<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY INVESTMENT TRUST II
(FORMERLY KIDDER, PEABODY INVESTMENT TRUST II)
AND THE SERIES THEREOF
MITCHELL HUTCHINS/KIDDER, PEABODY EMERGING MARKETS EQUITY FUND
MITCHELL HUTCHINS/KIDDER, PEABODY MUNICIPAL BOND FUND
SUPPLEMENT TO PROSPECTUSES DATED OCTOBER 28, 1994
The following information revises and supplements the information contained
in the Funds' Prospectuses dated October 28, 1994:
1. a. TRUST NAME. The name of Kidder, Peabody Investment Trust II was
changed to Mitchell Hutchins/Kidder, Peabody Investment Trust II ("Trust").
b. FUND NAMES. The names of the two series in the Trust (each a "Fund")
were changed to: "Mitchell Hutchins/Kidder, Peabody Emerging Markets Equity
Fund" and "Mitchell Hutchins/Kidder, Peabody Municipal Bond Fund."
c. INVESTMENT ADVISER AND SUB-ADVISER. At a special meeting of
shareholders that took place on April 13, 1995, shareholders approved a new
investment advisory and administration agreement with Mitchell Hutchins
Asset Management Inc. ("Mitchell Hutchins") and, in the case of Mitchell
Hutchins/Kidder, Peabody Emerging Markets Equity Fund ("Emerging Markets
Fund"), a new sub-advisory agreement with the Fund's existing investment
adviser (now referred to as the "Sub-Adviser"). The former investment
adviser of Mitchell Hutchins/Kidder, Peabody Municipal Bond Fund was not
appointed as its sub-adviser. Each Fund pays the same fee for investment
advisory and administration services to Mitchell Hutchins as previously
paid to Kidder Peabody Asset Management, Inc. ("KPAM") and, for Emerging
Markets Fund, Mitchell Hutchins (not the Fund) pays the same fee for sub-
advisory services to the Sub-Adviser as previously paid by KPAM, as
described in each Fund's Prospectus. Mitchell Hutchins, or the Sub-Adviser
in the case of Emerging Markets Fund, continues to manage each Fund in
accordance with each Fund's investment objective, policies and restrictions
as stated in each Prospectus.
Mitchell Hutchins is a wholly owned subsidiary of PaineWebber
Incorporated ("PaineWebber"), which is in turn wholly owned by Paine Webber
Group Inc., a publicly owned financial services holding company. Mitchell
Hutchins is located at 1285 Avenue of the Americas, New York, New York
10019. As of June 30, 1995, Mitchell Hutchins served as adviser or sub-
adviser to 41 investment companies with an aggregate of 86 separate
portfolios and aggregate assets of approximately $28 billion.
d. OTHER SERVICES. Mitchell Hutchins serves as each Fund's distributor.
All references in each Fund's Prospectus to Kidder, Peabody & Co.
Incorporated as each Fund's distributor are replaced with references to
Mitchell Hutchins.
PFPC Inc. ("PFPC"), a subsidiary of PNC Bank, National Association, whose
principal address is 400 Bellevue Parkway, Wilmington, Delaware 19809 is
each Fund's transfer agent. All references in the Prospectus to IFTC as the
Fund's transfer agent are replaced with references to PFPC.
1
<PAGE>
The address for purchase, exchange and redemption transactions has been
changed to:
PFPC Inc.
P.O. Box 8950
Wilmington, DE 19899
Attn: Mitchell Hutchins/Kidder, Peabody Emerging Markets Equity Fund
or Mitchell Hutchins/Kidder, Peabody Municipal Bond Fund
800-647-1568
e. VOLUME DISCOUNTS AND RIGHTS OF ACCUMULATION. The terms of Letters of
Intent executed prior to February 14, 1995 will be observed, but new
Letters of Intent are no longer available.
Reduced sales charges are available through volume discounts and a right
of accumulation. If an investor or eligible group of related Fund
investors, as defined below, purchases Class A shares of a Fund
concurrently with Class A shares of other PaineWebber mutual funds or
Mitchell Hutchins/Kidder, Peabody mutual funds, the purchases may be
combined to take advantage of the reduced sales charges applicable to
larger purchases. The right of accumulation permits a Fund investor or
eligible group of related Fund investors, as defined below, to pay the
lower sales charge applicable to larger purchases by basing the sales
charge on (1) the dollar amount of Class A shares then being purchased plus
(2) an amount equal to the then-current net asset value of the investor's
or group's combined holdings of Class A Fund shares and Class A shares of
any other PaineWebber mutual fund or Mitchell Hutchins/Kidder, Peabody
mutual fund. The purchaser must provide sufficient information to permit
confirmation of his or her holdings, and the acceptance of the purchase
order is subject to that confirmation. This right of accumulation may be
amended or terminated at any time.
An "eligible group of related Fund investors" can consist of any
combination of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her Individual Retirement Account
("IRA");
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds
25% or more of the outstanding voting securities of a corporation will
be deemed to control the corporation, and a partnership will be deemed
to be controlled by each of its general partners);
(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by individual(s);
(e) an individual (or eligible group of individuals) and a trust
created by the individual(s), the beneficiaries of which are the
individual and/or the individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers
to Minors Act account created by the individual or the individual's
spouse; or
(g) an employer (or group of related employers) and one or more
qualified retirement plans of such employer or employers (an employer
controlling, controlled by or under common control with another
employer is deemed related to that other employer).
f. STOCK CERTIFICATES. Stock certificates are no longer issued for shares
of each Fund.
g. REINSTATEMENT PRIVILEGE. Shareholders who have redeemed Class A shares
may reinstate their Fund account without a sales charge up to the dollar
amount redeemed by purchasing Class A shares within 365 days after the
redemption. To take advantage of this reinstatement privilege, shareholders
must notify their investment executive at the time the privilege is
exercised.
h. REDEMPTION BY MAIL. Redemption requests received by PFPC by mail will
be processed by PFPC. PFPC 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" as specified in the Prospectuses.
2
<PAGE>
i. AUTOMATIC INVESTMENT PLAN. The Automatic Investment Plan no longer
accepts twice monthly orders, but will accept monthly, quarterly and semi-
annual orders.
j. INSTANCES OF A REDUCED OR WAIVED SALES CHARGE. The three paragraphs of
the section titled "PURCHASE OF SHARES--Instances of a Reduced or Waived
Sales Charge" are replaced with the following:
SALES CHARGE WAIVERS--CLASS A SHARES. Class A shares may be purchased
without a sales charge by employees, directors and officers of
PaineWebber or its affiliates, directors or trustees and officers of
any PaineWebber mutual funds, their spouses, parents and children and
advisory clients of Mitchell Hutchins.
Class A shares also may be purchased without a sales charge if the
purchase is made through a PaineWebber investment executive who
formerly was employed as a broker with another firm registered as a
broker-dealer with the Securities and Exchange Commission, provided (1)
the purchaser was the investment executive's client at the competing
brokerage firm, (2) within 90 days of the purchase of Class A shares
the purchaser redeemed shares of one or more mutual funds for which
that competing firm or its affiliates was principal underwriter,
provided the purchaser either paid a sales charge to invest in those
funds, paid a contingent deferred sales charge upon redemption or held
shares of those funds for the period required not to pay the otherwise
applicable contingent deferred sales charge and (3) the total amount of
shares of all PaineWebber mutual funds or Mitchell Hutchins/Kidder,
Peabody mutual funds purchased under this sales charge waiver does not
exceed the amount of the purchaser's redemption proceeds from the
competing firm's funds. To take advantage of this waiver, an investor
must provide satisfactory evidence that all the above-noted conditions
are met. Qualifying investors should contact their PaineWebber
investment executives for more information.
k. OTHER REDEMPTION POLICIES. With respect to shareholder holdings that
are reduced by redemptions, and not by reason of market fluctuations, to a
value of $500 or less, for which involuntary redemptions by the Trust may
be made, the shareholder notice provision is modified to increase the time
period to 60 days in which shareholders will be given the opportunity to
increase the account balance to more than $500.
l. SYSTEMATIC WITHDRAWAL PLAN. The paragraph under the section entitled
"Systematic Withdrawal Plan" is replaced with the following:
Shareholders who own shares of the Fund with a value of $5,000 or
more may have Mitchell Hutchins redeem a portion of their shares
monthly, quarterly or semi-annually under the systematic withdrawal
plan. The minimum amount for all withdrawals of shares is $100.
Quarterly withdrawals are made in March, June, September and December,
and semi-annual withdrawals are made in June and December. Shareholders
who receive dividends or other distributions in cash may not
participate in the systematic withdrawal plan. Purchases of additional
shares of the Fund concurrently with withdrawals are ordinarily
disadvantageous to shareholders because of tax liabilities and any
sales charges.
2. EXCHANGE PRIVILEGES AND CHARGES. Shares of the Funds may be exchanged for
shares of the corresponding class of PaineWebber Funds offered under the
PaineWebber Flexible Pricing SM System. Exchanges are no longer subject to the
payment of an amount equal to the difference between the sales charge
previously paid and the sales charge payable on the shares acquired in the
exchange. In addition, the exchange privilege of each Fund with former Kidder,
Peabody money market funds is eliminated. The first paragraph of the section
titled "Exchange Privilege" is replaced with the following:
Fund shares will continue to be exchangeable with the corresponding class
of Mitchell Hutchins/Kidder, Peabody Funds and additionally can be
exchanged with the corresponding class of shares of PaineWebber Funds
offered under the PaineWebber Flexible PricingSM System (Class A shares for
Class A shares of PaineWebber Funds and Class B shares for Class D shares
of PaineWebber Funds).
3
<PAGE>
3. SALES CHARGES. Effective February 13, 1995, Mitchell Hutchins/Kidder,
Peabody Emerging Markets Equity Fund no longer imposes a contingent deferred
sales charge (CDSC) on Class B shares held less than one year.
4. PURCHASES AND REDEMPTIONS THROUGH PAINEWEBBER. The following information
revises and supplements the information appearing under the captions "Purchase
of Shares" and "Redemption of Shares" in each Fund's prospectus:
PURCHASE OF SHARES--PURCHASE OF SHARES THROUGH PAINEWEBBER OR
CORRESPONDENT FIRMS. The time by which payment for shares purchased is due
at PaineWebber has changed due to the implementation of "T+3" settlement
procedures. Payment is due on the third Business Day after the order is
received in PaineWebber's New York City offices. A "Business Day" is any
day on which the New York Stock Exchange, Inc. ("NYSE") is open for
business.
REDEMPTION OF SHARES--REDEMPTION OF SHARES THROUGH PAINEWEBBER OR
CORRESPONDENT FIRMS. The time by which redemption proceeds will be paid to
the redeeming shareholder has also changed due to the implementation of
"T+3." Repurchase proceeds will be paid within three Business Days after
receipt of the request in PaineWebber's New York City office. "Business
Day" is defined above.
5. The following information revises the information contained only in the
Mitchell Hutchins/Kidder, Peabody Emerging Markets Equity Fund prospectus:
The sales load appearing in the prospectus for Class A shares is replaced
with the schedule shown below, which became effective on July 3, 1995:
<TABLE>
<CAPTION>
SALES CHARGE AS A
PERCENTAGE OF DISCOUNT TO
---------------------------------- SELECTED
NET AMOUNT DEALERS AS A
INVESTED PERCENTAGE
AMOUNT OF PURCHASE OFFERING (NET ASSET OF OFFERING
AT OFFERING PRICE PRICE VALUE) PRICE
---------------------- -------- ---------- ------------
<S> <C> <C> <C>
Less than $ 50,000 4.50% 4.71% 4.25%
$ 50,000 to $ 99,999 4.00 4.17 3.75
$ 100,000 to $249,999 3.50 3.63 3.25
$ 250,000 to $499,999 2.50 2.56 2.25
$ 500,000 to $999,999 1.75 1.78 1.50
$1,000,000 and over None None 1.00
</TABLE>
Dated: August 18, 1995
This Supplement supersedes and replaces all previous Supplements.
4
<PAGE>
PROSPECTUS OCTOBER 28, 1994
--------------------------------------------------------------------------------
Kidder, Peabody Municipal Bond Fund
60 BROAD STREET NEW YORK, NEW YORK 10004-2350 (212) 656-1737
Kidder, Peabody Municipal Bond Fund (the 'Fund'), a series of Kidder, Peabody
Investment Trust II (the 'Trust'), is designed for investors seeking current
interest income that is exempt from federal income taxation. The Fund's
investment objective is to achieve as high a level of current interest income
that is exempt from federal income taxation as is consistent with prudent
investment management and the preservation of capital. The Fund's portfolio
consists primarily of high quality municipal obligations.
This Prospectus briefly sets forth certain information about the Fund, including
applicable operating and shareholder servicing expenses, that prospective
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference.
Additional information about the Fund, contained in a Statement of Additional
Information dated the same date as this Prospectus, has been filed with the
Securities and Exchange Commission (the 'SEC') and is available to investors
upon request and without charge by calling or writing the Trust at the telephone
number or address listed above. The Statement of Additional Information is
incorporated in its entirety by reference into this Prospectus.
--------------------------------------------------------------------------------
MANAGER
Kidder Peabody Asset Management, Inc.
INVESTMENT ADVISER
GE Investment Management Incorporated
DISTRIBUTOR
Kidder, Peabody & Co. Incorporated
[Logo]
--------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
--------------------------------------------------------------------------------
FEE TABLE
The table appearing below shows the costs and expenses that an investor would
incur, either directly or indirectly, as a shareholder of the Fund, based upon
the Fund's annual operating expenses.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases of Shares (as a
percentage of offering price)................................... 2.25% 0% 0%
Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage of offering price)................................... 0% 0% 0%
Maximum Contingent Deferred Sales Charge (as a percentage of
redemption proceeds)............................................ 0% 0% 0%
Redemption Fees (as a percentage of amount redeemed).............. 0% 0% 0%
Maximum Exchange Fee.............................................. 0% 0% 0%
Maximum Annual Investment Advisory Fee Payable by Shareholders
Holding Class C Shares through the INSIGHT Investment Advisory
Program (as a percentage of average daily value of shares
held)........................................................... 0% 0% 1.50%
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets) Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
Management Fees................................................... .60% .60% .60%
12b-1 Fees........................................................ .25 .75 0
Other Expenses.................................................... .87 .87 .87
------- ------- -------
Total Fund Operating Expenses........................... 1.72% 2.22% 1.47%
------- ------- -------
------- ------- -------
</TABLE>
The nature of the services provided to, and the aggregate management fees
paid by, the Fund are described below under 'Management of the Fund.' The Fund
bears an annual Rule 12b-1 service fee of .25% of the value of the average daily
net assets of Class A shares and an annual Rule 12b-1 fee of .75% of the value
of the average daily net assets of Class B shares, consisting of a .25% service
fee and a .50% distribution fee. Long-term shareholders of Class B Shares may
pay more than the economic equivalent of the maximum front-end sales charge
currently permitted by the rules of the National Association of Securities
Dealers, Inc. governing investment company sales charges. See 'Distributor.'
The percentage of 'Other Expenses' in the table above has been restated to
reflect current fees and elimination of the expense reimbursement arrangement in
effect during the Fund's most recent fiscal year. 'Other Expenses' include fees
for shareholder services, custodial fees, legal and accounting fees, printing
costs and registration fees, the costs of regulatory compliance, a portion of
the costs associated with maintaining the Trust's legal existence and the costs
involved in communicating with the Fund's shareholders.
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical $1,000 investment in the Fund assuming (1) a 5% annual return,
(2) payment of the shareholder transaction expenses and annual Fund operating
expenses set forth in the table above and (3) complete redemption at the end of
the period.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------------------------------------------ ------- ------- ------- --------
<S> <C> <C> <C> <C>
Class A........................................................... $40 $75 $ 114 $221
Class B........................................................... $23 $69 $ 119 $255
Class C........................................................... $15 $46 $ 80 $176
</TABLE>
------------
The above example is intended to assist an investor in understanding various
costs and expenses that the investor would bear upon becoming a shareholder of
the Fund. The example should not be considered to be a representation of past or
future expenses. Actual expenses of the Fund may be greater or less than those
shown above. The assumed 5% annual return shown in the example is hypothetical
and should not be considered to be a representation of past or future annual
return; the actual return of the Fund may be greater or less than the assumed
return.
2
<PAGE>
--------------------------------------------------------------------------------
HIGHLIGHTS
<TABLE>
<S> <C>
------------------------------------------------------------------------------------------------------------------
The Trust The Trust is an open-end management investment company. See 'General Information.'
