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Prospectus December 1, 1995
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PaineWebber/Kidder, Peabody California Tax Exempt Money Fund
1285 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019 (800) 647-1568
PaineWebber/Kidder, Peabody California Tax Exempt Money Fund (the 'Fund') is a
non-diversified, open-end management investment company. The Fund's objective is
the maximization of current income exempt from Federal and State of California
personal income taxes consistent with the preservation of capital and the
maintenance of liquidity. The Fund attempts to achieve its objective by
investing primarily in short-term California Municipal Obligations. See
'Investment Objective and Policies.' Shares of the Fund are offered exclusively
to existing shareholders and shareholders of other PaineWebber/Kidder, Peabody
money market funds who may exchange their shares for shares of the Fund.
The board of trustees of the Fund has approved a Plan of Reorganization and
Termination ('Reorganization') for submission to the Fund's shareholders, at a
special meeting expected to be held on December 4, 1995. If the proposed
Reorganization is approved and implemented, all of the Fund's assets will be
acquired and its liabilities assumed by PaineWebber RMA California Municipal
Money Fund in a tax-free reorganization. As a result of the Reorganization, the
two funds' assets would be combined and each Fund shareholder would, on the
closing date of the transaction, receive shares of PaineWebber RMA California
Municipal Money Fund having an aggregate value equal to the value of the
shareholder's holdings in the Fund. There can be no assurance that the Fund's
shareholders will approve the Reorganization.
An investment in the Fund is neither insured nor guaranteed by the U.S.
Government. While the Fund seeks to maintain a stable net asset value of $1.00
per share, there can be no assurance that it will be able to do so.
PaineWebber Incorporated ('PaineWebber'), 1285 Avenue of the Americas, New York,
New York 10019, serves as the Fund's investment adviser, administrator and
distributor. Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), 1285
Avenue of the Americas, New York, New York 10019, a wholly owned subsidiary of
PaineWebber, serves as the Fund's sub-adviser and sub-administrator. See
'Management of the Fund.'
The Fund's Trustees and shareholders have approved a Plan of Distribution
pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the 'Plan of
Distribution'), pursuant to which the Fund pays a maximum annual fee of .12% of
its average daily net assets to PaineWebber. See 'The Distributor.'
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Investors should read this
Prospectus and retain it for future reference. Additional information about the
Fund has been filed with the Securities and Exchange Commission (the 'SEC') in a
Statement of Additional Information dated December 1, 1995 which is hereby
incorporated by reference, and is available without charge upon request made to
the Fund at the above address. Shareholder inquiries may be directed to the Fund
at the same address.
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INVESTMENT ADVISER, ADMINISTRATOR AND DISTRIBUTOR
PaineWebber Incorporated
SUB-ADVISER AND SUB-ADMINISTRATOR
Mitchell Hutchins Asset Management Inc.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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FEE TABLE
The purpose of the Fee Table is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. For more detailed information on these costs and expenses, see
'Management of the Fund' and 'The Distributor.'
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES FOR THE FISCAL YEAR ENDED JULY 31, 1995
(as a percentage of average daily net assets)
Management Fees................................................................. .50%
12b-1 Fees...................................................................... .12
Other Expenses.................................................................. .11
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Total Fund Operating Expenses.......................................... .73%
---
---
</TABLE>
<TABLE>
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EXAMPLE* 1 YEAR 3 YEARS 5 YEARS 10 YEARS
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A shareholder would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual return,
(2) total annual operating expenses as shown in
the fee table set out above and (3) redemption at
the end of each time period...................... $7 $23 $41 $91
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</TABLE>
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* The amounts shown in the example assume reinvestment of all dividends and
distributions and should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown. The assumed
5% annual return is hypothetical and should not be considered a representation
of the Fund's past or future annual return. The actual annual return of the
Fund may be greater or less than the assumed return.
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HIGHLIGHTS
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The Fund The Fund is a non-diversified, open-end, management investment company whose investment
objective is the maximization of current income exempt from Federal and State of California
personal income taxes to the extent consistent with the preservation of capital and the
maintenance of liquidity through investments primarily in short-term debt securities of the
State of California, its political subdivisions, authorities and corporations, the interest
from which is, in the opinion of bond counsel to the issuer, exempt from Federal and State of
California personal income taxes.
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Benefits of Mutual funds, such as the Fund, are flexible investment tools that are increasingly
Investing popular -- one of four American households now owns shares of at least one mutual fund -- for
in the very sound reasons. The Fund offers investors the following important benefits:
Fund
Tax Exempt Investing for California Investors
The Fund offers investors the opportunity to receive dividends consisting primarily of income
that is exempt from Federal and California personal income taxation. See 'Investment Objective
and Policies.'
Professional Management
By pooling the monies of many investors, the Fund enables shareholders to obtain the benefits
of full-time professional management and a degree of diversification of investments that is
typically beyond the means of most investors. The Fund's investment adviser reviews the
fundamental characteristics of far more securities than can a typical individual investor and
may employ portfolio management techniques that frequently are not used by individual or many
institutional investors. Additionally, the larger denominations of securities in which the
Fund invests may result in better overall prices for the investments. See 'Investment
Objective and Policies.'
Transaction Savings
By investing in the Fund, a shareholder is able to acquire ownership in a diversified
portfolio of securities without paying the higher transaction costs generally associated with
a series of small securities purchases.
Convenience
Fund shareholders are relieved of the administrative and recordkeeping burdens and
coordination of maturities normally associated with direct ownership of securities.
Quality
All securities in which the Fund invests will be rated in one of the two highest rating
categories for debt obligations by at least two nationally recognized statistical rating
organizations (or one rating organization if the instrument was rated only by one such
organization) or determined to be of comparable quality by the Fund's investment adviser
acting under the supervision of the Trustees if not so rated, and will also be determined to
present minimal credit risks.
</TABLE>
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<TABLE>
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Liquidity
The Fund's convenient purchase and redemption procedures provide shareholders with ready
access to their money and reduce the delays frequently involved in the direct purchase and
sale of securities. See 'Purchase of Shares' and 'Redemption of Shares.'
Exchange Privilege
Shareholders of the Fund may exchange all or a portion of their shares for shares of
specified PaineWebber/Kidder, Peabody money market funds. See 'Exchange Privilege.'
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Purchase of The purchase price for shares of the Fund is the net asset value per share next determined
Shares after receipt by the Fund of a purchase order in proper form. Shares of the Fund are offered
exclusively to existing shareholders and shareholders of other PaineWebber/Kidder, Peabody
money market funds who may exchange their shares for shares of the Fund. See 'Purchase of
Shares' and 'Determination of Net Asset Value.'
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Redemption of Shares of the Fund may be redeemed at the Fund's net asset value per share next determined
Shares after receipt by the transfer agent of instructions from PaineWebber Incorporated
('PaineWebber'). See 'Redemption of Shares' for a discussion of the various alternative methods
of redeeming shares of the Fund and 'Determination of Net Asset Value.'
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Management PaineWebber serves as investment adviser and administrator of the Fund and receives an annual
Services fee of .50% of the Fund's average daily net assets. Mitchell Hutchins Asset Management Inc.
('Mitchell Hutchins') serves as the Fund's sub-adviser and sub-administrator and receives from
PaineWebber (not the Fund) 20% of the fee received by PaineWebber. See 'Management of the
Fund.'
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Distributor PaineWebber serves as distributor of the Fund's shares. See 'The Distributor.'
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Dividends The Fund declares dividends on each day the New York Stock Exchange is open for business of all
of its daily net income to shareholders of record. See 'Dividends, Distributions and Taxes.'
</TABLE>
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Risk Factors Investing in an investment company that invests in Municipal Obligations (as defined herein)
involves risks. The value of a Municipal Obligation is dependent on, among other things, the
ability of its issuer to pay interest and repay principal in accordance with the terms of the
instrument. In addition, as a non-diversified fund, the Fund may concentrate investments in
individual issuers to a greater degree than a diversified fund and an investment in the Fund
may under certain circumstances present greater risk to an investor than an investment in a
diversified fund. Further, because the Fund invests primarily in California Municipal
Obligations, the Fund is subject to economic and other factors affecting issuers of those
obligations. See 'Investment Objective and Policies -- Risk Factors -- Investing in California
Municipal Obligations' and ' -- Other Investment Considerations.'
</TABLE>
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FINANCIAL HIGHLIGHTS
The table below provides selected per share data and ratios for each of the
periods shown. This information is supplemented by the financial statements and
accompanying notes appearing in the Fund's Annual Report to Shareholders for the
fiscal year ended July 31, 1995, which are incorporated by reference into the
Statement of Additional Information. The financial statements and notes, and the
financial information for the fiscal year ended July 31, 1995 appearing in the
table below, have been audited by Ernst & Young LLP, independent auditors, whose
report thereon is included in the Annual Report to Shareholders. The financial
information for the prior fiscal years was audited by other auditors whose
reports thereon were unqualified. Further information about the Fund's
performance is also included in the Annual Report to Shareholders, which may be
obtained without charge.
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<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
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1988`D' 1989 1990 1991 1992 1993 1994 1995
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year.............................. $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
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Net investment income............... 0.042 0.054 0.051 0.040 0.028 0.018 0.018 0.028
Dividends from net investment
income............................ (0.042) (0.054) (0.051) (0.040) (0.028) (0.018) (0.018) (0.028)
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Contribution to capital from
predecessor advisor............... -- -- -- -- -- -- -- 0.002
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Net asset value, end of year........ $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
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Total return(1)..................... 4.20%* 5.56% 5.15% 4.11% 2.93% 1.81% 1.81% 2.87%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in
thousands)........................ $147,227 $221,844 $259,101 $202,779 $202,854 $202,443 $182,892 $153,882
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RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees.............................. .59%* .65% .67% .70% .71% .71% .70% 0.73%
Net investment income............... 4.33%* 5.47% 5.07% 4.06% 2.84% 1.79% 1.80% 2.80%
</TABLE>
(1) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends at net asset value on
the payable date, and a sale at net asset value on the last day of each
period reported.
`D' From August 17, 1987 (commencement of investment operations) to July 31,
1988.
* Annualized.
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YIELD
The chart below shows the current and effective yields, calculated in accordance
with rules of the SEC, and the average portfolio maturity for the seven-day
periods ended July 31, 1995 and November 1, 1995.
<TABLE>
<CAPTION>
7/31/94 11/1/94
-------- --------
<S> <C> <C>
Current Yield.......................................................... 3.03% 2.98%
Effective Yield........................................................ 3.07% 3.03%
Average Portfolio Maturity............................................. 54 days 47 days
</TABLE>
From time to time, the Fund advertises its 'current yield' and 'effective
yield.' Both yield figures are based on historical earnings and are not intended
to indicate future performance. The 'current yield' of the Fund refers to the
income generated by an investment in the Fund over a seven-day period (which
period will be stated in the advertisement). This income is then 'annualized.'
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The 'effective yield' is calculated similarly but,
when annualized, the income earned by an investment in the Fund is assumed to be
reinvested. The 'effective yield' will be slightly higher than the 'current
yield' because of the compounding effect of this assumed reinvestment. The
Statement of Additional Information describes in more detail the methods used to
calculate the yields of the Fund.
Performance data for the Fund may, in reports and promotional literature,
be compared to: (i) other mutual funds tracked by IBC/Donoghue's Money Fund
Report and Lipper Analytical Services, widely used independent research firms
which rank mutual funds by overall performance, investment objective and assets,
or tracked by other services, companies, publications, or persons who rank
mutual funds on overall performance or other criteria; (ii) unmanaged indices so
that investors may compare the Fund's results with those of a group of unmanaged
securities widely regarded by investors as representative of the securities
markets in general; and (iii) the Consumer Price Index, an inflation measure.
Promotional and advertising literature also may refer to discussions of the Fund
and comparative mutual fund data and ratings reported in independent
periodicals.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is the maximization of current income
exempt from Federal and State of California personal income taxes consistent
with the preservation of capital and the maintenance of liquidity. The Fund
attempts to achieve its objective by investing primarily in debt securities of
the State of California, its political subdivisions, authorities and
corporations, the interest from which is, in the opinion of bond counsel to the
issuer, exempt from Federal and State of California personal income taxes
(collectively, 'California Municipal Obligations'). To the extent acceptable
California Municipal Obligations are at any time unavailable for investment by
the Fund, the Fund will invest, for temporary defensive purposes, primarily in
other debt securities the interest from which is, in the opinion of bond counsel
to the issuer, exempt from Federal, but not State of California, income tax. The
Fund may not generate as high a level of income as other investment companies
which invest in lower quality or long term securities. The Fund's investment
objective cannot be changed without approval by the holders of a majority of
7
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the Fund's outstanding voting shares, as defined in the Investment Company Act
of 1940, as amended (the 'Act'). There can be no assurance that the Fund's
investment objective will be achieved.
MUNICIPAL OBLIGATIONS
Debt securities, the interest from which is exempt from Federal income tax in
the opinion of bond counsel to the issuer, are referred to as 'Municipal
Obligations.' Municipal Obligations generally include debt obligations issued to
obtain funds for various public purposes as well as certain industrial
development bonds issued by or on behalf of public authorities. Municipal
Obligations are classified as general obligation bonds, revenue bonds and notes.
General obligation bonds are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable from the revenue derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source, but not from the general taxing power. Tax exempt
industrial development bonds, in most cases, are revenue bonds and generally do
not carry the pledge of the credit of the issuing municipality, but generally
are guaranteed by the corporate entity on behalf of which they are issued. Notes
are short-term instruments which are obligations of the issuing municipalities
or agencies and are sold in anticipation of a bond sale, collection of taxes or
receipt of other revenues. Municipal Obligations include municipal
lease/purchase agreements which are similar to installment purchase contracts
for property or equipment issued by municipalities. Municipal Obligations bear
fixed, variable or floating rates of interest.
MANAGEMENT POLICIES
It is a fundamental policy of the Fund that it invest at least 80% of its net
assets in Municipal Obligations and at least 65% of its net assets in California
Municipal Obligations except when maintaining a temporary defensive position.
The remainder of the Fund's net assets may be invested in securities that are
not California Municipal Obligations and, therefore, may be subject to
California state income tax. See 'Risk Factors -- Investing in California
Municipal Obligations' below, and 'Dividends, Distributions and Taxes.'
The Fund may invest more than 25% of the value of its assets in Municipal
Obligations which are related in such a way that an economic, business, or
political development or change affecting one such security also would affect
the other securities; for example, securities the interest upon which is paid
from revenues of similar types of projects.
The Fund also may invest more than 25% of the value of its assets in
industrial development bonds which, although issued by industrial development
authorities, may be backed only by the assets and revenues of the
non-governmental users. Interest on Municipal Obligations (including certain
industrial development bonds) which are specified private activity bonds, as
defined in the Internal Revenue Code of 1986, as amended (the 'Code'), issued
after August 7, 1986, while exempt from Federal income tax, is a preference item
for the purpose of the alternative minimum tax. Where a regulated investment
company receives such interest, a proportionate share of any exempt-interest
dividend paid by the investment company may be treated as such a preference item
to the shareholder. The Fund does not presently intend to purchase any such
private activity bonds but reserves the right to acquire such bonds in the
future. The Fund does not invest more than 20% of its net assets in obligations
the interest from
8
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which gives rise to a preference item for the purpose of the alternative minimum
tax and, except for temporary defensive purposes, in other investments subject
to Federal income tax.
The Fund may purchase floating and variable rate demand obligations which
are tax exempt obligations that normally have stated maturities in excess of 397
days, but which permit the holder to demand payment of principal at any time or
at specified intervals not exceeding 397 days, in each case upon not more than
30 days' notice. Variable rate demand notes include master demand notes which
are obligations that permit the Fund to invest fluctuating amounts, which may
change daily without penalty, pursuant to direct arrangements between the Fund,
as lender, and the borrower. The interest rates on these obligations fluctuate
from time to time. Frequently, such obligations are secured by letters of credit
or other credit support arrangements provided by banks. Use of letters of credit
or other support arrangements will not adversely affect the tax exempt status of
these obligations. Because these obligations are direct lending arrangements
between the lender and borrower, it is not contemplated that such instruments
generally will be traded, and there generally is no established secondary market
for these obligations, although they are redeemable at face value. Accordingly,
where these obligations are not secured by letters of credit or other credit
support arrangements, the Fund's right to redeem is dependent on the ability of
the borrower to pay principal and interest on demand. Each obligation purchased
by the Fund will meet the quality criteria established for the purchase of
Municipal Obligations. Mitchell Hutchins, on behalf of the Fund, will consider
on an ongoing basis the creditworthiness of the issuers of the floating and
variable rate demand obligations in the Fund's portfolio. The Fund will not
invest more than 10% of the value of its net assets in floating or variable rate
demand obligations as to which the Fund cannot exercise the demand feature on
not more than seven days' notice if there is no secondary market available for
these obligations, and in other securities that are not readily marketable. See
'Investment Restrictions' below.
