MITCHELL HUTCHINS/KIDDER, PEABODY MUNICIPAL BOND FUND
(A SERIES OF MITCHELL HUTCHINS/KIDDER, PEABODY INVESTMENT TRUST II)
September 27, 1995
Dear Shareholder:
The attached proxy materials describe a proposal that Mitchell
Hutchins/Kidder, Peabody Municipal Bond Fund ("MH/KP Fund") reorganize and
become part of PaineWebber National Tax-Free Income Fund ("PW Fund") (each a
"Fund"). If the proposal is approved and implemented, each shareholder of MH/KP
Fund automatically would 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
similar to the investment objective of MH/KP Fund 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,
/s/ Margo N. Alexander
MARGO N. ALEXANDER
President, Mitchell Hutchins/
Kidder, Peabody Municipal Bond Fund
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY
MUNICIPAL BOND FUND
(A SERIES OF MITCHELL HUTCHINS/KIDDER, PEABODY INVESTMENT TRUST II)
-------------------
NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS
OCTOBER 27, 1995
-------------------
To The Shareholders:
A special meeting of shareholders ("Meeting") of Mitchell Hutchins/Kidder,
Peabody Municipal Bond Fund ("MH/KP Fund"), a series of Mitchell
Hutchins/Kidder, Peabody Investment Trust II, will be held on October 27, 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 National Tax-Free Income Fund ("PW Fund"), a series of
PaineWebber Mutual Fund 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 20, 1995. If
you attend the Meeting, you may vote your shares in person. If you do not expect
to attend the Meeting, please complete, date, sign and return the enclosed proxy
card in the enclosed postage paid envelope.
By order of the board of trustees,
DIANNE E. O'DONNELL
Secretary
September 27, 1995
1285 Avenue of the Americas
New York, New York 10019
YOUR VOTE IS
IMPORTANT
NO MATTER HOW MANY SHARES YOU OWN
Please indicate your voting instructions on the enclosed proxy card, date
and sign the card, and return it in the envelope provided. IF YOU SIGN, DATE AND
RETURN THE PROXY CARD BUT GIVE NO VOTING INSTRUCTIONS, YOUR SHARES WILL BE VOTED
"FOR" THE PROPOSAL NOTICED ABOVE. In order to avoid the additional expense of
further solicitation, we ask your cooperation in mailing in your proxy card
promptly. Unless proxy cards submitted by corporations and partnerships are
signed by the appropriate persons as indicated in the voting instructions on the
proxy card, they will not be voted.
<PAGE>
PAINEWEBBER NATIONAL TAX-FREE INCOME FUND
(A SERIES OF PAINEWEBBER MUTUAL FUND TRUST)
MITCHELL HUTCHINS/KIDDER, PEABODY
MUNICIPAL BOND FUND
(A SERIES OF MITCHELL HUTCHINS/
KIDDER, PEABODY INVESTMENT TRUST II)
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(TOLL FREE) 1-800-647-1568
PROSPECTUS/PROXY STATEMENT
SEPTEMBER 27, 1995
This Prospectus/Proxy Statement ("Proxy Statement") is being furnished to
shareholders of Mitchell Hutchins/Kidder, Peabody Municipal Bond Fund ("MH/KP
Fund"), a series of Mitchell Hutchins/Kidder, Peabody Investment Trust II
("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 27, 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 National Tax-Free Income Fund ("PW Fund"), a series
of PaineWebber Mutual Fund 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 primary investment objective is high current
income exempt from federal income tax, consistent with the preservation of
capital and liquidity within the Fund's quality standards. PW Fund seeks to
achieve its investment objective by investing primarily in investment grade debt
obligations of varying maturities issued by states, municipalities and public
authorities.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
This Proxy Statement, which should be retained for future reference, sets
forth concisely the information about the Reorganization and PW Fund that a
shareholder should know before voting.
This Proxy Statement is accompanied by the Prospectus of PW Fund dated July
1, 1995, and by its Annual Report to Shareholders for the fiscal year ended
February 28, 1995, which are incorporated by this reference into this Proxy
Statement. A Statement of Additional Information of PW Fund, dated September 27,
1995, relating to the Reorganization and including historical financial
statements, has been filed with the Securities and Exchange Commission ("SEC")
and is incorporated herein by reference. A Prospectus of MH/KP Fund dated
October 28, 1994 (as supplemented August 21, 1995), a Statement of Additional
Information of MH/KP Fund dated October 28, 1994, and a Statement of Additional
Information of PW Fund dated July 1, 1995 have been filed with the SEC and also
are incorporated herein by this reference. Copies of these documents, as well as
MH/KP Fund's Annual Report to Shareholders, may be obtained without charge and
further inquiries may be made by contacting your PaineWebber Incorporated
("PaineWebber") investment executive or PaineWebber's correspondent firms or by
calling toll-free 1-800-647-1568.
<PAGE>
TABLE OF CONTENTS
VOTING INFORMATION................................................. 1
SYNOPSIS........................................................... 2
COMPARISON OF PRINCIPAL RISK FACTORS............................... 12
THE PROPOSED TRANSACTION........................................... 15
MISCELLANEOUS...................................................... 20
APPENDIX A--AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION... A-1
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY
MUNICIPAL BOND FUND
(A SERIES OF MITCHELL HUTCHINS/
KIDDER, PEABODY INVESTMENT TRUST II)
-------------------
PROSPECTUS/PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON
OCTOBER 27, 1995
-------------------
VOTING INFORMATION
This Prospectus/Proxy Statement ("Proxy Statement") is being furnished to
shareholders of Mitchell Hutchins/Kidder, Peabody Municipal Bond Fund ("MH/KP
Fund"), a series of Mitchell Hutchins/Kidder, Peabody Investment Trust II
("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 27,
1995, and at any adjournment thereof ("Meeting"). This Proxy Statement will
first be mailed to shareholders on or about September 28, 1995.
At least thirty percent of MH/KP Fund's outstanding shares on September 20,
1995, represented in person or by proxy, must be present for the transaction of
business at the Meeting. If a quorum is not present at the Meeting or a quorum
is present but sufficient votes to approve the proposal are not received, the
persons named as proxies may propose one or more adjournments of the Meeting to
permit further solicitation of proxies. Any such adjournment will require the
affirmative vote of a majority of those shares represented at the Meeting in
person or by proxy. The persons named as proxies will vote those proxies that
they are entitled to vote FOR 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.
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 24,
1995 ("Reorganization Plan"), which is attached to this Proxy Statement as
Appendix A. Under the Reorganization Plan, PaineWebber National Tax-Free Income
Fund ("PW Fund"), a series of PaineWebber Mutual Fund 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
<PAGE>
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 enclosed proxy card, but give
no voting instructions, the duly appointed proxies may vote your shares, in
their discretion, upon such other matters as may come before the Meeting. The
proxy card may be revoked by giving another proxy or by letter or telegram
revoking the initial proxy. To be effective, such revocation must be received by
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 20, 1995 ("Record Date"), MH/KP Fund had 1,068,399 shares of
beneficial interest outstanding. The solicitation of proxies, the cost of which
will be borne by the Funds in proportion to their respective net assets, will be
made primarily by mail but also may include telephone or oral communications by
representatives of Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins"), who will not receive any compensation therefor from the Funds, or by
Shareholder Communications Corporation, professional proxy solicitors retained
by MH/KP Fund, who will be paid fees and expenses of up to approximately $2,500
for soliciting services.
At the close of business on the Record Date, the George W. Roberts Trust,
1429 Iron Hills Lane, Las Vegas, Nevada, owned of record approximately 7.8% of
the outstanding shares of MH/KP Fund. Upon consummation of the Reorganization,
it would own less than 0.20% of the PW Fund. Management does not know of any
other single shareholder or "group" (as that term is used in Section 13(d) of
the Securities Exchange Act of 1934) who owns beneficially more than 5% of the
outstanding shares of either Fund. Trustees and officers of PW Trust own in the
aggregate less than 1% of the shares of PW Fund.
Approval of the Reorganization Plan requires the affirmative vote of a
majority of the outstanding voting securities of 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 reorganizations
under the laws of some states.
SYNOPSIS
The following is a summary of certain information contained elsewhere in
this Proxy Statement, the Prospectus of each Fund (which is incorporated herein
by reference), and the Reorganization Plan. Shareholders should read this Proxy
Statement and the Prospectus of PW Fund 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 similar
to the investment objective of MH/KP Fund, although its investment strategy may
differ from the investment strategy of MH/KP Fund in some respects. It is
expected that, following the Reorganization, the total operating expenses for
2
<PAGE>
the combined Fund, before taking into account voluntary fee waivers and expense
reimbursements, will be lower as a percentage of net assets than the total
operating expenses experienced by MH/KP Fund.