------------------------------------------------------------------------------------------------------------------
The Fund The Fund, one of several series of the Trust currently offering interests to the public, is a
diversified fund that seeks as high a level of current interest income that is exempt from
federal income taxation as is consistent with prudent investment management and the
preservation of capital. The Fund's portfolio consists primarily of high quality Municipal
Obligations, as defined below. See 'Investment Objective and Policies' and 'General
Information.'
------------------------------------------------------------------------------------------------------------------
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
The Fund offers investors the opportunity to receive dividends consisting primarily of income
that are exempt from federal 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 an array of investments that are typically beyond the
means of most investors. The Fund's investment adviser, GE Investment Management Incorporated
('GEIM'), reviews the fundamental characteristics, including credit quality, 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.
High Quality Municipal Obligations
The Fund's portfolio consists primarily of high quality Municipal Obligations, which are
rated in the two highest categories by recognized rating agencies, the interest income on
which is exempt from federal income taxation. The quality of the Fund's portfolio is enhanced
by broad issuer and geographic diversification and GEIM's independent credit analysis. See
'Investment Objective and Policies.'
Transaction Savings
By investing in the Fund, an investor is able to acquire ownership in a portfolio of
municipal obligations without paying the higher transaction costs generally associated with a
series of small securities purchases.
</TABLE>
3
<PAGE>
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Convenience
Fund shareholders are relieved of the administrative and recordkeeping burdens normally
associated with direct ownership of securities, such as the coordination of maturities and the
calculation of the value of securities on an ongoing basis.
Ready Access to Assets
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.'
Choice Pricing System
Under the Choice Pricing System'sm', the Fund presently offers three classes of shares
('Classes') that provide different methods of purchasing shares and allow investment
flexibility and a wider range of investment choices. See 'Purchase of Shares.'
Exchange Privilege
Shareholders of the Fund may exchange all or a portion of their shares for shares of the same
Class or the sole outstanding Class of specified funds in the Kidder Family of Funds. See
'Exchange Privilege.'
Total Portfolio Approach
The funds in the Kidder Family of Funds are designed to be strategically combined as part of
a total portfolio approach. This investment philosophy acknowledges the interplay of a
shareholder's many different investing needs and preferences and recognizes that every
investment move a shareholder makes alters the balance of his or her overall financial
profile. The Fund may be used in conjunction with other funds in the Kidder Family of Funds to
build a portfolio that maximizes the potential of available assets while meeting many
different -- and changing -- financial needs.
------------------------------------------------------------------------------------------------------------------
Purchase of Kidder, Peabody & Co. Incorporated ('Kidder, Peabody'), a major full-line investment services
Shares firm serving the United States and foreign securities markets, acts as the distributor of the
Fund's shares. The Fund presently offers three Classes of shares that differ principally in
terms of the sales charges and rate of expenses to which they are subject and are designed to
provide an investor with the flexibility of selecting an investment best suited to the
investor's needs. See 'Purchase of Shares' and 'Distributor.'
</TABLE>
4
<PAGE>
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Class A Shares
The public offering price of Class A shares is the current net asset value per share next
determined after a purchase order is received, plus a maximum sales charge of 2.25% (2.33% of
the net amount invested). Investors purchasing $50,000 or more, certain employee benefit plans
and employees of Kidder, Peabody's affiliates are eligible for reduced sales charges. The Fund
pays Kidder, Peabody a service fee with respect to Class A shares at the annual rate of .25%
of the value of the average daily net assets attributable to this Class.
Class B Shares
The public offering price of Class B shares is the net asset value per share next determined
after a purchase order is received, without imposition of a sales charge. The Fund pays
Kidder, Peabody a service fee at the annual rate of .25%, and a distribution fee at the annual
rate of .50%, of the average daily net assets attributable to this Class.
Class C Shares
The public offering price of Class C shares, which are available exclusively to employees of
Kidder, Peabody and their associated accounts, directors or trustees of any fund in the Kidder
Family of Funds, employee benefit plans of Kidder, Peabody and participants in the INSIGHT
Investment Advisory Program'sm' ('INSIGHT'), is the net asset value per share next determined
after a purchase order is received, without imposition of a sales charge. This Class bears no
service or distribution fees. Participation in INSIGHT is subject to payment of an advisory
fee at the maximum annual rate of 1.50% of assets held through INSIGHT, generally charged
quarterly in advance.
Investment Minimums.
The minimum initial investment in the Fund is $1,000 and the minimum subsequent investment is
$50, except that for accounts established pursuant to the Uniform Gifts to Minors Act, the
minimum initial investment is $250 and the minimum subsequent investment is $1.00.
------------------------------------------------------------------------------------------------------------------
Redemption of Shares of the Fund may be redeemed at the Fund's next determined net asset value per share.
Shares Redemptions are not subject to any contingent deferred sales charges or other charges. See
'Redemption of Shares.'
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
------------------------------------------------------------------------------------------------------------------
Management Kidder Peabody Asset Management, Inc. ('KPAM'), a wholly-owned subsidiary of Kidder, Peabody,
serves as the Fund's manager and receives a fee, accrued daily and paid monthly, at the annual
rate of .60% of the Fund's average daily net assets. KPAM in turns employs GEIM, a wholly-owned
subsidiary of General Electric Company ('GE'), as the Fund's investment adviser, in which
capacity GEIM receives from KPAM a fee, accrued daily and paid monthly, at the annual rate of
.30% of the Fund's average daily net assets. Kidder, Peabody is a major full-line investment
services firm serving foreign and domestic securities markets. General Electric Capital
Services, Inc., a wholly-owned subsidiary of GE, owns all the outstanding stock of Kidder,
Peabody Group Inc. ('Kidder Group'), the parent company of Kidder, Peabody. See 'Management of
the Fund' and 'Distributor.'
------------------------------------------------------------------------------------------------------------------
Risk Factors No assurance can be given that the Fund will achieve its investment objective. Investing in an
and Special investment company that invests in Municipal Obligations involves risks. The value of a
Considerations 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. Although the
Fund's assets are invested primarily in high quality Municipal Obligations, up to 35% of the
Fund's total assets may be invested in Municipal Obligations that, while considered investment
grade, may also be considered to possess speculative characteristics. The Fund may also be
subject to certain risks in using investment techniques and strategies such as entering into
futures contracts and options on futures contracts and investing in certain investments such as
municipal leases and zero coupon municipal obligations. See 'Investment Objective and
Policies -- Risk Factors and Special Considerations' at page 15 of this Prospectus. The Fund
may invest without limitation in Municipal Obligations the interest on which is a specific tax
preference item for purposes of the federal individual and corporate alternative minimum taxes.
See 'Dividends, Distributions and Taxes -- Taxes.' The Fund may also experience high portfolio
turnover. See 'Investment Objective and Policies -- Portfolio Turnover.'
</TABLE>
6
<PAGE>
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audit of the financial statements of the Trust with respect to
the Fund by Deloitte & Touche LLP. Financial statements for the fiscal period
ended June 30, 1994 and the report of independent auditors' thereon are included
in the Statement of Additional Information.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
--------------- -------------- --------------
PERIOD PERIOD PERIOD
ENDED EMDED ENDED
JUNE 30, 1994'D' JUNE 30, 1994'D' JUNE 30, 1994'D'
--------------- --------------- --------------
<S> <C> <C> <C>
Net asset value, beginning of period...................................... $ 12.00 $ 12.00 $ 12.00
------------ ------------ ------------
Income from Investment Operations
Net investment income................................................ 0.46 0.42 0.47
Net realized and unrealized losses on investments.................... (1.16) (1.16) (1.16)
------------ ------------ ------------
Total from investment operations.......................................... (0.70) (0.74) (0.69)
------------ ------------ ------------
Distributions to Shareholders from
Net investment income................................................ (0.46) (0.42) (0.47)
------------ ------------ ------------
Net asset value, end of period............................................ $ 10.84 $ 10.84 $ 10.84
------------ ------------ ------------
------------ ------------ ------------
Total return#............................................................. (5.96)% (6.34)% (5.95)%
Ratios/Supplemental Data
Net assets, end of period (in thousands)............................. $ 17,007 $ 5,410 $ 900
------------ ------------ ------------
------------ ------------ ------------
Ratios to average net assets (Annualized)
Expenses, excluding distribution fees, net of reimbursement.......... 0.07% 0.07% 0.07%
Expenses, including distribution fees, net of reimbursement.......... 0.09% 0.59% 0.07%
Expenses, before reimbursement from manager.......................... 1.72% 2.22% 1.47%
Net investment income..................................................... 4.95% 4.45% 4.97%
Portfolio turnover rate................................................... 161.18% 161.18% 161.18%
</TABLE>
------------
`D' From September 8, 1993 (Commencement of Operations) to June 30, 1994.
# Total return does not reflect the effects of a sales charge, and is calculated
by giving effect to the reinvestment of dividends on the dividend payment
date. Since the period covered is less than 12 months, these figures represent
aggregate returns and have not been annualized.
7
<PAGE>
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
OBJECTIVE
The Fund's investment objective is to achieve as high a level of current
interest income that is exempt from federal income taxation as is consistent
with prudent investment management and the preservation of capital. No assurance
can be given that the Fund will be able to achieve its objective, which may be
changed only with the approval of a majority of the Fund's outstanding voting
securities, which is defined in the Investment Company Act of 1940, as amended
(the '1940 Act'), as the lesser of (1) 67% or more of the shares present at a
Fund meeting, if the holders of more than 50% of the outstanding shares of the
Fund are present or represented by proxy or (2) more than 50% of the outstanding
shares of the Fund.
The Fund's annual report for the fiscal period ended June 30, 1994 contains
information regarding factors, including the relevant market conditions and the
investment strategies and techniques pursued by GEIM during such fiscal year,
and is available to shareholders without charge upon request made to the Fund at
the address listed on the front cover page of this Prospectus.
TYPES OF PORTFOLIO INVESTMENTS
It is a fundamental policy of the Fund, which can be changed only with the
approval of a majority of the Fund's outstanding voting securities, that under
normal market conditions at least 80% of its total assets will be invested in
Municipal Obligations. In addition, it is a non-fundamental policy of the Fund
that under normal market conditions at least 65% of its total assets will be
invested in municipal bonds and at least 65% of its total assets will be
invested in Municipal Obligations rated no lower than Aa, VMIG-2, MIG-2 or
Prime-2 ('P-2') by Moody's Investors Service, Inc. ('Moody's'), AA, SP-2, or A-2
by Standard & Poor's Corporation ('Standard & Poor's') or AA or F-1 by Fitch
Investors Service, Inc. ('Fitch'). The Fund may invest up to 35% of its total
assets in Municipal Obligations that are rated at least Baa, VMIG-3, MIG-3 or
Prime-3 ('P-3') by Moody's, BBB, SP-3 or A-3 by Standard & Poor's or BBB or F-3
by Fitch, which Municipal Obligations, though considered investment grade, are
also considered to possess speculative characteristics insofar as adverse
changes in economic conditions are more likely to weaken the ability of issuers
of these debt securities to pay principal and interest. See 'Municipal
Obligations' below.
The Fund will not invest more than 25% of its total assets in Municipal
Obligations whose issuers are located in the same state or more than 25% of its
total assets in Municipal Obligations that are secured by revenues from entities
in any one of the following categories: hospitals and health facilities; ports
and airports; or colleges and universities. The Fund may invest more than 25% of
its total assets in Municipal Obligations of one or more of the following
categories: turnpikes and toll roads; public housing authorities; general
obligations of states and localities; state and local housing finance
authorities; municipal utilities systems; bonds that are secured or backed by
the U.S. Treasury or other securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities ('Government Securities'); and
pollution control bonds. The Fund will not invest more than 25% of its assets in
private activity bonds relating to similar projects.
The Fund may invest in Municipal Obligations that are not rated by either
Moody's, Standard & Poor's or Fitch but that are deemed by GEIM to be of a
quality comparable to rated Municipal Obligations in which the Fund may invest.
Municipal Obligations that are not rated
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will be included with rated Municipal Obligations of comparable quality in
applying the percentage limitations set forth above. It should be emphasized
that ratings are relative and subjective and are not absolute standards of
quality. Although these ratings are initial criteria for selection of portfolio
investments, GEIM also makes its own evaluation of these securities. Among the
factors that are considered are the long-term ability of the issuers to pay
interest and repay principal and general economic trends. Subsequent to its
purchase by the Fund, an issue of Municipal Obligations may cease to be rated or
its rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require sale of these Municipal Obligations by the Fund but
GEIM will consider this event in its determination of whether the Fund should
continue to hold the securities. A description of the rating systems of Moody's,
Standard & Poor's and Fitch is contained in the Statement of Additional
Information.
The Fund may invest up to 20% of its total assets in short term
investments, some of which may not be tax exempt ('Taxable Investments'). In
addition, when the Fund is maintaining a temporary defensive position, the Fund
may without limitation hold cash or invest in Taxable Investments. Securities
eligible for short term investment by the Fund are tax exempt notes of municipal
issuers having, at the time of purchase, a rating within the three highest
grades of Moody's, Standards & Poor's or Fitch, or, if not rated, having an
issue of outstanding Municipal Obligations rated within the three highest grades
by Moody's, Standard & Poor's or Fitch, and taxable money market instruments
having quality characteristics comparable to those for Municipal Obligations.
The Fund may invest in temporary investments for defensive reasons in
anticipation of a market decline. At no time will more than 20% of the Fund's
total assets be invested in temporary investments unless the Fund has adopted a
defensive investment policy. The Fund will purchase tax exempt temporary
investments pending the investment of the proceeds from the sale of the
securities held by the Fund or from the purchase of the Fund's shares by
investors or in order to have highly liquid securities available to meet
anticipated redemptions. To the extent that it holds cash or invests in Taxable
Investments, the Fund will not achieve its investment objective of high current
interest income that is exempt from federal income taxation. Dividends paid by
the Fund that are attributable to income earned by the Fund from taxable
investments will be taxable to investors. See 'Dividends, Distributions and
Taxes -- Taxes.'
The Fund may invest in the following types of Taxable Investments:
Government Securities; bank obligations (including certificates of deposit, time
deposits and bankers' acceptances of foreign or domestic banks, domestic savings
and loan associations and other banking institutions having total assets in
excess of $500 million); commercial paper rated no lower than A-1 by Standard &
Poor's, Prime-1 by Moody's or F-1+ by Fitch, or the equivalent from another
major rating service, or, if unrated, of an issuer having an outstanding
unsecured debt issue then rated within the three highest rating categories; and
repurchase agreements meeting the conditions described below under 'Investment
Techniques and Strategies -- Repurchase Agreements.' At no time will the Fund's
investments in bank obligations, including time deposits, exceed 25% of the
value of its assets.
Government Securities in which the Fund may invest include: direct
obligations of the U.S. Treasury, and obligations issued or guaranteed by the
U.S. Government or one of its agencies or instrumentalities. Among the
Government Securities that may be held by the Fund are instruments that are
supported by the full faith and credit of the United States; instruments that
are supported by the right of the issuer to borrow from the U.S. Treasury; and
instruments that are supported solely by the credit of the instrumentality.
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The Fund is authorized to invest in obligations of foreign banks or foreign
branches of domestic banks that are traded in the United States or outside the
United States, but that are denominated in U.S. dollars. These obligations
entail risks that are different from those of investments in obligations in
domestic banks, including foreign economic and political developments, foreign
governmental restrictions that may adversely affect payment of principal and
interest on the obligations, foreign exchange controls and foreign withholding
or other taxes on income. Foreign branches of domestic banks are not necessarily
subject to the same or similar regulatory requirements that apply to foreign
banks, such as mandatory reserve requirements, loan limitations and accounting,
auditing and financial recordkeeping requirements. In addition, less information
may be publicly available about a foreign branch of a domestic bank than about a
domestic bank.
MUNICIPAL OBLIGATIONS
IN GENERAL. 'Municipal Obligations' as used in this Prospectus are debt
securities issued by or on behalf of states, territories and possessions of the
United States and the District of Columbia and their political subdivisions,
agencies and instrumentalities or multistate agencies or authorities, the
interest on which debt securities is, in the opinion of bond counsel to their
issuer, excluded from gross income for federal income tax purposes.
Municipal Obligations are classified as general obligation bonds, revenue
bonds and notes. General obligation bonds are secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of principal and
interest. Revenue bonds are payable 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
that generally do not carry the pledge of the credit of the issuing
municipality, but generally are guaranteed by the corporate entity on whose
behalf they are issued. Private activity bonds are in most cases revenue bonds
and generally do not carry the pledge of the credit of the issuing municipality.
Notes are short-term instruments that 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 bear
fixed, floating and variable rates of interest. Variations exist in the security
of Municipal Obligations, both within a particular classification and between
classifications.