The Fund may purchase from financial institutions participation interests
in Municipal Obligations (such as industrial development bonds and municipal
lease/purchase agreements). A participation interest gives the purchaser an
undivided interest in the Municipal Obligations in the proportion that the
purchaser's participation interest bears to the total principal amount of
Municipal Obligations. These instruments may be variable rate or fixed rate with
remaining maturities of 397 days or less. If the participation interest is
unrated, or has been given a rating below that which otherwise is permissible
for purchase by the Fund, the participation interest will be backed by an
irrevocable letter of credit or guarantee of a bank that the Trustees have
determined meets the prescribed quality standards for banks set forth below or
the payment obligation otherwise will be collateralized by U.S. Government
securities or other securities deemed appropriate by the Trustees, or the
underlying Municipal Obligations will be permissible investments for the Fund.
For certain participation interests, the Fund will have the right to demand
payment, upon a specified number of days' notice, for all or any part of the
Fund's participation interest in the Municipal Obligations, plus accrued
interest. As to these instruments, the Fund intends to exercise its right to
demand payment only upon a default under the terms of the Municipal Obligations,
as needed to provide liquidity to meet redemptions, or to maintain a high
quality investment portfolio. The Fund will not invest more than 10% of the
value of its net assets in participation interests that do not have this demand
feature, and in other securities that are not readily marketable.
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The Fund may acquire stand-by commitments with respect to Municipal
Obligations held in its portfolio. Under a stand-by commitment, the Fund
obligates a dealer to repurchase at the Fund's option specified securities at a
specified price. The exercise of a stand-by commitment, therefore, is subject to
the ability of the seller to make payment on demand. The Fund will acquire
stand-by commitments solely to facilitate portfolio liquidity and does not
intend to exercise its rights thereunder for trading purposes. The Fund may pay
for stand-by commitments if such action is deemed necessary, thus increasing to
a degree the cost of the underlying Municipal Obligation and similarly
decreasing such security's yield to investors.
The Fund may invest, for other than temporary defensive purposes in an
amount not to exceed 20% of its net assets, or without limitation for temporary
defensive purposes, in taxable short-term investments ('Taxable Investments')
consisting of: notes of issuers having, at the time of purchase, a quality
rating within the two highest grades of Moody's Investors Service, Inc.
('Moody's') or Standard & Poor's Ratings Group ('S&P'); obligations of the U.S.
Government, its agencies or instrumentalities; commercial paper rated Prime-1 by
Moody's or A-1 or better by S&P; certificates of deposit of U.S. domestic banks,
including foreign branches of domestic banks, with assets of $1 billion or more;
time deposits; bankers' acceptances and other short-term bank obligations; and
repurchase agreements in respect of any of the foregoing with selected
registered or unregistered securities dealers or banks. Under normal market
conditions, the Fund does not invest more than 5% of its total assets in any one
category of Taxable Investments. Dividends paid by the Fund that are
attributable to income earned from Taxable Investments will be taxable to
shareholders. If the Fund purchases Taxable Investments, it will value them
using the amortized cost method and comply with the provisions of Rule 2a-7
under the Act relating to purchases of taxable instruments. To the extent the
Fund is invested in Taxable Investments, it will not be achieving its objective
of maximizing tax exempt income. See 'Dividends, Distributions and Taxes.'
Taxable Investments are more fully described in the Statement of Additional
Information.
The Fund seeks to maintain a net asset value of $1.00 per share for
purchases and redemptions. To do so, the Fund uses the amortized cost method of
valuing its securities pursuant to Rule 2a-7 under the Act, certain requirements
of which are summarized as follows. In accordance with Rule 2a-7, the Fund is
required to maintain a dollar-weighted average portfolio maturity of 90 days or
less, purchase only instruments having remaining maturities of 397 days or less
and invest only in U.S. dollar denominated securities determined in accordance
with procedures established by the Trustees to present minimal credit risks and
which are rated in one of the two highest rating categories for debt obligations
by at least two nationally recognized statistical rating organizations (or one
rating organization if the instrument was rated only by one such organization)
or, if unrated, are of comparable quality as determined in accordance with
procedures established by the Trustees. The nationally recognized statistical
rating organizations currently rating investments of the type the Fund may
purchase are Moody's and S&P and their rating criteria are described in the
Fund's Statement of Additional Information. For further information regarding
the amortized cost method of valuing securities, see 'Determination of Net Asset
Value' in the Fund's Statement of Additional Information. There can be no
assurance that the Fund will be able to maintain a stable net asset value of
$1.00 per share.
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INVESTMENT RESTRICTIONS
The policies described in this paragraph summarize certain important investment
restrictions of the Fund which can only be changed with the approval of a vote
of a majority of the outstanding voting securities of the Fund, as defined in
the Act. All of the Fund's investment restrictions are set forth in the
Statement of Additional Information. The Fund may (i) borrow money from banks,
but only for temporary or emergency (not leveraging) purposes, in an amount up
to 10% of its total assets (including the amount borrowed) based on the lesser
of cost or market, less liabilities (not including the amount borrowed) at the
time the borrowing is made; (ii) pledge, hypothecate, mortgage or otherwise
encumber its assets, but only in an amount up to 10% of the value of its total
assets to secure borrowings for temporary or emergency purposes; (iii) invest up
to 25% of its assets in the securities of issuers in any single industry,
provided that there is no such limitation on the purchase of Municipal
Obligations or, for temporary defensive purposes, in securities issued by
domestic banks and obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities; (iv) invest up to 10% of its net assets in
repurchase agreements maturing in more than seven days and in securities not
readily marketable (which securities would include floating and variable rate
demand notes as to which the Fund cannot exercise the related demand feature
described above and as to which there is no secondary market); and (v) invest up
to 10% of its net assets in time deposits maturing in two business days through
seven calendar days.
RISK FACTORS -- INVESTING IN CALIFORNIA MUNICIPAL OBLIGATIONS
There are certain risks associated with the Fund's investment in California
Municipal Obligations. These risks result from certain amendments to the
California Constitution and other statutes that limit the taxing and spending
authority of California governmental entities and from the overall financial
condition of the State of California. Since the start of the State's 1990-91
fiscal year, the State has experienced the worst economic, fiscal and budget
conditions since the 1930s. As a result, the State has experienced recurring
budget deficits for four of the five fiscal years ending with 1991-92. The State
had an operating surplus of approximately $109 million in 1992-93 and $917
million in 1993-94. However, at June 30, 1994, according to California's
Department of Finance, the State's Special Fund for Economic Uncertainties had
an accumulated deficit, on a budget basis, of approximately $1.8 billion. A
further consequence of the large budget imbalances has been that the State
depleted its available cash resources and has had to use a series of external
borrowings to meet its cash needs. To meet its cash flow needs in the 1994-95
fiscal year, the State issued, in July and August 1994, $4.0 billion of revenue
anticipation warrants and $3.0 billion of revenue anticipation notes. The
1994-95 Budget Act contains a plan to retire a projected $1.025 billion deficit
in the 1995-96 fiscal year. The Department of Finance projects that, after
repaying the last of the carryover budget deficit, there will be a positive
balance of $28 million in the Special Fund for Economic Uncertainties at June
30, 1996. As a result of the deterioration in the State's budget and cash
situation, between October 1991 and July 1994 the rating on the State's general
obligation bonds was reduced by S&P from AAA to A and by Moody's from Aaa to A.
These and other factors may impair the ability of issuers of California
Municipal Obligations to pay interest and principal on their obligations. See
the Statement of Additional Information for a more complete discussion of such
risks.
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OTHER INVESTMENT CONSIDERATIONS
Even though interest-bearing securities are investments which promise a stable
stream of income, the prices of such securities are inversely affected by
changes in interest rates and, therefore, are subject to the risk of market
price fluctuations. The values of fixed-income securities also may be affected
by changes in the credit rating or financial condition of the issuing entities.
New issues of Municipal Obligations usually are offered on a when-issued
basis; that is, delivery and payment for such Municipal Obligations ordinarily
take place within 45 days after the date of the commitment to purchase. The
payment obligation and the interest rate that will be received on the Municipal
Obligations are fixed at the time the Fund enters into the commitment. The Fund
will make commitments to purchase such Municipal Obligations only with the
intention of actually acquiring the securities, but the Fund may sell these
securities before the settlement date if it is deemed advisable, although any
gain realized on such sale would be taxable. The Fund will not accrue income in
respect of a when-issued security prior to its stated delivery date. No
additional when-issued commitments will be made if more than 20% of the Fund's
net assets would be so committed.
Municipal Obligations purchased on a when-issued basis and the securities
held in the Fund's portfolio are subject to changes in value (both generally
changing in the same way, i.e., appreciating when interest rates decline and
depreciating when interest rates rise) based upon the public's perception of the
creditworthiness of the issuer and changes, real or anticipated, in the level of
interest rates. Municipal Obligations purchased on a when-issued basis may
expose the Fund to risk because they may experience such fluctuations prior to
their actual delivery. Purchasing Municipal Obligations on a when-issued basis
can involve a risk that the yields available in the market when the delivery
takes place actually may be higher than those obtained in the transaction
itself. A segregated account of the Fund consisting of cash or liquid debt
securities at least equal to the amount of the when-issued commitments will be
established and maintained at the Fund's custodian bank. Purchasing Municipal
Obligations on a when-issued basis when the Fund is fully or almost fully
invested may result in greater potential fluctuation in the value of the Fund's
net assets and its net asset value per share.
Certain municipal lease/purchase obligations in which the Fund may invest
may contain 'non-appropriation' clauses which provide that the municipality has
no obligation to make lease payments in future years unless money is
appropriated for such purpose on a yearly basis. Although 'non-appropriation'
lease/purchase obligations are secured by the leased property, disposition of
the leased property in the event of foreclosure might prove difficult.
Certain provisions in the Code relating to the issuance of Municipal
Obligations may reduce the volume of Municipal Obligations qualifying for
Federal tax exemption. One effect of these provisions could be to increase the
cost of Municipal Obligations available for purchase by the Fund and thus reduce
available yield. Shareholders should consult their tax advisers concerning the
effect of these provisions on an investment in the Fund. Proposals that may
restrict or eliminate the income tax exemptions for interest on Municipal
Obligations may be introduced in the future. If any such proposal were enacted
that would reduce the availability of Municipal Obligations for investment by
the Fund so as to adversely affect Fund shareholders, the Fund would reevaluate
its investment objective and policies and submit possible changes in the Fund's
structure to shareholders for their consideration. If legislation were enacted
that would treat a
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type of Municipal Obligation as taxable, the Fund would treat such security as a
permissible Taxable Investment within the applicable limits set forth herein.
The Fund's classification as a 'non-diversified' investment company means
that the proportion of the Fund's assets that may be invested in the securities
of a single issuer is not limited by the Act. A 'diversified' investment company
is required by the Act generally to invest, with respect to 75% of its total
assets, not more than 5% of such assets in the securities of a single issuer.
However, the Fund conducts its operations so as to qualify as a 'regulated
investment company' for purposes of the Code, which requires that, at the close
of each quarter of the Fund's taxable year, (i) at least 50% of the market value
of the Fund's total assets be invested in cash, U.S. Government securities, the
securities of other regulated investment companies and other securities with,
for purposes of this calculation, not more than 5% of the Fund's total assets
invested in such other securities of a single issuer; and (ii) not more than 25%
of the Fund's total assets be invested in the securities of any one issuer
(other than U.S. Government securities or the securities of other regulated
investment companies). Since a relatively high percentage of the Fund's assets
may be invested in the obligations of a limited number of issuers, the Fund's
portfolio securities may be more susceptible to any single economic, political
or regulatory occurrence than the portfolio securities of a diversified
investment company.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of its
Trustees. The day-to-day operations of the Fund are conducted through or under
the direction of its officers. The Statement of Additional Information contains
general background information regarding each Trustee and officer of the Fund.
MANAGEMENT
At a special meeting of shareholders on April 13, 1995, shareholders approved a
new investment advisory and administration agreement with PaineWebber and a new
sub-advisory and sub-administration agreement with Mitchell Hutchins.
PaineWebber and Mitchell Hutchins are located at 1285 Avenue of the Americas,
New York, New York 10019. Mitchell Hutchins is a wholly owned subsidiary of
PaineWebber, which in turn is wholly owned by Paine Webber Group Inc., a
publicly owned financial services holding company. As of October 31, 1995,
PaineWebber or Mitchell Hutchins served as investment adviser or sub-adviser to
38 investment companies with an aggregate of 75 separate portfolios and
aggregate assets of over $29 billion.
The Fund pays the same fee for investment advisory and administration
services to PaineWebber as previously paid to Kidder Peabody Asset Management,
Inc. ('KPAM'), the Fund's predecessor investment adviser and administrator.
PaineWebber (not the Fund) pays Mitchell Hutchins a fee for sub-advisory and
sub-administration services at the annual rate of 20% of the fee received by
PaineWebber from the Fund. PaineWebber and Mitchell Hutchins continue to manage
the Fund in accordance with the Fund's investment objective, policies and
restrictions.
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As compensation for PaineWebber's services, the Fund pays a fee, computed
daily and paid monthly, at an annual rate of .50% of the Fund's average daily
net assets. For the fiscal year ended July 31, 1995, the Fund's total expenses
represented .73% of its average daily net assets.
Mitchell Hutchins manages the Fund's portfolio in accordance with the
stated policies of the Fund, makes investment decisions for the Fund and places
the purchase and sale orders for portfolio transactions. Although investment
decisions for the Fund are made independently from those of the other accounts
managed by Mitchell Hutchins, investments of the type the Fund may make may also
be made by those other accounts. When the Fund and one or more other accounts
managed by Mitchell Hutchins are prepared to invest in, or desire to dispose of,
the same security, available investments or opportunities for sales are
allocated in a manner believed by Mitchell Hutchins to be equitable to each. In
some cases, this procedure may adversely affect the price paid or received by
the Fund or the size of the position obtained or disposed of by the Fund.
Mitchell Hutchins investment personnel may engage in securities
transactions for their own accounts to a code of ethics that establishes
procedures for personal investing and restricts certain transactions.
PORTFOLIO TRANSACTIONS
Mitchell Hutchins places the orders for the purchase and sale of the Fund's
portfolio securities. Transactions are allocated to various dealers by Mitchell
Hutchins in its best judgment. The primary consideration is prompt and effective
execution of orders at the most favorable price. Subject to that primary
consideration, dealers may be selected for research, statistical or other
services to enable Mitchell Hutchins to supplement its own research and analysis
with the views and information of other securities firms. No brokerage
commissions have been paid to date.
Investment decisions for the Fund are made independently from those of any
other fund(s) managed by Mitchell Hutchins. If, however, funds managed by
Mitchell Hutchins are simultaneously engaged in the purchase or sale of the same
security, the transactions are averaged as to price and allocated equitably to
each fund. In some cases, this system might adversely affect the price paid or
received by the Fund or the size of the position obtainable for the Fund.
SHARES OF THE FUND
The Fund was organized as a Massachusetts business trust on May 7, 1987 and
commenced operations on August 17, 1987. On January 30, 1995, the name of the
Fund changed from 'Kidder, Peabody California Tax Exempt Money Fund' to
'PaineWebber/Kidder, Peabody California Tax Exempt Money Fund.' The Trustees may
issue an unlimited number of full and fractional shares of beneficial interest
with $.001 par value per share. Upon liquidation of the Fund, shareholders are
entitled to share pro rata in the net assets of the Fund available for
distribution to shareholders. Shares have no preemptive or conversion rights and
are fully paid and non-assessable. The shareholders of the Fund are entitled to
a full vote for each full share held and proportionate, fractional votes for
fractional shares held. Meetings of shareholders may be called by the Trustees
in their discretion or upon demand by the holders of at least 10% of the
outstanding shares of the Fund for the purpose of electing or removing Trustees.
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In the interest of economy and convenience, certificates representing the
Fund's shares are not physically issued. Investors Fiduciary Trust Company
('IFTC'), the Fund's custodian, and transfer, dividend disbursing and
recordkeeping agent, maintains a record of each shareholder's ownership. Each
shareholder receives confirmation of orders from PaineWebber. Fund shares and
any dividends paid by the Fund are reflected in statements from PaineWebber.