THE REORGANIZATION
The Reorganization Plan was considered and approved by MH/KP Trust's board
of trustees 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 distribute those shares to its shareholders, by
class, so that each MH/KP Fund shareholder will receive the number of full and
fractional shares of the class of PW Fund that corresponds most closely in terms
of fees and other characteristics ("Corresponding Class") and that equals in
value 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 p.m., Eastern time, on
November 3, 1995 or such later date as 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 has recently authorized and will
issue Class C shares. Class B shares of PW Fund will not be issued in connection
with the Reorganization. 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 shares 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 2.25% of
the public offering price. PW Fund's Class A shares normally
3
<PAGE>
are sold with a maximum sales charge of 4% of the public offering price. The
Class A shares of PW Fund that will be distributed to shareholders of MH/KP Fund
as part of the Reorganization, however, 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 4%. 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
mutual funds. PW Fund shareholders pay a $5.00 fee for each exchange, which fee
will continue to be imposed on exchanges from PW Fund after the Reorganization.
PW Fund pays 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.
Mitchell Hutchins is currently paid a management fee at the annual rate of
0.60% of the average daily net assets of MH/KP Fund. Since February 13, 1995,
Mitchell Hutchins has been voluntarily waiving this management fee. PW Fund pays
Mitchell Hutchins an annual investment advisory and administration fee, computed
daily and paid monthly, at a rate of 0.50% of its average daily net assets.
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 of PW Fund,
respectively. No 12b-1 fees are paid by the Class C shareholders of either Fund,
but persons who hold their Class C shares through the INSIGHT Investment
Advisory Program ("INSIGHT Program") must pay an investment advisory fee at the
maximum annual rate of 1.50% of the assets held through the INSIGHT Program.
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 in the Reorganization will incur
after giving effect to the Reorganization; and (2) the operating fees and
expenses incurred by the Class A, Class B and Class C shares of MH/KP Fund for
the twelve months ended February 28, 1995 (unaudited) and the Class A and Class
D shares of PW Fund for the fiscal year ended February 28, 1995, and pro forma
fees for PW Fund's Class A, Class D and Class C shares based on the same period
after giving effect to the Reorganization.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
MH/KP FUND COMBINED FUND(1)
----------------------------- -----------------------------
CLASS A CLASS B CLASS C CLASS A CLASS D CLASS C
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Maximum sales charge (as a percentage of
public offering price)................ 2.25% NONE NONE 4.00% NONE NONE
Exchange fee............................ NONE NONE NONE $ 5.00 $ 5.00 N/A(2)
Maximum contingent deferred sales charge
(as a percentage of redemption
proceeds)............................. NONE NONE NONE NONE NONE NONE
</TABLE>
- ------------
(1) Under certain circumstances, Class A and Class D shares of PW Fund that are
purchased after November 1, 1995 may be subject to a 1% contingent deferred
sales charge ("CDSC"). See "Operations of PW Fund Following the
Reorganization." However, Class A and Class D shares of PW Fund that are
issued to MH/KP Fund shareholders as part of the Reorganization will not be
subject to that CDSC.
(2) Class C shares of PW Fund will not be exchangeable for shares of other
PaineWebber or Mitchell Hutchins/Kidder, Peabody mutual funds.
4
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE><CAPTION>
MH/KP FUND PW FUND(1)
--------------------------- ----------------- COMBINED FUND
---------------------------------
(TWELVE MONTHS (FISCAL YEAR
ENDED 2/28/95) ENDED 2/28/95) (PRO FORMA)
--------------------------- ----------------- ---------------------------------
CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS
A B(2) C(3) A D A D C(1)(3)
------- ------- ------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees................ 0.60% 0.60% 0.60% 0.50% 0.50% 0.50% 0.50% 0.50%
12b-1 Fees(4).................. 0.25% 0.75% 0.00%(3) 0.25% 0.75% 0.25% 0.75% 0.00%
Other Expenses................. 1.02% 1.02% 1.02% 0.13% 0.15% 0.13% 0.14% 0.13%
Total Fund Operating Expenses
(5).......................... 1.87% 2.37% 1.62% 0.88% 1.40% 0.88% 1.39% 0.63%
</TABLE>
- ------------
(1) PW Fund currently has no Class C shares outstanding; however, PW Fund has
recently authorized and will issue Class C shares, which will be exchanged
for Class C shares of MH/KP Fund in the Reorganization.
(2) Class B shares of MH/KP Fund will be exchanged for Class D shares of PW
Fund.
(3) A maximum annual 1.50% advisory fee is payable by shareholders holding Class
C shares of MH/KP Fund through the INSIGHT Program. This fee, which is not
reflected in the Annual Fund Operating Expenses above, will continue to be
assessed at that rate following the Reorganization.
(4) 12b-1 fees have two components, as follows:
<TABLE>
<CAPTION>
BOTH FUNDS MH/KP FUND PW FUND
CLASS A CLASS B CLASS D
---------- ---------- -------
<S> <C> <C> <C>
12b-1 service fee........................................ 0.25% 0.25% 0.25%
12b-1 distribution fee................................... 0.00% 0.50% 0.50%
</TABLE>
12b-1 distribution fees are asset-based sales charges. Long-term Class B and
Class D 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.
(5) The ratios of Total Fund Operating Expenses as a percentage of net assets
included in the table for MH/KP Fund have been restated to reflect current
fees and expenses (i.e., absent waivers and reimbursements). During the
fiscal year ended June 30, 1995, and the twelve months ended February 28,
1995, certain fees and expenses were waived and/or reimbursed for MH/KP
Fund. After giving effect to those waivers and reimbursements, the Total
Fund Operating Expenses of MH/KP Fund for the fiscal year ended June 30,
1995 were 0.27%, 0.76% and 0.21% for Class A, Class B and Class C,
respectively and, for the twelve months ended February 28, 1995, were 0.32%,
0.80% and 0.23% for Class A, Class B and Class C, respectively. The ratios
of total operating expenses as a percentage of average net assets were
2.15%, 2.65% and 1.90% for Class A, Class B and Class C, respectively, of
MH/KP Fund for the fiscal year ended June 30, 1995.
EXAMPLE OF EFFECT ON FUND EXPENSES
The following illustrates the expenses on a $1,000 investment under the fees
and expenses stated above, assuming a 5% annual return. The fees shown below
reflect an initial maximum sales charge of 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 maximum sales charge of 4.0% 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 held for one
year are higher than for MH/KP Fund Class A shares held for one year due to the
higher initial sales charge normally charged on PW Fund Class A
5
<PAGE>
shares. However, no initial sales charge will be charged 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>
MH/KP FUND ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Class A shares(1)............................... $ 41 $80 $121 $ 237
Class B shares.................................. $ 24 $74 $127 $ 271
Class C shares(2)............................... $ 16 $51 $ 88 $ 192
PW FUND
Class A shares(3)............................... $ 49 $67 $ 87 $ 144
Class D shares.................................. $ 14 $44 $ 77 $ 168
COMBINED FUND
Class A shares(3)............................... $ 49 $67 $ 87 $ 144
Class D shares.................................. $ 14 $44 $ 76 $ 167
Class C shares(2)............................... $ 6 $20 $ 35 $ 79
</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 4% initial sales
charge.
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 this Example of a 5% annual return are required by regulations of the
Securities and Exchange Commission ("SEC") applicable to all mutual funds; the
assumed 5% annual return is not a prediction of, and does not represent, the
projected or actual performance of any Class of the Funds' shares.
This Example should not be considered a representation of past or future
expenses, and a Fund's actual expenses may be more or less than those shown. The
actual expenses attributable to each Class of a Fund's shares will depend upon,
among other things, the level of average net assets and the extent to which a
Fund incurs variable expenses, such as transfer agency costs.
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. Each Trust's Declaration of Trust authorizes its trustees to create
separate series and, within each series, separate Classes, of an unlimited
number of shares of beneficial interest, par value of $.001 per share. PW Fund,
a diversified series of PW Trust, commenced operations on December 3, 1984.
Prior to June 30, 1992, PW Fund was part of a different Massachusetts business
trust, PaineWebber Managed Municipal Trust. MH/KP Fund, a diversified series of
MH/KP Trust, commenced operations on September 8, 1993. The Trusts are not
required to (and do not) hold annual shareholder meetings.
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.
6
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of each Fund are set forth below. PW
Fund has an investment objective generally similar to the investment objective
of MH/KP Fund, although its investment strategy may differ in some material
respects. 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.
PW FUND. The investment objective of PW Fund is high current income exempt
from federal income tax, consistent with preservation of capital and liquidity
within the Fund's quality standards. In seeking to achieve this objective, PW
Fund invests only in municipal securities that are rated at least BBB or SP-2 by
Standard & Poor's ("S&P"), Baa or MIG-2 by Moody's Investors Services, Inc.