PRIVATE ACTIVITY BONDS. The Fund may invest without limit in Municipal
Obligations that are tax exempt 'private activity bonds,' as defined in the
Internal Revenue Code of 1986, as amended (the 'Code'), which are in most cases
revenue bonds and generally do not carry the pledge of the credit of the issuing
municipality, but are guaranteed by the corporate entity on whose behalf they
are issued. Interest income on certain types of private activity bonds issued
after August 7, 1986 to finance nongovernmental activities is a specific tax
preference item for purposes of the federal individual and corporate alternative
minimum taxes. Individual and corporate shareholders may be subject to a federal
alternative minimum tax to the extent the Fund's dividends are derived from
interest on these bonds. Dividends derived from interest income on Municipal
Obligations are a 'current earnings' adjustment item for purposes of the federal
corporate alternative minimum tax. See 'Dividends, Distributions and
Taxes -- Taxes.' Private activity bonds held by the Fund are included in the
term 'Municipal Obligations' for purposes of determining compliance with the
Fund's policy of investing at least 80% of its total assets in Municipal
Obligations.
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MUNICIPAL LEASES. Among the Municipal Obligations in which the Fund may
invest are municipal leases. Municipal leases, which are generally
participations in intermediate and short-term obligations issued by
municipalities consisting of leases or installment purchase contracts for
property or equipment ('lease obligations'), are subject to special risks
described below under 'Risk Factors and Special Considerations -- Municipal
Leases.'
FLOATING AND VARIABLE RATE INSTRUMENTS. The Fund may purchase floating and
variable rate demand notes and bonds, which are tax exempt obligations
ordinarily having stated maturities in excess of one year but which permit the
holder to demand payment of principal at any time or at specified intervals.
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 these obligations are secured by letters of credit or other
credit support arrangements provided by banks. Use of letters of credit or other
credit support arrangements 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 these instruments
generally will be traded and there generally is no established secondary market
for these obligations, although they are redeemable at face value. If these
obligations are not secured by letters of credit or other credit support
arrangements, the Fund's right to demand payment 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. GEIM, on behalf of the Fund, considers 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 for which no secondary market exists and as to which the Fund cannot
exercise the demand feature on not more than seven days' notice, and in other
securities that are not readily marketable. See 'Investment Restrictions' below.
PARTICIPATION INTERESTS. The Fund may purchase from financial institutions
participation interests in certain Municipal Obligations, such as industrial
development bonds and municipal leases. A participation interest gives the Fund
an undivided interest in the Municipal Obligation in the proportion that the
Fund's participation interest bears to the total principal amount of the
Municipal Obligation. These instruments may have fixed, floating or variable
rates of interest. 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 meets the prescribed quality standards for banks set
forth above, or the payment obligation otherwise will be collateralized by
Government Securities. For certain participation interests, the Fund has the
right to demand payment, on not more than seven days' notice, for all or any
part of the Fund's participation interest in the Municipal Obligation, plus
accrued interest. As to these instruments, the Fund intends to exercise its
right to demand payment only upon a default under the terms of the Municipal
Obligation, as needed to provide liquidity to meet redemptions or to maintain or
improve the quality of its 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. See 'Investment Restrictions' below.
ZERO COUPON MUNICIPAL OBLIGATIONS. The Fund may invest up to 5% of its
assets in zero coupon Municipal Obligations. Zero coupon Municipal Obligations
are generally divided into
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two categories: 'Pure Zero Obligations,' which are those that pay no interest
currently for their entire life and 'Zero/Fixed Obligations,' which pay no
interest for some initial period and thereafter pay interest currently. In the
case of a Pure Zero Obligation, the failure to pay interest currently may result
from the obligation's having no stated interest rate, in which case the
obligation pays only principal at maturity and is sold at a discount. A Pure
Zero Obligation may, in the alternative, provide for a stated interest rate, but
provide that no interest is payable until maturity, in which case the bond may
be sold at par. The value to the investor of a zero coupon Municipal Obligation
consists of the economic accretion either of the difference between the purchase
price and the nominal principal amount (if no interest is stated to accrue) or
of accrued, unpaid interest during the Municipal Obligation's life or payment
deferral period.
AUCTION AND RESIDUAL COMPONENTS. The Fund may invest in Municipal
Obligations the interest rate on which has been divided by the issuer into two
different and variable components, which together result in a fixed interest
rate. Typically, the first of the components (the 'Auction Component') pays an
interest rate that is reset periodically through an auction process, whereas the
second of the components (the 'Residual Component') pays a residual interest
rate based on the difference between the total interest paid by the issuer on
the Municipal Obligation and the auction rate paid on the Auction Component. The
Fund may purchase both Auction and Residual Components. Because the interest
rate paid to holders of Residual Components is generally determined by
subtracting the interest rate paid to the holders of Auction Components from a
fixed amount, the interest rate paid to Residual Component holders will decrease
as the Auction Component's rate increases and increase as the Auction
Component's rate decreases. Moreover, the magnitude of the increases and
decreases in market value of Residual Components may be larger than comparable
changes in the market value of an equal principal amount of a fixed rate
Municipal Obligation having similar credit quality, redemption provisions and
maturity.
INVESTMENT TECHNIQUES AND STRATEGIES
The Fund is authorized to engage in any one or more of the specialized
investment techniques and strategies described below.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. New issues of Municipal
Obligations frequently are offered on a when-issued basis or delayed-delivery
basis. To secure prices deemed advantageous at a particular time, the Fund may
purchase securities on a when-issued or delayed-delivery basis, in which case
delivery of the securities occurs beyond the normal settlement period; payment
for or delivery of the securities would be made prior to the reciprocal delivery
or payment by the other party to the transaction. The Fund enters into
when-issued or delayed-delivery transactions for the purpose of acquiring
securities and not for the purpose of leverage. The Fund establishes with its
custodian a segregated account consisting of cash, Government Securities or
other liquid high-grade debt obligations in an amount equal to the amount of its
when-issued or delayed-delivery purchase commitments.
STAND-BY COMMITMENTS. The Fund may acquire 'stand-by' commitments with
respect to Municipal Obligations held in its portfolio. Under a stand-by
commitment, a broker, dealer or bank is obligated to repurchase at the Fund's
option specified securities at a specified price and, in this way, stand-by
commitments are comparable to put options. The exercise of a stand-by
commitment, therefore, is subject to the ability of the seller to make payment
on demand. The Fund acquires stand-by commitments solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The Fund anticipates that stand-by
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commitments will be available from brokers, dealers and banks without the
payment of any direct or indirect consideration. The Fund may pay for stand-by
commitments if payment were deemed necessary, thus, increasing to a degree the
cost of the underlying Municipal Obligation and similarly decreasing the
security's yield to investors. Gains realized in connection with stand-by
commitments are taxable.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund may trade
interest rate and municipal bond index futures contracts, and options on those
contracts, for a variety of risk reduction purposes such as hedging against
changes in the value of its portfolio securities due to anticipated changes in
interest rates and market conditions and when the transactions are economically
appropriate to the reduction of risks inherent in the management of the Fund. A
municipal bond index futures contract is an agreement to take or make delivery
of an amount of cash equal to the difference between the value of the index at
the beginning and at the end of the contract period. An interest rate futures
contract is a similar contract for the future delivery of a specific debt
security, including, for example, Government Securities. An option on a futures
contract, in contrast to a direct investment in the contract, gives the
purchaser the right, in return for the premium paid, to assume a position in the
underlying futures contract at a specified exercise price at any time on or
before the expiration date of the option.
The Fund may assume both 'long' and 'short' positions with respect to
futures contracts. A long position involves entering into a futures contract to
buy a commodity, whereas a short position involves entering into a futures
contract to sell a commodity. In entering into futures contracts, the Fund will
be required to make initial 'margin' payments, which are payments in the nature
of performance bonds or good faith deposits, and to make 'variation' margin
payments from time to time as the values of the futures contracts fluctuate.
The Fund will not (1) trade any futures contracts or options on futures
contracts if, immediately after the transactions, the aggregate of margin
deposits on all of the Fund's outstanding futures contracts and premiums paid on
its outstanding options on futures contracts would exceed 5% of the market value
of the total assets of the Fund after taking into account unrealized profits and
losses on any futures contracts or options on futures contracts or (2) enter
into any futures contracts or options on futures contracts if the aggregate of
the market value of the Fund's outstanding futures contracts and market value of
futures contracts subject to outstanding options written by the Fund would
exceed 50% of the market value of the total assets of the Fund. Each short
position in a futures or options contract entered into by the Fund will be
secured by the Fund's ownership of underlying securities. The Fund will not use
leverage when it enters into long futures or options contracts; the Fund will
place in a segregated account with its custodian with respect to each of its
long positions cash, short-term Government Securities or other U.S.
dollar-denominated, high-grade, short-term money market instruments having a
value equal to the underlying commodity value of the contract.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase agreement
transactions with respect to instruments in which the Fund is authorized to
invest. Although the amount of the Fund's assets that may be invested in
repurchase agreements terminable in less than seven days is not limited,
repurchase agreements maturing in more than seven days, together with other
illiquid securities, will not exceed 15% of the Fund's net assets. The Fund may
engage in repurchase agreement transactions with certain member banks of the
Federal Reserve System and with certain dealers listed on the Federal Reserve
Bank of New York's list of reporting dealers. Under the terms of a typical
repurchase agreement, the Fund would acquire an
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underlying debt obligation for a relatively short period (usually not more than
seven days) subject to an obligation of the seller to repurchase, and the Fund
to resell, the obligation at an agreed-upon price and time, thereby determining
the yield during the Fund's holding period. Thus, repurchase agreements are in
the nature of collateralized loans made by the Fund. This arrangement results in
a fixed rate of return that is not subject to market fluctuations during the
Fund's holding period. Under each repurchase agreement, the selling institution
is required to maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. The value of the securities
underlying a repurchase agreement of the Fund is monitored on an ongoing basis
by GEIM to ensure that the value is at least equal at all times to the total
amount of the repurchase obligation, including interest. GEIM also monitors, on
an ongoing basis to evaluate potential risks, the creditworthiness of those
banks and dealers with which the Fund enters into repurchase agreements.
INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental investment restrictions with respect
to the Fund that may not be changed without approval of a majority of the Fund's
outstanding voting securities (as defined in the 1940 Act). Included among those
fundamental restrictions are the following:
1. The Fund will not purchase securities (other than Government
Securities) of any issuer if, as a result of the purchase, more than 5% of
the value of the Fund's total assets would be invested in the securities of
the issuer, except that up to 25% of the value of the Fund's total assets
may be invested without regard to this 5% limitation.
2. The Fund will not purchase more than 10% of the voting securities
of any one issuer, or more than 10% of the securities of any class of any
one issuer, except that this limitation is not applicable to the Fund's
investments in Government Securities. For purposes of this restriction, all
debt obligations of an issuer will be considered a single class.
3. The Fund will not borrow money, except that the Fund may borrow
from banks for temporary or emergency (not leveraging) purposes, including
the meeting of redemption requests and cash payments of dividends and
distributions that might otherwise require the untimely disposition of
securities, in an amount not to exceed 20% of the value of the Fund's total
assets (including the amount borrowed) valued at market less liabilities
(not including the amount borrowed) at the time the borrowing is made.
Whenever borrowings exceed 5% of the value of the total assets of the Fund,
the Fund will not make any additional investments.
4. The Fund will not lend money to other persons, except through
purchasing debt obligations and entering into repurchase agreements.
5. Except as described above, the Fund will invest no more than 25% of
the value of its total assets in securities of issuers in any one industry,
the term industry being deemed to exclude the government of the United
States.
Notwithstanding investment restriction number 3 above, the Fund has no
present intention of borrowing money for other than for temporary or emergency
(not leveraging) purposes, including the meeting of redemption requests and cash
payments of dividends and distributions that might otherwise require the
untimely disposition of securities. Certain other investment restrictions
adopted by the Trust with respect to the Fund are described in the Statement of
Additional Information.
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RISK FACTORS AND SPECIAL CONSIDERATIONS
Investing in the Fund involves risks and special considerations, such as those
described below:
INTEREST RATE RISK. It can be expected that the value of the debt
obligations held by the Fund, and hence the Fund's net asset value, will vary
inversely with changes in prevailing interest rates. Thus, the Fund's net asset
value can be expected to rise when interest rates are expected to decline and to
decline when interest rates are expected to rise.
MUNICIPAL LEASES. Municipal leases in which the Fund may invest 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 is ordinarily
backed by the municipality's covenant to budget for, appropriate and make the
payments due under the lease obligation. Certain lease obligations contain
'non-appropriation' clauses, however, that provide that the municipality has no
obligation to make lease or installment purchase payments in future years unless
money is appropriate for that purpose on a yearly basis. The Fund's ability to
recover under a non-appropriation lease in the event of non-appropriation or
default will be limited solely to the repossession of the leased property,
without recourse to the general credit of the lessee and disposition of the
property in the event of foreclosure might prove difficult. The Fund will seek
to minimize these risks in several ways. First, the Fund will invest in lease
obligations that are rated in the four highest categories by Moody's, Standard &
Poor's or Fitch. Second, the Fund's investment in lease obligations that do not
contain 'non-appropriation clauses' will be limited to those obligations under
which the municipality is required to continue the lease under all circumstances
except bankruptcy. Third, the Fund will only invest in lease obligations that
contain non-appropriation clauses when (1) the nature of the leased equipment or
property is such that its ownership or use is essential to a governmental
function of the municipality, (2) the lease payments will commence amortization
of principal at an early date resulting in an average life of seven years or
less for the lease obligation, (3) appropriate covenants will be obtained from
the municipal obligor prohibiting the substitution or purchase of similar
equipment if lease payments are not appropriated, (4) the lease obligor has
maintained good market acceptability in the past, (5) the investment is of a
size that will be attractive to institutional investors, and (6) the underlying
leased equipment has elements of portability and use, or both, that enhance its
marketability in the event foreclosure on the underlying equipment were ever
required. Municipal leases represent a type of financing that has not yet
developed the depth of marketability generally associated with other Municipal
Obligations. Accordingly, municipal leases are deemed to be illiquid and are
included in the 15% restriction on investment in illiquid securities unless
GEIM, acting under the supervision of KPAM and the Board of Trustees, determines
on an ongoing basis that municipal leases are readily marketable.
ZERO COUPON MUNICIPAL OBLIGATIONS. The value to the investor of a zero
coupon Municipal Obligation consists of the economic accretion either of the
difference between the purchase price and the nominal principal amount (if no
interest is stated to accrue) or of accrued, unpaid interest during the
Municipal Obligation's life or payment deferral period. Thus, the Fund will
accrue income on these investments for tax and accounting purposes, which is
distributable to shareholders and which, because no cash is received at the time
of accrual, may require the liquidation of other portfolio securities to satisfy
the Fund's distribution obligations, in which case the Fund will forego the
purchase of additional income producing assets with these funds.
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Moreover, these investments may experience greater volatility in market value
than Municipal Obligations that make regular payments of interest.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. Securities purchased on a
when-issued or delayed-delivery basis may expose the Fund to risk because the
securities may experience fluctuations in value prior to their actual delivery.
The Fund does not accrue income with respect to a when-issued or
delayed-delivery security prior to its stated delivery date. Purchasing
securities on a when-issued or delayed-delivery basis can involve the additional
risk that the yield available in the market when the delivery takes place may be
higher than that obtained in the transaction itself.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. In entering into
transactions involving futures contracts and options on those contracts, the
Fund is subject to a number of risks and special considerations. Should markets
or interest rates move in an unexpected manner, the Fund may not achieve the
anticipated benefits of futures contracts or options on those contracts or may
realize losses and thus be in a less advantageous position than if those
strategies had not been used. Certain futures contracts and options on futures
contracts are subject to no daily price fluctuation limits so that adverse
market movements could continue with respect to those instruments to an
unlimited extent over a period of time. In addition, the correlation between
movements in the prices of those instruments and movements in the price of the
securities and currencies hedged or used for cover will not be perfect.
The Fund's ability to dispose of its positions in futures contracts and
options on those contracts depends on the availability of active markets in
those instruments. Markets in options and futures with respect to a number of
securities are relatively new and still developing. GEIM cannot now predict the
amount of trading interest that may exist in the future in various types of
futures contracts and options. Futures and options may be closed out only on the
exchange or board of trade on which the contract was entered (or a linked
exchange) so that no assurance can be given that the Fund will be able to
utilize these instruments effectively for the purposes described above. In
addition, although the Fund anticipates that its options and futures
transactions will not prevent the Fund from qualifying as a regulated investment
company for federal income tax purposes, the Fund's ability to engage in options
and futures transactions may be limited by this tax consideration. See
'Dividends, Distributions and Taxes -- Taxes.' In writing options, the Fund is
subject to the risk of loss resulting from the difference between the premium
received for the option and the price of the futures contract underlying the
option that the Fund must purchase or deliver upon exercise of the option.