The Declaration of Trust (the 'Declaration') establishing the Fund refers
to the Trustees under the Declaration collectively as Trustees, but not as
individuals or personally; and no Trustee, shareholder, officer, employee or
agent of the Fund shall be held to any personal liability, nor shall resort be
had to their private property for the satisfaction of any obligation or claim or
otherwise in connection with the affairs of the Fund but the Trust Estate only
shall be liable. For more information on the Fund's shares and organization as a
Massachusetts business trust, see the Statement of Additional Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund declares dividends of all of its daily net investment income on each
day the New York Stock Exchange (the 'NYSE') is open for business. Dividends are
paid monthly and are automatically reinvested in additional Fund shares at net
asset value or, at the shareholder's option, paid in cash. The Fund's earnings
for Saturdays, Sundays and holidays are declared as dividends on the preceding
business day. The amount of the dividend may fluctuate and may be omitted on
some days if net realized losses on portfolio securities exceed the Fund's net
investment income. If a shareholder redeems all of his shares at any time during
the month, all dividends to which the shareholder is entitled are paid to him
together with the proceeds of the redemption. Distributions of net realized
securities gains, if any, are paid once a year, but the Fund may make
distributions on a more frequent basis to comply with the distribution
requirements of the Code, in all events in a manner consistent with the
provisions of the Act. A shareholder may choose whether to receive distributions
in cash or to reinvest in additional Fund shares at net asset value.
The Fund qualified as a regulated investment company under the Code for the
fiscal year ended July 31, 1995, and plans to continue to so qualify as long as
the Fund determines that such qualification is in the best interest of its
shareholders. Such qualification relieves the Fund of any liability for Federal
income tax to the extent its income is distributed to shareholders in accordance
with applicable provisions of the Code. Regulated investment companies, such as
the Fund, are subject to a non-deductible 4% excise tax, measured with respect
to certain undistributed amounts of taxable investment income and capital gains.
Except for dividends from Taxable Investments, the Fund anticipates that
all dividends paid by it will not be subject to Federal income tax and that
substantially all dividends paid by the Fund will not be subject to State of
California personal income tax (but may be subject to California corporation
franchise tax). To the extent that a shareholder is obligated to pay state or
local taxes outside of California, dividends earned by an investment in the Fund
may represent taxable income. Dividends derived from Taxable Investments,
together with distributions from any net realized short-term securities gains of
the Fund and gains from the sale or other disposition of certain market discount
bonds, are subject to Federal income tax as ordinary income, whether or not
reinvested. Distributions from net realized long-term securities gains of the
Fund generally are subject to Federal income tax as long-term capital gains for
shareholders
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who are citizens or residents of the United States. The Code provides that the
net capital gain of an individual generally will not be subject to Federal
income tax at a rate in excess of 28%. No dividend paid by the Fund will qualify
for the dividends-received deduction allowable to certain U.S. corporations.
Under the Code, interest on indebtedness incurred or continued to purchase
or carry shares of the Fund which is deemed to relate to tax exempt dividends
will not be deductible. Depending on the circumstances, the Internal Revenue
Service ('IRS') may consider Fund shares to have been purchased or carried with
borrowed funds even though the shares are not directly traceable to the borrowed
funds.
Although all or a substantial portion of the dividends paid by the Fund may
be excluded by shareholders of the Fund from their gross income for Federal
income tax purposes, the Fund may purchase specified private activity bonds, the
interest from which may be (i) a preference item for purposes of the alternative
minimum tax, (ii) a component of the 'adjusted current earnings' preference item
for purposes of the corporate alternative minimum tax as well as a component in
computing the corporate environmental tax or (iii) a factor in determining the
extent to which a shareholder's Social Security benefits are taxable. If the
Fund purchases such securities, the portion of the Fund's dividends related
thereto will not necessarily be tax exempt to an investor who is subject to the
alternative minimum tax and/or tax on Social Security benefits and may cause an
investor to be subject to such taxes.
The Fund is required to withhold and remit to the U.S. Treasury 31% of
taxable dividends and distributions from net realized securities gains of the
Fund paid to a shareholder ('backup withholding') if such shareholder fails to
certify either that the Taxpayer Identification Number, furnished in connection
with opening an account, is correct, or that such shareholder has not received
notice from the IRS of being subject to backup withholding as a result of a
failure to properly report taxable dividend or interest income on a Federal
income tax return. Furthermore, the Fund may be notified by the IRS to institute
backup withholding if the IRS determines a shareholder's Taxpayer Identification
Number is incorrect or if a shareholder has failed to properly report taxable
dividend and interest income on a Federal income tax return.
A Taxpayer Identification Number is either the Social Security number or
employer identification number of the record owner of the account. Any tax
withheld as a result of backup withholding does not constitute an additional tax
imposed on the record owner of the account, and may be claimed as a credit on
the record owner's Federal income tax return.
Statements as to the tax status of each shareholder's dividends and
distributions are mailed annually. Shareholders are urged to consult their own
tax advisers regarding specific questions as to Federal, state or local taxes.
DETERMINATION OF NET ASSET VALUE
Net asset value is determined daily at 12:00 noon, Eastern time, Monday through
Friday, except that net asset value is not computed on any day when no orders to
purchase, sell, exchange or redeem Fund shares have been received, when there is
not sufficient trading in the Fund's portfolio securities that the Fund's net
asset value per share might be materially affected by changes in the value of
such portfolio securities or when the NYSE is not open for trading. The
determination of net asset value is made by subtracting from the value of the
assets of the Fund the amount of its liabilities and dividing the remainder by
the number of outstanding shares of
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the Fund. Expenses and fees of the Fund, including PaineWebber's fee, are
accrued daily and taken into account for the purpose of determining net asset
value.
The Fund attempts to maintain a net asset value of $1.00 per share for
purchases and redemptions, although there can be no assurance that the Fund will
always be able to do so. In order to effectuate this policy, the Fund may, under
certain circumstances, consider the sale of portfolio instruments prior to
maturity to realize capital gains or losses, withhold dividends, make
distributions from capital or capital gains, or reduce the number of outstanding
shares of the Fund held by a shareholder. The Fund determines the value of its
portfolio securities by the amortized cost method of valuation which involves
valuing a security at its cost at the time of purchase and thereafter assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument.
Additional information concerning the amortized cost method of valuation and
certain conditions imposed upon its use is contained in the Statement of
Additional Information.
PURCHASE OF SHARES
GENERAL INFORMATION
PaineWebber serves as the Fund's distributor. Shares of the Fund are offered
exclusively to existing shareholders and must be maintained through a brokerage
account with PaineWebber (an 'Account').
Shares are sold on a continuous basis at their net asset value next
determined after an order and good funds (e.g., cash, Federal funds or certified
checks drawn on a United States bank) are received. If an investor does not have
a sufficient credit balance in his Account, payment for shares must be converted
into Federal funds before an order to purchase is effective. Purchase orders
received before 12:00 noon, Eastern time, for which payment has been received by
PaineWebber will be executed at that time and the shareholder will receive the
dividend declared on that day. Purchase orders received after 12:00 noon,
Eastern time, and purchase orders received earlier in the same day for which
payment has not been received by 12:00 noon, Eastern time, will be executed at
the close of regular trading on the New York Stock Exchange, if payment has been
received by PaineWebber by that time, and the shareholder will receive the
dividend declared on the following day.
Credit balances of $1 or more in a PaineWebber Resource Management Account
('RMA') or PaineWebber Business Services Account ('BSA') will be swept
automatically into shares of the Fund daily. Credit balances for non-RMA and
non-BSA accounts from $1 to $4,999 will be swept as of the close of business
each Friday for settlement on the next business day and credit balances of
$5,000 or more will be swept daily for settlement on the next business day. The
Fund reserves the right at any time to impose minimum initial and subsequent
purchase amounts.
PURCHASES WITH FUNDS HELD AT PAINEWEBBER
All deposits to a brokerage account and any free credit cash balances that may
arise in a brokerage account will be automatically invested in shares of the
Fund, according to sweep rules described above, provided that Federal funds are
available for the investment. Federal funds normally are available for cash
balances arising from the sale of securities held in a brokerage account on the
business day following settlement, but in some cases can take longer.
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PURCHASES BY WIRE
Shares of the Fund may also be purchased by transferring Federal funds by wire
to a PaineWebber brokerage account. Wire transfers should be directed to: Bank
of New York, ABA 021000018, PaineWebber Inc., for RMAs/BSAs A/C 890-0114-088 and
for all other accounts A/C 890-0114-096 OBI-FBO [Account Name]/[Brokerage
Account Number]. The wire must include the investor's name and PaineWebber
brokerage account number. Participants wishing to transfer Federal funds into
their accounts should contact their PaineWebber investment executives or
correspondent firms to determine the appropriate wire instructions.
To the extent that the amounts transferred by wire create a cash balance in
an investor's account, that cash balance will be automatically invested in the
Fund, as described above under 'Purchases with Funds Held at PaineWebber.'
Participants wishing to invest amounts transferred by wire in the Fund should so
instruct their PaineWebber investment executives or correspondent firms.
If PaineWebber receives a notice from an investor's bank or a wire transfer
of Federal funds by 12:00 noon, Eastern time, on a business day, the automatic
investment will be executed on that business day. Otherwise, the automatic
investment will be executed at 12:00 noon, Eastern time, on the next business
day. PaineWebber and/or an investor's bank may impose a service charge for wire
transfers.
REDEMPTION OF SHARES
A shareholder may redeem shares on any day that the Fund's net asset value is
determined by following the procedures set forth below.
REDEMPTION THROUGH PAINEWEBBER
PaineWebber wires the terms of any redemption request properly received to PFPC
Inc. The price at which a redemption request is executed is the net asset value
per share next determined after proper redemption instructions are received.
Payment for redemption orders, if any, that are received before 12:00 noon,
Eastern time, normally is made on the same business day. Shares redeemed in this
manner will not be entitled to the dividend declared on the day of redemption.
Payment for redemption orders, that are received at or after 12:00 noon, Eastern
time, will be made on the next business day following the redemption. Shares
redeemed in this manner are entitled to the dividend declared on the day of
redemption. Proceeds of a redemption generally are credited to the shareholder's
Account, or sent to the shareholder, as applicable.
REDEMPTION BY MAIL
Shares may also be redeemed by submitting a written request in 'good order' to
PFPC Inc. at the following address:
PFPC Inc.
P.O. Box 8950
Wilmington, Delaware 19899
Attn: PaineWebber Mutual Funds
Redemption requests received by PFPC Inc. by mail are processed by PFPC
Inc. which will mail a check in the appropriate redemption amount to the
shareholder the next business day after receipt of a redemption request in 'good
order.'
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A redemption request is considered to have been received in 'good order' if
the following conditions are satisfied:
(1) the request is in writing, states the number of shares to be
redeemed and identifies the shareholder's Fund account number;
(2) the request is signed by each registered owner exactly as the
shares are registered; and
(3) the signatures on the written redemption request have been
guaranteed by a bank, broker-dealer, municipal securities broker or dealer,
government securities broker or dealer, credit union, a member firm of a
national securities exchange, registered securities association or clearing
agency, or savings association (the purpose of a signature guarantee is to
protect shareholders against the possibility of fraud.) The transfer agent
may reject redemption instructions if the guarantor is neither a member of
nor a participant in a signature guarantee program (currently known as
'STAMP'sm'').
Additional supporting documents may be required for redemptions by
corporations, executors, administrators, trustees and guardians.
GENERAL REDEMPTION POLICIES
Signature guarantees (as described above) are required in connection with any
redemption of shares by mail and share ownership transfer requests. These
requirements may be waived by the Fund in certain instances.
If the shares to be redeemed represent an investment for which the Fund has
not yet received good funds, the Fund reserves the right not to honor the
redemption request until such time as it has assured itself that good funds have
been collected, which may take 15 or more business days. If purchases are made
with good funds, no redemption delay would occur.
Due to the relatively high cost of maintaining a Fund account, the Fund
reserves the right to redeem, upon not less than 60 days' notice, any Fund
account reduced by a shareholder to a value of $500 or less.
PaineWebber has established procedures pursuant to which shares of the Fund
held by a client having a deficiency (i.e., amount owed to PaineWebber resulting
from Account activity or otherwise and other amounts authorized by the client to
be paid to others from the Account, less the amount of any free credit cash
balance) in his Account will be redeemed automatically to the extent of that
deficiency, unless the client notifies PaineWebber to the contrary in advance.
The amount of the redemption will be the lesser of (a) the total net asset value
of Fund shares held in the client's Account or (b) the deficiency in the
client's Account at the close of business on the redemption day adjusted for
purchase and sale transactions in other securities settling on the following
business day. Accordingly, a client who has previously consented to this
automatic redemption procedure and who wishes to pay for a securities
transaction other than through such automatic redemption procedure must do so
not later than the day before the settlement date for that transaction.
THE DISTRIBUTOR
PaineWebber acts as distributor of the Fund's shares pursuant to a Distribution
Agreement dated January 30, 1995. To reimburse PaineWebber for the services it
provides and for the expenses it bears under the Distribution Agreement, the
Fund has adopted the Plan of Distribution. Trustees
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and shareholders of the Fund approved the Plan of Distribution on July 28, 1988
and November 16, 1988, respectively, which was most recently amended on December
16, 1994.
The Plan of Distribution provides that the Fund reimburse PaineWebber for
the expenses incurred by it in connection with the distribution of the Fund's
shares at the annual rate of up to .12% of the Fund's average daily net assets.
The expenses which may be reimbursed include compensation to investment
executives and other employees of PaineWebber, printing of prospectuses and
reports for other than existing shareholders, and the preparation, printing and
distribution of sales literature and advertising materials. It is not
anticipated that items reimbursable under the Plan of Distribution generally
will include any profit to PaineWebber. The Fund is not authorized to reimburse
PaineWebber for expenses incurred more than 12 months prior to the date of such
reimbursement. PaineWebber anticipates that there will be no carryover of
expenses from one year to the next. The expenses to be reimbursed are for
activities primarily intended to result in the sale of Fund shares and the
maintenance of Fund accounts and account balances, and there will be no
reimbursement for expenses related to PaineWebber's overhead. PaineWebber
currently intends that .10% per annum of the Fund's average daily net assets
will be paid to its investment executives proportionately in respect of Fund
share balances maintained by their respective clients. For the fiscal year ended
July 31, 1995, the Fund reimbursed PaineWebber an amount equal to .12% of the
Fund's average daily net assets.
The Plan of Distribution remains in effect for as long as such continuance
is approved annually by vote of the Trustees, including a majority of those
Trustees who are not interested persons and who have no direct or indirect
financial interest in the Plan of Distribution, cast in person at a meeting
called for such purpose. The Plan of Distribution may not be amended to increase
materially the amount to be spent for the services described therein without
approval of the shareholders of the Fund, and all material amendments of the
Plan must also be approved by the Trustees in the manner described above. The
Plan of Distribution may be terminated at any time, without payment of any
penalty, by vote of a majority of the Trustees as described above, or by vote by
the holders of a majority of the outstanding voting securities of the Fund, as
defined in the Act, on not more than 30 days' written notice to any other party
to the Plan of Distribution. So long as the Plan of Distribution is in effect,
the election and nomination of Trustees who are not interested persons of the
Fund shall be committed to the discretion of the Trustees who are not interested
persons. The Trustees have determined that, in their judgment, there is a
reasonable likelihood that the Plan of Distribution will continue to benefit the
Fund and its shareholders.
Pursuant to the Plan of Distribution, PaineWebber provides the Fund's
Trustees, at least quarterly, with a written report of the amounts expended
under the Plan of Distribution. The report includes an itemization of the
distribution expenses incurred by PaineWebber on behalf of the Fund and the
purpose of such expenditures. In their quarterly review of the Plan of
Distribution, the Trustees consider its continued appropriateness and the level
of compensation provided therein. For the fiscal year ended July 31, 1995,
PaineWebber and Kidder, Peabody & Co. Incorporated ('Kidder, Peabody'), the
Fund's predecessor distributor, incurred distribution expenses of approximately
$188,983, of which approximately $188,983 was recovered in the form of
reimbursements made by the Fund to PaineWebber and Kidder, Peabody at the rate
provided in the Plan of Distribution.