("Moody's") or an equivalent rating by another nationally recognized statistical
rating organization ("NRSRO") or, if unrated, determined by Mitchell Hutchins to
be of comparable quality.
PW Fund seeks to invest 100% of its net assets in municipal obligations.
Normally, at least 80% of PW Fund's net assets are invested in municipal
obligations that pay interest that is not a tax preference item for purposes of
the federal alternative minimum tax ("AMT"). Under normal market conditions, PW
Fund will invest no more than 20% of its net assets in private activity bonds.
PW Fund may invest in municipal leases, provided it does not invest more than 5%
of its total assets in uninsured "non-appropriation" municipal lease
obligations. PW Fund may invest in floating-rate and variable-rate municipal
securities, with or without demand features. PW Fund may not invest more than
10% of its total assets in "inverse floaters." Although PW Fund may engage in
repurchase agreements, it does not intend to do so except under unusual
circumstances or as a temporary measure. PW Fund may engage in certain option
income strategies and use options and futures in hedging strategies, all of
which may generate taxable income. PW Fund has not engaged in these strategies
in the past, however, and has no intention of so doing during the coming year.
PW Fund may invest up to 10% of its net assets in illiquid securities.
MH/KP FUND. MH/KP Fund's investment objective is to achieve as high a level
of current income that is exempt from federal income taxation as is consistent
with prudent investment management and the preservation of capital. MH/KP Fund
seeks to achieve its investment objective through a portfolio consisting of high
quality municipal obligations. Under normal market conditions, MH/KP Fund
invests at least 80% of its net assets in Municipal Obligations (defined as debt
securities issued by or on behalf of states, territories and possessions of the
United States and the District of Columbia and their political subdivisions,
agencies and instrumentalities, the interest on which is, in the opinion of bond
counsel to their issuer, excluded from gross income for federal income tax
purposes). In addition, it is a non-fundamental policy of MH/KP Fund that under
normal market conditions, at least 65% of its total assets will be invested in
municipal bonds, and at least 65% of its total assets will be invested in
Municipal Obligations rated no lower than Aa, VMIG-2, MIG-2 or Prime-2 by
Moody's, AA, SP-2 or A-2 by S&P or AA or F-1 by Fitch Investors Service, Inc.
("Fitch"). MH/KP Fund may invest up to 35% of its total assets in Municipal
Obligations that are rated at least Baa, VMIG-3, MIG-3 or Prime-3 by Moody's,
BBB, SP-3 or A-3 by S&P or BBB or F-3 by Fitch. These Municipal Obligations,
though considered investment grade, are also considered to possess speculative
characteristics insofar as adverse changes in economic conditions are more
likely to weaken the ability of issuers of these debt securities to pay
principal and interest. MH/KP Fund may invest up to 20% of its total assets in
short-term investments, even if not tax exempt; however, if MH/KP Fund is
maintaining a temporary defensive position, MH/KP Fund may hold these
investments, or cash, without limitation.
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MH/KP may invest without limitation in Municipal Obligations the interest on
which is a tax preference item for purposes of the AMT. MH/KP Fund may also
invest up to 5% of its assets in zero coupon Municipal Obligations.
MH/KP Fund may invest up to 15% of its net assets in illiquid securities.
MH/KP Fund may invest in private activity bonds, provided that it will not
invest more than 25% of its assets in private activity bonds relating to similar
projects. MH/KP Fund may purchase and write put and call options on municipal
bond index and interest rate futures contracts that are traded on a U.S.
exchange or board of trade to the extent permitted under rules and
interpretations of the Commodity Futures Trading Commission. MH/KP Fund will
invest no more than 25% of its net assets in issuers that are in the same state.
OTHER POLICIES OF BOTH FUNDS. Each Fund may purchase securities on a
when-issued or delayed-delivery basis, provided that each Fund maintains a
segregated account containing cash, U.S. government securities or other liquid,
high-grade debt obligations equal in value to the Fund's purchase commitments.
Neither Fund will lend money except through purchasing debt obligations and
entering into repurchase agreements.
OPERATIONS OF PW FUND FOLLOWING THE REORGANIZATION
There are differences in the investment objectives and policies of the
Funds. It is not expected, however, that PW Fund will revise its investment
objective or policies following the Reorganization to reflect those of MH/KP
Fund. Based on its review of the investments held by each Fund, Mitchell
Hutchins believes that all of the assets held by MH/KP Fund will be consistent
with the investment policies of PW Fund and thus can be transferred to and held
by PW Fund if the Reorganization is approved.
After 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. Gregory W.
Serbe and Richard S. Murphy, who currently are portfolio managers for PW Fund
and who have been primarily responsible for the day-to-day portfolio management
of PW Fund, will continue as the portfolio managers of PW Fund. Mr. Murphy is a
senior vice president of Mitchell Hutchins. Mr. Serbe is a vice president of PW
Trust and a managing director of Mitchell Hutchins.
As indicated above, PW Fund will issue Class C Shares in connection with the
Reorganization. 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. In
addition, Class A shares purchased after that date which are purchased without
an initial sales charge due to a sales waiver for purchases of $1 million or
more, and held less than one year, and Class D (to be renamed Class C) shares
that are held less than one year, will be subject to a CDSC of 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 of redemption. Class A and Class D shares
of 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 initial investment in
PW Fund Class A, B or D shares is $1,000; subsequent
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purchases must be $100 or more. 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.
A "Business Day" is any day, Monday through Friday, on which the New York Stock
Exchange, Inc. ("NYSE") is open for business.
PW Fund's Class A shares normally are sold with a maximum initial sales
charge of 4% 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. Following the Reorganization,
however, new purchases of Class A shares of PW Fund will be subject to an
initial sales charge of up to 4%, 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.
For PW Fund, sales charge waivers and reduced sales charge purchase plans
are available for Class A shares, and exchange fee waivers are available for
Class A and Class D shares. Class D shares of PW Fund are sold without an
initial sales charge or CDSC. No initial sales charge or CDSC is imposed with
respect to Class A shares of PW Fund that are purchased with reinvested
dividends or other distributions on those Classes of shares.
Class C shares of PW Fund will be issued to holders of Class C shares of
MH/KP Fund in connection with the Reorganization. Effective November 1, 1995, PW
Fund's Class C shares (renamed 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 the 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 (although PW Fund is not expected to be an investment option
available to participants in such plans), 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 the net
asset value next determined after the purchase order is received. No initial
sales charge or CDSC will be imposed, nor will Class C shares be subject to Rule
12b-1 distribution or service fees. PW Fund and Mitchell Hutchins will reserve
the right to reject any purchase order and to suspend the offering of Class C
shares for a period of time.
INSIGHT PROGRAM. An investor who purchases $50,000 or more of shares of the
mutual funds that are available to INSIGHT participants (which include the
PaineWebber mutual funds that are in the Flexible Pricing System and certain
specified other mutual funds) may take part in the INSIGHT Program, a total
portfolio asset allocation program sponsored by PaineWebber, and thus become
eligible to purchase Class C shares of PW Fund. The INSIGHT Program offers
comprehensive investment services, including a personalized asset allocation
investment strategy using an appropriate combination of funds, 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 1.50% 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
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PaineWebber and its affiliates are entitled to a 50% reduction in the fee
otherwise payable for participation in the INSIGHT Program. INSIGHT Program
clients may elect to have their INSIGHT Program fees charged to their
PaineWebber accounts (by the automatic redemption of money market fund shares)
or, for qualified plans, billed separately.
Shares of MH/KP Fund are available through a PaineWebber brokerage account.
The minimum initial investment in MH/KP Fund is $1,000, and the minimum
subsequent investment is $50, except that accounts established pursuant to the
Uniform Gifts/Transfer to Minors Acts, the minimum initial investment is $250
and the minimum subsequent investment is $1.00. MH/KP Fund's Class A shares
normally are sold with a maximum initial sales charge of 2.25% of the public
offering price. MH/KP Fund's Class B and Class C shares are sold without an
initial sales charge or CDSC, although the Class C shares are currently
available to participants in the INSIGHT Program and a maximum annual investment
advisory fee of 1.50% of shares held through the INSIGHT Program is paid by
participants in that program.
REDEMPTIONS
Shareholders of each Fund may submit redemption requests to their investment
executives or correspondent firms in person or by telephone, mail or wire. As
each Fund's agent, PaineWebber may honor a redemption request by repurchasing
shares from a redeeming shareholder at the shares' 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 per share
next computed after it is received in "good order," and redemption proceeds will
be paid within seven days of the receipt of the request. Shareholders are
responsible for ensuring that a request for redemption is received in "good
order." "Good order" means that the request must be accompanied by the
following: (1) a letter of instruction or a stock assignment specifying the
number of shares or amount of investment to be redeemed (or that all shares
credited to the Fund account be redeemed), signed by all registered owners of
the shares in the exact names in which they are registered, (2) a guarantee of
the signature of each registered owner by an eligible institution acceptable to
the Transfer Agent and in accordance with SEC rules, such as a commercial bank,
trust company or member of a recognized stock exchange, (3) other supporting
legal documents for estates, trusts, guardianships, custodianships, partnerships
and corporations and (4) duly endorsed share certificates, if any.