REPURCHASE AGREEMENTS. In entering into a repurchase agreement, the Fund
bears a risk of loss in the event that the other party to the transaction
defaults on its obligations and the Fund is delayed or prevented from exercising
its rights to dispose of the underlying securities, including the risk of a
possible decline in the value of the underlying securities during the period in
which the Fund seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or a
part of the income from the agreement.
PORTFOLIO TURNOVER
The Fund's portfolio is actively managed. For the period January 19, 1994
(commencement of operations) through the fiscal year ended June 30, 1994, the
Fund's portfolio turnover rate was 161.18%. An annual turnover rate of 100%
would occur if all of the securities held by the Fund are replaced once during a
period of one year. Short-term gains realized from portfolio transactions are
taxable to shareholders as ordinary income. In addition, higher portfolio
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turnover rates can result in corresponding increases in brokerage commissions
and may make it more difficult for the Fund to qualify as a regulated investment
company for federal income tax purposes. See 'Dividends, Distributions and
Taxes -- Taxes.'
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Trust's Board of Trustees, and the day-to-day operations of the Fund are
conducted through or under the direction of officers of the Trust. The Statement
of Additional Information contains general background information regarding each
Trustee and officer of the Trust.
MANAGER
KPAM, located at 60 Broad Street, New York, New York 10004-2350, serves as the
Fund's manager. A wholly-owned subsidiary of Kidder, Peabody, and a registered
investment adviser under the Investment Advisers Act of 1940, as amended (the
'Advisers Act'), KPAM currently provides investment management, investment
advisory and administrative services to a wide variety of individual and
institutional clients. The Kidder, Peabody Asset Management Group of Companies
(of which KPAM is the primary entity) provides advisory and consulting services
to more than $18 billion in assets as of September 30, 1994. General Electric
Capital Services, Inc., a wholly-owned subsidiary of GE, owns all of the
outstanding stock of Kidder Group, the parent company of Kidder, Peabody.
Under an agreement dated as of October 17, 1994, GE and Kidder Group agreed
to sell to PaineWebber Group Inc. certain assets of Kidder Group, including
certain of Kidder Group's subsidiaries, including Kidder, Peabody and KPAM. The
consummation of this transaction, which is subject to a number of conditions and
cannot be assured, will result in the deemed assignment and automatic
termination of the agreements pursuant to which Kidder, Peabody serves as the
principal underwriter of the Fund's shares and KPAM serves as the Fund's
manager. Institution of new arrangements with Kidder, Peabody's and KPAM's
successors following the consummation of the transaction will require approval
of the Board of Trustees and the separate approval of the majority of the
Trustees who are not 'interested persons' of the Fund within the meaning of the
1940 Act. In addition, the Fund's new management arrangements will require
approval of a 'majority of the outstanding voting securities' of the Fund, as
defined in the 1940 Act. No assurance can be given that any of the foregoing
required approvals will be obtained and, if they are not, the Board will take
such action as it determines to be appropriate and in the best interests of the
Fund and its shareholders.
As the Fund's manager, KPAM, subject to the supervision and direction of
the Trust's Board of Trustees, is generally responsible for furnishing, or
causing to be furnished to the Fund, investment advisory and management
services. Included among the specific services provided by KPAM as manager are:
the selection and compensation of an investment adviser to the Fund; the review
of all purchases and sales of portfolio instruments made by the Fund to assess
compliance with its stated investment objective and policies; the monitoring of
the selection of brokers and dealers effecting transactions on behalf of the
Fund; the maintenance and furnishing of all required records or reports
pertaining to the Fund to the extent those records or reports are not maintained
or furnished by the Fund's transfer agent, custodian or other agents employed by
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the Fund; the providing of general administrative services to the Fund not
otherwise provided by the Fund's transfer agent, custodian or other agents
employed by the Fund; and the payment of reasonable salaries and expenses of
those of the Fund's officers and employees, and the fees and expenses of those
members of the Trust's Board of Trustees, who are directors, officers or
employees of KPAM. The Trust pays KPAM a fee for services provided to the Fund
that is accrued daily and paid monthly at the annual rate of .60% of the Fund's
average daily net assets. For the period January 19, 1994 (commencement of
operations) through the fiscal year ended June 30, 1994, Class A shares', Class
B shares' and Class C shares' total expenses on an annualized basis represented
.09%, .59% and .07%, respectively, of their average daily net assets. However,
during such period, had KPAM not reimbursed the Classes for a portion of their
operating expenses nor waived a portion of its fee, Class A shares', Class B
shares' and Class C shares' total expenses on an annualized basis would have
represented 1.72%, 2.22% and 1.47%, respectively, of their average daily net
assets. From time to time, KPAM in its sole discretion may waive all or a
portion of its fee and/or reimburse all or a portion of the Fund's operating
expenses.
INVESTMENT ADVISER
Under the terms of an investment advisory agreement among KPAM, the Trust and
GEIM, KPAM employs GEIM as the Fund's investment adviser. GEIM, located at 3003
Summer Street, P.O. Box 7900, Stamford, Connecticut 06904, is a wholly-owned
subsidiary of GE and a registered investment adviser under the Advisers Act.
GEIM, which was formed under the laws of Delaware in 1988, provides investment
management services to various institutional accounts with total assets, as of
September 30, 1994, in excess of $45 billion.
GEIM currently serves as the investment adviser to several series of
Kidder, Peabody Investment Trust. GEIM also serves as investment adviser and
administrator of several other open-end management investment companies. In
addition, GEIM's principal officers and directors serve in similar capacities
with respect to General Electric Investment Corporation, which like GEIM is a
wholly-owned subsidiary of GE, and which currently acts as the investment
adviser of the Elfun group of funds, including the Elfun Tax-Exempt Income Fund,
an open-end management investment company registered under the 1940 Act, that
has an investment objective and policies substantially similar to those of the
Fund. Investment in the Elfun Tax-Exempt Income Fund is generally limited to
regular and senior members of the Elfun Society, whose regular members are
selected from active employees of GE and/or its majority-owned subsidiaries, and
whose senior members are former members who have retired from those companies.
As the Fund's investment adviser, GEIM, subject to the supervision and
direction of the Trust's Board of Trustees, and subject to review by KPAM,
manages the Fund's portfolio in accordance with the investment objective and
stated policies of the Fund, makes investment decisions for the Fund and places
purchase and sale orders for the Fund's portfolio transactions. GEIM also pays
the salaries of all officers and employees who are employed by both it and the
Trust, provides the Fund with investment officers who are authorized by the
Board of Trustees to execute purchases and sales of securities on behalf of the
Fund and employs a professional staff of portfolio managers who draw upon a
variety of sources for research information for the Fund.
Michael J. Caufield serves as the Fund's Chief Investment Officer and in
that capacity is the individual primarily responsible for the management of the
Fund's assets. Mr. Caufield is Vice
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President of the Municipal Bond Research and Analysis Department of General
Electric Investment Corporation, an affiliate of GEIM, and has been assigned to
GEIM to provide management services to the Fund.
KPAM pays GEIM a fee for services provided by GEIM to the Fund that is
accrued daily and paid monthly at the annual rate of .30% of the value of the
Fund's average daily net assets. The Fund pays no direct fee to GEIM. From time
to time, GEIM in its sole discretion may waive all or a portion of its fee.
Although investment decisions for the Fund will be made independently from
those of the other accounts managed by GEIM, 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 GEIM are prepared to invest in, or desire to dispose
of, the same security, available investments or opportunities for sales will be
allocated in a manner believed by GEIM 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.
EXPENSES
Each Class bears its own expenses, which generally include all costs not
specifically borne by KPAM and GEIM. Included among a Class' expenses are costs
incurred in connection with the Class' and Fund's organization; investment
advisory and management fees; any distribution and/or service fees; fees for
necessary professional and brokerage services; fees for any pricing service used
in connection with the valuation of shares; the costs of regulatory compliance;
and a portion of the costs associated with maintaining the Trust's legal
existence and corresponding with shareholders of the Fund. The Trust's agreement
with KPAM provides that KPAM will reduce its fees to the Fund to the extent
required by applicable state laws for certain expenses that are described in the
Statement of Additional Information.
PURCHASE OF SHARES
GENERAL INFORMATION
Shares of the Fund must be purchased and maintained through a Kidder, Peabody
brokerage account (an 'Account'), so that an investor who wishes to purchase
shares but who has no existing Account must establish one. Kidder, Peabody
charges no maintenance fee in connection with an Account through which an
investor purchases or holds shares of the Fund.
Purchases of Fund shares are effected at the public offering price next
determined after a purchase order is received. Payment for shares is due at
Kidder, Peabody on the 'settlement date,' which is generally the fifth business
day after the order for purchase is placed, unless the investor has 'good funds'
available in an existing Account that can be applied to the purchase. 'Good
funds' as used in this Prospectus means cash, Federal funds or certified checks
drawn on a U.S. bank. The Trust reserves the right to reject any purchase order
for shares of the Fund and to suspend the offering for any period of time.
The minimum initial investment is $1,000 and the minimum subsequent
investment is $50, except that for accounts established pursuant to the Uniform
Gifts to Minors Act, the minimum initial investment is $250 and the minimum
subsequent investment is $1.00. The Trust reserves the right to vary at any time
the minimum initial or subsequent investment amounts. It is not
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recommended that the Fund be used as a vehicle for Individual Retirement
Accounts or other qualified retirement plans.
Purchase orders for shares of the Fund that are received prior to the close
of regular trading on the New York Stock Exchange (the 'NYSE') on a particular
day (currently 4:00 p.m., New York time) are priced according to the net asset
values determined on that day. Purchase orders received after the close of
regular trading on the NYSE are priced as of the time each Class' net asset
value per share is next determined. See 'Determination of Net Asset Value' below
for a description of the time at which each Class' net asset value per share is
determined.
The Trust offers Fund shareholders an Automatic Investment Plan under which
a shareholder may authorize Kidder, Peabody to place monthly, twice monthly or
quarterly, as selected by the shareholder, a purchase order for Fund shares in
an amount not less than $100. The purchase price is paid automatically from a
designated bank account of the shareholder. The Fund reserves the right to
terminate or change the provisions of the Automatic Investment Plan.
Under the Choice Pricing System, the Fund presently offers three methods of
purchasing shares, enabling investors to choose the Class that best suits their
needs, given the amount of purchase and intended length of investment. Kidder,
Peabody Investment Executives and other persons remunerated on the basis of
sales of shares may receive different levels of compensation for selling one
Class of shares over another. When purchasing shares of the Fund, investors must
specify whether the purchase is for Class A shares, Class B shares or Class C
shares, as described below.
CLASS A SHARES
The public offering price of Class A shares is the net asset value per Class A
share next determined after a purchase order is received plus a sales charge, if
applicable. Class A shares are subject to a service fee at the annual rate of
.25% of the value of the average daily net assets attributable to the Class. See
'Distributor.' The sales charges payable upon the purchase of Class A shares
will vary with the amount of purchase as shown in the table set forth below:
<TABLE>
<CAPTION>
Total Sales Charge
-------------------------------------------
Amount of Purchase As Percentage As Percentage
at Offering Price of Offering Price of Net Amount Invested
---------------------- ----------------- ----------------------
<S> <C> <C>
Less than $50,000............................................ 2.25% 2.33%
$50,000 but less than $100,000............................... 1.75 1.75
$100,000 but less than $250,000.............................. 1.50 1.50
$250,000 but less than $500,000.............................. 1.00 1.00
$500,000 but less than $1,000,000............................ .75 .75
$1,000,000 or more........................................... 0 0
</TABLE>
INSTANCES OF A REDUCED OR WAIVED SALES CHARGE. Class A shares are sold
subject to a reduction of 20% in the sales charges shown in the table above to:
(1) employees of GE and other affiliates of Kidder, Peabody; (2) other employee
benefit plans for those employees; and (3) the spouses and minor children of
those employees when orders on their behalf are placed by the employees.
No sales charge is imposed on Class A shares purchased through reinvestment
of dividends or capital gains distributions. Clients of a newly-employed Kidder,
Peabody Investment Executive are eligible to purchase Class A shares subject to
no sales charge for a period of 90
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days after the Investment Executive first becomes employed by Kidder, Peabody,
so long as the following conditions are met: (1) the purchase is made within 30
days of, and with the proceeds from, a redemption of shares of a mutual fund
sponsored by the Investment Executive's previous employer; (2) the Investment
Executive served as the client's broker on the purchase of the shares of the
mutual fund; and (3) the shares of the mutual fund sold were subject to a sales
charge. Clients of a Kidder, Peabody Investment Executive are also eligible to
purchase Class A shares subject to no sales charge so long as the following
conditions are met: (1) the purchase is made within 30 days of, and with the
proceeds from, a redemption of shares of a mutual fund that were purchased
through Kidder, Peabody acting as a selected dealer for the shares pursuant to
an agreement between Kidder, Peabody and the mutual fund's principal
underwriter; (2) the mutual fund invested primarily in Municipal Obligations;
(3) the Investment Executive served as the client's broker on the purchase of
the shares of the mutual fund sold; and (4) the shares of the mutual fund sold
were subject to a sales charge. Class A shares may also be offered without a
sales charge to any investment company, other than a company for which Kidder,
Peabody serves as distributor, in connection with the combination of the company
with the Fund by merger, acquisition of assets or otherwise.
VOLUME DISCOUNTS. Any investor meeting certain requirements, including the
signing of a Letter of Intent (a 'Letter'), is eligible to obtain a reduced
sales charge for purchasing Class A shares by combining purchases made over a
13-month period of Fund shares and shares of other mutual funds in the Kidder
Family of Funds with respect to which the investor previously paid, or is
subject to the payment of, a sales charge (collectively referred to as 'Eligible
Shares'). Purchases of Fund shares by eligible investors must aggregate at least
$50,000 and must include a minimum initial investment of at least $1,000 and
minimum subsequent investments of at least $50. For purposes of the procedure
contemplated by a Letter, Eligible Shares owned by an investor will be valued at
their original cost in determining the size of a purchase and the applicable
sales charge.
An investor's purchase of Eligible Shares not originally made pursuant to a
Letter may be included under a Letter subsequently executed within 90 days of
the purchase, so long as the investor informs Kidder, Peabody in writing within
the 90-day period of the investor's desired use of a Letter. The original cost
of an investor's Eligible Shares not purchased pursuant to a Letter may be
included under a Letter subsequently executed within 90 days of the purchase, so
long as the investor informs Kidder, Peabody in writing within the 90-day period
of the investor's desire for that treatment to be applicable. The original cost
of Eligible Shares not purchased pursuant to a Letter may be included as a
credit toward the fulfillment of the terms of the Letter; the reduced sales
charge contemplated by the Letter, however, will apply only to the purchases of
Eligible Shares made after the execution of the Letter, which purchases, as
noted above, must aggregate at least $50,000.
A Letter must provide for 5% of the dollar amount of the intended
investment to be held in escrow by Investors Fiduciary Trust Company ('IFTC') in
the form of Eligible Shares in an account registered in the name of the
shareholder. If the total amount of any Eligible Shares owned at the time a
Letter is signed plus all purchases made under the terms of the Letter less
redemptions (the 'investment') are at least equal to the intended investment,
the amount in escrow will be released to the shareholder. If the investment is
more than $50,000 but less than the intended investment a remittance of the
difference in the dollar amount of sales charge paid and the sales charge that
would have been paid if the investment had been made at a single time will be
made upon request. If the remittance is not sent within 20 days after such a
request, IFTC
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will redeem an appropriate number of Eligible Shares held in escrow in order to
realize the difference. Amounts remaining in the escrow account will be released
to the shareholder's account. If the total investment is more than the intended
investment and the total is sufficient to qualify for an additional sales charge
reduction, a retroactive price adjustment will be made for all purchases made
under a Letter to reflect the sales charge applicable to the aggregate amount of
the purchases during the 13-month period. A Letter is not a binding obligation
to purchase the indicated amount, and Kidder, Peabody is not obligated to sell
the indicated amount. Reinvested dividends and capital gains are not applied
toward the completion of the purchases contemplated by a Letter.
