments Trust
August 11, 1995
Page 14
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 trans-
fer).
No minimum holding period for shares of an acquiring corpora-
tion is imposed under the Code on the acquired corporation's share-
holders. 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 sub-
stantial" 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 ac-
quiring corporation's shares could be problematic. Shareholders
with no such preconceived plan or arrangement, however, are basi-
cally 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 Share-
holders to dispose of any portion of the Acquiring Fund Shares to
be received by them in the Reorganization or (2) anticipates dis-
positions 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. Conse-
quently, 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 inter-
est 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 proper-
ties 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.
PaineWebber Managed
Investments Trust
August 11, 1995
Page 15
G. Business Purpose.
All reorganizations must meet the judicially imposed require-
ments of the "business purpose doctrine," which was established in
Gregory v. Helvering, 293 U.S. 465 (1935), and is now set forth in
Treas. Reg. Sections 1.368-1(b), -1(c), and -2(g) (the last of which pro-
vides 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 doc-
trine, 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 Reorgan-
ization 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 Reorganiza-
tion 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 recog-
nized 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, pur-
suant 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 reorgani-
zation to qualify as a C reorganization.) Section 361(c)(4) pro-
vides that specified provisions requiring recognition of gain on
certain distributions shall not apply to a distribution described
in (2) above.
PaineWebber Managed
Investments Trust
August 11, 1995
Page 16
Section 357(a) provides in pertinent part that, except as pro-
vided 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 con-
sideration, 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 prin-
cipal 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 reor-
ganization, 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/
III. No Gain or Loss Will Be Recognized to Acquiring Fund.
Section 1032(a) provides that no gain or loss will be recog-
nized to a corporation on the receipt by it of money or other prop-
erty 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 Reorgan-
ization.
------------
/3/ Notwithstanding anything herein to the contrary, no opinion is
expressed as to the effect of the Reorganization on the Funds or
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.
PaineWebber Managed
Investments Trust
August 11, 1995
Page 17
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 corpora-
tion 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 reorganiza-
tion 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 pe-
riod 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 consti-
tute a C reorganization, the Plan constitutes a plan of reorganiza-
tion, and each Fund will be a party to a reorganization. Accord-
ingly, we believe that under section 354 a Shareholder will recog-
nize no gain or loss on the constructive exchange of all its Target
Shares solely for Acquiring Fund Shares pursuant to the Reorganiza-
tion.
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 re-
ceived 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 trans-
PaineWebber Managed
Investments Trust
August 11, 1995
Page 18
action and increased by the amount of any gain recognized on the
exchange by the shareholder.
As noted above, the Reorganization will constitute a C reor-
ganization 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 Reorgani-
zation 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 ex-
changed 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 Registra-
tion Statement and to the references to our firm under the captions
"Approval of the Reorganization -- Synopsis -- Federal Income Tax
Consequences of the Reorganization" and "The Proposed Transaction -
- Federal Income Tax Considerations" in the Proxy.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By: /s/ Theodore L. Press
Theodore L. Press
[LETTERHEAD OF WILLKIE FARR & GALLAGHER]
August 11, 1995
Mitchell Hutchins/Kidder, Peabody
Investment Trust, on behalf of
Mitchell Hutchins/Kidder, Peabody
Adjustable Rate Government 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 Adjustable Rate
Government Fund (the "Acquired Fund"), a series of Mitchell Hutchins/Kidder,
Peabody Investment Trust, (b) PaineWebber Short-Term 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
<PAGE>
August 11, 1995
Page 2
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 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;
<PAGE>
August 11, 1995
Page 3
(2) no gain or loss will be recognized by the Acquiring Fund upon the
receipt of the assets of the Acquired Fund in exchange solely for Acquiring
Fund Shares and the assumption by the Acquiring Fund of the liabilities of the
Acquired Fund;
(3) no gain or loss will be recognized by the Acquired Fund upon the
transfer of the Acquired Fund's assets to the Acquiring Fund in exchange for
Acquiring Fund Shares and the assumption by the Acquiring Fund 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 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,
/s/ Willkie Farr & Gallagher
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
Short-Term US Government Income Fund dated January 20, 1995, in this
Registration Statement (Form N-14) of PaineWebber Managed Investments
Trust.
ERNST & YOUNG LLP
New York, New York
August 9, 1995
CONSENT OF INDEPENDENT AUDITORS
Mitchell Hutchins/Kidder, Peabody Global Fixed Income Fund
(one of the portfolios constituting the
Mitchell Hutchins/Kidder, Peabody Investment 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 for the year ended August 31, 1994, our report dated April 21,
1995, appearing in the semi-annual report to shareholders for the six month
period ended February 28, 1995, and to the references to us under the captions
"Experts" appearing in the Prospectus/Proxy Statement, which also is a part of
such Registration Statement.
Deloitte & Touche LLP
New York, New York
August 9, 1995
EXHIBIT 99.17(a)
Registration No. 2-91362
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No.___
[ ] Post-Effective Amendment No.___
PAINEWEBBER FIXED INCOME PORTFOLIOS, INC.
(Exact Name of Registrant as Specified in Charter)
140 Broadway
New York, New York 10005
(Address of Principal Executive Offices)
(212) 437-6796
(Registrant's Area Code and Telephone Number)
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. 20036-5891
Telephone: (202) 452-7000
Approximate Date of Proposed Public Offering: as soon as
practicable after this Registration Statement becomes effective.
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 be effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
EXHIBIT 99.17(b)
PROXY
-----
MITCHELL HUTCHINS/KIDDER, PEABODY INVESTMENT TRUST
MITCHELL HUTCHINS/KIDDER, PEABODY ADJUSTABLE RATE GOVERNMENT FUND
Special Meeting of Shareholders - October __, 1995
The undersigned hereby appoints as proxies Dianne E. O'Donnell and Jennifer
Farrell 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 indicate authority to vote 'FOR' all proposals. This proxy is
solicited on behalf of the Board of Trustees 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.
This proxy will not be voted unless it is dated and signed exactly as
instructed below.
Sign exactly as name appears hereon.
__________________________________(L.S.)
__________________________________(L.S.) Date ____________, 1995
If the 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 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.'
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
between PaineWebber Short-Term U.S. Government Income Fund and Mitchell
Hutchins/Kidder Peabody Adjustable Rate Government Fund
FOR _______ AGAINST _______ ABSTAIN ______
Please sign and date the reverse side of this card
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<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