A shareholder 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
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<PAGE>
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 a 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 27, 1995, so that shares of MH/KP Fund will no longer be
available for purchase or exchange starting on October 30, 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 Mitchell
Hutchins/Kidder, Peabody fund may be effected through the Closing Date.
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
Mitchell Hutchins/Kidder, Peabody funds, and Class A, B and D shares of both
Funds may be acquired through an exchange of shares of the Corresponding Class
of other PaineWebber and Mitchell Hutchins/Kidder, Peabody 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 Mitchell Hutchins/Kidder, Peabody mutual fund will continue to be
imposed following the Reorganization. Class C shares of each Fund have no
exchange privileges.
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. 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) if any, together with any taxable income (including any
net short-term capital gains). Dividends from MH/KP Fund's net investment income
are declared daily and paid 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.
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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. Such distribution will be paid 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, net
capital gain and net short-term capital gain.
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 proposed Reorganization will constitute a
tax-free reorganization within the meaning of section 368(a)(1)(C) of the
Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, no gain or
loss will be recognized to either Fund or its shareholders as a result of the
Reorganization. See "The Proposed Transaction--Federal Income Tax
Considerations," page 18.
COMPARISON OF PRINCIPAL RISK FACTORS
Because PW Fund's investment objective and investment policies are similar
to those of MH/KP Fund, the investment risks of the two Funds are also similar.
These risks are those typically associated with investing in a municipal bond
fund. Certain differences are identified below. See the Prospectus of PW Fund,
which accompanies this Proxy Statement, for a more detailed discussion of the
investment risks of PW Fund and of the various types of Municipal Obligations in
which PW Fund invests.
MUNICIPAL OBLIGATIONS. Both Funds invest in Municipal Obligations , which
may be either "general obligation" bonds or "revenue" bonds. General obligation
bonds are secured by the issuer's pledge of its full faith, credit and taxing
power for the payment of principal and interest. Revenue bonds are payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a specific excise tax or other specific
revenue source such as from the user of the facility being financed.
Municipal Obligations also include municipal lease obligations, such as
leases, installment purchase contracts and conditional sales contracts, and
certificates of participation therein. Municipal lease obligations are issued by
state and local governments and authorities to purchase land or various types of
equipment or facilities. Certain lease obligations contain "non-appropriation"
clauses that provide that the municipality has no obligation to make payments in
future years unless money is appropriated for the purpose on a yearly basis. PW
Fund limits its investment in such "non-appropriation" leases to not more than
5% of total assets. MH/KP Fund has no such percentage limitation, but does limit
its investment in such leases to those which the municipality is required to
continue under all circumstances except bankruptcy and that meet several other
conditions intended to reduce the risk of loss.
Both Funds may also invest in private activity bonds. To the extent a Fund
invests in private activity bonds, shareholders generally will be required to
include a portion of their exempt-interest dividends from that Fund in
calculating their liability for the AMT. Under normal conditions, PW Fund limits
its investment in private activity bonds to no more than 20% of assets; MH/KP
Fund places no percentage limitation on its investment in such instruments.
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MH/KP Fund may invest in zero coupon Municipal Obligations. The Fund must
accrue income on these investments for tax and accounting purposes which is
distributable to shareholders, and which, because no cash is received at the
time of accrual, may require the liquidation of other portfolio securities to
satisfy the Fund's distribution obligations, in which case the Fund will forgo
the purchase of additional income producing assets with these funds. Zero coupon
Municipal Obligations may experience greater volatility in market value than
Municipal Obligations that make regular payments of interest. PW Fund does not
invest in zero coupon Municipal Obligations.
Both Funds may invest in Municipal Obligations on which the rate of interest
varies inversely with interest rates on other Municipal Obligations or an index.
Such obligations include components of securities on which interest is paid in
two separate parts--an auction component, which pays interest at a market rate
that is set periodically through an auction process or other method, and a
residual component, or "inverse floater," which pays interest at a rate equal to
the difference between the rate that the issuer would have paid on a fixed-rate
obligation at the time of issuance and the rate paid on the auction component.
The market value of an inverse floater will be more volatile than that of a
fixed-rate obligation and, like most debt obligations, will vary inversely with
changes in interest rates. PW Fund limits its investment in such inverse
floaters to 10% of its total assets. MH/KP Fund is subject to no such percentage
limitation.
INTEREST RATE RISK. If general market interest rates are increasing, the
prices of Municipal Obligations ordinarily will decrease and, if rates decrease,
the opposite generally will be true. During periods of market uncertainty, the
market values of fixed income securities can become volatile. Generally, the
longer the maturity of a Municipal Obligations, the higher the rate of interest
paid and the greater the volatility of the Municipal Obligation.
CREDIT QUALITY. Each Fund is permitted to purchase investment grade
municipal obligations. PW Fund may invest a higher percentage of its assets in
the two lower grades of investment grade bonds, and accordingly may be subject
to greater investment risk than MH/KP Fund. Since its inception, however, PW
Fund has not invested in the lowest grade of investment grade securities. Under
normal market conditions, MH/KP Fund invests at least 65% of its total assets in
municipal obligations rated in the two highest rating categories by an NRSRO.
MH/KP Fund may invest up to 35% of its total assets in municipal obligations
that are rated in the fourth highest rating categories by an NRSRO. PW Fund,
however, may invest in municipal securities that are rated in the top four
categories by an NRSRO, without any percentage limitations as to how investments
are allocated among the four categories. The fourth highest rating category
includes securities rated BBB by S&P, Baa by Moody's or comparably rated by
another NRSRO. These securities are investment grade, although Moody's considers
securities rated Baa to have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
for these securities to make principal and interest payments than is the case
for higher rated securities. MH/KP Fund has authority to invest in short-term
municipal notes that are one grade lower than the minimal quality permissible
for PW Fund (i.e., MH/KP Fund can invest in instruments rated MIG-3, VMIG-3 or
Prime 3 by Moody's or SP-3 or A-3 by S&P, while PW Fund may not invest in
instruments rated lower than MIG-2, VMIG-2 or Prime 2 by Moody's, or SP-2 or A-2
by S&P).
Ratings of debt securities represent the NRSRO's opinion regarding their
quality, are not a guarantee of quality and may be reduced after a Fund has
acquired the security. In the event that a security's rating is downgraded,
neither Fund is required to sell the obligation, but Mitchell Hutchins will
consider the event in its determination of whether the Fund should continue to
hold the obligation.
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HEDGING STRATEGIES. Each Fund may use options, futures contracts, and
options on futures contracts. There can be no assurance, however, that any
strategy utilizing these instruments will succeed. If Mitchell Hutchins
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 it not hedged at all. 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 its need 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.
OTHER INVESTMENT POLICIES AND STRATEGIES. There are several other
differences between the two Funds' investment policies and strategies. MH/KP
Fund will not invest more than 25% of its total assets in obligations whose
issuers are in the same state or more than 25% of its total assets in
obligations that are secured by revenues from any one of the following entities:
hospital and health facilities, ports and airports, and colleges and
universities. It may invest more than 25% of its total assets in Municipal
Obligations of one or more of the following categories: turnpikes and toll
roads, public housing authorities, general obligations of states and localities,
state and local housing finance authorities, municipal utilities, bonds that are
secured or backed by U.S. Treasury or other securities issued or guaranteed by
the U.S. government, and pollution control bonds. PW Fund may invest more than
25% of its total assets in municipal securities that are related in such a way
that an economic, business or political development affecting one such security
might affect the other securities, such as securities the interest on which is
paid from similar types of projects.
While both Funds may invest in floating- and variable-rate demand notes and
bonds, MH/KP Fund will invest no more than 10% of its net assets in notes and
bonds for which no secondary market exists and as to which it cannot exercise
the demand feature on seven or fewer days' notice. PW Fund has no such specific
limit; however, as such notes and bonds would be considered illiquid, PW Fund
could not invest more than 10% of its net assets in such notes and bonds. Both
Funds may invest in participation interests. While PW Fund has no specific
limitations on the amount it may invest in participation interests, MH/KP Fund
will not invest more than 10% of its net assets in participation interests with
respect to which it does not have the right to demand payment on not more than
seven days' notice. In addition, if the participation interest is unrated, or
has been given a rating below that which otherwise is permissible for purchase
by MH/KP Fund, the participation interest must be backed by an irrevocable
letter of credit or guarantee of a bank, or the payment obligation otherwise
must be collateralized by U.S. government securities.