RIGHT OF ACCUMULATION. Reduced sales charges on Class A shares are
available under a combined right of accumulation permitting an investor to
combine the value of Eligible Shares and the value of Fund shares being
purchased, to qualify for a reduced sales charge. Before a shareholder may take
advantage of the right of accumulation, the shareholder must provide Kidder,
Peabody at the time of purchase with sufficient information to permit Kidder,
Peabody to confirm that the shareholder is qualified for the right; acceptance
of the shareholder's purchase order is subject to that confirmation. The right
of accumulation may be amended or terminated at any time by the Trust.
DEFINITION OF PURCHASE. For purposes of the volume discounts and right of
accumulation described above, a 'purchase' refers to: a single purchase of
Eligible Shares by an individual; concurrent purchases by an individual, his or
her spouse and their children under the age of 21 years purchasing Eligible
Shares for his, her or their own account; and single purchases by a trustee or
other fiduciary purchasing Eligible Shares for a single trust estate or single
fiduciary account, including a pension, profit-sharing or other employee benefit
trust created pursuant to a plan qualified under Section 401 of the Code, even
though more than one beneficiary is involved. The term 'purchase' also includes
purchases by any 'company,' as that term is defined in the 1940 Act, but does
not include: purchases by any such company that has not been in existence for at
least six months or that has no purpose other than the purchase of Eligible
Shares or shares of other investment companies registered under the 1940 Act at
a discount; or purchases by any group of individuals whose participants are
related by virtue of being credit cardholders of a company, policyholders of an
insurance company, customers of either a bank or broker-dealer or clients of an
investment adviser. The term 'purchase' also includes purchases by employee
benefit plans not qualified under Section 401 of the Code, including purchases
by employees or by employers on behalf of employees by means of a payroll
deduction plan, or otherwise, of Eligible Shares. Purchases by such a company or
non-qualified employee benefit plan will qualify for the volume discounts
offered with respect to the Fund's shares only if the Trust and Kidder, Peabody
are able to realize economies of scale in sales efforts and sales-related
expenses by means of the company's, the employer's or the plan's making the
Prospectus available to individual investors or employees and forwarding
investments by those persons to the Trust, and by any such employer's or plan's
bearing the expense of any payroll deduction plan. The term 'purchase' also
includes any purchase of Eligible Shares by or on behalf of certain members of
the same family, including spouses, children (adult and minor), parents,
grandparents and siblings, provided, however, that the following conditions are
met: (1) following consummation of the purchase, the family has, in the
aggregate, (a) at least $5 million invested in Eligible Shares of one or more
funds within the Kidder Family of Funds or (b) at least $10 million in cash
and/or securities in Kidder, Peabody Accounts; and (2) the Trust and Kidder,
Peabody are able to realize economies of scale in sales effort and sales-related
expenses by means
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of dealing with a common decision-maker or otherwise being able to treat the
accounts as a single relationship.
REINSTATEMENT PRIVILEGE. The Fund offers a reinstatement privilege under
which a shareholder that has redeemed Class A shares may reinvest the proceeds
from the redemption without imposition of a sales charge, provided the
reinvestment is made within 60 days of the redemption. The tax status of a gain
realized on a redemption will not be affected by exercise of the reinstatement
privilege but a loss will be nullified if the reinvestment is made within 30
days of the redemption. See the Statement of Additional Information for the tax
consequences when, within 90 days of a purchase of Class A shares, the shares
are redeemed and reinvested in the Fund or another mutual fund.
CLASS B SHARES
The public offering price of Class B shares is the net asset value per share
next determined after a purchase order is received without imposition of any
sales charge. Class B shares are subject to a service fee at the annual rate of
.25%, and a distribution fee at the annual rate of .50%, of the value of the
Fund's average daily net assets attributable to this Class. See 'Distributor.'
Kidder, Peabody has adopted guidelines, in view of the relative sales charges,
service fees and distribution fees, directing Investment Executives that all
purchases of shares should be for Class A shares when the purchase is for
$1,000,000 or more by an investor not eligible to purchase Class C shares.
Kidder, Peabody reserves the right to vary these guidelines at any time.
CLASS C SHARES
The public offering price of Class C shares is the net asset value per share
next determined after a purchase order is received without imposition of any
sales charge. Class C shares, which are not subject to any service fee or
distribution fee, are available exclusively to employees of Kidder, Peabody and
their associated accounts, directors or trustees of any fund in the Kidder
Family of Funds, employee benefit plans of Kidder, Peabody and participants in
INSIGHT when shares are purchased through that program. Investors eligible to
purchase Class C shares may not purchase any other Class of shares.
INSIGHT. An investor purchasing $50,000 or more of shares of funds in the
Kidder Family of Funds may participate in INSIGHT, KPAM's total portfolio asset
allocation program, and receive Class C shares. INSIGHT offers comprehensive
investment services, including a personalized asset allocation investment
strategy using an appropriate combination of funds in the Kidder Family of
Funds, professional investment advice regarding investment among the funds in
the Kidder Family of Funds by KPAM portfolio specialists, monitoring of
investment performance and comprehensive quarterly reports that cover market
trends, portfolio summaries and personalized account information. Participation
in INSIGHT is subject to payment of an advisory fee to KPAM at the maximum
annual rate of 1.5% of assets held through the program (generally charged
quarterly in advance), which covers all INSIGHT investment advisory services and
program administration fees. Employees of Kidder, Peabody are entitled to a 50%
reduction in the fee otherwise payable for participation in INSIGHT. INSIGHT
clients may elect to have their INSIGHT fees charged to their accounts (by
automatic redemption of money market fund shares) or another of their Kidder,
Peabody accounts or, billed separately.
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REDEMPTION OF SHARES
A shareholder may redeem Fund shares on any day that the Fund's net asset values
are determined by following the procedures described below.
REDEMPTION THROUGH KIDDER, PEABODY
Shares may be redeemed through Kidder, Peabody, which wires the terms of any
redemption request properly received prior to 4:00 p.m., New York time, on a
given day, to the Fund's transfer agent. The trade date of a redemption so
received is considered to be that day, and the trade date of any redemption
request received at or after 4:00 p.m., New York time, is considered to be the
next business day. If shares to be redeemed were issued in certificate form, the
certificates for the shares to be redeemed must be submitted to the transfer
agent in accordance with the procedures described in items (1) through (4) under
'Redemption by Mail' below.
REDEMPTION BY MAIL
Shares may be redeemed by submitting a written request in 'good order' to the
Fund's transfer agent at the following address:
Kidder, Peabody Municipal Bond Fund
Class A, B, or C (please specify)
c/o Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
The transfer agent transmits any redemption request that it receives to
Kidder, Peabody, and the request is then treated as if it had been made through
Kidder, Peabody. 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 Class and number of shares
to be redeemed and identifies the shareholder's Fund account number;
(2) the request is signed by each registered owner exactly as the
shares are registered;
(3) if the shares to be redeemed were issued in certificate form, the
certificates are endorsed by the shareholder for transfer (or are
themselves accompanied by an endorsed stock power) and accompany the
redemption request, which should be sent by registered mail for the
protection of the shareholder; and
(4) the signatures on either the written redemption request or the
certificates (or the accompanying stock power) have been guaranteed by a
bank, broker-dealer, municipal securities broker, government securities
dealer or broker, 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 being to protect Fund
shareholders against the possibility of fraud). The transfer agent may
reject redemption instructions if the guarantor is neither a member of nor
a participant in a signature guarantee program (currently known as
'STAMP'sm'').
Additional supporting documents may be required for redemptions of Fund
shares by corporations, executors, administrators, trustees and guardians.
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<PAGE>
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OTHER REDEMPTION POLICIES
Signature guarantees are required in connection with (1) any redemption of Fund
shares made by mail and (2) share ownership transfer requests. These
requirements may be waived by the Trust in certain instances.
Any redemption request made by a shareholder of the Fund will be effected
at the net asset value per share next determined after proper redemption
instructions are received. See 'Determination of Net Asset Value' below. The
proceeds of the redemption generally are credited to the shareholder's Account,
or sent to the shareholder, as applicable, on the fifth business day following
the date after the redemption request was received in good order, but in no
event later than seven days following that date. A shareholder who pays for Fund
shares by personal check will be credited with the proceeds of a redemption of
those shares only after the check used for the purchase has cleared, which may
take up to 15 days or more. If shares are purchased with good funds, no delay in
redemption will occur. The amount of redemption proceeds received by a Fund
shareholder will in no way be affected by any delay in the crediting of those
proceeds.
A Fund account with respect to a Class of shares that is reduced by
redemptions, and not by reason of market fluctuations, to a value of $500 or
less may be redeemed by the Trust, but only after the shareholder has been given
at least 30 days in which to increase the balance in the account to more than
$500. Proceeds of such a redemption will be mailed to the shareholder.
DISTRIBUTIONS IN KIND
If the Trustees determine that it would be detrimental to the best interests of
the Fund's shareholders to make a redemption payment wholly in cash, the Fund
may pay, in accordance with rules adopted by the SEC, any portion of a
redemption in excess of the lesser of $250,000 or 1% of the Fund's net assets by
a distribution in kind of readily marketable portfolio securities in lieu of
cash. Redemptions failing to meet this threshold must be made in cash.
Shareholders receiving distributions in kind of portfolio securities may incur
brokerage commissions when subsequently disposing of those securities.
SYSTEMATIC WITHDRAWAL PLAN
The Trust offers a Systematic Withdrawal Plan (the 'Withdrawal Plan') under
which a shareholder of the Fund with $20,000 or more invested in a Class may
elect periodic redemption payments to the shareholder or a designated payee on a
monthly basis. Payments pursuant to the Withdrawal Plan normally are made within
the last ten days of the month. The minimum rate of withdrawal is $200 per month
and the maximum annual withdrawal is 12% of current account value in the Class
as of the commencement of participation in the Withdrawal Plan (less the amount
of any subsequent redemption outside the Withdrawal Plan). A shareholder
participating in the Withdrawal Plan must reinvest all income and capital gains
distributions, and may not continue to participate if the shareholder redeems
outside the Withdrawal Plan or exchanges to another fund an amount that would
cause the account value in the Class to fall below $20,000. The Trust may amend
or terminate the Withdrawal Plan, and a shareholder may terminate participation
in the Plan at any time.
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DETERMINATION OF NET ASSET VALUE
Each Class' net asset value per share is calculated by State Street Bank and
Trust Company ('State Street'), the Fund's custodian, on each day, Monday
through Friday, except that net asset value is not computed on a day in which no
orders to purchase, sell, exchange or redeem Fund shares have been received, any
day on which there is not sufficient trading in the Fund's portfolio securities
that the Fund's net asset values per share might be materially affected by
changes in the value of such portfolio securities or on days on which the NYSE
is closed. The NYSE is currently scheduled to be closed on New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas, and on the preceding Friday when one of those
holidays falls on a Saturday or on the subsequent Monday when one of those
holidays falls on a Sunday.
Net asset value per share of a Class is determined as of the close of
regular trading on the NYSE, and is computed by dividing the value of the Fund's
net assets attributable to that Class by the total number of shares outstanding
of that Class. Generally, the Fund's investments are valued at market value or,
in the absence of a market value, at fair value as determined by or under the
direction of the Trustees.
Investments in Government Securities and other securities traded
over-the-counter, other than short-term investments that mature in 60 days or
less, are valued at the average of the quoted bid and asked prices in the
over-the-counter market. Short-term investments that mature in 60 days or less
are valued on the basis of amortized cost (which involves valuing an investment
at its cost and, thereafter, assuming a constant amortization to maturity of any
discount or premium, regardless of the effect of fluctuating interest rates on
the market value of the investment) when the Board of Trustees has determined
that amortized cost represents fair value. A security that is primarily traded
on an exchange is valued at the last sale price on that exchange or, if no sales
occurred during the day, at the current quoted bid price. An option that is
written by the Fund is generally valued at the last sale price or, in the
absence of the last sale price, the last offer price. An option that is
purchased by the Fund is generally valued at the last sale price or, in the
absence of the last sale price, the last bid price. The value of a futures
contract is equal to the unrealized gain or loss on the contract that is
determined by marking the contract to the current settlement price for a like
contract on the valuation date of the futures contract. A settlement price may
not be used if the market makes a limit move with respect to a particular
futures contract or if the securities underlying the futures contract experience
significant price fluctuations after the determination of the settlement price.
When a settlement price cannot be used, futures contracts will be valued at
their fair market value as determined by or under the direction of the Board of
Trustees.
In carrying out the Board's valuation policies, State Street may consult
with an independent pricing service retained by the Trust. Further information
regarding the Fund's valuation policies is contained in the Statement of
Additional Information.
EXCHANGE PRIVILEGE
Shares of each Class may be exchanged for shares of the same Class (or the sole
Class offered) in certain funds in the Kidder Family of Funds, to the extent
shares are offered for sale in the shareholder's state of residence. For a list
and a description of the funds in the Kidder Family of Funds for which shares
may be exchanged, see 'Exchange Privilege' in the Statement of Additional
Information. Under the Choice Pricing System, an exchange of shares of the Fund
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with other funds' shares will be limited to shares of the same class or the sole
class (money market funds only) of shares of a fund from or to which the
exchange is to be effected. For example, if a holder of Class A shares of the
Fund exchanges his shares for shares of Kidder, Peabody Cash Reserve Fund, Inc.
('Cash Reserve Fund') (a money market fund) and thereafter wishes to exchange
those shares for shares of Kidder, Peabody Government Income Fund, Inc. he may
receive only Class A shares in the latter transaction. As another example, if a
holder of shares of Cash Reserve Fund acquired as a result of an initial
investment and not from an exchange with shares of another fund wishes to
exchange his shares for shares of the Fund, he may receive Class A shares, Class
B shares or Class C shares (depending on his eligibility for Class C shares) in
the exchange transaction. Thereafter, any further exchanges would be subject to
the principal described above limiting subsequent exchanges to the same class or
the sole class of shares of other funds. If Class A shares acquired in an
exchange are subject to payment of a sales charge higher than the sales charge
paid on the shares relinquished in the exchange (or any predecessor of those
shares), the exchange will be subject to payment of an amount equal to the
difference, if any, between the sales charge previously paid and the sales
charge payable on the Class A shares acquired in the exchange.
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 1940 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 total 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 Kidder, Peabody 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. Kidder, Peabody reserves the right to reject any exchange
request at any time. Prior to or concurrently with the delivery of a
confirmation of a shareholder's exchange transaction, Kidder, Peabody will
deliver to that shareholder a copy of the prospectus of the fund into which the
exchange is being made.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income of the Fund are declared daily and
distributed monthly and distributions of net realized capital gains of the Fund,
if any, will be declared and distributed annually after the close of the fiscal
year in which they are earned. Unless a shareholder instructs the Fund that
dividends and capital gains distributions on shares of any Class be paid in cash
and credited to the shareholder's Account, dividends and capital gains
distributions are reinvested automatically at net asset value in additional
shares of the same Class. The Fund is subject to a 4% nondeductible excise tax
measured with respect to certain undistributed amounts of net investment income
and capital gains. If necessary to avoid the imposition of this tax, and if in
the best interests of its shareholders, the Fund will declare and pay dividends
of its net investment income and distributions of its net capital gains more
frequently than stated above. The per share dividends and distributions on Class
C shares are higher than those on Class A shares, which in turn are higher than
those on Class B shares, as a result of the different service, distribution and
transfer agency fees applicable to the Classes. See 'Fee Table,' 'Purchase of
Shares,' 'Distributor' and 'General Information.'
Shares of the Fund begin earning dividends on the day on which the shares
are issued, the date of issuance customarily being the settlement date, which is
the date on which the Fund receives payment for the shares. Shares continue to
earn dividends until the day prior to the settlement date of a redemption.
TAXES
The Fund has qualified for the fiscal year ended June 30, 1994 as a regulated
investment company within the meaning of the Code and intends to qualify for
this treatment for each year. To qualify as a regulated investment company for
federal income tax purposes, the Fund will limit its income and investments so
that (1) less than 30% of its gross income is derived from the sale or
disposition of stocks, other securities and certain financial instruments
(including certain forward contracts) that were held for less than three months
and (2) at the close of each quarter of the taxable year (a) not more than 25%
of the market value of the Fund's total assets is invested in the securities
(other than Government Securities) of a single issuer or of two or more issuers
controlled by the Fund that are engaged in the same or similar trades or
businesses or in related trades or businesses and (b) at least 50% of the market
value of the Fund's total assets is represented by (i) cash and cash items, (ii)
Government Securities and (iii) other securities limited in respect of any one
issuer to an amount not greater in value than 5% of the market value of the
Fund's total assets and to not more than 10% of the outstanding voting
securities of the issuer. The requirements for qualification may cause the Fund
to restrict the degree to which it sells or otherwise disposes of stocks, other
securities and certain financial instruments held for less than three months.