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EXCHANGE PRIVILEGE
Shares of the Fund may be exchanged for shares of certain other
PaineWebber/Kidder, Peabody funds, to the extent such shares are offered for
sale in the shareholder's state of residence. For a list of the
PaineWebber/Kidder, Peabody funds for which shares may be exchanged and for a
description of each of those funds, please see 'Redemption and Exchange of
Shares' in the Statement of Additional Information.
Although the Fund currently imposes no limit on the number of times the
Exchange Privilege may be exercised by any shareholder, the Fund may impose such
limits in the future, in accordance with applicable provisions of the Act and
rules thereunder. In addition, the Exchange Privilege may be terminated or
revised at any time upon 60 days' prior written notice to Fund shareholders, and
is available only to residents of states in which exchanges are permitted under
state law. The exchange of shares of one fund for shares of another is treated
for Federal income tax purposes as a sale of the shares given in exchange by the
shareholder, so that a shareholder may recognize a taxable gain or loss on an
exchange.
Upon receipt of proper instructions and all necessary supporting documents,
Fund shares submitted for exchange will be redeemed at their net asset value
next determined and simultaneously invested in shares of the fund being
acquired. Settlement of an exchange would occur one business day after the date
on which the request for exchange was received in proper form, unless the dollar
amount of the transaction exceeds 5% of the Fund's net assets on any given day,
in which case settlement would occur within five business days after the date on
which the request for exchange was received in proper form. The proceeds of a
redemption of Fund shares made to facilitate the exchange of those shares for
shares of another fund must be equal to at least (1) the minimum initial
investment requirement imposed by the fund into which the exchange is being
sought if the shareholder seeking the exchange has not previously invested in
that fund or (2) the minimum subsequent investment requirement imposed by the
fund into which the exchange is being sought if the shareholder has previously
made an investment in that fund.
A shareholder of the Fund wishing to exercise the Exchange Privilege should
obtain from PaineWebber a copy of the current prospectus of the fund into which
an exchange is being sought and review that prospectus carefully before making
the exchange. PaineWebber reserves the right to reject any exchange request at
any time.
CUSTODIAN, AND TRANSFER, DIVIDEND DISBURSING AND
RECORDKEEPING AGENT
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, serves as the Fund's custodian, and transfer, dividend disbursing and
recordkeeping agent.
COUNSEL AND INDEPENDENT AUDITORS
Stroock & Stroock & Lavan, 7 Hanover Square, New York, New York 10004-2696, is
counsel for the Fund. Ernst & Young LLP, located at 787 Seventh Avenue, New
York, New York 10019, serves as the Fund's independent auditors. For the fiscal
year ended July 31, 1994, and prior thereto, the Fund's independent auditors
were Deloitte & Touche LLP, 2 World Financial Center, New York, New York 10281.
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No person has been authorized to give any information or to make any
representations not contained in this Prospectus or in the Statement
of Additional Information incorporated into this Prospectus by
reference in connection with the offering made by this Prospectus,
and, if given or made, any such other information or representations
must not be relied upon as having been authorized by the Fund or its
distributor. This Prospectus does not constitute an offering by the
Fund or by its distributor in any jurisdiction in which such
offering may not lawfully be made.
<TABLE>
<S> <C>
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Contents
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Fee Table 2
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Highlights 3
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Financial Highlights 6
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Yield 7
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Investment Objective and Policies 7
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Management of the Fund 13
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Portfolio Transactions 14
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Shares of the Fund 14
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Dividends, Distributions and Taxes 15
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Determination of Net Asset Value 16
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Purchase of Shares 17
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Redemption of Shares 18
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The Distributor 19
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Exchange Privilege 21
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Custodian, and Transfer,
Dividend Disbursing and
Recordkeeping Agent 21
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Counsel and Independent Auditors 21
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</TABLE>
PaineWebber/
Kidder,
Peabody
California
Tax
Exempt
Money
Fund
Prospectus
December 1, 1995
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Statement of Additional Information December 1, 1995
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PaineWebber/Kidder, Peabody
California Tax Exempt Money Fund
1285 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019 (800) 647-1568
PaineWebber/Kidder, Peabody California Tax Exempt Money Fund (the 'Fund') is a
non-diversified, open-end management investment company whose investment
objective is the maximization of current income exempt from Federal and State of
California personal income taxes consistent with the preservation of capital and
the maintenance of liquidity. The Fund attempts to achieve its objective by
investing primarily in short-term California Municipal Obligations.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Fund's Prospectus. A copy of the Fund's Prospectus can
be obtained from the Fund at the above address. The date of the Prospectus to
which this Statement relates is December 1, 1995.
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INVESTMENT ADVISER, ADMINISTRATOR AND DISTRIBUTOR
PaineWebber Incorporated
SUB-ADVISER AND SUB-ADMINISTRATOR
Mitchell Hutchins Asset Management Inc.
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INVESTMENT OBJECTIVE AND POLICIES
The following information supplements and should be read in conjunction with the
section in the Fund's Prospectus entitled 'Investment Objective and Policies.'
MUNICIPAL OBLIGATIONS
Municipal Obligations generally include debt obligations issued to obtain funds
for various public purposes, including the construction of a wide range of
public facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which Municipal Obligations may be issued include refunding
outstanding obligations, obtaining funds for general operating expenses and
lending such funds to other public institutions and facilities. In addition,
certain types of industrial development bonds are issued by or on behalf of
public authorities to obtain funds to provide for the construction, equipment,
repair or improvement of privately operated housing facilities, sports
facilities, convention or trade show facilities, airport, mass transit,
industrial, port or parking facilities, air or water pollution control
facilities and certain local facilities for water supply, gas, electricity, or
sewage or solid waste disposal; the interest paid on such obligations may be
exempt from Federal income tax, although current tax laws place substantial
limitations on the size of such issues. Such obligations are considered to be
Municipal Obligations, if the interest paid thereon qualifies as exempt from
Federal income tax in the opinion of bond counsel to the issuer. There are, of
course, variations in Municipal Obligations, both within a particular
classification and between classifications.
Floating and variable rate demand obligations are tax exempt obligations
which may have a stated maturity in excess of 397 days, but which permit the
holder to demand payment of principal upon a specified number of days' notice.
The issuer of such obligations ordinarily has a corresponding right, after a
given period, to prepay in its discretion the outstanding principal amount of
the obligation plus accrued interest upon a specified number of days' notice to
the noteholders. The interest rate on a floating rate demand obligation is based
on a known lending rate, such as a bank's prime rate, and is adjusted
automatically each time such rate is adjusted. The interest rate on a variable
rate demand obligation is adjusted at specified intervals. Because floating and
variable rate demand obligations are direct lending arrangements between the
lender and borrower, it is not contemplated that such instruments generally will
be traded, and there is no established secondary market for these obligations,
although they are redeemable (and thus immediately repayable by the borrower) at
face value, plus accrued interest, at any time. Accordingly, where these
obligations are not secured by letters of credit or other credit support
arrangements, the Fund's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. Each obligation purchased by
the Fund will meet the quality criteria established for the purchase of
Municipal Obligations.
The yields on Municipal Obligations are dependent on a variety of factors,
including general economic and monetary conditions, money market factors,
conditions in the municipal market, size of a particular offering, maturity of
the obligation and rating of the issue. The imposition of the Fund's management
and investment advisory fee, as well as other operating
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expenses, including fees paid under its Plan of Distribution pursuant to Rule
12b-1 (the 'Plan of Distribution'), has the effect of reducing the yield to
shareholders.
Municipal lease obligations or installment purchase contract obligations
(collectively, 'lease obligations') have special risks not normally associated
with Municipal Obligations. Although lease obligations do not constitute general
obligations of the municipality for which the municipality's taxing power is
pledged, a lease obligation ordinarily is backed by the municipality's covenant
to budget for, appropriate and make the payments due under the lease obligation.
However, certain lease obligations contain 'non-appropriation' clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such purpose
on a yearly basis. Although 'non-appropriation' leased obligations are secured
by the leased property, disposition of the property in the event of foreclosure
might prove difficult. The Fund will seek to minimize these risks by investing
only in those lease obligations that (1) are rated in one of the two highest
rating categories for debt obligations by at least two nationally recognized
statistical rating organizations (or one rating organization if the lease
obligation was rated only by one such organization) or (2) if unrated, are
purchased principally from the issuer or domestic banks or other responsible
third parties, in each case only if the seller shall have entered into an
agreement with the Fund providing that the seller or other responsible third
party will either remarket or repurchase the lease obligation within a short
period after demand by the Fund. The staff of the Securities and Exchange
Commission (the 'SEC') currently considers certain lease obligations to be
illiquid. Accordingly, the Trustees have established guidelines to be used by
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins') in determining the
liquidity of municipal lease obligations. In addition, the Fund will invest no
more than 10% of the value of its net assets in lease obligations that are
illiquid and in other illiquid securities. See 'Investment Restriction No. 7'
below.
RATINGS OF MUNICIPAL OBLIGATIONS
If, subsequent to its purchase by the Fund, (a) an issue of rated Municipal
Obligations ceases to be rated in the highest rating category by at least two
rating organizations (or one rating organization if the instrument was rated by
only one such organization), or the Fund's Trustees determine that it is no
longer of comparable quality; or (b) Mitchell Hutchins becomes aware that any
portfolio security not so highly rated or any unrated security has been given a
rating by any rating organization below the rating organization's second highest
rating category, the Fund's Trustees will reassess promptly whether such
security presents minimal credit risk and will cause the Fund to take such
action as it determines is in the best interest of the Fund and its
shareholders, provided that the reassessment required by clause (b) is not
required if the portfolio security is disposed of or matures within five
business days of Mitchell Hutchins becoming aware of the new rating and the
Fund's Trustees are subsequently notified of Mitchell Hutchins' actions.
To the extent that the ratings given by Moody's Investors Service, Inc.
('Moody's') or Standard & Poor's, a division of The McGraw Hill Companies, Inc.,
('S&P') for Municipal Obligations may change as a result of changes in such
organizations or their rating systems, the Fund will attempt to use comparable
ratings as standards for its investments in accordance with
3
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the investment policies contained in the Fund's Prospectus and this Statement of
Additional Information. The ratings of Moody's and S&P represent their opinions
as to the quality of the Municipal Obligations which they undertake to rate. It
should be emphasized, however, that ratings are relative and subjective and are
not absolute standards of quality. Although these ratings are an initial
criterion for selection of portfolio securities, Mitchell Hutchins also will
evaluate these securities and the creditworthiness of the issuers of such
securities. See 'Ratings of Securities.'
TAXABLE INVESTMENTS
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities include a variety of U.S. Treasury securities which differ in
their interest rates, maturities and times of issuance: Treasury Bills have
initial maturities of one year or less; Treasury Notes have initial maturities
of one to ten years; and Treasury Bonds generally have initial maturities of
greater than ten years. Some obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, such as Government National Mortgage Association
pass-through certificates, are supported by the full faith and credit of the
U.S. Treasury; others, such as those of the Federal Home Loan Banks, by the
right of the issuer to borrow from the U.S. Treasury; others, such as those
issued by the Federal National Mortgage Association, by discretionary authority
of the U.S. Government to purchase certain obligations of the agency or
instrumentality; and others, such as those issued by the Student Loan Marketing
Association, only by the credit of the agency or instrumentality. These
securities bear fixed, floating or variable rates of interest. Interest may
fluctuate based on generally recognized reference rates or the relationship of
rates. While the U.S. Government provides financial support to such U.S.
Government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so, since it is not so obligated by law. The Fund invests
in such securities only when it is satisfied that the credit risk with respect
to the issuer is minimal.
Commercial paper consists of short-term unsecured promissory notes issued
to finance short-term credit needs.
Certificates of deposit are certificates representing the obligation of a
bank to repay funds deposited with it for a specified period of time.
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate.
Investments in time deposits generally are limited to London branches of
domestic banks that have total assets in excess of $1 billion. Time deposits
which may be held by the Fund will not benefit from insurance from the Bank
Insurance Fund or the Savings Association Insurance Fund administered by the
Federal Deposit Insurance Corporation.
Bankers' acceptances are credit instruments evidencing the obligation of a
bank to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. Other short-term bank obligations may include
uninsured, direct obligations bearing fixed, floating or variable rates of
interest.
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Repurchase agreements involve the acquisition by the Fund of an underlying
debt instrument for a relatively short period (usually not more than one week),
subject to an obligation of the seller to repurchase, and the Fund to resell,
the instrument at a fixed price. The Fund's custodian will have custody of, and
will hold in a segregated account, securities acquired by the Fund under a
repurchase agreement. Repurchase agreements are considered by the staff of the
SEC to be loans by the Fund. The Fund enters into repurchase agreements only
with selected registered or unregistered securities dealers or banks and
requires that additional securities be deposited with it if the value of the
securities purchased should decrease below resale price. Mitchell Hutchins will
consider on an ongoing basis the value of the collateral to assure that it
always equals or exceeds the repurchase price. Certain costs may be incurred by
the Fund in connection with the sale of the securities if the seller does not
repurchase them in accordance with the repurchase agreement. Mitchell Hutchins
considers on an ongoing basis the creditworthiness of the institutions with
which it enters into repurchase agreements.
RISK FACTORS -- INVESTING IN CALIFORNIA MUNICIPAL OBLIGATIONS
Certain California (the 'State') constitutional amendments, legislative
measures, executive orders, civil actions and voter initiatives, as well as the
general financial condition of the State, could adversely affect the ability of
issuers of California Municipal Obligations to pay interest and principal on
such obligations. The following information constitutes only a brief summary,
does not purport to be a complete description, and is based on information drawn
from official statements relating to securities offerings of the State and
various local agencies, available as of the date of this Statement of Additional
Information. While the Fund has not independently verified such information, it
has no reason to believe that such information is not correct in all material
respects.
RECENT DEVELOPMENTS. From mid-1990 to late 1993, the State suffered a
recession with the worst economic, fiscal and budget conditions since the 1930s.
Construction, manufacturing (especially aerospace), exports and financial
services, among others, were all severely affected. Job losses were the worst of
any post-war recession. Unemployment reached 10.1% in January 1994, but fell
sharply to 7.7% in October and November 1994. According to the State's
Department of Finance, recovery from the recession in California began in 1994.
The recession seriously affected State tax revenues, which basically mirror
economic conditions. It also caused increased expenditures for health and
welfare programs. The State has also been facing a structural imbalance in its
budget with the largest programs supported by the General Fund -- K-12 schools
and community colleges, health and welfare, and corrections -- growing at rates
higher than the growth rates for the principal revenue sources of the General
Fund. As a result, the State has experienced recurring budget deficits in the
late 1980s and early 1990s. The Controller reported that expenditures exceeded
revenues for four of the five fiscal years ending with 1991-92. The State had an
operating surplus of approximately $109 million in 1992-93 and $917 million in
1993-94. However, at June 30, 1994, according to the Department of Finance, the
State's Special Fund for Economic Uncertainties had a deficit, on a budget
basis, of approximately $1.8 billion.
5
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A further consequence of the large budget imbalances over the last three
fiscal years has been that the State depleted its available cash resources and
has had to use a series of external borrowings to meet its cash needs. To meet
its cash flow needs in the 1994-95 fiscal year, the State issued, in July and
August 1994, $4.0 billion of revenue anticipation warrants which mature on April
25, 1996, and $3.0 billion of revenue anticipation notes which matured on June
28, 1995.
The 1994-95 Fiscal Year Budget (as updated in the January 10, 1995
Governor's Budget) is projected to have $41.9 billion of General Fund revenues
and transfers and $40.9 billion of budgeted expenditures. In addition, the
1994-95 Budget Act anticipates deferring retirement of about $1 billion of the
accumulated budget deficit to the 1995-96 fiscal year when it is intended to be
fully retired by June 30, 1996.
As a result of the deterioration in the State's budget and cash situation,
the rating agencies reduced the State's credit ratings. Between October 1991 and
July 1994 the rating on the State's general obligation bonds was reduced by S&P
from 'AAA' to 'A,' by Moody's from 'Aaa' to 'A1' and by Fitch from 'AAA' to 'A.'
On January 17, 1994, an earthquake of the magnitude of an estimated 6.8 on
the Richter Scale struck Los Angeles causing significant damage to public and
private structures and facilities. Although some individuals and businesses
suffered losses totaling in the billions of dollars, the overall effect of the
earthquake on the regional and State economy is not expected to be serious.