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THE PROPOSED TRANSACTION
REORGANIZATION PLAN
The terms and conditions under which the proposed transaction may be
consummated are set forth in the Reorganization Plan. Significant provisions of
the Reorganization Plan are summarized below; however, this summary is qualified
in its entirety by reference to the Reorganization Plan, which is attached as
Appendix A to this Proxy Statement.
The Reorganization Plan contemplates (a) the acquisition by PW Fund on the
Closing Date of the assets of 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 such shares to the shareholders of MH/KP Fund, by
Class.
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 NYSE on the Closing Date. Where market quotations are
readily available, portfolio securities will be valued based upon such market
quotations, provided such quotations adequately reflect, in Mitchell Hutchins'
judgment, the fair value of the security. Where such market quotations are not
readily available, such securities will be valued based upon appraisals received
from a pricing service using a computerized matrix system or based upon
appraisals derived from information concerning the security or similar
securities received from recognized dealers in those securities. The amortized
cost method of valuation generally will be used to value debt instruments with
60 days or less remaining to maturity, unless 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.
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 Class of PW Fund equal in value to that
shareholder's shares in the Corresponding Class of MH/KP Fund immediately prior
to the Reorganization. Moreover, because shares of each
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Corresponding 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 each Class of PW Fund shares 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 transaction. 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 it is terminated.
The cost of the Reorganization, including professional fees and the cost of
soliciting proxies for the Meeting, consisting principally of printing and
mailing expenses, together with the cost of any supplementary solicitation, will
be borne by both Funds in proportion to their respective net assets. Mitchell
Hutchins recommended this method of expense allocation to the trustees of the
Trusts. Mitchell Hutchins based its recommendations on its belief that the
method is fair because, for the reasons discussed under "Reasons for the
Reorganization," the transaction has the potential to benefit both Funds. The
trustees of each Trust considered the expense allocation method in approving the
Reorganization and finding that the Reorganization is in the best interests of
each Fund.
The consummation of the Reorganization is subject to a number of conditions
set forth in the Reorganization Plan, some of which may be waived by each Trust.
In addition, the Reorganization Plan may be amended in any mutually agreeable
manner, except that no amendment may be made subsequent to the Meeting that has
a material adverse effect on the shareholders' interests.
REASONS FOR THE REORGANIZATION
MH/KP Trust's board of trustees, including a majority of its Independent
Trustees, has concluded 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 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 Reorganization 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
(after the Reorganization) relative to each Fund's current expense ratio;
(4) the costs to be incurred by each Fund as a result of the
Reorganization;
(5) the tax consequences of the Reorganization;
16
<PAGE>
(6) possible alternatives to the Reorganization, including continuing to
operate on a stand-alone basis or liquidation; and
(7) the potential benefits of the Reorganization to other persons,
including Mitchell Hutchins and PaineWebber.
The Reorganization was recommended to the trustees by Mitchell Hutchins at
meetings of the boards of trustees of MH/KP Trust and PW Trust held on July 20,
1995. In recommending the Reorganization, Mitchell Hutchins advised the boards
of trustees that, because PW Fund is considerably larger than MH/KP Fund, the
total operating expenses for the combined Fund following the Reorganization
would be approximately the same as those currently in effect for PW Fund and
lower than those of MH/KP Fund. The boards recognized that the impact of this
reduction in expenses for MH/KP Fund will not be immediately apparent to
shareholders, however, because Mitchell Hutchins (like the previous adviser) has
been voluntarily waiving fees and reimbursing expenses of MH/KP Fund since
February 13, 1995.
Mitchell Hutchins advised the board of trustees of MH/KP Fund that it
undertook such waivers and reimbursements pending the merger of MH/KP Fund with
a larger Fund. In approving the Reorganization, the board of trustees of MH/KP
Fund considered the fact that such waivers and reimbursements were voluntary and
that Mitchell Hutchins was under no obligation to continue them.
The boards took into account that the Funds have similar investment
objectives and similar investment policies with the differences noted, and that
Mitchell Hutchins did not believe there was 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 the Reorganization. In considering the proposed
transaction, the boards noted that PW Fund's overall objective of high current
income exempt from federal income taxation consistent with preservation of
capital and liquidity within the Fund's quality standards remains an appropriate
one to offer to investors as part of an overall investment strategy.
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 four 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 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 differ as
follows: (1) Class A, Class B and Class D shares, unlike Class C shares, bear
certain fees under plans of
17
<PAGE>
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 service and distribution fees, are subject to a CDSC upon
certain redemptions and automatically convert to Class A shares approximately
six years after issuance; (4) Class C shares will be subject to no sales charge,
will bear no service or distribution fees, but may be purchased only by certain
categories of purchasers; (5) Class D shares are subject to neither an initial
sales charge nor a CDSC, bear ongoing service and distribution fees and do not
convert into another Class; and (6) each Class may bear differing amounts of
certain Class-specific expenses. Each share of each Class of PW Fund is entitled
to participate equally in dividends and other distributions and the proceeds of
any liquidation, except that because of the higher expenses resulting from the
distribution fees borne by the Class B and Class D shares, dividends on those
shares are expected to be lower than those on Class A and Class C shares of the
Fund. For the same reason, dividends on Class B shares of PW Fund are expected
to be lower than those on its Class D 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 normally will
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 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;
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(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
unrealized gain or loss is required to be recognized for federal income tax
purposes at the end of a taxable year (or on the termination or transfer
thereof) under a mark-to-market system of accounting.
Utilization by PW Fund after the Reorganization of pre-Reorganization
capital losses realized by 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 February 28,
1995 (unaudited, with respect to MH/KP Fund), 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......................................... $346,579,345 $10,541,198 $357,120,543
Class B(1)...................................... $ 58,958,037 $ 4,161,433 $ 58,958,037
Class C......................................... -- $ 656,333 $ 656,333
Class D......................................... $101,641,722 -- $105,803,155
NET ASSET VALUE PER SHARE
Class A......................................... $11.26 $11.03 $11.26
Class B(1)...................................... $11.26 $11.03 $11.26
Class C......................................... -- $11.03 $11.26
Class D......................................... $11.26 -- $11.26
SHARES OUTSTANDING
Class A......................................... 30,774,300 955,842 31,710,618
Class B(1)...................................... 5,236,630 377,320 5,236,630
Class C......................................... -- 59,509 58,293
Class D......................................... 9,025,376 -- 9,394,989
</TABLE>
- ------------
(1) Class B shares of MH/KP Fund will be exchanged for Class D shares of PW
Fund.
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<PAGE>
MISCELLANEOUS
AVAILABLE INFORMATION
Each Trust is subject to the information requirements of the Securities
Exchange Act of 1934 and the 1940 Act, and in accordance therewith files
reports, proxy material and other information with the SEC. Such reports, proxy
material and other information can be inspected and copied at the Public
Reference Room maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549. Copies of such material can also be obtained from the Public Reference
Branch, Office of Consumer Affairs and Information Services, Securities and
Exchange Commission, Washington, D.C. 20459 at prescribed rates.
LEGAL MATTERS
Certain legal matters in connection with the issuance of PW Fund shares as
part of the Reorganization will be passed upon by Kirkpatrick & Lockhart LLP,
counsel to PW Trust.
EXPERTS
The audited financial statements of PW Fund and MH/KP Fund, incorporated
herein by reference or included in their respective Statements 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 Reports to Shareholders for the fiscal years ended February 28,
1995 and June 30, 1995, respectively. The financial statements audited by Ernst
& Young LLP and Deloitte & Touche LLP have been incorporated herein 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.
20
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
THIS AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION ("Agreement") is
made as of August 24, 1995, between PaineWebber Mutual Fund Trust, a
Massachusetts business trust ("PW Trust"), on behalf of PaineWebber National
Tax-Free Income Fund, a segregated portfolio of assets ("series") thereof
("Acquiring Fund"), and Mitchell Hutchins/Kidder, Peabody Investment Trust II, a
Massachusetts business trust ("MH/KP Trust"), on behalf of its Mitchell
Hutchins/Kidder, Peabody Municipal Bond 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
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 Acquiring Fund Shares to the holders of shares of
beneficial interest in Target ("Target Shares") in exchange therefor, all upon
the terms and conditions set forth herein. The foregoing transactions are
referred to herein as the "Reorganization." All agreements, representations,
actions, and obligations described herein made or to be taken or undertaken by
either Fund are made and shall be taken or undertaken by PW Trust on behalf of
Acquiring Fund and by MH/KP Trust on behalf of Target.