If the Fund qualifies as a regulated investment company and meets certain
distribution requirements, the Fund will not be subject to federal income tax on
its net investment income and net realized capital gains that it distributes to
its shareholders. The Fund's net investment income for dividend purposes
consists of (i) interest accrued and discount earned on the Fund's assets, (ii)
less amortization of market premium on such assets, accrued expenses directly
attributable to the Fund and the general expenses (e.g., legal, accounting and
Trustees' fees) of the Trust attributed to the Fund on the basis of its relative
net assets. The amortization of market
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discount on the Fund's assets will not be included in the calculation of net
income unless the Fund elects to include accrued market discount currently.
Dividends paid from the Fund's net investment income and distributions of
the Fund's net realized short-term capital gains are taxable to shareholders as
ordinary income, regardless of how long shareholders in the Fund have held their
shares and whether the dividends or distributions are received in cash or
reinvested in additional shares of the Fund. Distributions of a Fund's net
realized long-term capital gains will be taxable to shareholders as long-term
capital gains, regardless of how long shareholders have held their shares of the
Fund and whether the distributions are received in cash or are reinvested in
additional Fund shares. In addition, as a general rule, a shareholder's gain or
loss on a sale or redemption of shares of the Fund will be a long-term capital
gain or loss if the shareholder has held the shares for more than one year and
will be a short-term capital gain or loss if the shareholder has held the shares
for one year or less.
Dividends paid by the Fund that are derived from interest earned on
qualifying tax-exempt obligations are expected to be 'exempt-interest' dividends
that shareholders may exclude from their gross incomes for federal income tax
purposes if the Fund satisfies certain asset percentage requirements. Any
exempt-interest dividends of the Fund derived from interest on Municipal
Obligations, the interest on which is a specific tax preference item for federal
income tax purposes, will be a specific tax preference item for purposes of the
federal individual and corporate alternative minimum taxes. In addition, all
exempt-interest dividends will be a component of the 'current earnings'
adjustment item for purposes of the federal corporate alternative minimum income
tax and corporate shareholders may incur a larger federal environmental tax
liability through the receipt of Fund dividends and distributions from the Fund.
Statements as to the tax status of the dividends and distributions received
by shareholders of each Fund are mailed annually. These statements set forth the
dollar amount of income excluded from federal income taxes and the dollar
amount, if any, subject to federal income taxes. These statements will also
designate the amount of exempt-interest dividends that are a specific preference
item for purposes of the federal individual and corporate alternative minimum
taxes. The Fund notifies its shareholders annually as to the interest excluded
from federal income taxes earned by the Fund with respect to those states and
possessions in which the Fund has or had investments.
Shareholders of the Fund should consult their tax advisors with specific
reference to their own tax situations. Shareholders of the Fund should in
particular consult their tax advisors about the status of the Fund's dividends
and distributions for state and local tax purposes in order to assess the
consequences of investing in the Fund under state and local laws generally and
to determine whether dividends paid by the Fund are exempt from any otherwise
applicable state or local income taxes.
Shareholders are urged to consult their tax advisors regarding the
application of federal, state, local and foreign tax laws to their specific
situations before investing in the Fund.
DISTRIBUTOR
Kidder, Peabody, a major full-line investment services firm serving foreign and
domestic securities markets, located at 10 Hanover Square, New York, New York
10005-3592, serves as the distributor of the Fund's shares and is paid monthly
fees by the Fund in connection with (1) the servicing of shareholder accounts in
Class A and Class B shares and (2) providing distribution
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related services in respect of Class B shares. A monthly service fee, authorized
pursuant to a Shareholder Servicing and Distribution Plan (the 'Plan') adopted
by the Trust with respect to the Fund pursuant to Rule 12b-1 under the 1940 Act,
is calculated at the annual rate of .25% of the value of the average daily net
assets of the Fund attributable to each of Class A and Class B shares and is
used by Kidder, Peabody to provide compensation for ongoing servicing and/or
maintenance of shareholder accounts and an allocation of overhead and other
Kidder, Peabody branch office expenses related to servicing shareholder
accounts. Compensation is paid by Kidder, Peabody to persons, including Kidder,
Peabody employees, who respond to inquiries of shareholders of the Fund
regarding their ownership of shares or their accounts with the Fund or who
provide other similar services not otherwise required to be provided by the
Fund's manager, investment adviser or transfer agent.
In addition, pursuant to the Plan, the Fund pays to Kidder, Peabody a
monthly distribution fee at the annual rate of .50% of the Fund's average daily
net assets attributable to Class B shares. The distribution fee is used by
Kidder, Peabody to provide initial and ongoing sales compensation to its
Investment Executives in respect of sales of Class B shares; costs of printing
and distributing the Fund's Prospectus, Statement of Additional Information and
sales literature to prospective investors in Class B shares; costs associated
with any advertising relating to Class B shares; an allocation of overhead and
other Kidder, Peabody branch office expenses related to distribution of Class B
shares; and payments to, and expenses of, persons who provide support services
in connection with the distribution of Class B shares.
Payments under the Plan are not tied exclusively to the service and/or
distribution expenses actually incurred by Kidder, Peabody, and the payments may
exceed expenses actually incurred by Kidder, Peabody. The Trustees evaluate the
appropriateness of the Plan and its payment terms on a continuing basis and in
doing so will consider all relevant factors, including expenses borne by Kidder,
Peabody and amounts it receives under the Plan.
PERFORMANCE INFORMATION
From time to time, the Trust may advertise the 30-day 'yield' of the Fund for
each Class. The yield refers to the income generated by an investment in a Class
over the 30-day period identified in the advertisement and is computed by
dividing the net investment income per share earned by a Class during the period
by the net asset value per share for that Class on the last day of the period.
This income is 'annualized' by assuming that the amount of income is generated
each month over a one-year period and is compounded semi-annually. The
annualized income is then shown as a percentage of the net asset value.
From time to time, the Trust may advertise the Fund's 'equivalent taxable
yield' for each Class, which demonstrates the yield on a taxable investment
necessary to produce an after-tax yield equal to the Fund's tax-exempt yield. It
is calculated by increasing the yield shown for the Class, calculated as
described above, to the extent necessary to reflect the payment of specified tax
rates. Thus, the equivalent taxable yield always will exceed the Class' yield.
The table below shows individual taxpayers how to translate the tax savings
from investments such as the Fund into an equivalent return from a taxable
investment. The yields
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used below are for illustration only and are not intended to represent current
or future yields for the Fund, which may be higher or lower than those shown.
<TABLE>
<CAPTION>
Federal Tax-Exempt Yields
Marginal --------------------------------------------------
Sample Taxable Income Rate* 4.00% 5.00% 6.00% 7.00% 8.00% 9.00%
------------------------------------------------------ -------- ----- ----- ----- ----- ----- -----
Equivalent Taxable Yield
--------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Single or Joint Return
$ 17,000 $ 27,000..................................... 15.00% 4.71 % 5.88 % 7.06 % 8.24% 9.41% 10.59%
30,000 40,000..................................... 28.00% 5.56 % 6.94 % 8.33 % 9.72% 11.11% 12.50%
60,000 100,000..................................... 31.00% 5.80 % 7.25 % 8.70 % 10.14% 11.59% 13.04%
170,000 200,000..................................... 36.00% 6.25 % 7.81 % 9.38 % 10.94% 12.50% 14.06%
300,000 400,000..................................... 39.60% 6.62 % 8.28 % 9.93 % 11.59% 13.25% 14.90%
</TABLE>
------------
* The federal tax rates shown are those currently in effect for 1994, taking
into account the rate changes made by the Omnibus Budget Reconciliation Act of
1993. The calculations assume that no income will be subject to the federal
individual alternative minimum tax.
From time to time, the Trust may advertise the Fund's 'average annual total
return' over various periods of time for each Class. Total return figures, which
are based on historical earnings and are not intended to indicate future
performance, show the average percentage change in value of an investment in the
Class from the beginning date of a measuring period to the end of that period.
These figures reflect changes in the price of shares and assume that any income
dividends and/or capital gains distributions made by the Fund during the period
were reinvested in shares of the same Class. Total return figures will be given
for the most recent one-and five-year periods, or for the life of the Class to
the extent that it has not been in existence for the full length of those
periods, and may be given for other periods as well, such as on a year-by-year
or month-by-month basis. The average annual total return for any one year in a
period longer than one year might be greater or less than the average for the
entire period.
The Trust may quote 'aggregate total return' figures for various periods,
representing the cumulative change in value of an investment in a Class for the
specific period and reflecting changes in share prices and assuming reinvestment
of dividends and distributions. Aggregate total return may be calculated either
with or without the effect of the sales charge to which Class A shares are
subject and may be shown by means of schedules, charts or graphs, and may
indicate subtotals of the various components of total return (that is, changes
in value of initial investment, income dividends and capital gains
distributions). Reflecting compounding over a longer period of time, aggregate
total return data generally will be higher than average annual total return
data.
The Trust may, in addition to quoting the Classes' average annual and
aggregate total returns, advertise the actual annual and annualized total return
performance data for various periods of time. Actual annual and annualized total
returns may be calculated either with or without the effect of the sales charge
to which Class A shares are subject and may be shown by means of schedules,
charts or graphs. Actual annual or annualized total return data generally will
be lower than average annual total return data, which reflects compounding of
return.
In reports or other communications to Fund shareholders and in advertising
material, the Trust may compare the Classes' performance with (1) the
performance of other mutual funds (or classes thereof) as listed in rankings
prepared by Lipper Analytical Services Inc., CDA Investment Technologies, Inc.,
Micropal or similar investment services that monitor the performance of mutual
funds or as set out in the nationally recognized publications listed below,
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(2) the Lehman Brothers Municipal Bond Index, which is an unmanaged index or (3)
other appropriate indexes of investment securities or with data developed by
GEIM or KPAM derived from those indexes. The Trust may also include in
communications to Fund shareholders evaluations of the Fund published by
nationally recognized ranking services and by financial publications that are
nationally recognized, such as Barron's, Business Week, Forbes, Institutional
Investor, Investor's Daily, Kiplinger's Personal Finance Magazine, Money,
Morningstar Mutual Fund Values, The New York Times, USA Today and The Wall
Street Journal. Any given performance comparison should not be considered as
representative of the Fund's performance for any future period.
GENERAL INFORMATION
ORGANIZATION OF THE TRUST
The Trust was formed as a business trust pursuant to a Declaration of Trust, as
amended from time to time (the 'Declaration'), under the laws of The
Commonwealth of Massachusetts on August 10, 1992. The Fund commenced operations
on September 8, 1993. The Declaration authorizes the Trust's Board of Trustees
to create separate series, and within each series separate Classes, of an
unlimited number of shares of beneficial interest, par value $.001 per share. As
of the date of this Prospectus, the Trustees have established several such
series, representing interests in the Fund as described in this Prospectus and
in several other series. See 'Exchange Privilege' in the Statement of Additional
Information.
When issued, Fund shares will be fully paid and non-assessable. Shares are
freely transferable and have no pre-emptive, subscription or conversion rights.
Each Class represents an identical interest in the Fund's investment portfolio.
As a result, the Classes have the same rights, privileges and preferences,
except with respect to: (1) the designation of each Class; (2) the effect of the
respective sales charges, if any, for each Class; (3) the distribution and/or
service fees, if any, borne by each Class; (4) the expenses allocable
exclusively to each Class; (5) voting rights on matters exclusively affecting a
single Class; and (6) the exchange privilege of each Class. The Board of
Trustees does not anticipate that there will be any conflicts among the
interests of the holders of the different Classes. The Trustees, on an ongoing
basis, will consider whether any conflict exists and, if so, take appropriate
action. Certain aspects of the shares may be changed, upon notice to Fund
shareholders, to satisfy certain tax regulatory requirements, if the change is
deemed necessary by the Trust's Board of Trustees.
Shareholders of the Fund are entitled to one vote for each full share held
and fractional votes for fractional shares held. Voting rights are not
cumulative and, as a result, the holders of more than 50% of the aggregate
shares of the Trust may elect all of the Trustees. Generally, shares of the
Trust are voted on a Trust-wide basis on all matters except those affecting only
the interests of one series, such as the Fund's investment advisory agreement.
In turn, shares of the Fund are voted on a Fund-wide basis on all matters except
those affecting only the interests of one Class, such as the terms of the Plan
as it relates to a Class.
The Trust intends to hold no annual meetings of shareholders for the
purpose of electing Trustees unless, and until such time as, less than a
majority of the Trustees holding office have been elected by shareholders.
Shareholders of record of no less than two-thirds of the outstanding shares of
the Trust may remove a Trustee through a declaration in writing or by vote cast
in person or by proxy at a meeting called for that purpose. A meeting will be
called for the purpose of voting on the removal of a Trustee at the written
request of holders of 10% of the
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Trust's outstanding shares. Shareholders of the Fund who satisfy certain
criteria will be assisted by the Trust in communicating with other shareholders
in seeking the holding of the meeting.
REPORTS TO SHAREHOLDERS
The Trust sends Fund shareholders audited semi-annual and annual reports, each
of which includes a list of the investment securities held by the Fund as of the
end of the period covered by the report.
CUSTODIAN AND RECORDKEEPING AGENT;
TRANSFER AND DIVIDEND AGENT
State Street, located at One Monarch Drive, North Quincy, Massachusetts 02171,
serves as the Fund's custodian and recordkeeping agent. IFTC, located at 127
West 10th Street, Kansas City, Missouri 64105, serves as the Fund's transfer and
dividend agent.
33
<PAGE>
No person has been authorized to give any information or to make any
representations not contained in this Prospectus, or in the
Statement of Additional Information incorporated into this
Prospectus by reference, in connection with the offering made by
this Prospectus and, if given or made, any such information or
representations must not be relied upon as having been authorized by
the Fund or its distributor. This Prospectus does not constitute an
offering by the Fund or by its distributor in any jurisdiction in
which the offering may not lawfully be made.
<TABLE>
<S> <C>
------------------------------------------------
Contents
------------------------------------------------
Fee Table 2
------------------------------------------------
Highlights 3
------------------------------------------------
Financial Highlights 7
------------------------------------------------
Investment Objective and Policies 8
------------------------------------------------
Management of the Fund 17
------------------------------------------------
Purchase of Shares 19
------------------------------------------------
Redemption of Shares 24
------------------------------------------------
Determination of Net Asset Value 26
------------------------------------------------
Exchange Privilege 26
------------------------------------------------
Dividends, Distributions and Taxes 28
------------------------------------------------
Distributor 29
------------------------------------------------
Performance Information 30
------------------------------------------------
General Information 32
------------------------------------------------
Custodian and Recordkeeping Agent; Transfer
and Dividend Agent 33
------------------------------------------------
</TABLE>
Kidder,
Peabody
Municipal
Bond
Fund
Prospectus
October 28, 1994
In Affiliation With
GE Investment Management [LOGO]
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION OCTOBER 28, 1994
--------------------------------------------------------------------------------
KIDDER, PEABODY MUNICIPAL BOND FUND
60 BROAD STREET NEW YORK, NEW YORK 10004-2350 (212) 656-1737
This Statement of Additional Information supplements the information contained
in the Prospectus dated October 28, 1994, of Kidder, Peabody Municipal Bond Fund
(the 'Fund'), a series of Kidder, Peabody Investment Trust II (the 'Trust'), and
should be read together with the Prospectus. The Prospectus may be obtained
without charge by writing or calling the Trust at the address or the telephone
number listed above. This Statement of Additional Information, although not a
prospectus, is incorporated in its entirety by reference into the Prospectus.
For ease of reference, the section headings used in this Statement of Additional
Information are identical to those used in the Prospectus except as noted in
parentheses in the Table of Contents.
--------------------------------------------------------------------------------
MANAGER
Kidder Peabody Asset Management, Inc.
INVESTMENT ADVISER
GE Investment Management Incorporated
DISTRIBUTOR
Kidder, Peabody & Co. Incorporated
[Logo]
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<PAGE>
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INVESTMENT OBJECTIVE AND POLICIES
The Prospectus discusses the investment objective of the Fund and the policies
to be employed to achieve that objective. Supplemental information is set out
below concerning certain of the securities and other instruments in which the
Fund may invest, the investment techniques and strategies that the Fund may
utilize and certain risks involved with those investments, techniques and
strategies.
GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities ('Government Securities') in which the Fund may invest include
debt obligations of varying maturities issued by the U.S. Treasury or issued or
guaranteed by an agency or instrumentality of the U.S. Government, including the
Federal Housing Administration, Farmers Home Administration, Export-Import Bank
of the United States, Small Business Administration, Government National
Mortgage Association, General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks, Federal Home
Loan Mortgage Corporation, Federal Intermediate Credit Banks, Federal Land
Banks, Federal National Mortgage Association, Maritime Administration, Tennessee
Valley Authority, District of Columbia Armory Board, Student Loan Marketing
Association and Resolution Trust Corporation. Direct obligations of the U.S.