On December 6, 1994, Orange County, California (the 'County'), together
with its pooled investment funds (the 'Pools') filed for protection under
Chapter 9 of the federal Bankruptcy Code, after reports that the Pools had
suffered significant market losses in their investments, causing a liquidity
crisis for the Pools and the County. More than 180 other public entities, most
of which, but not all, are located in the County, were also depositors in the
Pools. The County has reported the Pools' loss at about $1.69 billion, or about
23 percent of their initial deposits of approximately $7.5 billion. Many of the
entities which deposited moneys in the Pools, including the County, faced
interim and/or extended cash flow difficulties because of the bankruptcy filing
and may be required to reduce programs or capital projects.
The State has no existing obligation with respect to any outstanding
obligations or securities of the County or any of the other participating
entities.
STATE FINANCES. State moneys are segregated into the General Fund and
approximately 600 Special Funds. The General Fund consists of the revenues
received into the State Treasury and earnings from State investments, which are
not required by law to be credited to any other fund. The General Fund is the
principal operating fund for the majority of governmental activities and is the
depository of most major State revenue sources.
The Special Fund for Economic Uncertainties is funded with General Fund
revenues and was established to protect the State from unforeseen reduced levels
of revenues and/or unanticipated expenditure increases. Amounts in the Special
Fund for Economic Uncertainties may be transferred by the Controller as
necessary to meet cash needs of the General Fund. The Controller is required to
return monies so transferred without payment of interest as soon as there are
sufficient monies in the General Fund. For budgeting and accounting purposes,
any appropriation made from the Special Fund for Economic Uncertainties is
deemed an
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appropriation from the General Fund. For year-end reporting purposes, the
Controller is required to add the balance in the Special Fund for Economic
Uncertainties to the balance in the General Fund so as to show the total monies
then available for General Fund purposes.
Inter-fund borrowing has been used for many years to meet temporary
imbalances of receipts and disbursements in the General Fund. As of June 30,
1994, the General Fund had outstanding loans in the aggregate principal amount
of $5.2 billion, which consisted of $4.0 billion of internal loans to the
General Fund from the Special Fund for Economic Uncertainties and other Special
Funds and $1.2 billion of external loans represented by the 1994 revenue
anticipation warrants.
ARTICLES XIIIA AND XIIIB TO THE STATE CONSTITUTION AND OTHER REVENUE LAW
CHANGES. Prior to 1977, revenues of the State government experienced significant
growth primarily as a result of inflation and continuous expansion of the tax
base of the State. In 1978, State voters approved an amendment to the State
Constitution known as Proposition 13, which added Article XIIIA to the State
Constitution, reducing ad valorem local property taxes by more than 50%. In
addition, Article XIIIA provides that additional taxes may be levied by cities,
counties and special districts only upon approval of not less than a two-thirds
vote of the 'qualified electors' of such district, and requires not less than a
two-thirds vote of each of the two houses of the State Legislature to enact any
changes in State taxes for the purpose of increasing revenues, whether by
increased rate or changes in methods of computation.
Primarily as a result of the reductions in local property tax revenues
received by local governments following the passage of Proposition 13, the
Legislature undertook to provide assistance to such governments by substantially
increasing expenditures from the General Fund for that purpose beginning in the
1978-79 fiscal year. In recent years, in addition to such increased
expenditures, the indexing of personal income tax rates (to adjust such rates
for the effects of inflation), the elimination of certain inheritance and gift
taxes and the increase of exemption levels for certain other such taxes had a
moderating impact on the growth in State revenues. In addition, the State has
increased expenditures by providing a variety of tax credits, including renters'
and senior citizens' credits and energy credits.
The State is subject to an annual 'appropriations limit' imposed by Article
XIIIB of the State Constitution adopted in 1979. Article XIIIB prohibits the
State from spending 'appropriations subject to limitation' in excess of the
appropriations limit imposed. 'Appropriations subject to limitations' are
authorizations to spend 'proceeds of taxes,' which consist of tax revenues, and
certain other funds, including proceeds from regulatory licenses, user charges
or other fees to the extent that such proceeds exceed 'the cost reasonably borne
by such entity in providing the regulation, product or service.' One of the
exclusions from these limitations is 'debt service' (defined as 'appropriations
required to pay the cost of interest and redemption charges, including the
funding of any reserve or sinking fund required in connection therewith, on
indebtedness existing or legally authorized as of January 1, 1979 or on bonded
indebtedness thereafter approved' by voters). In addition, appropriations
required to comply with mandates of courts or the Federal government and,
pursuant to Proposition 111 enacted in June 1990, appropriations for qualified
capital outlay projects and appropriations of revenues derived from any increase
in gasoline taxes and motor vehicle weight fees above January 1, 1990 levels are
not included as appropriations subject to limitation. In addition, a number of
recent initiatives were
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structured or proposed to create new tax revenues dedicated to certain specific
uses, with such new taxes expressly exempted from the Article XIIIB limits
(e.g., increased cigarette and tobacco taxes enacted by Proposition 99 in 1988).
The appropriations limit also may be exceeded in cases of emergency. However,
unless the emergency arises from civil disturbance or natural disaster declared
by the Governor, and the appropriations are approved by two-thirds of the
Legislature, the appropriations limit for the next three years must be reduced
by the amount of the excess.
The State's appropriations limit in each year is based on the limit for the
prior year, adjusted annually for changes in California per capita personal
income and changes in population, and adjusted, when applicable, for any
transfer of financial responsibility of providing services to or from another
unit of government. The measurement of change in population is a blended average
of statewide overall population growth, and change in attendance at local school
and community college ('K-14') districts. As amended by Proposition 111, the
appropriations limit is tested over consecutive two-year periods. Any excess of
the aggregate 'proceeds of taxes' received over such two-year period above the
combined appropriations limits for those two years is divided equally between
transfers to K-14 districts and refunds to taxpayers.
As originally enacted in 1979, the State's appropriations limit was based
on its 1978-79 fiscal year authorizations to expend proceeds of taxes and was
adjusted annually to reflect changes in cost of living and population (using
different definitions, which were modified by Proposition 111). Commencing with
the 1991-92 fiscal year, the State's appropriations limit is adjusted annually
based on the actual 1986-87 limit, and as if Proposition 111 had been in effect.
The State Legislature has enacted legislation to implement Article XIIIB which
defines certain terms used in Article XIIIB and sets forth the methods for
determining the State's appropriations limit. Government Code Section 7912
requires an estimate of the State's appropriations limit to be included in the
Governor's Budget, and thereafter to be subject to the budget process and
established in the Budget Act.
For the 1990-91 fiscal year, the State appropriations limit was $32.2
billion, and appropriations subject to limitation were $7.51 million under the
limit. The limit for the 1991-92 fiscal year was $34.2 billion, and
appropriations subject to limitations were $3.8 billion under the limit. The
limit for the 1992-93 fiscal year was $35.01 billion, and the appropriations
subject to limitation were $4.27 billion under the limit. The estimated limits
for the 1993-94 and 1994-95 fiscal years are $36.60 billion and $36.61 billion,
respectively, and the estimated appropriations subject to limitation are $3.77
billion and $5.49 billion, respectively, under the limit.
In November 1988, State voters approved Proposition 98, which changed State
funding of public education below the university level and the operation of the
State's appropriations limit, primarily by guaranteeing K-14 schools a minimum
share of General Fund revenues. Under Proposition 98 (as modified by Proposition
111, which was enacted in June 1990), K-14 schools are guaranteed the greater of
(a) 40.9% of General Fund revenues ('Test 1'), (b) the amount appropriated to
K-14 schools in the prior year, adjusted for changes in the cost of living
(measured as in Article XIIIB by reference to California per capita personal
income) and enrollment ('Test 2'), or (c) a third test, which would replace
'Test 2' in any year when the percentage growth in per capita General Fund
revenues from the prior year plus .5% is less than the percentage growth in
California per capita personal income ('Test 3'). Under 'Test 3',
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schools would receive the amount appropriated in the prior year adjusted for
changes in enrollment and per capita General Fund revenues, plus an additional
small adjustment factor. If 'Test 3' is used in any year, the difference between
'Test 3' and 'Test 2' would become a 'credit' to schools which would be the
basis of payments in future years when per capita General Fund revenue growth
exceeds per capita personal income growth.
Proposition 98 permits the Legislature by two-thirds vote of both houses,
with the Governor's concurrence, to suspend the K-14 school's minimum funding
formula for a one-year period. In the fall of 1989, the Legislature and the
Governor utilized this provision to avoid having 40.3% of revenues generated by
a special supplemental sales tax enacted for earthquake relief go to K-14
schools. Proposition 98 also contains provisions transferring certain State tax
revenues in excess of the Article XIIIB limit to K-14 schools.
The 1991-92 Budget Act, applying 'Test 2' of Proposition 98, appropriated
approximately $18.5 billion for K-14 schools pursuant to Proposition 98. During
the course of the fiscal year, revenues proved to be substantially below
expectations. By the time the Governor's Budget was introduced in January 1992,
it became clear that per capita growth in General Fund revenues for 1991-92
would be far smaller than the growth in California per capita personal income
and the Governor's Budget therefore reflected a reduction in Proposition 98
funding in 1991-92 by applying 'Test 3' rather than 'Test 2.'
In response to the changing revenue situation and to fully fund the
Proposition 98 guarantee in both the 1991-92 and 1992-93 fiscal years without
exceeding it, the Legislature enacted several bills as part of the 1992-93
budget package which responded to the fiscal crisis in education funding. In
fiscal year 1991-92, Proposition 98 appropriations for K-14 schools were reduced
by $1.083 billion. In order to not adversely impact cash received by school
districts, however, a short-term loan was appropriated from the non-Proposition
98 State General Fund. The Legislature then appropriated $16.6 billion to K-14
schools for 1992-93 (the minimum guaranteed by Proposition 98) but designated
$1.083 billion of this amount to 'repay' the prior year loan, thereby reducing
cash outlays in 1992-93 by that amount.
The 1993-94 Budget Act projected the Proposition 98 minimum funding level
at $13.5 billion based on the 'Test 3' calculation where the guarantee is
determined by the change in per capita growth in General Fund revenues, which
are projected to decrease on a year-over-year basis. This amount also takes into
account increased property taxes transferred to school districts from other
local governments.
The 1994-95 Budget Act appropriated $14.4 billion of Proposition 98 funds
for K-14 schools based on Test 12. This exceeds the minimum Proposition 98
guarantee by $8 million to maintain K-12 funding per pupil at $4,217. Based upon
updated State revenues, growth rates and inflation factors, the 1994-95 Budget
Act appropriated an additional $286 million within Proposition 98 for the
1993-94 fiscal year, to reflect a need in appropriations for school districts
and county offices of education, as well as an anticipated deficiency in special
education fundings. These appropriations increase the 1993-94 Proposition 98
guarantee to $13.8 billion, which exceeds the minimum guarantee in that year by
$272 million and provides per pupil funding of $4,225.
SOURCES OF TAX REVENUE. The California personal income tax, which in fiscal
1993-94 contributed about 44% of General Fund revenues, is closely modeled after
the Federal income tax
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law. It is imposed on net taxable income (gross income less exclusions and
deductions). The tax is progressive with rates ranging from 1% to 11%. Personal,
dependent, and other credits are allowed against the gross tax liability. In
addition, taxpayers may be subject to an alternative minimum tax ('AMT') which
is similar to the Federal AMT. This is designed to ensure that excessive use of
tax preferences does not reduce taxpayers' liabilities below some minimum level.
Legislation enacted in July 1991 added two new marginal tax rates, at 10% and
11%, effective for tax years 1991 through 1995. After 1995, the maximum personal
income tax rate is scheduled to return to 9.3%, and the AMT rate is scheduled to
drop from 8.5% to 7%.
The personal income tax is adjusted annually by the change in the consumer
price index to prevent taxpayers from being pushed into higher tax brackets
without a real increase in income.
The sales tax is imposed upon retailers for the privilege of selling
tangible personal property in California. Most retail sales and leases are
subject to the tax. However, exemptions have been provided for certain
essentials such as food for home consumption, prescription drugs, gas,
electricity and water. Sales tax accounted for about 35% of General Fund revenue
in 1993-94. Bank and corporation tax revenues comprised about 12% of General
Fund revenue in 1993-94. In 1989, Proposition 99 added a 25 cents per pack
excise tax on cigarettes, and a new equivalent excise tax on other tobacco
products. Legislation enacted in 1993 added an additional 2 cents per pack for
the purpose of funding breast cancer research.
GENERAL FINANCIAL CONDITION OF THE STATE. Revenues in the most recent
fiscal years have been unusually difficult to forecast with a high degree of
accuracy due in major part to the volatility in the personal income tax. The
1986-87 through 1989-90 fiscal years were affected by both the Federal Tax
Reform Act of 1986 and subsequent State conformity legislation. The difficulty
with recent forecasts has occurred because taxpayers have changed their behavior
as a result of these events. Capital gains are now fully taxed. This revenue
component is subject to taxpayer discretion and is very sensitive to change in
tax law, market conditions and individual circumstances. Capital gains have
always been a volatile item and since it is contributing a greater percentage of
total revenue, it makes these collections subject to greater variance.
Primarily because of changes to the Federal and State tax statutes,
revenues for the fiscal year 1987-88 were approximately $1.1 billion less than
originally estimated. This shortfall in revenues was made up through the
application of approximately $900 million from the Special Fund for Economic
Uncertainties and a variety of expenditure reduction actions initiated by the
Governor. As a result, the Special Fund for Economic Uncertainties was
substantially depleted by June 30, 1988.
The State entered the 1988-89 fiscal year with essentially no budget
reserve. The 1988-89 Budget Act called for significant spending cuts to balance
expected revenues and expenditures and to provide an estimated balance of
approximately $600 million in the Special Fund for Economic Uncertainties at
year-end.
Revenues for the 1989-90 fiscal year were approximately $517.7 million less
than presented in the Governor's Budget in January 1990 and $1.021 billion less
than estimated in July 1989, primarily owing to lower than estimated receipts
from individual and corporate taxes. The shortfall in revenues was made up
through the transfer of moneys from the Special Fund for Economic Uncertainties
and a variety of expenditure reduction actions initiated by the
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Administration. As a result, the Special Fund for Economic Uncertainties was
fully depleted by June 30, 1990.
The California State Controller reported that the State's General Fund
ended the 1990-91 fiscal year with a negative budgetary basis balance of $1.316
billion. In order to pay necessary cash expenses through June 1991, including
payment of $4.1 billion of 1990 Revenue Anticipation Notes which were due June
28, 1991, the General Fund borrowed $1.390 billion from the Special Fund for
Economic Uncertainties and $3.266 billion from other Special Funds as of the end
of the fiscal year. Data on General Fund revenues for the 1990-91 fiscal year
show that revenues in all major categories (except insurance taxes) were lower
than receipts in 1989-90, the first time this has happened on a year-over-year
basis since the 1930s.
The Governor's 1991-92 Budget originally projected a $7 billion gap between
revenues and program needs (including restoration of a budget reserve) through
June 30, 1992. However, as revenues remained depressed in early 1991, the
estimate of the budget gap eventually increased to $14.3 billion. The
legislature passed the 1991-92 Budget Bill on June 22, 1991, but it was not
signed by the Governor until July 16, 1991, as the balancing of the budget
required enactment of dozens of additional bills to raise revenues and change
programs and laws. The 1991-92 Budget Act projected General Fund expenditures of
$43.4 billion and Special Fund expenditures of $10.6 billion. The Department of
Finance estimated that there would be a balance in the Special Fund For Economic
Uncertainties on June 30, 1992 of $1.2 billion.
The $14.3 billion estimated budget gap between revenues over the two fiscal
years 1990-91 and 1991-92 and estimated program needs based on existing laws,
including restoration of a prudent reserve for economic uncertainties, were
addressed through a combination of temporary and permanent changes in laws and
some one-time budget adjustments. The major features of the budget solutions
were: program funding reductions totaling $5.1 billion; a total of $5.1 billion
of increased State tax revenues; savings of $2.1 billion by returning certain
health and welfare programs to counties; and additional miscellaneous savings or
revenue gains and one-time accounting charges totaling $2.0 billion.
The 1992-93 Governor's Budget proposed expenditures of $56.3 billion in the
General and Special Funds for the 1992-93 fiscal year, a 1.6% increase over
corresponding figures for the 1991-92 fiscal year. General Fund expenditures
were projected at $43.8 billion, an increase of 0.2% over the 1991-92 Revised
Governor's Budget. The Budget estimated $45.7 billion of revenues and transfers
for the General Fund (a 4.7% change over 1991-92) and $12.4 billion for Special
Funds (a 9.6% change over 1991-92). To balance the proposed budget, program
reductions totaling $4.365 billion and revenue and transfer increases of $872
million were proposed for the 1991-92 and 1992-93 fiscal years. The 1992-93
Governor's Budget eliminated the deficit from 1991-92 and estimated $105.4
million as a year-end balance in the Special Fund for Economic Uncertainties,
representing approximately 0.2% of General Fund expenditures.