Acquiring Fund's shares are divided into four classes, designated Class A,
Class B, Class C, and Class D shares ("Class A Acquiring Fund Shares," "Class B
Acquiring Fund Shares," "Class C Acquiring Fund Shares," and "Class D Acquiring
Fund Shares," respectively). (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 distribution 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
A-1
<PAGE>
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 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), net interest income excludable from gross
income under section 103(a) of the Code, 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
A-2
<PAGE>
books in the Shareholders' names and transferring such Acquiring Fund Shares
thereto. Each Shareholder's account shall be credited with the respective pro
rata number of full and fractional (rounded to the third decimal place)
Acquiring Fund Shares due that Shareholder, by class (i.e., the account for a
Shareholder of Class A Target Shares shall be credited with the respective pro
rata number of Class A Acquiring Fund Shares due that Shareholder, the account
for a Shareholder of Class B Target Shares shall be credited with the respective
pro rata number of Class D Acquiring Fund Shares due that Shareholder, and the
account for a Shareholder of Class C Target Shares shall be credited with the
respective pro rata number of Class C Acquiring Fund Shares due that
Shareholder). All outstanding Target Shares, including any represented by
certificates, shall simultaneously be canceled on Target's share transfer
records. Acquiring Fund shall not issue certificates representing the Acquiring
Fund Shares in connection with the Reorganization.
1.6. As soon as reasonably practicable after distribution of the Acquiring
Fund Shares pursuant to paragraph 1.5, Target shall be terminated as a series of
MH/KP Trust and any further actions shall be taken in connection therewith as
required by applicable law.
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 November 3,
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
A-3
<PAGE>
elsewhere is disrupted, so that accurate appraisal of the net value of Target
and the NAV per Acquiring Fund Share is impracticable, the Effective Time shall
be postponed until the first business day after the day when such trading shall
have been fully resumed and such reporting shall have been restored.
3.2. MH/KP Trust shall deliver to PW Trust at the Closing a schedule of the
Assets as of the Effective Time, which shall set forth for all portfolio
securities included therein their adjusted tax basis and holding period by lot.
Target's custodian shall deliver at the Closing a certificate of an authorized
officer stating that (a) the Assets held by the custodian will be transferred to
Acquiring Fund at the Effective Time and (b) all necessary taxes in conjunction
with the delivery of the Assets, including all applicable federal and state
stock transfer stamps, if any, have been paid or provision for payment has been
made.
3.3. MH/KP Trust shall deliver to PW Trust at the Closing a list of the
names and addresses of the Shareholders and the number (by class) of outstanding
Target Shares owned by each Shareholder, all as of the Effective Time, certified
by the Secretary or Assistant Secretary of MH/KP Trust. The Transfer Agent shall
deliver at the Closing a certificate as to the opening on Acquiring Fund's share
transfer books of accounts in the Shareholders' names. PW Trust shall issue and
deliver a confirmation to MH/KP Trust evidencing the Acquiring Fund Shares (by
class) to be credited to Target at the Effective Time or provide evidence
satisfactory to MH/KP Trust that such Acquiring Fund Shares have been credited
to Target's account on Acquiring Fund's books. At the Closing, each party shall
deliver to the other such bills of sale, checks, assignments, stock
certificates, receipts, or other documents as the other party or its counsel may
reasonably request.
3.4. Each Investment Company shall deliver to the other at the Closing a
certificate executed in its name by its President or a Vice President in form
and substance satisfactory to the recipient and dated the Effective Time, to the
effect that the representations and warranties it made in this Agreement are
true and correct at the Effective Time except as they may be affected by the
transactions contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1. Target represents and warrants as follows:
4.1.1. MH/KP Trust is an unincorporated voluntary association with
transferable shares organized as a business trust under a written instrument
("Business Trust"); it is duly organized, validly existing, and in good
standing under the laws of the Commonwealth of Massachusetts; and a copy of
its Declaration of Trust is on file with the Secretary of the Commonwealth
of Massachusetts;
4.1.2. MH/KP Trust is duly registered as an open-end management
investment company under the 1940 Act, and such registration will be in full
force and effect at the Effective Time;
4.1.3. Target is a duly established and designated series of MH/KP
Trust;
4.1.4. At the Closing, Target will have good and marketable title to the
Assets and full right, power, and authority to sell, assign, transfer, and
deliver the Assets free of any liens or other encumbrances; and upon
delivery and payment for the Assets, Acquiring Fund will acquire good and
marketable title thereto;
A-4
<PAGE>
4.1.5. Target's current prospectus and statement of additional
information conform in all material respects to the applicable requirements
of the Securities Act of 1933 ("1933 Act") and the 1940 Act and the rules
and regulations thereunder and do not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
4.1.6. Target is not in violation of, and the execution and delivery of
this Agreement and consummation of the transactions contemplated hereby will
not conflict with or violate, Massachusetts law or any provision of MH/KP
Trust's Declaration of Trust or By-Laws or of any agreement, instrument,
lease, or other undertaking to which Target is a party or by which it is
bound or result in the acceleration of any obligation, or the imposition of
any penalty, under any agreement, judgment, or decree to which Target is a
party or by which it is bound, except as previously disclosed in writing to
and accepted by PW Trust;
4.1.7. Except as disclosed in writing to and accepted by PW Trust, all
material contracts and other commitments of or applicable to Target (other
than this Agreement and investment contracts, including options, futures,
and forward contracts) will be terminated, or provision for discharge of any
liabilities of Target thereunder will be made, at or prior to the Effective
Time, without either Fund's incurring any liability or penalty with respect
thereto and without diminishing or releasing any rights Target may have had
with respect to actions taken or omitted to be taken by any other party
thereto prior to the Closing;
4.1.8. Except as otherwise disclosed in writing to and accepted by PW
Trust, no litigation, administrative proceeding, or investigation of or
before any court or governmental body is presently pending or (to Target's
knowledge) threatened against MH/KP Trust with respect to Target or any of
its properties or assets that, if adversely determined, would materially and
adversely affect Target's financial condition or the conduct of its
business; Target knows of no facts that might form the basis for the
institution of any such litigation, proceeding, or investigation and is not
a party to or subject to the provisions of any order, decree, or judgment of
any court or governmental body that materially or adversely affects its
business or its ability to consummate the transactions contemplated hereby;
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
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<PAGE>
registration statement by PW Trust on Form N-14 relating to the Acquiring
Fund Shares issuable hereunder, and any supplement or amendment thereto
("Registration Statement"), including therein a prospectus/proxy statement
("Proxy Statement"), (b) receipt of the exemptive relief referenced in
subparagraph 4.1.9, and (c) such consents, approvals, authorizations, and
filings as have been made or received or as may be required subsequent to
the Effective Time;
4.1.12. On the effective date of the Registration Statement, at the time
of the shareholders' meeting referred to in paragraph 5.2, and at the
Effective Time, the Proxy Statement will (a) comply in all material respects
with the applicable provisions of the 1933 Act, the 1934 Act, and the 1940
Act and the regulations thereunder and (b) not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading;
provided that the foregoing shall not apply to statements in or omissions
from the Proxy Statement made in reliance on and in conformity with
information furnished by PW Trust for use therein;
4.1.13. The Liabilities were incurred by Target in the ordinary course
of its business;
4.1.14. Target is a "fund" as defined in section 851(h)(2) of the Code;
it qualified for treatment as a regulated investment company under
Subchapter M of the Code ("RIC") for each past taxable year since it
commenced operations and will continue to meet all the requirements for such
qualification for its current taxable year; and it has no earnings and
profits accumulated in any taxable year in which the provisions of
Subchapter M did not apply to it. The Assets shall be invested at all times
through the Effective Time in a manner that ensures compliance with the
foregoing;
4.1.15. 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;
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4.2.5. The Acquiring Fund Shares to be issued and delivered to Target
hereunder will, at the Effective Time, have been duly authorized and, when
issued and delivered as provided herein, will be duly and validly issued and
outstanding shares of Acquiring Fund, fully paid and non-assessable, except
to the extent that under Massachusetts law shareholders of a Business Trust
may, under certain circumstances, be held personally liable for its
obligations. Except as contemplated by this Agreement, Acquiring Fund does
not have outstanding any options, warrants, or other rights to subscribe for
or purchase any of its shares, nor is there outstanding any security
convertible into any of its shares;
4.2.6. Acquiring Fund's current prospectus and statement of additional
information conform in all material respects to the applicable requirements
of the 1933 Act and the 1940 Act and the rules and regulations thereunder
and do not include any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading;
4.2.7. Acquiring Fund is not in violation of, and the execution and
delivery of this Agreement and consummation of the transactions contemplated