Treasury include a variety of securities that differ in their interest rates,
maturities and dates of issuance. Because the U.S. Government is not obligated
by law to provide support to an instrumentality that it sponsors, the Fund will
invest in obligations issued by an instrumentality of the U.S. Government only
if Kidder Peabody Asset Management, Inc. ('KPAM'), the Fund's manager, or GE
Investment Management Incorporated ('GEIM'), the Fund's investment adviser,
determines that the instrumentality's credit risk does not make its securities
unsuitable for investment by the Fund.
MUNICIPAL OBLIGATIONS
The Fund invests principally in debt obligations issued by, or on behalf of,
states, territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities or
multistate agencies or authorities, the interest from which debt obligations is,
in the opinion of bond counsel to the issuer, excluded from gross income for
federal income tax purposes ('Municipal Obligations'). Municipal Obligations
generally are understood to include debt obligations issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities, refunding of outstanding obligations, payment of general operating
expenses and extensions of loans to public institutions and facilities. Private
activity bonds that are issued by or on behalf of public authorities to finance
privately operated facilities are considered to be Municipal Obligations if the
interest paid on them qualifies as excluded from gross income (but not
necessarily from alternative minimum taxable income) for federal income tax
purposes in the opinion of bond counsel to the issuer.
Municipal Obligations may be issued to finance life care facilities, which
are an alternative form of long-term housing for the elderly that offer
residents the independence of a condominium life style and, if needed, the
comprehensive care of nursing home services. Bonds
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to finance these facilities have been issued by various state industrial
development authorities. Because the bonds are secured only by the revenues of
each facility and not by state or local government tax payments, they are
subject to a wide variety of risks, including a drop in occupancy levels, the
difficulty of maintaining adequate financial reserves to secure estimated
actuarial liabilities, the possibility of regulatory cost restrictions applied
to health care delivery and competition from alternative health care or
conventional housing facilities.
Municipal leases are Municipal Obligations that may take the form of a
lease or an installment purchase contract issued by state and local governmental
authorities to obtain funds to acquire a wide variety of equipment and
facilities such as fire and sanitation vehicles, computer equipment and other
capital assets. These obligations have evolved to make it possible for state and
local government authorities to acquire property and equipment without meeting
constitutional and statutory requirements for the issuance of debt. Thus,
municipal leases have special risks not normally associated with Municipal
Obligations. These obligations frequently contain 'non-appropriation' clauses
which provide that the governmental issuer of the obligation has no obligation
to make future payments under the lease or contract unless money is appropriated
for those purposes by the legislative body on a yearly or other periodic basis.
In addition to the 'non-appropriation' risk, municipal leases represent a type
of financing that has not yet developed the depth of marketability associated
with other Municipal Obligations. Moreover, although municipal leases will be
secured by the leased equipment or facility, the disposition of the equipment or
facility in the event of foreclosure might prove to be difficult.
From time to time, proposals to restrict or eliminate the federal income
tax exemption for interest on Municipal Obligations have been introduced before
Congress. Similar proposals may be introduced in the future. In addition, the
Internal Revenue Code of 1986, as amended (the 'Code'), currently provides that
small issue private activity bonds will not be tax-exempt if the proceeds are
used to finance projects other than manufacturing facilities. If a proposal to
restrict or eliminate the federal tax exemption for interest on Municipal
Obligations were enacted, the availability of Municipal Obligations for
investment by the Fund would be adversely affected. In such event, the Trust's
Board of Trustees would reevaluate the investment objective and policies of the
Fund and submit possible changes in structure for the consideration of
shareholders.
INVESTMENT TECHNIQUES AND STRATEGIES
FUTURES CONTRACTS. The Fund may trade municipal bond index and interest
rate futures contracts to the extent permitted under rules and interpretations
adopted by the Commodity Futures Trading Commission (the 'CFTC'). Futures
contracts have been designed by exchanges that have been designated as 'contract
markets' by the CFTC, and must be executed through a futures commission
merchant, or brokerage firm, that is a member of the relevant contract market.
Futures contracts trade on a number of contract markets, and, through their
clearing corporations, the exchanges guarantee performance of the contracts as
between the clearing members of the exchange.
The purpose of trading futures contracts is to protect the Fund from
fluctuations in value of its investment securities without its necessarily
buying or selling the securities. Because the value of the Fund's investment
securities will exceed the value of the futures contracts sold by the Fund, an
increase in the value of the futures contracts could only mitigate, but not
totally offset,
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the decline in the value of the Fund's assets. No consideration is paid or
received by the Fund upon trading a futures contract. Upon trading a futures
contract, the Fund will be required to deposit in a segregated account with its
custodian an amount of cash, short-term Government Securities or other
high-grade, short-term money market instruments equal to approximately 1% to 10%
of the contract amount (this amount is subject to change by the exchange on
which the contract is traded and brokers may charge a higher amount). This
amount is known as 'initial margin' and is in the nature of a performance bond
or good faith deposit on the contract that is returned to the Fund upon
termination of the futures contract, assuming that all contractual obligations
have been satisfied; the broker will have access to amounts in the margin
account if the Fund fails to meet its contractual obligations. Subsequent
payments, known as 'variation margin,' to and from the broker, will be made
daily as the price of the currency or securities underlying the futures contract
fluctuates, making the long and short positions in the futures contract more or
less valuable, a process known as 'marking-to-market.' At any time prior to the
expiration of a futures contract, the Fund may elect to close a position by
taking an opposite position, which will operate to terminate the Fund's existing
position in the contract.
Positions in futures contracts may be closed out only on the exchange on
which they were undertaken (or through a linked exchange). No secondary market
for futures contracts currently exists, and although the Fund intends to trade
futures contracts only if an active market for them exists, no assurance can be
given that an active market will exist for the contracts at any particular time.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made on that day at a price
beyond that limit. Prices for futures contracts may move to the daily limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and subjecting the Fund to substantial
losses. In that case, and in the event of adverse price movements, the Fund
would be required to make daily cash payments of variation margin. In such
circumstances, an increase in the value of the portion of the Fund's securities
being hedged, if any, may partially or completely offset losses on the futures
contract.
OPTIONS ON FUTURES CONTRACTS. The Fund may purchase and write put and call
options on municipal bond index and interest rate futures contracts that are
traded on a U.S. exchange or board of trade to the extent permitted under rules
and interpretations of the CFTC, as a hedge against changes in market conditions
and interest rates, and may enter into closing transactions with respect to
those options to terminate existing positions. No assurance can be given that
the closing transactions can be effected.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. When the Fund engages in
when-issued or delayed-delivery securities transactions, it relies on the other
party to consummate the trade. Failure of the seller to do so may result in the
Fund's incurring a loss or missing an opportunity to obtain a price considered
to be advantageous.
INVESTMENT RESTRICTIONS
Investment restrictions numbered 1 through 9 below have been adopted by the
Trust as fundamental policies with respect to the Fund. Under the Investment
Company Act of 1940, as amended (the '1940 Act'), a fundamental policy may not
be changed without the vote of a
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majority of the outstanding voting securities of the Fund, as defined in the
1940 Act. Investment restrictions numbered 10 through 16 may be changed by a
vote of a majority of the Trust's Board of Trustees at any time.
Under the investment restrictions adopted by the Trust with respect to the
Fund:
1. The Fund will not purchase securities (other than Government
Securities) of any issuer if, as a result of the purchase, more than 5% of
the value of the Fund's total assets would be invested in the securities of
the issuer, except that up to 25% of the value of the Fund's total assets
may be invested without regard to this 5% limitation.
2. The Fund will not purchase more than 10% of the voting securities
of any one issuer, or more than 10% of the securities of any class of any
one issuer, except that this limitation is not applicable to the Fund's
investments in Government Securities. For purposes of this restriction, all
debt obligations of an issuer will be considered a single class.
3. The Fund will not borrow money, except that the Fund may borrow
from banks for temporary or emergency (not leveraging) purposes, including
the meeting of redemption requests and cash payments of dividends and
distributions that might otherwise require the untimely disposition of
securities, in an amount not to exceed 20% of the value of the Fund's total
assets (including the amount borrowed) valued at market less liabilities
(not including the amount borrowed) at the time the borrowing is made.
Whenever borrowings exceed 5% of the value of the total assets of the Fund,
the Fund will not make any additional investments.
4. The Fund will not lend money to other persons, except through
purchasing debt obligations and entering into repurchase agreements.
5. Except as described in the Prospectus, the Fund will invest no more
than 25% of the value of its total assets in securities of issuers in any
one industry. For purposes of this restriction, the term industry will be
deemed to exclude the government of the United States.
6. The Fund will not purchase securities on margin, except that the
Fund may obtain any short-term credits necessary for the clearance of
purchases and sales of securities. For purposes of this restriction, the
deposit or payment of initial or variation margin in connection with
futures contracts or options on futures contracts will not be deemed to be
a purchase of securities on margin.
7. The Fund will not purchase or sell real estate or real estate
limited partnership interests, except that the Fund may purchase and sell
securities of companies that deal in real estate or interests in real
estate.
8. The Fund will not purchase or sell commodities or commodity
contracts (except municipal bond index and interest rate futures contracts
and related options and other similar contracts).
9. The Fund will not act as an underwriter of securities, except that
the Fund may acquire securities under circumstances in which, if the
securities were sold, the Fund might be deemed to be an underwriter for
purposes of the Securities Act of 1933, as amended.
10. The Fund will not invest in oil, gas or other mineral leases or
exploration or development programs.
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11. The Fund will not purchase any security, other than a security
acquired pursuant to a plan of reorganization or an offer of exchange, if
as a result of the purchase (a) the Fund would own any securities of an
open-end investment company or more than 3% of the total outstanding voting
stock of any closed-end investment company or (b) more than 5% of the value
of the Fund's total assets would be invested in securities of any one or
more closed-end investment companies.
12. The Fund will not participate on a joint or joint-and-several
basis in any securities trading account.
13. The Fund will not make investments for the purpose of exercising
control of management.
14. The Fund will not purchase any security, if as a result of the
purchase, the Fund would then have more than 5% of its total assets
invested in securities of companies (including predecessors) that have been
in continuous operation for fewer than three years.
15. The Fund will not purchase or retain securities of any company if,
to the knowledge of the Fund, any of the Trust's Trustees or officers or
any officer or director of GEIM or KPAM individually owns more than .5% of
the outstanding securities of the company and together they own
beneficially more than 5% of the securities.
16. The Fund will not invest in warrants (other than warrants acquired
by the Fund as part of a unit or attached to securities at the time of
purchase) if, as a result, the investments (valued at the lower of cost or
market) would exceed 5% of the value of the Fund's net assets of which not
more than 2% of the Fund's net assets may be invested in warrants not
listed on a recognized foreign or domestic stock exchange.
Notwithstanding investment restriction number 3 above, the Fund has no
present intention of borrowing money other than for temporary or emergency (not
leveraging) purposes, including the meeting of redemption requests and cash
payments of dividends and distributions that might otherwise require the
untimely disposition of securities. The Trust may make commitments regarding the
Fund more restrictive than the restrictions listed above so as to permit the
sale of the Fund's shares in certain states. Should the Trust determine that a
commitment is no longer in the best interests of the Fund and its shareholders,
the Trust will revoke the commitment by terminating the sale of the Fund's
shares in the state involved. The percentage limitations contained in the
restrictions listed above apply at the time of purchase of the securities.
RISK FACTORS AND SPECIAL CONSIDERATIONS
RATINGS AS INVESTMENT CRITERIA
In general, the ratings of Moody's Investors Service, Inc. ('Moody's'), Standard
& Poor's Corporation ('Standard & Poor's') and Fitch Investors Service, Inc.
('Fitch') represent the opinions of those agencies as to the quality of debt
obligations that they rate. These ratings, however, are relative and subjective,
are not absolute standards of quality and do not evaluate the market risk of
securities. Ratings are used as initial criteria for the selection of portfolio
securities; the Fund also relies upon the independent advice of GEIM to evaluate
potential investments. Among the factors that are considered by GEIM are the
long-term ability of the
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issuer to pay principal and interest and general economic trends. The Appendix
to this Statement of Additional Information contains further information
concerning the ratings of Moody's, Standard & Poor's and Fitch, together with a
brief discussion of the significance of those ratings.
Subsequent to its purchase by the Fund, an issue of debt obligations may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Fund. Neither event will require the sale of the debt obligation
by the Fund, but GEIM will consider the event in its determination of whether
the Fund should continue to hold the obligation. In addition, to the extent that
the ratings change as a result of changes in rating organizations or their
rating systems or as a result of a corporate restructuring of Moody's, Standard
& Poor's or Fitch, GEIM will attempt to use comparable ratings as standards for
the Fund's investments.
REPURCHASE AGREEMENTS
The Fund may engage in repurchase agreement transactions with member banks of
the Federal Reserve System and with certain dealers listed on the Federal
Reserve Bank of New York's list of reporting dealers. A repurchase agreement is
a contract under which the buyer of a security simultaneously commits to resell
the security to the seller at an agreed-upon price and date. Under each
repurchase agreement, the selling institution is required to maintain the value
of the securities subject to the repurchase agreement at not less than their
repurchase price. Repurchase agreements could involve certain risks in the event
of default or insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
PORTFOLIO TRANSACTIONS AND TURNOVER
Decisions to buy and sell securities for the Fund are made by GEIM, subject to
review by KPAM and the Trust's Board of Trustees. No stated commission is
generally applicable to securities traded in U.S. over-the-counter markets, but
the prices of those securities include undisclosed commissions or mark-ups. The
cost of securities purchased from underwriters includes an underwriting
commission or concession, and the prices at which securities are purchased from
and sold to dealers include a dealer's mark-up or mark-down. Government
Securities generally are purchased from underwriters or dealers, although
certain newly issued Government Securities may be purchased directly from the
U.S. Treasury or from the issuing agency or instrumentality.
In selecting brokers or dealers to execute securities transactions on
behalf of the Fund, GEIM seeks the best overall terms available. In assessing
the best overall terms available for any transaction, GEIM considers factors
that it deems relevant, including the breadth of the market in the security, the
price of the security, the financial condition and execution capability of the
broker or dealer and the reasonableness of the commission, if any, for the
specific transaction and on a continuing basis. In addition, the investment
advisory agreement among the Trust, KPAM and GEIM relating to the Fund (the
'Advisory Agreement') authorizes GEIM, on behalf of the Fund, in selecting
brokers or dealers to execute a particular transaction, and in evaluating the
best overall terms available, to consider the brokerage and research services
(as those terms are defined in Section 28(e) of the Securities Exchange Act of
1934) provided to the Fund and/or other accounts over which GEIM or its
affiliates exercise investment discretion. The fees under
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the investment advisory agreement are not reduced by reason of the Fund's
receiving brokerage and research services. The Trustees periodically review the
commissions paid by the Fund to determine if the commissions paid over
representative periods of time were reasonable in relation to the benefits
inuring to the Fund. Over-the-counter purchases and sales by the Fund are
transacted directly with principal market makers except in those cases in which
better prices and executions may be obtained elsewhere. The Fund will not
purchase any security, including Government Securities, during the existence of
any underwriting or selling group relating to the security of which Kidder,
Peabody & Co. Incorporated ('Kidder, Peabody'), the Fund's distributor, is a
member, except to the extent permitted under rules, interpretations or
exemptions of the Securities and Exchange Commission (the 'SEC'). No brokerage
commissions have been incurred by the Fund for the period September 8, 1993
(commencement of operations) through the fiscal year ended June 30, 1994.
The Fund does not consider portfolio turnover rate a limiting factor in
making investment decisions. The Fund's turnover rate is calculated by dividing
the lesser of purchases or sales of portfolio securities for the year by the
monthly average value of portfolio securities. Securities with remaining
maturities of one year or less on the date of acquisition are excluded from the
calculation.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The names of Trustees and officers of the Trust, together with information as to
their principal business occupations during the last five years, are shown
below. An asterisk appears before the name of each Trustee who is an 'interested
person' of the Trust, as defined in the 1940 Act.
*George V. Grune, Jr., Trustee, Chairman of the Board and President.
Executive Managing Director of the Asset Management Division of Kidder, Peabody
and President and a Director of KPAM. Prior to November 1989, Managing Director
of GE Capital Corporate Finance Group, Inc.