In early 1992, the Director of Finance acknowledged that actual economic
conditions were worse than the projections in the Governor's Budget. Because the
State had accumulated a significant budget deficit over two consecutive years,
and the continuing recession depressed revenue estimates for the coming year,
the State faced a major challenge to enact a balanced budget. The State also
began the 1992-93 fiscal year with essentially no cash reserves. By June
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1992, it was estimated that approximately $7.9 billion of budget actions would
be required to end the 1992-93 fiscal year without a budget deficit. The
severity of the budget actions needed led to a long delay in adopting the
budget.
With the failure to enact a budget by July 1, 1992, the State had no legal
authority to pay many of its vendors until the budget was passed. Starting on
July 1, 1992, the Controller was required to issue 'registered warrants' in lieu
of normal warrants backed by cash to pay many State obligations. Available cash
was used to pay constitutionally mandated and priority obligations, such as debt
service on bonds and revenue anticipation warrants. Between July 1 and September
4, 1992, the Controller issued an aggregate of approximately $3.8 billion of
registered warrants payable from the General Fund, all of which were called for
redemption by September 4, 1992 following enactment of the 1992-93 Budget Act
and issuance by the State of $3.3 billion of interim notes.
The Legislature enacted the 1992-93 Budget Bill on August 29, 1992, and it
was signed by the Governor on September 2, 1992. The 1992-93 Budget Act provides
for expenditures of $57.4 billion and consists of General Fund expenditures of
$40.8 billion and Special Fund and Bond Fund expenditures of $16.6 billion. The
Department of Finance estimates there will be a balance in the Special Fund for
Economic Uncertainties of $28 million on June 30, 1993.
The $7.9 billion estimated budget gap was closed through a combination of
increased revenues and transfers and expenditure cuts such as:
1. General Fund savings in health and welfare programs totalling $1.6
billion.
2. General Fund reductions of $1.9 billion for K-12 schools and
community colleges. This was accomplished by requiring schools to repay
$1.1 billion in excess appropriations from 1991-92.
3. Redirecting property taxes from cities ($200 million) and counties
($525 million) to schools. These shifts are permanent and will reduce the
State General Funds obligation for schools. The State will also redirect
property taxes from special districts ($375 million) and redevelopment
agencies ($200 million) to schools. The shift from redevelopment agencies
is a one-time shift.
4. Program cuts for higher education totalling $415 million ($246
million for the University of California, $143 million for California State
University, and $26 million Student Aid Commission). These reductions are
partially offset by $141 million in increased student fees.
5. A total of $1.6 billion of transfers and accelerated collections of
State revenues by conforming state schedules for estimated payments for
personal income and bank and corporate taxes with federal schedules ($105
million), accelerating settlement of outstanding tax disputes ($300
million), reaching an agreement with the Federal government to repay
federal contractors over a ten-year period beginning in 1992-93, rather
than making a lump sum payment in 1992-93 ($580 million), accelerating
liquidation of unclaimed properties through the sale of all unclaimed
securities received prior to July 1, 1992, rather than maintaining them for
three years ($70 million), transfers from Special Funds ($423 million), and
other miscellaneous actions ($122 million).
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6. Approximately $1.0 billion from various additional program
reductions.
In May 1993, the Department of Finance projected that the General Fund
would end the fiscal year on June 30, 1993 with an accumulated budget deficit of
about $2.8 billion, and a negative fund balance of about $2.2 billion (the
difference being certain reserves for encumbrances and school funding costs). As
a result, the State issued $5 billion of revenue anticipation notes and
warrants.
The Governor's 1993-94 Budget, introduced on January 8, 1993, proposed
General Fund expenditures of $37.3 billion, with projected revenues of $39.9
billion. It also proposed Special Fund expenditures of $12.4 billion and Special
Fund revenues of $12.1 billion. To balance the budget in the face of declining
revenues, the Governor proposed a series of revenue shifts from local
government, reliance on increased federal aid and reductions in state spending.
The 'May Revision' of the Governor's Budget, released on May 20, 1993,
indicated that the revenue projections of the January Budget Proposal were
tracking well, with the full year 1992-93 about $80 million higher than the
January projection. Personal income tax revenue was higher than projected, sales
tax was close to target, and bank and corporation taxes were lagging behind
projections. The May Revision projected the State would have an accumulated
deficit of about $2.75 billion by June 30, 1993. The Governor proposed to
eliminate this deficit over an 18-month period. He also agreed to retain the
0.5% sales tax scheduled to expire June 30 for a six-month period, dedicated to
local public safety purposes, with a November election to determine a permanent
extension. Unlike previous years, the Governor's Budget and May Revision did not
calculate a 'gap' to be closed, but rather set forth revenue and expenditure
forecasts and proposals designed to produce a balanced budget.
The 1993-94 Budget Act was signed by the Governor on June 30, 1993, along
with implementing legislation. The Governor vetoed about $71 million in
spending. With enactment of the Budget Act, the State carried out its regular
cash flow borrowing program for the fiscal year, which included issuance of
approximately $2 billion of revenue anticipation notes which matured on June 28,
1994.
The 1993-94 Budget Act was predicated on General Fund revenues and
transfers estimated at $40.6 billion, about $700 million higher than the January
Governor's Budget, but still about $400 million below 1992-93 (and the second
consecutive year of actual decline). The principal reasons for declining
revenues were the continued weak economy and the expiration (or repeal) of three
fiscal steps taken in 1991 -- a half cent temporary sales tax, a deferral of
operating loss carryforwards, and repeal by initiative of a sales tax on candy
and snack foods.
The 1993-94 Budget Act also assumed Special Fund revenues of $11.9 billion,
an increase of 2.9% over 1992-93.
The 1993-94 Budget Act included General Fund expenditures of $38.5 billion
(a 6.3% reduction from projected 1992-93 expenditures of $41.1 billion), in
order to keep a balanced budget within the available revenues. The Budget also
included Special Fund expenditures of $12.1 billion, a 4.2% increase.
The 1993-94 Budget Act contained no General Fund tax/revenue increases
other than a two-year suspension of the renters' tax credit.
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Administration reports during the course of the 1993-94 fiscal year
indicated that while economic recovery appeared to have started in the second
half of the fiscal year, recessionary conditions continued longer than had been
anticipated when the 1993-94 Budget Act was adopted. Overall, revenues to the
1993-1994 fiscal year were about $800 million lower than original projections,
and expenditures were about $780 million higher, primarily because of higher
health and welfare caseloads, lower property taxes which require greater State
support for K-14 education to make up the shortfall, and lower than anticipated
Federal government payments for immigration-related costs. The reports in May
and June 1994, indicated that revenues in the second half of the 1993-94 fiscal
year have been very close to the projections made in the Governor's Budget of
January 10, 1994, which is consistent with a slow turn around in the economy.
The Department of Finance's July 1994 Bulletin, including the final June
receipts, reported that June revenues were $114 million (2.5%) above projection,
with final end-of-year results at $377 million (about 1%) above the May Revision
projections. Part of this result was due to end-of-year adjustments and
reconciliations. Personal income tax and sales tax continued to track
projections very well. The largest factor in the higher anticipated revenues was
from bank and corporation taxes, which were $140 million (18.4%) above
projection in June.
During the 1993-94 fiscal year, the State implemented the Deficit
Retirement Plan, which was part of the 1993-94 Budget Act, by issuing $1.2
billion of revenue anticipation warrants in February 1994 maturing December 21,
1994. This borrowing reduced the cash deficit at the end of the 1993-94 fiscal
year. Nevertheless, because of the $1.5 billion variance from the original
1993-94 Budget Act assumptions, the General Fund ended the fiscal year at June
30, 1994 carrying forward an accumulated deficit of approximately $1.8 billion.
Because of the revenue shortfall and the State's reduced internal
borrowable cash resources, in addition to the $1.2 billion of revenue
anticipation warrants issued as part of the Deficit Retirement Plan, the State
issued an additional $2.0 billion of revenue anticipation warrants, maturing
July 26, 1994, which were needed to fund the State's obligations and expenses
through the end of the 1993-94 fiscal year.
The 1994-95 fiscal year represents the fourth consecutive year the Governor
and Legislature were faced with a very difficult budget environment to produce a
balanced budget. Many program cost and budgetary adjustments were made in the
last three years. The Governor's Budget Proposal, as updated in May and June
1994, recognized that the accumulated deficit could not be repaid in one year,
and proposed a two-year solution. The budget proposal sets forth revenue and
expenditure forecasts and revenue and expenditure proposals which result in
operating surpluses for the budget for both 1994-95 and 1995-96, and lead to the
elimination of the accumulated budget deficit, estimated at about $1.8 billion
at June 30, 1994, by June 30, 1996.
The 1994-95 Budget Act, signed by the Governor on July 8, 1994, projects
revenues and transfers of $41.9 billion, $2.1 billion higher than revenues in
1993-94. This reflected the Administration's forecast of an improving economy.
The 1994-95 Budget Act projected Special Fund revenues of $12.1 billion, a
decrease of 2.4% from 1993-94 estimated revenues. The 1994-95 Budget Act
projected General Fund expenditures of $40.9 billion, an increase of $1.6
billion over
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the 1993-94 fiscal year. The 1994-95 Budget Act also projected Special Fund
expenditures of $13.7 billion, a 5.4% increase over 1993-94 fiscal year
estimated expenditures.
The 1994-95 Budget Act contained no tax increases. Under legislation
enacted for the 1993-94 Budget Act, the renters' tax credit was suspended for
two years (1993 and 1994). A ballot proposition to permanently restore the
renters' tax credit after this year failed at the June 1994 election. The
Legislature enacted a further one-year suspension of the renters' tax credit,
for 1995, saving about $390 million in the 1995-96 fiscal year.
The 1994-95 Budget Act assumed that the State would use a cash flow
borrowing program in 1994-95 which combines one-year notes and two-year
warrants, which have now been issued. Issuance of the warrants allows the State
to defer repayment of approximately $1.0 billion of its accumulated budget
deficit into the 1995-96 fiscal year. The Budget Adjustment Law, described
above, enacted along with the 1994-95 Budget Act is designed to ensure that the
warrants will be repaid in the 1995-96 fiscal year.
RECENT ECONOMIC TRENDS. Reports by the Department of Finance in May, 1995
indicate that, with economic recovery well underway in the State, General Fund
revenues for the entire 1994-95 fiscal Year were above projections, and
expenditures were below projections because of slower than anticipated
health/welfare caseload growth and school enrollments. The aggregate effect
improved the budget picture by about $500 million, leaving an estimated budget
deficit of about $630 million at June 30, 1995.
For the first time in four years, the state enters the upcoming 1995-96
fiscal year with strengthening revenues based on an improving economy. On
January 10, 1995, the Governor presented his 1995-96 Fiscal Year Budget Proposal
(the ' Proposed Budget'). The Proposed Budget estimates General Fund revenues
and transfers of $42.5 billion (an increase of 0.2% over 1994-95). This nominal
increase from 1994-95 fiscal year reflects the Governor's realignment proposal
and the first year of his tax cut proposal. Without these two proposals, General
Fund revenues would be projected at approximately $43.8 billion, or an increase
of 3.3% over 1994-95. Expenditures are estimated at $41.7 billion (essentially
unchanged from 1994-95). Special Fund revenues are estimated at $13.5 billion
(10.7% higher than 1994-95) and Special Fund expenditures are estimated at $13.8
billion (12.2% higher than 1994-95). The Proposed Budget projects that the
General Fund will end the fiscal year at June 30, 1996 with a budget surplus in
SFBU of about $92 million, or less than 1% of General Fund expenditures, and
will have repaid all of the accumulated budget deficits.
Revised employment data indicate that California's recession ended in 1993,
and following a period of stability, a solid recovery is now underway. The
State's unemployment rate fell from 9.2% in fiscal 1993 to 8.6% in fiscal 1994.
The national unemployment rate in 1994 was 6.1%. The number of employed
Californians increased more than 250,000 during fiscal 1994.
Other indicators, including retail sales, homebuilding activity, existing
home sales and bank lending volume all confirm the State's recovery.
Personal income was severely affected by the Northridge Earthquake, which
reduced the first quarter 1994 figure by $22 billion at an annual rate,
reflecting the uninsured damage to residences and unincorporated businesses. As
a result, personal income growth for all of 1994
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was about 2.8%. However, excluding the Northridge effects, growth would have
been in excess of 3%.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies. These
restrictions cannot be changed without approval by the holders of a majority of
the outstanding shares of the Fund, defined in the Investment Company Act of
1940, as amended (the 'Act'), as the lesser of (i) 67% of the Fund's shares
present at a meeting if the holders of more than 50% of the outstanding shares
are present in person or by proxy, or (ii) more than 50% of the Fund's
outstanding shares. The Fund may not:
1. Purchase securities other than Municipal Obligations and Taxable
Investments as those terms are referred to above and in the Prospectus.
2. Borrow money, except from banks for temporary or emergency (not
leveraging) purposes, in an amount up to 10% of the Fund's total assets
(including the amount borrowed) based upon the lesser of cost or market,
less liabilities (not including the amount borrowed) at the time the
borrowing is made. While borrowings exceed 5% of the value of the Fund's
total assets, the Fund will not make any additional investments.
3. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except in an amount up to 10% of the value of its total assets, but only to
secure borrowings for temporary or emergency purposes.
4. Make loans to others, except through the purchase of qualified debt
obligations and entry into repurchase agreements referred to above and in
the Prospectus.
5. Purchase or sell real estate investment trust securities,
commodities or commodity contracts, or oil and gas interests, but this
shall not prevent the Fund from investing in Municipal Obligations secured
by real estate or interests therein.
6. Sell securities short or purchase securities on margin.
7. Purchase securities subject to restrictions on disposition under
the Securities Act of 1933. The Fund may not enter into repurchase
agreements maturing in more than seven days or purchase securities that are
not readily marketable (which securities include floating and variable rate
demand notes as to which the Fund cannot exercise the demand feature
described in the Fund's Prospectus on less than seven days notice and as to
which there is no secondary market), if, in the aggregate, more than 10% of
its net assets would be so invested. The Fund may not invest in time
deposits maturing in more than seven days and time deposits maturing in
from two business days through seven calendar days may not exceed 10% of
the Fund's net assets.
8. Underwrite securities of other issuers, except that the Fund may
bid separately or as part of a group for the purchase of Municipal
Obligations directly from an issuer for its own portfolio to take advantage
of the lower purchase price available.
9. Purchase the securities of any other registered investment company,
except in connection with a merger, consolidation, reorganization or
acquisition of assets.
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10. Purchase securities of any issuer for the purpose of exercising
control or management.
11. Invest more than 25% of its assets in the securities of issuers in
any single industry; however, there is no limitation on the purchase of
Municipal Obligations and, for temporary defensive purposes, securities
issued by domestic banks and obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
For purposes of restriction 11, industrial development bonds, where payment
of principal and interest is the ultimate responsibility of companies within the
same industry, are grouped together as an 'industry.'
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage resulting from a change in value of
portfolio securities or amount of net assets will not be considered a violation
of any of the foregoing restrictions.
MANAGEMENT OF THE FUND
Information regarding the Trustees and officers of the Fund, including
information as to their principal business occupations during the last five
years, is listed below.
David J. Beaubien, 61, Trustee. Chairman of Yankee Environmental Systems,
Inc., manufacturer of meteorological measuring instruments. Director of IEC,
Inc., manufacturer of electronic assemblies, Belfort Instruments, Inc.,
manufacturer of environmental instruments, and Oriel Corp., manufacturer of
optical instruments. Prior to January 1991, Senior Vice President of EG&G, Inc.,
a company that makes and provides a variety of scientific and technically
oriented products and services. Mr. Beaubien is a director or trustee of 11
other investment companies for which Mitchell Hutchins or PaineWebber
Incorporated ('PaineWebber') serves as investment adviser.