hereby will not conflict with or violate, Massachusetts law or any provision
of PW Trust's Declaration of Trust or By-Laws or of any provision of any
agreement, instrument, lease, or other undertaking to which Acquiring Fund
is a party or by which it is bound or result in the acceleration of any
obligation, or the imposition of any penalty, under any agreement, judgment,
or decree to which Acquiring Fund is a party or by which it is bound, except
as previously disclosed in writing to and accepted by MH/KP Trust;
4.2.8. Except as otherwise disclosed in writing to and accepted by MH/KP
Trust, no litigation, administrative proceeding, or investigation of or
before any court or governmental body is presently pending or (to Acquiring
Fund's knowledge) threatened against PW Trust with respect to Acquiring Fund
or any of its properties or assets that, if adversely determined, would
materially and adversely affect Acquiring Fund's financial condition or the
conduct of its business; Acquiring Fund knows of no facts that might form
the basis for the institution of any such litigation, proceeding, or
investigation and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that materially
or adversely affects its business or its ability to consummate the
transactions contemplated hereby;
4.2.9. The execution, delivery, and performance of this Agreement has
been duly authorized as of the date hereof by all necessary action on the
part of PW Trust's board of trustees, which has made the determinations
required by Rule 17a-8(a) under the 1940 Act; and, subject to receipt of any
necessary exemptive relief or no-action assurances requested from the SEC or
its staff with respect to sections 17(a) and 17(d) of the 1940 Act, this
Agreement will constitute a valid and legally binding obligation of
Acquiring Fund, enforceable in accordance with its terms, except as the same
may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium, and similar laws relating to or affecting
creditors' rights and by general principles of equity;
4.2.10. No governmental consents, approvals, authorizations, or filings
are required under the 1933 Act, the 1934 Act, or the 1940 Act for the
execution or performance of this Agreement by PW Trust, except for (a) the
filing with the SEC of the Registration Statement and a post-effective
amendment to PW Trust's registration statement, (b) receipt of the exemptive
relief referenced in subparagraph 4.2.9, and (c) such consents, approvals,
authorizations, and filings as have been made or received or as may be
required subsequent to the Effective Time;
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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 for each past taxable year
since it commenced operations and will continue to meet all the requirements
for such qualification for its current taxable year; Acquiring Fund intends
to continue to meet all such requirements for the next taxable year; and it
has no earnings and profits accumulated in any taxable year in which the
provisions of Subchapter M of the Code did not apply to it;
4.2.13. Acquiring Fund has no plan or intention to issue additional
Acquiring Fund Shares following the Reorganization except for shares issued
in the ordinary course of its business as a series of an open-end investment
company; nor does Acquiring Fund have any plan or intention to redeem or
otherwise reacquire any Acquiring Fund Shares issued to the Shareholders
pursuant to the Reorganization, other than through redemptions arising in
the ordinary course of that business;
4.2.14. Acquiring Fund (a) will actively continue Target's business in
substantially the same manner that Target conducted that business
immediately before the Reorganization, (b) has no plan or intention to sell
or otherwise dispose of any of the Assets, except for dispositions made in
the ordinary course of that business and dispositions necessary to maintain
its status as a RIC under Subchapter M of the Code, and (c) expects to
retain substantially all the Assets in the same form as it receives them in
the Reorganization, unless and until subsequent investment circumstances
suggest the desirability of change or it becomes necessary to make
dispositions thereof to maintain such status;
4.2.15. There is no plan or intention for Acquiring Fund to be dissolved
or merged into another corporation or business trust or any "fund" thereof
(within the meaning of section 851(h)(2) of the Code) following the
Reorganization;
4.2.16. Immediately after the Reorganization, (a) not more than 25% of
the value of Acquiring Fund's total assets (excluding cash, cash items, and
U.S. government securities) will be invested in the stock and securities of
any one issuer and (b) not more than 50% of the value of such assets will be
invested in the stock and securities of five or fewer issuers; and
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.
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4.3. Each Fund represents and warrants as follows:
4.3.1. The fair market value of the Acquiring Fund Shares, when received
by the Shareholders, will be approximately equal to the fair market value of
their Target Shares constructively surrendered in exchange therefor;
4.3.2. Its management (a) is unaware of any plan or intention of
Shareholders to redeem or otherwise dispose of any portion of the Acquiring
Fund Shares to be received by them in the Reorganization and (b) does not
anticipate dispositions of those Acquiring Fund Shares at the time of or
soon after the Reorganization to exceed the usual rate and frequency of
dispositions of shares of Target as a series of an open-end investment
company. Consequently, its management expects that the percentage of
Shareholder interests, if any, that will be disposed of as a result of or at
the time of the Reorganization will be de minimis. Nor does its management
anticipate that there will be extraordinary redemptions of Acquiring Fund
Shares immediately following the Reorganization;
4.3.3. The Shareholders will pay their own expenses, if any, incurred in
connection with the Reorganization;
4.3.4. Immediately following consummation of the Reorganization,
Acquiring Fund will hold substantially the same assets and be subject to
substantially the same liabilities that Target held or was subject to
immediately prior thereto, plus any liabilities and expenses of the parties
incurred in connection with the Reorganization;
4.3.5. The fair market value on a going concern basis of the Assets will
equal or exceed the Liabilities to be assumed by Acquiring Fund and those to
which the Assets are subject;
4.3.6. There is no intercompany indebtedness between the Funds that was
issued or acquired, or will be settled, at a discount;
4.3.7. Pursuant to the Reorganization, Target will transfer to Acquiring
Fund, and Acquiring Fund will acquire, at least 90% of the fair market value
of the net assets, and at least 70% of the fair market value of the gross
assets, held by Target immediately before the Reorganization. For the
purposes of this representation, any amounts used by Target to pay its
Reorganization expenses and redemptions and distributions made by it
immediately before the Reorganization (except for (a) distributions made to
conform to its policy of distributing all or substantially all of its income
and gains to avoid the obligation to pay federal income tax and/or the
excise tax under section 4982 of the Code and (b) redemptions not made as
part of the Reorganization) will be included as assets thereof held
immediately before the Reorganization;
4.3.8. None of the compensation received by any Shareholder who is an
employee of Target will be separate consideration for, or allocable to, any
of the Target Shares held by such Shareholder-employee; none of the
Acquiring Fund Shares received by any such Shareholder-employee will be
separate consideration for, or allocable to, any employment agreement; and
the consideration paid to any such Shareholder-employee will be for services
actually rendered and will be commensurate with amounts paid to third
parties bargaining at arm's-length for similar services; and
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4.3.9. Immediately after the Reorganization, the Shareholders will not
own shares constituting "control" of Acquiring Fund within the meaning of
section 304(c) of the Code.
5. COVENANTS
5.1. Each Fund covenants to operate its respective business in the ordinary
course between the date hereof and the Closing, it being understood that (a)
such ordinary course will include declaring and paying customary dividends and
other distributions and such changes in operations as are contemplated by each
Fund's normal business activities and (b) each Fund will retain exclusive
control of the composition of its portfolio until the Closing; provided that
Target shall not dispose of more than an insignificant portion of its historic
business assets during such period without Acquiring Fund's prior consent.
5.2. Target covenants to call a shareholders' meeting to consider and act
upon this Agreement and to take all other action necessary to obtain approval of
the transactions contemplated hereby.
5.3. Target covenants that the Acquiring Fund Shares to be delivered
hereunder are not being acquired for the purpose of making any distribution
thereof, other than in accordance with the terms hereof.
5.4. Target covenants that it will assist PW Trust in obtaining such
information as PW Trust reasonably requests concerning the beneficial ownership
of Target Shares.
5.5. Target covenants that Target's books and records (including all books
and records required to be maintained under the 1940 Act and the rules and
regulations thereunder) will be turned over to PW Trust at the Closing.
5.6. Each Fund covenants to cooperate in preparing the Proxy Statement in
compliance with applicable federal securities laws.
5.7. Each Fund covenants that it will, from time to time, as and when
requested by the other Fund, execute and deliver or cause to be executed and
delivered all such assignments and other instruments, and will take or cause to
be taken such further action, as the other Fund may deem necessary or desirable
in order to vest in, and confirm to, (a) Acquiring Fund, title to and possession
of all the Assets, and (b) Target, title to and possession of the Acquiring Fund
Shares to be delivered hereunder, and otherwise to carry out the intent and
purpose hereof.
5.8. PW Trust covenants to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act, and such
state securities laws it may deem appropriate in order to continue its
operations after the Effective Time.
5.9. Subject to this Agreement, each Fund covenants to take or cause to be
taken all actions, and to do or cause to be done all things reasonably
necessary, proper, or advisable to consummate and effectuate the transactions
contemplated hereby.