William W. Hewitt, Jr., 67, Trustee. Trustee of The Guardian Asset
Allocation Fund, The Guardian Baillie Gifford International Fund, The Guardian
Bond Fund, Inc., The Guardian Cash Fund, Inc., The Guardian Park Ave. Fund, The
Guardian Stock Fund, Inc., The Guardian Cash Management Trust and The Guardian
U.S. Government Trust. Mr. Hewitt is a director or trustee of 11 other
investment companies for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
Thomas R. Jordan, 66, Trustee. Principal of The Dilenschneider Group, Inc.,
a corporate communications and public policy counseling firm. Prior to January
1992, Senior Vice President of Hill & Knowlton, a public relations and public
affairs firm. Prior to April 1991, President of The Jordan Group, a management
consulting and strategies development firm. Mr. Jordan is a director or trustee
of 10 other investment companies for which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Carl W. Schafer, 59, Trustee. President of the Atlantic Foundation, a
charitable foundation supporting mainly oceanographic exploration and research.
Director of International Agritech Resources, Inc., an agribusiness investment
and consulting firm, Ardic Exploration and Development Ltd., Evans Systems, Inc.
and Hidden Lake Gold Mines Ltd., gold mining companies, Electronic Clearing
House, Inc., a financial transactions processing company,
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Wainoco Oil Corporation and Nutraceutix, Inc., a biotechnology company. Prior to
January 1993, chairman of the Investment Advisory Committee of the Howard Hughes
Medical Institute and director of Ecova Corporation, a toxic waste treatment
firm. Mr. Schafer is a director or trustee of 10 other investment companies for
which Mitchell Hutchins or PaineWebber serves as investment adviser.
Margo N. Alexander, 48, President. President, chief executive officer and a
director of Mitchell Hutchins. Prior to January 1995, an executive vice
president of PaineWebber. Ms. Alexander is also a director or trustee of two
investment companies and president of 37 other investment companies for which
Mitchell Hutchins or PaineWebber serves as investment adviser.
Teresa M. Boyle, 37, Vice President. First vice president and
manager -- advisory administration of Mitchell Hutchins. Prior to November 1993,
compliance manager of Hyperion Capital Management, Inc., an investment advisory
firm. Prior to April 1993, a vice president and manager -- legal administration
of Mitchell Hutchins. Ms. Boyle is also a vice president of 37 other investment
companies for which Mitchell Hutchins or PaineWebber serves as investment
adviser.
Scott H. Griff, 29, Vice President and Assistant Secretary. Vice president
and attorney of Mitchell Hutchins. Prior to January 1995, an associate at the
law firm of Cleary, Gottlieb, Steen & Hamilton. Mr. Griff is also a vice
president and assistant secretary of 10 other investment companies for which
Mitchell Hutchins or PaineWebber serves as investment adviser.
C. William Maher, 34, Vice President and Assistant Treasurer. Mr. Maher is
a first vice president and a senior manager of the mutual fund finance division
of Mitchell Hutchins. Mr. Maher is also a vice president and assistant treasurer
of 37 other investment companies for which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Ann E. Moran, 38, Vice President and Assistant Treasurer. Vice president of
Mitchell Hutchins. Ms. Moran is also a vice president and assistant treasurer of
37 other investment companies for which Mitchell Hutchins or PaineWebber serves
as investment adviser.
Dianne E. O'Donnell, 43, Vice President and Secretary. Senior vice
president and deputy general counsel of Mitchell Hutchins. Ms. O'Donnell is also
a vice president and secretary of 37 other investment companies for which
Mitchell Hutchins or PaineWebber serves as investment adviser.
Gregory W. Serbe, 49, Vice President. Mr. Serbe is a managing director of
Mitchell Hutchins. Mr. Serbe is also a vice president of 8 other investment
companies for which Mitchell Hutchins or PaineWebber serves as investment
adviser.
Victoria E. Schonfeld, 44, Vice President. Managing director and general
counsel of Mitchell Hutchins. From April 1990 to May 1994, a partner in the law
firm of Arnold & Porter. Ms. Schonfeld is also a vice president and assistant
secretary of 37 other investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Paul H. Schubert, 32, Vice President and Assistant Treasurer. First vice
president and a senior manager of the mutual fund finance division of Mitchell
Hutchins. From August 1992 to August 1994, vice president at BlackRock Financial
Management, Inc. Prior to August 1992, an audit manager with Ernst & Young LLP.
Mr. Schubert is also a vice president and assistant treasurer of
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37 other investment companies for which Mitchell Hutchins or PaineWebber serves
as investment adviser.
Julian F. Sluyters, 35, Vice President and Treasurer. Senior vice president
and the director of the mutual fund finance division of Mitchell Hutchins. Prior
to 1991, an audit senior manager with Ernst & Young LLP. Mr. Sluyters is also a
vice president and treasurer of 37 other investment companies for which Mitchell
Hutchins or PaineWebber serves as investment adviser.
Gregory K. Todd, 38, Vice President and Assistant Secretary. First vice
president and associate general counsel of Mitchell Hutchins. Prior to 1993, a
partner with the law firm of Shereff, Friedman, Hoffman & Goodman. Mr. Todd is
also a vice president and assistant secretary of 37 other investment companies
for which Mitchell Hutchins or PaineWebber serves as investment adviser.
The address of each of the Trustees is: Mr. Beaubien, Montague Industrial
Park, 101 Industrial Road, Box 7461, Turners Falls, Massachusetts 01376; Mr.
Hewitt, P.O. Box 2359, Princeton, New Jersey 08543-2359; Mr. Jordan, 200 Park
Avenue, New York, New York 10166; and Mr. Schafer, P.O. Box 1164, Princeton, New
Jersey 08542. The address of the officers listed above is 1285 Avenue of the
Americas, New York, New York 10019.
By virtue of the management responsibilities assumed by PaineWebber under
the Investment Advisory and Administration Agreement, the Fund requires no
executive employees other than its officers, each of whom is employed by either
PaineWebber or Mitchell Hutchins and none of whom devotes full time to the
affairs of the Fund. Trustees and officers of the Fund, as a group, owned less
than 1% of the outstanding shares of beneficial interest of the Fund as of
November 1, 1995. No officer, director or employee of PaineWebber or Mitchell
Hutchins or any affiliate receives any compensation from the Fund for serving as
an officer or Trustee of the Fund. The Fund pays each Trustee who is not an
officer, director or employee of PaineWebber or Mitchell Hutchins or any of its
affiliates an annual retainer of $1,000 and $375 for each Trustees' meeting
attended, and reimburses the Trustee for out-of-pocket expenses associated with
attendance at Trustees' meetings. The Chairman of the Trustees' audit committee
receives an annual fee of $250. The amount of compensation paid by the Fund to
each Trustee for the fiscal year ended July 31, 1995, and the aggregate amount
of compensation paid to each such Trustee for the year ended December 31, 1994
by all investment companies in the same fund complex for which such person is a
Board member were as follows:
<TABLE>
<CAPTION>
(5)
(3) TOTAL COMPENSATION
(2) PENSION OR (4) FROM FUND AND
(1) AGGREGATE RETIREMENT BENEFITS ESTIMATED ANNUAL OTHER INVESTMENT
NAME OF BOARD COMPENSATION FROM ACCRUED AS PART OF BENEFITS UPON COMPANIES IN THE
MEMBER FUND FUND'S EXPENSES RETIREMENT FUND COMPLEX*
- ------------------------------ ----------------- -------------------- ----------------- ------------------
<S> <C> <C> <C> <C>
David J. Beaubien $2,500 None None $80,700
William W. Hewitt, Jr. $2,500 None None $74,425
Thomas R. Jordan $2,500 None None $83,125
Carl W. Schafer $2,700 None None $84,575
</TABLE>
- ------------
* Represents total compensation paid to each Trustee during the calendar year
ended December 31, 1994.
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INVESTMENT ADVISORY AND OTHER SERVICES
PaineWebber, the Fund's investment adviser and administrator, and Mitchell
Hutchins, the Fund's sub-adviser and sub-administrator, are located at 1285
Avenue of the Americas, New York, New York 10019.
Subject to the supervision and direction of the Fund's Trustees, Mitchell
Hutchins manages the Fund's portfolio in accordance with the stated policies of
the Fund. Mitchell Hutchins makes investment decisions for the Fund and places
the purchase and sale orders for portfolio transactions. In addition, Mitchell
Hutchins pays the salaries of all officers and employees who are employed by
both it and the Fund, maintains office facilities, furnishes statistical and
research data, clerical help and accounting, data processing, bookkeeping,
internal auditing and legal services and certain other services required by the
Fund, prepares reports to shareholders, tax returns to and filings with the SEC
and state Blue Sky authorities, is responsible for the calculation of the net
asset value of shares and generally assists in all aspects of the Fund's
operations. Mitchell Hutchins bears all expenses in connection with the
performance of its services.
Expenses incurred in the operation of the Fund, including, but not limited
to, taxes, interest, brokerage fees and commissions, fees of Trustees who are
not officers, directors, stockholders or employees of PaineWebber or Mitchell
Hutchins, SEC fees and related expenses, state Blue Sky qualification fees,
charges of the custodian and transfer, dividend disbursing and recordkeeping
agent, charges and expenses of any outside service used for pricing of the
Fund's portfolio securities and calculating net asset value, outside auditing
and legal expenses, and costs of maintenance of trust existence, investor
services, printing of prospectuses and statements of additional information for
regulatory purposes or for distribution to shareholders, shareholders' reports
and trust meetings, are borne by the Fund.
The Investment Advisory and Administration Agreement remains in effect for
successive annual periods provided continuance is approved at least annually by
(i) the Trustees of the Fund or (ii) vote by the holders of a majority, as
defined in the Act, of the outstanding voting securities of the Fund, provided
that in either event the continuance is also approved by a majority of the
Trustees who are not interested persons, as defined in the Act, of the Fund or
PaineWebber or Mitchell Hutchins, by vote cast in person at a meeting called for
the purpose of voting on such approval. The Investment Advisory and
Administration Agreement is terminable without penalty, on not more than 60
days' nor less than 30 days' notice, by the Trustees of the Fund or by vote of
the holders of a majority of the outstanding voting securities of the Fund or by
PaineWebber. The Investment Advisory and Administration Agreement will terminate
automatically in the event of its assignment.
As compensation for PaineWebber's services rendered to the Fund, the Fund
pays a fee, computed daily and paid monthly, at an annual rate of .50% of the
Fund's average daily net assets. The fees paid to Kidder Peabody Asset
Management, Inc., the Fund's predecessor investment adviser and administrator,
or PaineWebber for the fiscal years ended July 31, 1993, 1994 and 1995 were
$1,009,226, $1,026,841 and $787,433, respectively.
PaineWebber has agreed that if, in any fiscal year, the aggregate expenses
of the Fund (including fees pursuant to the Investment Advisory and
Administration Agreement but
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excluding interest, taxes, brokerage and distribution fees and extraordinary
expenses) exceed the expense limitation of any state having jurisdiction over
the Fund, PaineWebber will reimburse the Fund for such excess expense. This
expense reimbursement obligation is not limited to the amount of PaineWebber's
fee. Such expense reimbursement, if any, will be estimated, reconciled and
credited on a monthly basis. The Fund believes that currently the most stringent
state expense limitation applicable to the Fund is 2 1/2% of the first $30
million of the average daily net assets of the Fund, 2% of the next $70 million
and 1 1/2% of the remaining average daily net assets of the Fund. During the
fiscal year ended July 31, 1995, the Fund's expenses did not exceed such
limitations.
PaineWebber shall not be liable for any error of judgment or mistake of law
or for any loss suffered by the Fund in connection with the matters to which the
Investment Advisory and Administration Agreement relates, except for a loss
resulting from willful misfeasance, bad faith or gross negligence on its part in
the performance of its duties or from reckless disregard by it of its
obligations and duties under the Investment Advisory and Administration
Agreement.
Mitchell Hutchins personnel may invest in securities for their own accounts
pursuant to a code of ethics that describes the fiduciary duty owed to
shareholders of the PaineWebber and PaineWebber/Kidder, Peabody ('PW/KP') mutual
funds and other Mitchell Hutchins' advisory accounts by all Mitchell Hutchins'
directors, officers and employees, establishes procedures for personal investing
and restricts certain transactions. For example, employee accounts generally
must be maintained at PaineWebber, personal trades in most securities require
pre-clearance and short-term trading and participaton in initial public
offerings generally are prohibited. In addition, the code of ethics puts
restrictions on the timing of personal investing in relation to trades by
PaineWebber and PW/KP mutual funds and other Mitchell Hutchins advisory clients.
Investors Fiduciary Trust Company ('IFTC'), 127 West 10th Street, Kansas
City, Missouri 64105, serves as the Fund's custodian. PFPC Inc., a subsidiary of
PNC Bank, National Association, whose principal address is 400 Bellevue,
Wilmington, Delaware 19809, acts as transfer, dividend disbursing and
recordkeeping agent. As custodian, IFTC maintains custody of the Fund's
portfolio securities. As transfer agent, PFPC Inc. maintains the Fund's official
record of shareholders, as dividend disbursing agent, it is responsible for
crediting dividends to shareholders' accounts and, as recordkeeping agent, it
maintains certain accounting and financial records of the Fund.
PaineWebber is the distributor of the Fund's shares and is acting on a best
efforts basis.
The Trustees believe that the Fund's expenditures under the Fund's Plan of
Distribution pursuant to Rule 12b-1 benefit the Fund and its shareholders by
providing better shareholder services. For the fiscal year ended July 31, 1995,
PaineWebber and/or Kidder, Peabody & Co. Incorporated, the Fund's predecessor
distributor, received $188,983 from the Fund, of which approximately $110,503
was spent on payments to investment executives and approximately $78,480 was
spent on overhead-related expenses.
Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019, acts as
independent auditors for the Fund. In such capacity, Ernst & Young LLP audits
the Fund's annual financial statements. For the fiscal year ended July 31, 1994,
and prior thereto, the Fund's independent auditors were Deloitte & Touche LLP, 2
World Financial Center, New York, New York 10281.
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Stroock & Stroock & Lavan, 7 Hanover Square, New York, New York 10004-2696,
is counsel for the Fund.
PRINCIPAL SHAREHOLDERS
To the knowledge of the Fund, Nathaniel N. Ratner, Trustee, UDT 12/17/82, The
Nathaniel N. and Sara Ratner Living Trust, c/o Mitchell Hutchins, 1285 Avenue of
the Americas, New York, New York 10019, owned of record 5% of the Fund's
outstanding shares of beneficial interest on November 1, 1995.
The Fund is not aware as to whether or to what extent shares owned of
record also are owned beneficially.
PORTFOLIO TRANSACTIONS
Portfolio securities are purchased from and sold to parties acting as either
principal or agent. Newly-issued securities ordinarily are purchased directly
from the issuer or from an underwriter; other purchases and sales are allocated
to various dealers. Usually no brokerage commissions, as such, are paid by the
Fund for such purchases and sales, although the price paid usually includes an
undisclosed compensation to the dealer acting as agent. The prices paid to
underwriters of newly-issued securities usually include a concession paid by the
issuer to the underwriter, and purchases of after-market securities from dealers
normally are executed at a price between the bid and asked price. No brokerage
commissions have been paid by the Fund to date.
Transactions are allocated to various dealers by Mitchell Hutchins in its
best judgment. The primary consideration is the prompt and effective execution
of orders at the most favorable price. Subject to that primary consideration,
dealers may be selected for research, statistical or other services to enable
Mitchell Hutchins to supplement its own research and analysis with the views and
information of other securities firms.
Information so received supplements, but does not replace, that to be
provided by Mitchell Hutchins, and Mitchell Hutchins' fee is not reduced as a
consequence of the receipt of any such supplemental information. Such
information may be useful to Mitchell Hutchins in serving both the Fund and
other clients and, conversely, supplemental information obtained by the
placement of business of its clients may be useful to Mitchell Hutchins in
carrying out its obligations to the Fund.
Investment decisions for the Fund are made independently from those of any
other fund managed by Mitchell Hutchins. If, however, funds managed by Mitchell
Hutchins are simultaneously engaged in the purchase or sale of the same
security, the transactions are averaged as to price and allocated equitably to
each fund. In some cases, this system might adversely affect the price paid or
received by the Fund or the size of the position obtainable for, or disposable
by, the Fund.
SHARES OF THE FUND
The Declaration of Trust of the Fund permits the Trustees to issue an unlimited
number of full and fractional shares of a single class and to divide or combine
the shares into a greater or lesser
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number of shares without thereby changing the proportionate beneficial interests
in the Fund. Each share represents an equal proportionate interest in the Fund
with each other share. Upon liquidation of the Fund, shareholders are entitled
to share pro rata in the net assets of the Fund available for distribution to
shareholders. Shares have no preemptive or conversion rights. Shares are fully
paid and non-assessable by the Fund.
The shareholders of the Fund are entitled to a full vote for each full
share held (and proportionate, fractional votes for fractional shares held). The
Trustees themselves have the power to alter the number and the terms of office
of the Trustees, and they may at any time lengthen their own terms and make
their terms of unlimited duration (subject to certain removal procedures) and
appoint their own successors, provided that always at least a majority of the
Trustees have been elected by the shareholders of the Fund. The voting rights of
shareholders are not cumulative, so that holders of more than 50% of the shares
voting can, if they choose, elect all Trustees being selected, while the holders
of the remaining shares would be unable to elect any Trustees. The Fund is not
required to hold Annual Meetings of Shareholders. The Trustees may call Special
Meetings of Shareholders for action by shareholder vote as may be required by
the Act or the Declaration of Trust.
The Fund is a trust fund of the type commonly known as a 'Massachusetts
business trust.' Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the Fund, which is not the case with a corporation. The
Declaration of Trust provides that shareholders shall not be subject to any
personal liability for the acts or obligations of the Fund and that every
written agreement, obligation, instrument or undertaking made by the Fund shall
contain a provision to the effect that the shareholders are not personally
liable thereunder.
Special counsel for the Fund is of the opinion that no personal liability
will attach to the shareholders under any undertaking containing such provision
when adequate notice of such provision is given, except possibly in a few
jurisdictions. With respect to all types of claims in the latter jurisdictions
and with respect to tort claims, contract claims where the provision referred to
is omitted from the undertaking, claims for taxes and certain statutory
liabilities in other jurisdictions, a shareholder may be held personally liable
to the extent that claims are not satisfied by the Fund. However, upon payment
of any such liability the shareholder will be entitled to reimbursement from the
general assets of the Fund. The Trustees intend to conduct the operations of the
Fund, with the advice of counsel, in such a way so as to avoid, as far as
possible, ultimate liability of the shareholders for the liabilities of the
Fund.
The Declaration of Trust further provides that no Trustee, officer,
employee or agent of the Fund is liable to the Fund or to a shareholder, nor is
any Trustee, officer, employee or agent liable to any third persons in
connection with the affairs of the Fund, except as such liability may arise from
his or its own bad faith, willful misfeasance, gross negligence, or reckless
disregard of his or its duties. It also provides that all third persons shall
look solely to the Fund property for satisfaction of claims arising in
connection with the affairs of the Fund. With the exceptions stated, the
Declaration of Trust provides that a Trustee, officer, employee or agent is
entitled to be indemnified against all liability in connection with the affairs
of the Fund.
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REDEMPTION AND EXCHANGE OF SHARES
The right of redemption may be suspended or the date of payment postponed (a)
for any period during which the New York Stock Exchange ('NYSE') is closed other
than for customary weekend and holiday closings, (b) when trading in the markets
the Fund normally utilizes is restricted, or when an emergency, as defined by
the rules and regulations of the SEC, exists, making disposal of the Fund's
investments or determination of its net asset value not reasonably practicable,
or (c) for any other periods as the SEC by order may permit for protection of
the Fund's shareholders.
Shares of the Fund may be exchanged for shares of the following
PaineWebber/Kidder, Peabody funds, to the extent such shares are offered for
sale in the shareholder's state of residence:
PaineWebber/Kidder, Peabody Cash Reserve Fund, Inc.
PaineWebber/Kidder, Peabody Municipal Money Market
Series -- Connecticut Series.
PaineWebber/Kidder, Peabody Municipal Money Market Series -- New
Jersey Series.
PaineWebber/Kidder, Peabody Premium Account Fund.
The right of exchange may be suspended or postponed if (a) there is a
suspension of the redemption of Fund shares under Section 22(e) of the Act, or
(b) the Fund temporarily delays or ceases the sale of its shares because it is
unable to invest amounts effectively in accordance with its applicable
investment objective, policies and restrictions.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund will not be computed on the following NYSE
holidays (observed): New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas. If one of these
holidays falls on a Saturday or Sunday, the NYSE will be closed on the preceding
Friday or the following Monday, respectively. The days on which net asset value
is determined are the Fund's business days. Net asset value is computed by
dividing the value of the Fund's total assets less liabilities by the total
number of shares outstanding. The Fund's expenses and fees, including
PaineWebber's fee, are accrued daily and taken into account for the purpose of
determining net asset value. It is the Fund's policy to attempt to maintain a
net asset value of $1.00 per share for purposes of sales and redemptions,
although there can be no assurance that the Fund will always be able to do so.
The Fund maintains a dollar-weighted average portfolio maturity of 90 days
or less, purchases only instruments having remaining maturities of 397 days or
less and invests only in securities which present minimal credit risks and are
of high quality as determined by any major rating service or, in the case of any
instrument that is not rated, of comparable quality as determined by the
Trustees.
The valuation of the Fund's portfolio securities is based on their
amortized cost, which does not take into account unrealized gains or losses.
This involves valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument.
While
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this method provides certainty in valuation, it may result in periods during
which value, as determined by amortized cost, is higher or lower than the price
the Fund would receive if it sold the instrument.
In connection with the utilization of the amortized cost method of
valuation, the Trustees have established procedures reasonably designed, taking
into account current market conditions and the Fund's investment objective, to
stabilize net asset value per share as computed for the purpose of sales and
redemptions at $1.00. These procedures include periodic review, as the Trustees
deem appropriate and at such intervals as are reasonable in light of current
market conditions, of the relationship between the amortized cost value per
share and the net asset value per share based on available indications of market
value. In such review, market quotations and market equivalents are obtained
from an independent pricing service (the 'Service') approved by the Trustees.
The Service values the Fund's investments based on methods which include
consideration of: yields or prices of municipal bonds of comparable quality,
coupon, maturity and type; indications of values from dealers; and general
market conditions. The Service also may employ electronic data processing
techniques and/or a matrix system to determine valuations.
In the event of a difference of over 1/2 of 1% between the Fund's net asset
value based on available market quotations or market equivalents and $1.00 per
share based on amortized cost, the Trustees will promptly consider what action,
if any, should be taken. The Trustees also will take such action as they deem
appropriate to eliminate or to reduce to the extent reasonably practicable any
material dilution or other unfair results which might arise from differences
between the two. Such action may include redeeming shares in kind, selling
portfolio instruments prior to maturity to realize capital gains or losses, or
to shorten the average portfolio maturity, withholding dividends, making
distributions from capital or capital gains, utilizing a net asset value per
share as determined by using available market quotations, or reducing the number
of its outstanding shares. Any reduction of outstanding shares will be effected
by having each shareholder proportionately contribute to the Fund's capital the
necessary shares that represent the excess upon such determination. Each
shareholder will be deemed to have agreed to such contribution in these
circumstances by his investment in the Fund.
DIVIDENDS, DISTRIBUTIONS AND TAXES
If, at the close of each quarter of its taxable year, at least 50% of the value
of the Fund's total assets consists of municipal tax exempt obligations, then
the Fund may designate and pay Federal exempt-interest dividends from interest
earned on all such tax exempt obligations. Such exempt-interest dividends may be
excluded by shareholders of the Fund from their gross income for Federal income
tax purposes. Dividends derived from Taxable Investments, together with
distributions from any net realized short-term securities gains, generally are
taxable as ordinary income for Federal income tax purposes whether or not
reinvested. Distributions from net realized long-term securities gains generally
are taxable as long-term capital gains to a shareholder who is a citizen or
resident of the United States, whether or not reinvested and regardless of the
length of time the shareholder has held his shares.
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If, at the close of each quarter of its taxable year, at least 50% of the
value of the Fund's total assets consists of obligations which, when held by an
individual, the interest therefrom is exempt from California taxation, and if
the Fund qualifies as a management company under the California Revenue and
Taxation Code, then the Fund will be qualified to pay dividends to its
shareholders that are exempt from California personal income tax (but not from
California franchise tax). However, the total amount of such California
exempt-interest dividends paid by the Fund to a non-corporate shareholder with
respect to any taxable year cannot exceed such shareholder's pro rata share of
interest received by the Fund during such year that is exempt from California
personal income tax less any expenses and expenditures deemed to relate to such
interest.
For shareholders subject to the California personal income tax,
exempt-interest dividends derived from California Municipal Obligations will not
be subject to the California personal income tax. Distributions from net
realized short-term capital gains to California resident shareholders will be
subject to the California personal income tax as ordinary income. Distributions
from net realized long-term capital gains may constitute long-term capital gains
for individual California resident shareholders. Unlike under Federal tax law,
the Fund's shareholders will not be subject to California personal income tax,
or receive a credit for California taxes paid by the Fund, on undistributed
capital gains. In addition, California tax law does not consider any portion of
the exempt-interest dividends paid an item of tax preference for the purpose of
computing the California alternative minimum tax.
The Internal Revenue Code of 1986, as amended (the 'Code'), provides that
if a shareholder has not held his Fund shares for more than six months (or such
shorter period as the Internal Revenue Service may prescribe by regulation) and
has received an exempt-interest dividend with respect to such shares, any loss
incurred on the sale of such shares will be disallowed to the extent of the
exempt-interest dividend received.
Ordinarily, gains and losses realized from portfolio transactions will be
treated as capital gain or loss. However, all or a portion of any gain realized
from the sale or other disposition of certain market discount bonds will be
treated as ordinary income under Section 1276 of the Code.
DETERMINATION OF CURRENT AND EFFECTIVE YIELDS
The Fund provides current and effective yield quotations based on its daily
dividends. See 'Dividends, Distributions and Taxes' in the Fund's Prospectus.
Such quotations are made in reports, sales literature and advertisements
published by the Fund.
Current yield is computed by determining the net change exclusive of
capital changes in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of a seven day calendar period, dividing
the net change in account value by the value of the account at the beginning of
the period and multiplying the return over the seven day period by 365/7. For
purposes of the calculation, net change in account value reflects the value of
additional shares purchased with dividends from the original share and dividends
declared on both the original share and any such additional shares, but does not
reflect realized gains or losses or
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unrealized appreciation or depreciation. Effective yield is computed by
annualizing the seven-day return with all dividends reinvested in additional
shares of the Fund.
Current and effective yields fluctuate and are not necessarily
representative of future results. The shareholder should remember that yield is
a function of the type and quality of the instruments in the portfolio,
portfolio maturity and operating expenses. See 'Investment Objective and
Policies' in the Fund's Prospectus and 'Investment Advisory and Other Services'
above. Current and effective yield information is useful in reviewing the Fund's
performance, but because current and effective yields will fluctuate such
information may not provide a basis for comparison with bank deposits, other
investments which pay a fixed yield for a stated period of time or other
investment companies which may use a different method of calculating yield. A
shareholder's principal in the Fund is not guaranteed. See 'Determination of Net
Asset Value' for a discussion of the manner in which the Fund's price per share
is determined.
Historical and comparative yield information may be presented by the Fund.
FINANCIAL STATEMENTS
The Fund's Annual Report to Shareholders for the fiscal year ended July 31, 1995
is a separate document supplied with this Statement of Additional Information,
and the financial statements, accompanying notes and report of independent
auditors appearing therein are incorporated by reference in this Statement of
Additional Information.
RATINGS OF SECURITIES
RATINGS IN GENERAL
A rating of a rating service represents the service's opinion as to the credit
quality of the security being rated. However, ratings are general and are not
absolute standards of quality or guarantees as to the creditworthiness of an
issuer. Consequently, Mitchell Hutchins believes that the quality of Municipal
Obligations should be continuously reviewed and that individual analysts give
different weightings to the various factors involved in credit analysis. A
rating is not a recommendation to purchase, sell or hold a security, because it
does not take into account market value or suitability for a particular
investor. When a security has received a rating from more than one service, each
rating should be evaluated independently. Ratings are based on current
information furnished by the issuer or obtained by the rating services from
other sources which they consider reliable. Ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such information, or
for other reasons. The following is a description of the characteristics of
ratings used by Moody's and S&P.
RATING BY MOODY'S
MUNICIPAL BONDS
AAA. Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as 'gilt edge.'
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. Although the various
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protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such bonds.
AA. Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa bonds or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the long
term risks appear somewhat larger than in Aaa bonds.
CONDITIONAL RATINGS. The designation 'Con.' followed by a rating indicates
bonds for which the security depends upon the completion of some act or the
fulfillment of some condition. These are bonds secured by (a) earnings of
projects under construction, (b) earnings of projects unseasoned in operating
experience, (c) rentals which begin when facilities are completed, or (d)
payments to which some other limiting condition attaches. A parenthetical rating
denotes probable credit stature upon completion of construction or elimination
of the basis of the condition.
Note: Those bonds in the Aa group which Moody's believes possess the
strongest investment attributes are designated by the symbol Aa1.
MUNICIPAL NOTES
MIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
VARIABLE AND FLOATING RATE DEMAND OBLIGATIONS
Moody's assigns a dual rating, one representing an evaluation of the degree of
risk associated with scheduled principal and interest payments and the other
representing an evaluation of the degree of risk associated with the demand
feature (VMIG) to variable and floating rate demand obligations.
Depending upon the maturity of a variable or floating rate obligation, it
is assigned either a municipal bond and VMIG rating or a municipal note and VMIG
rating. The VMIG ratings include the following:
VMIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
VMIG 2. This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
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COMMERCIAL PAPER
PRIME-1. This designation is the highest commercial paper rating assigned
by Moody's. Denotes superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
-- Well established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2. Denotes a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
If an issuer represents to Moody's that its commercial paper obligations
are supported by the credit of another entity or entities, Moody's, in assigning
ratings to such issuers, evaluates the financial strength of the indicated
affiliated corporations, commercial banks, insurance companies, foreign
governments, or other entities, but only as one factor in the total rating
assessment.
RATINGS BY S&P
MUNICIPAL BONDS
AAA. Bonds rated AAA have the highest rating. Capacity to pay interest and
repay principal is extremely strong.
AA. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
In order to provide more detailed indications of credit quality, the AA
rating described above may be modified by the addition of a plus or a minus sign
to show relative standing within the rating category.
PROVISIONAL RATINGS. The letter 'p' indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, although addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
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MUNICIPAL NOTES
SP-1. Notes rated SP-1 have very strong or strong capacity to pay principal
and interest. Those issues determined to possess overwhelming safety
characteristics are designated as SP-1+.
Notes due in three years or less normally receive a note rating. Notes
maturing beyond three years normally receive a bond rating, although the
following criteria are used in making that assessment:
-- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely the issue will be rated as a
note).
-- Source of payment (the more dependent the issue is on the market
for its refinancing, the more likely it will be rated as a note).
VARIABLE AND FLOATING RATE DEMAND OBLIGATIONS
S&P assigns dual ratings to all long-term debt issues that have as part of their
provisions a demand feature. The first rating addresses the likelihood of
repayment of principal and interest as due, and the second rating addresses only
the demand feature. The long-term debt rating symbols are used for bonds to
denote the long-term maturity and the commercial paper rating symbols are
usually used to denote the put (demand) option (for example, AAA/A-1+).
Normally, demand notes receive note rating symbols combined with commercial
paper symbols (for example, SP-1/A-1+).
COMMERCIAL PAPER
A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designations 1, 2, and 3 to indicate the relative degree of safety.
A-1. This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are designated A-1+.
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<TABLE>
<S> <C>
- --------------------------------------------------------
Contents
- --------------------------------------------------------
Investment Objective and Policies 2
- --------------------------------------------------------
Management of the Fund 17
- --------------------------------------------------------
Investment Advisory and Other Services 20
- --------------------------------------------------------
Principal Shareholders 22
- --------------------------------------------------------
Portfolio Transactions 22
- --------------------------------------------------------
Shares of the Fund 22
- --------------------------------------------------------
Redemption and Exchange of Shares 24
- --------------------------------------------------------
Determination of Net Asset Value 24
- --------------------------------------------------------
Dividends, Distributions and Taxes 25
- --------------------------------------------------------
Determination of Current and Effective Yields 26
- --------------------------------------------------------
Financial Statements 27
- --------------------------------------------------------
Ratings of Securities 27
- --------------------------------------------------------
</TABLE>
PaineWebber/
Kidder,
Peabody
California
Tax
Exempt
Money
Fund
Statement of
Additional
Information
December 1, 1995
STATEMENT OF DIFFERENCES
The dagger shall be expressed as .......................... 'D'
The service mark shall be expressed as .................... 'sm'
<PAGE>