6. CONDITIONS PRECEDENT
Each Fund's obligations hereunder shall be subject to (a) performance by the
other Fund of all the obligations to be performed hereunder at or before the
Effective Time, (b) all representations and warranties of the other Fund
contained herein being true and correct in all material respects as of the
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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 Massachusetts law shareholders of a Business Trust may, under certain
circumstances, be held personally liable for its obligations, and no
shareholder of Acquiring Fund has any preemptive right to subscribe for or
purchase such shares;
6.4.4. The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate PW Trust's Declaration of Trust or
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By-Laws or any provision of any agreement (known to such counsel, without
any independent inquiry or investigation) to which PW Trust (with respect to
Acquiring Fund) is a party or by which it is bound or (to the knowledge of
such counsel, without any independent inquiry or investigation) result in
the acceleration of any obligation, or the imposition of any penalty, under
any agreement, judgment, or decree to which PW Trust (with respect to
Acquiring Fund) is a party or by which it is bound, except as set forth in
such opinion or as previously disclosed in writing to and accepted by MH/KP
Trust;
6.4.5. To the knowledge of such counsel (without any independent inquiry
or investigation), no consent, approval, authorization, or order of any
court or governmental authority is required for the consummation by PW Trust
on behalf of Acquiring Fund of the transactions contemplated herein, except
such as have been obtained under the 1933 Act, the 1934 Act, and the 1940
Act and such as may be required under state securities laws;
6.4.6. PW Trust is registered with the SEC as an investment company, and
to the knowledge of such counsel no order has been issued or proceeding
instituted to suspend such registration; and
6.4.7. To the knowledge of such counsel (without any independent inquiry
or investigation), (a) no litigation, administrative proceeding, or
investigation of or before any court or governmental body is pending or
threatened as to PW Trust (with respect to Acquiring Fund) or any of its
properties or assets attributable or allocable to Acquiring Fund and (b) PW
Trust (with respect to Acquiring Fund) is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental
body that materially and adversely affects Acquiring Fund's business, except
as set forth in such opinion or as otherwise disclosed in writing to and
accepted by MH/KP Trust.
In rendering such opinion, such counsel may (i) rely, as to matters governed
by the laws of the Commonwealth of Massachusetts, on an opinion of competent
Massachusetts counsel, (ii) make assumptions regarding the authenticity,
genuineness, and/or conformity of documents and copies thereof without
independent verification thereof, (iii) limit such opinion to applicable federal
and state law, and (iv) define the word "knowledge" and related terms to mean
the knowledge of attorneys then with such firm who have devoted substantive
attention to matters directly related to this Agreement and the Reorganization.
6.5. PW Trust shall have received an opinion of Willkie Farr & Gallagher,
counsel to MH/KP Trust, substantially to the effect that:
6.5.1. Target is a duly established series of MH/KP Trust, a Business
Trust duly organized and validly existing under the laws of the Commonwealth
of Massachusetts with power under its Declaration of Trust to own all of its
properties and assets and, to the knowledge of such counsel, to carry on its
business as presently conducted;
6.5.2. This Agreement (a) has been duly authorized, executed, and
delivered by MH/KP Trust on behalf of Target and (b) assuming due
authorization, execution, and delivery of this Agreement by PW Trust on
behalf of Acquiring Fund, is a valid and legally binding obligation of MH/KP
Trust with respect to Target, enforceable in accordance with its terms,
except as the same may be limited by bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium, and similar laws relating to or
affecting creditors' rights and by general principles of equity;
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6.5.3. The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate MH/KP Trust's Declaration of Trust or By-Laws or any provision of
any agreement (known to such counsel, without any independent inquiry or
investigation) to which MH/KP Trust (with respect to Target) is a party or
by which it is bound or (to the knowledge of such counsel, without any
independent inquiry or investigation) result in the acceleration of any
obligation, or the imposition of any penalty, under any agreement, judgment,
or decree to which MH/KP Trust (with respect to Target) is a party or by
which it is bound, except as set forth in such opinion or as previously
disclosed in writing to and accepted by PW Trust;
6.5.4. To the knowledge of such counsel (without any independent inquiry
or investigation), no consent, approval, authorization, or order of any
court or governmental authority is required for the consummation by MH/KP
Trust on behalf of Target of the transactions contemplated herein, except
such as have been obtained under the 1933 Act, the 1934 Act, and the 1940
Act and such as may be required under state securities laws;
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
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those shares to the Shareholders constructively in exchange for the
Shareholders' Target Shares, will constitute a reorganization within the
meaning of section 368(a)(1)(C) of the Code, and each Fund will be "a party
to a reorganization" within the meaning of section 368(b) of the Code;
6.6.2. No gain or loss will be recognized to Target on the transfer to
Acquiring Fund of the Assets in exchange solely for Acquiring Fund Shares
and Acquiring Fund's assumption of the Liabilities or on the subsequent
distribution of those shares to the Shareholders in constructive exchange
for their Target Shares;
6.6.3. No gain or loss will be recognized to Acquiring Fund on its
receipt of the Assets in exchange solely for Acquiring Fund Shares and its
assumption of the Liabilities;
6.6.4. Acquiring Fund's basis for the Assets will be the same as the
basis thereof in Target's hands immediately before the Reorganization, and
Acquiring Fund's holding period for the Assets will include Target's holding
period therefor;
6.6.5. A Shareholder will recognize no gain or loss on the constructive
exchange of all its Target Shares solely for Acquiring Fund Shares pursuant
to the Reorganization; and
6.6.6. A Shareholder's basis for the Acquiring Fund Shares to be
received by it in the Reorganization will be the same as the basis for its
Target Shares to be constructively surrendered in exchange for those
Acquiring Fund Shares, and its holding period for those Acquiring Fund
Shares will include its holding period for those Target Shares, provided
they are held as capital assets by the Shareholder at the Effective Time.
Notwithstanding subparagraphs 6.6.2 and 6.6.4, each Tax Opinion may state
that no opinion is expressed as to the effect of the Reorganization on the Funds
or any Shareholder with respect to any asset as to which any unrealized gain or
loss is required to be recognized for federal income tax purposes at the end of
a taxable year (or on the termination or transfer thereof) under a
mark-to-market system of accounting.
At any time before the Closing, (a) Acquiring Fund may waive any of the
foregoing conditions if, in the judgment of PW Trust's board of trustees, such
waiver will not have a material adverse effect on its shareholders' interests,
and (b) Target may waive any of the foregoing conditions if, in the judgment of
MH/KP Trust's board of trustees, such waiver will not have a material adverse
effect on the Shareholders' interests.
7. BROKERAGE FEES AND EXPENSES
7.1. Each Investment Company represents and warrants to the other that there
are no brokers or finders entitled to receive any payments in connection with
the transactions provided for herein.
7.2. Except as otherwise provided herein, all expenses incurred in
connection with the transactions contemplated by this Agreement (whether or not
they are consummated) will be borne by the Funds proportionately, as follows:
each such expense will be borne by the Funds in proportion to their respective
net assets as of the close of business on the last business day of the month in
which such expense was incurred. Such expenses include: (a) expenses incurred in
connection with entering into and carrying out the provisions of this Agreement;
(b) expenses associated with the preparation and filing of the Registration
Statement; (c) registration or qualification fees and expenses of preparing and
filing
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such forms as are necessary under applicable state securities laws to qualify
the Acquiring Fund Shares to be issued in connection herewith in each state in
which Target's shareholders are resident as of the date of the mailing of the
Proxy Statement to such shareholders; (d) printing and postage expenses; (e)
legal and accounting fees; and (f) solicitation costs.
8. ENTIRE AGREEMENT; SURVIVAL
Neither party has made any representation, warranty, or covenant not set
forth herein, and this Agreement constitutes the entire agreement between the
parties. The representations, warranties, and covenants contained herein or in
any document delivered pursuant hereto or in connection herewith shall survive
the Closing.
9. TERMINATION OF AGREEMENT
This Agreement may be terminated at any time at or prior to the Effective
Time, whether before or after approval by Target's shareholders:
9.1. By either Fund (a) in the event of the other Fund's material breach of
any representation, warranty, or covenant contained herein to be performed at or
prior to the Effective Time, (b) if a condition to its obligations has not been
met and it reasonably appears that such condition will not or cannot be met, or
(c) if the Closing has not occurred on or before March 31, 1996; or
9.2. By the parties' mutual agreement.
In the event of termination under paragraphs 9.1.(c) or 9.2, there shall be
no liability for damages on the part of either Fund, or the trustees or officers
of either Investment Company, to the other Fund.
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.
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IN WITNESS WHEREOF, each party has caused this Agreement to be executed by
its duly authorized officer.
ATTEST:
PAINEWEBBER MUTUAL FUND TRUST,
on behalf of its series,
PAINEWEBBER NATIONAL TAX-FREE
INCOME FUND
By: /s/ JENNIFER FARRELL By: /s/ DIANNE E. O'DONNELL
............................ .............................
Assistant Secretary Vice President
ATTEST:
MITCHELL HUTCHINS/KIDDER,
PEABODY INVESTMENT TRUST II,
on behalf of its series,
MITCHELL HUTCHINS/KIDDER,
PEABODY MUNICIPAL BOND FUND
By: /s/ S. H. JOHNSON By: /s/ SCOTT GRIFF
............................ .............................
Assistant Secretary Vice President
A-16