David J. Beaubien, Trustee. Chairman of Yankee Environmental Systems, Inc.,
manufacturer of meteorological measuring instruments. Director of IEC, Inc., a
manufacturer of electronic assemblies, Belfort Instruments, Inc., manufacturer
of environmental instruments, and Oriel Corp., manufacturer of optical
instruments. Prior to January 1991, Senior Vice President of EG&G, Inc., a
company that makes and provides a variety of scientific and technically oriented
products and services.
William W. Hewitt, Jr., Trustee. Trustee of The Guardian Asset Allocation
Fund, The Guardian Baillie Gifford International Fund, The Guardian Bond Fund,
Inc., The Guardian Cash Fund, Inc., The Guardian Park Ave. Fund, The Guardian
Stock Fund, Inc., The Guardian Cash Management Trust and The Guardian U.S.
Government Trust.
*Russell H. Johnson, Trustee and Vice Chairman. Managing Director of
Kidder, Peabody and Managing Director and Director of KPAM. Prior to April 1993
and December 1991, Senior Vice President of KPAM and Kidder, Peabody,
respectively.
Thomas R. Jordan, Trustee. Principal of The Dilenschneider Group, Inc., a
corporate communications and public policy counseling firm. Prior to January
1992, Senior Vice President
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of Hill & Knowlton, a public relations and public affairs firm. Prior to April
1991, President of The Jordan Group, a management consulting and strategies
development firm.
Carl W. Schafer, Trustee. President of the Atlantic Foundation, a
charitable foundation supporting mainly oceanographic exploration and research.
Director of Evans Systems, Inc., a retail motor fuels, convenience store and
diversified company, International Agritech Resources, Inc., an agribusiness
investment and consulting firm, Ardic Exploration and Development Ltd. and
Hidden Lake Gold Mines Ltd., gold mining companies, Electronic Clearing House,
Inc., a financial transactions processing company, Wainoco Oil Corporation and
Bio Techniques Laboratories Inc., an agricultural biotechnology company. Prior
to January 1993, chairman of the Investment Advisory Committee of the Howard
Hughes Medical Institute and director of Ecova Corporation, a toxic waste
treatment firm. Prior to May 1990, principal of Rockefeller and Company, Inc.,
manager of investments.
Michael J. Caufield, Executive Vice President and Chief Investment Officer.
Vice President of the Municipal Bond Research and Analysis Department of General
Electric Investment Corporation ('GEIC'), an affiliate of GEIM, assigned to GEIM
to provide management services to the Fund.
Robert B. Jones, Senior Vice President. Senior Vice President of Kidder,
Peabody and Senior Vice President and director of KPAM. Prior to December 1990,
Vice President of Kidder, Peabody.
Robin Pantalena, Vice President and Investment Officer. Vice President of
the Municipal Bonds Department of GEIC, assigned to GEIM to provide management
services to the Fund. Prior to December 1991, Senior Associate of the Municipal
Bonds Department.
Lawrence H. Kaplan, Senior Vice President, General Counsel and Secretary.
Senior Vice President and Associate General Counsel of Kidder, Peabody,
director, Senior Vice President, General Counsel and Assistant Secretary of KPAM
and a director and/or officer of various Kidder, Peabody subsidiaries. Prior to
November 1990, attorney in private practice with the law firm of Brown & Wood.
John J. Boretti, Vice President and Chief Financial Officer. Vice President
of Kidder, Peabody and Vice President and Chief Financial Officer of KPAM. Prior
to October 1992, self employed as a consultant. Prior to August 1992, director,
Executive Vice President, Chief Financial Officer and Treasurer of USF&G Review
Management Corp., Vice President and director of USF&G Investment Management
Corp., Treasurer of USF&G Mutual Funds, Executive Vice President, Treasurer and
Chief Financial Officer of USF&G Investment Services, Inc. and director of Axe
Houghton Management. Prior to December 1990, Vice President of USF&G Financial
Services.
Ronald A. Huether, Treasurer and Assistant Secretary. Vice President of
Kidder, Peabody and a Vice President and Treasurer of KPAM.
Lisa S. Kellman, Assistant Secretary. Assistant Vice President of Kidder,
Peabody and KPAM. Prior to January 1993, Administrative Officer of Kidder,
Peabody.
Leonard I. Chubinsky, Assistant Secretary. Assistant Vice President and
Assistant General Counsel of Kidder, Peabody and Assistant Vice President of
KPAM. Prior to July 1992, attorney with Curtiss-Wright Corporation, a
diversified manufacturing company.
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Helen V. Del Bove, Assistant Treasurer. Assistant Vice President of Kidder,
Peabody and a Vice President of KPAM.
Certain of the Trustees and officers of the Trust are directors and/or
trustees and officers of other mutual funds managed by KPAM. The addresses of
the non-interested Trustees are as follows: Mr. Beaubien, Montague Industrial
Park, 101 Industrial Road, Box 746, Turners Falls, Massachusetts 01376; Mr.
Hewitt, P.O. Box 2359, Princeton, New Jersey 08543-2359; Mr. Jordan, 200 Park
Avenue, New York, New York 10166; and Mr. Schafer, P.O. Box 1164, Princeton, New
Jersey 08542. The address of the other Trustees and officers listed above, other
than Mr. Caufield and Ms. Pantalena is 60 Broad Street, New York, New York
10004-2350. The address of Mr. Caufield and Ms. Pantalena is 3003 Summer Street,
Stamford, Connecticut 06094.
By virtue of the responsibilities assumed by KPAM under its management
agreement with the Trust, and by GEIM under its investment advisory agreement
with KPAM and the Trust, the Fund requires no executive employees other than
officers of the Trust, none of whom devotes full time to the affairs of the
Fund. Trustees and officers of the Trust, as a group, owned 2.69% of the
outstanding Class C shares as of September 30, 1994 and owned less than 1% of
the outstanding Class A shares and Class B shares as of September 30, 1994. The
Trust pays each Trustee who is not an officer, director or employee of KPAM,
GEIM, or any of their affiliates, an annual retainer of $1,000, and $375 for
each Board of Trustees meeting attended, and reimburses the Trustee for
out-of-pocket expenses associated with attendance at Board meetings. The
Chairman of the Board's audit committee receives an annual fee of $250. No
officer, director or employee of KPAM, GEIM, or any of their affiliates,
receives any compensation from the Trust for serving as an officer or Trustee of
the Trust. From September 8, 1993 (commencement of operations) through the
fiscal year ended June 30, 1994, the Trust paid $11,122 in Trustees' fees and
out-of-pocket expenses, of which $7,080 was allocated to the Fund.
MANAGER
KPAM, located at 60 Broad Street, New York, New York 10004-2350, and a
wholly-owned subsidiary of Kidder, Peabody, bears all expenses in connection
with the performance of its services as the Fund's manager.
The Management Agreement, pursuant to the terms of which KPAM acts as the
Fund's manager, remains in effect for an initial term of two years and
thereafter continues in effect from year to year, provided its continuance is
approved at least annually by (1) the Trustees or (2) by a vote of a majority of
the Fund's outstanding voting securities, as defined in the 1940 Act, provided
that in either event the continuance is also approved by a majority of the
Trustees who are not 'interested persons,' as defined in the 1940 Act, of any
party to the Management Agreement, by vote cast in person at a meeting called
for the purpose of voting on such approval. The Management Agreement was most
recently continued by the Trustees, including a majority of the Trustees who are
not 'interested persons,' at a meeting held on March 2, 1994. The Management
Agreement is terminable without penalty, by the Trust on not more than 60 nor
less than 30 days' notice to KPAM, by vote of the holders of a majority of the
Fund's outstanding voting securities, as defined in the 1940 Act, or by KPAM on
not more than 60 nor less than 30 days' notice to the Trust. The Management
Agreement will terminate automatically in the event of its assignment, as
defined in the 1940 Act and the rules thereunder.
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As compensation for KPAM's services rendered to the Fund, the Trust for the
period from September 8, 1993 (commencement of operations) through the fiscal
year ended June 30, 1994 incurred fees in the amount of $123,397 to KPAM.
However, during such period, KPAM voluntarily waived a portion of its fee in the
amount of $113,441 and reimbursed the Fund for a portion of its expenses in the
amount of $217,114.
Under its management agreement with the Trust relating to the Fund (the
'Management Agreement'), KPAM has agreed that, if in any fiscal year of the
Fund, the aggregate expenses of the Fund (including management fees, but
excluding interest, taxes, brokerage and, with the prior written consent of the
necessary state securities commissions, extraordinary expenses) exceed the
expense limitation of any state having jurisdiction over the Trust, KPAM will
reimburse the Trust for the excess expense. This expense reimbursement
obligation is limited to the amount of KPAM's fees under the Management
Agreement. Any expense reimbursement will be estimated, reconciled and paid on a
monthly basis. As of the date of this Statement of Additional Information, the
most restrictive state expense limitation applicable to the Fund requires
reimbursement of expenses in any year that the Fund's expenses, subject to the
limitation, exceed 2 1/2% of the first $30 million of the average daily value of
the Fund's net assets, 2% of the next $70 million of the average daily value of
the Fund's net assets and 1 1/2% of the remaining average daily value of the
Fund's net assets. For the fiscal period ended June 30, 1994, the Fund's
expenses did not exceed such limitations.
INVESTMENT ADVISER
GEIM, located at 3003 Summer Street, P.O. Box 7900, Stamford, Connecticut 06904,
and a wholly-owned subsidiary of General Electric Company, bears all expenses in
connection with the performance of its services as the Fund's investment
adviser.
The Advisory Agreement remains in effect for an initial term of two years
and thereafter continues in effect from year to year, provided its continuance
is approved at least annually by (1) the Trustees or (2) by vote of a majority
of the Fund's outstanding voting securities, as defined in the 1940 Act,
provided that in either event the continuance is also approved by a majority of
the Trustees who are not 'interested persons,' as defined in the 1940 Act, of
any party to the Advisory Agreement, by vote cast in person at a meeting called
for the purpose of voting on such approval. The Advisory Agreement is terminable
without penalty, by the Trust on not more than 60 nor less than 30 days' notice
to the Adviser, by vote of the holders of a majority of the Fund's outstanding
voting securities, as defined in the 1940 Act, or by KPAM on not more than 60
nor less than 30 days' notice to the Trust. The Advisory Agreement will
terminate automatically in the event of its assignment, as defined in the 1940
Act and the rules thereunder.
As compensation for GEIM's services rendered to the Fund, KPAM paid for the
period from September 8, 1993 (commencement of operations) through the fiscal
year ended June 30, 1994 a fee in the amount of $4,978.
Under the Advisory Agreement, GEIM has agreed that, if in any fiscal year
of the Fund, the aggregate expenses of the Fund (including management fees, but
excluding interest, taxes, brokerage and, with the prior written consent of the
necessary state securities commissions, extraordinary expenses) exceed the
expense limitation of any state having jurisdiction over the Trust, GEIM will
reimburse KPAM for 50% of the amount KPAM is required to reimburse the
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Trust under the Management Agreement. The expense reimbursement obligation of
GEIM is limited to the amount of GEIM's fees under the Advisory Agreement.
DISTRIBUTOR
Kidder, Peabody, located at 10 Hanover Square, New York, New York 10005-3592,
serves as the distributor of the Fund's shares on a best efforts basis. Under a
Shareholder Servicing and Distribution Plan (the 'Plan') adopted by the Trust
with respect to the Fund pursuant to Rule 12b-1 under the 1940 Act, the Trust
pays Kidder, Peabody monthly fees calculated at the aggregate annual rates of
.25% and .75% of the value of the Fund's average daily net assets attributed to
Class A shares and Class B shares, respectively. Under its terms, the Plan
continues from year to year, so long as its continuance is approved annually by
vote of the Trust's Board of Trustees, including a majority of the Trustees who
are not interested persons of the Trust and who have no direct or indirect
financial interest in the operation of the Plan (the 'Independent Trustees').
The Plan may not be amended to increase materially the amount to be spent for
the services provided by Kidder, Peabody without Fund shareholder approval, and
all material amendments of the Plan also must be approved by the Trustees in the
manner described above. The Plan may be terminated with respect to a Class at
any time, without penalty, by vote of a majority of the Independent Trustees or
by a vote of a majority of the outstanding voting securities (as defined in the
1940 Act) represented by the Class on not more than 30 days' written notice to
Kidder, Peabody.
Pursuant to the Plan, Kidder, Peabody provides the Trust's Board of
Trustees with periodic reports of amounts expended under the Plan and the
purpose for which the expenditures were made. The Trustees believe that the
Fund's expenditures under the Plan benefit the Fund and its shareholders by
providing better shareholder services and by facilitating the distribution of
shares. With respect to Class A shares, for the period from September 8, 1993
(commencement of operations) through the fiscal year ended June 30, 1994,
Kidder, Peabody received $3,004 from the Fund, of which it is estimated that $0
was spent on advertising, $0 was spent on printing and mailing of prospectuses
to other than current shareholders, $3,004 was spent on commission credits to
branch offices for payments of shareholder servicing compensation to Investment
Executives and $0 was spent on overhead and other branch office distribution or
shareholder servicing-related expenses. With respect to Class B shares, for the
period September 8, 1993 (commencement of operations) through the fiscal year
ended June 30, 1994, Kidder, Peabody received $22,777 from the Fund, of which it
is estimated that $0 was spent on advertising, $0 was spent on printing and
mailing of prospectuses to other than current shareholders, $10,674 was spent on
commission credits to branch offices for payments of commissions and shareholder
servicing compensation to Investment Executives and $12,103 was spent on
overhead and other branch office distribution or shareholder servicing-related
expenses. The term 'overhead and other branch office distribution or shareholder
servicing-related expenses' represents (1) the expenses of operating Kidder,
Peabody's branch offices in connection with the sale of Fund shares or servicing
of shareholder accounts, including lease costs, the salaries and employee
benefits of operations and sales support personnel, utility costs,
communications costs and the costs of stationery and supplies, (2) the costs of
client sales seminars, (3) travel expenses of mutual fund sales coordinators to
promote the sale of Fund shares and (4) other incidental expenses relating to
branch promotion of Fund sales.
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CUSTODIAN AND RECORDKEEPING AGENT
State Street Bank and Trust Company ('State Street'), located at One Monarch
Drive, North Quincy, Massachusetts 02171, serves as the Fund's custodian and
recordkeeping agent. In those capacities, State Street maintains custody of the
Fund's portfolio securities, calculates the Fund's net asset values per share
and maintains certain accounting and financial records of the Fund.
Under its custodial agreement with the Trust, State Street is authorized to
appoint one or more banking institutions as sub-custodians of assets owned by
the Fund.
TRANSFER AND DIVIDEND AGENT
Investors Fiduciary Trust Company ('IFTC'), located at 127 West 10th Street,
Kansas City, Missouri 64105, serves as the Fund's transfer and dividend agent.
As transfer agent, IFTC maintains the Trust's official record of Fund
shareholders and, as dividend agent, IFTC is responsible for crediting dividends
to the accounts of Fund shareholders.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, located at 1633 Broadway, New York, New York 10019,
serves as independent auditors for the Trust. In that capacity, Deloitte &
Touche LLP audits the Trust's financial statements.
COUNSEL
Willkie Farr & Gallagher, located at One Citicorp Center, 153 East 53rd Street,
New York, New York 10022, serves as counsel to the Trust.
PRINCIPAL SHAREHOLDERS
With respect to Class A shares, to the knowledge of the Fund, the following
persons owned of record 5% or more of the Fund's Class A shares of beneficial
interest as of September 30, 1994:
James Wells Coggeshall Revocable Trust, Debra A. Botellio/Rackemann,
Sawyer & Brewster, One Financial Center, Boston, Massachusetts 02111-2633,
owned 6.62% of the Class' outstanding shares.
Murray Innes, Jr. & Jean K. Innes, Trustees, Innes Family Trust, 93
Edwards Lane, Atherton, California 94027-4024, owned 6.28% of the Class'
outstanding shares.
George W. Roberts Trust, George W. Roberts, Trustee, 1429 Iron Hills
Lane, Las Vegas, Nevada 89134-0505, owned 6.28% of the Class' outstanding
shares.
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With respect to Class B shares, to the knowledge of the Fund, Schwartzman
Metals Inc., Investment Account, 2905 North Ferry Street, Anoka, Minnesota
55303-1149, owned of record 8.69% of the Class' outstanding shares as of
September 30, 1994.
With respect to Class C shares, to the knowledge of the Fund, the following
persons owned of record 5% or more of the Fund's Class C shares of beneficial
interest as of September 30, 1994:
Martha M. Cray, 1295 Sunview Lane, Winnetka, Illinois 60093-1622,
owned 10.88% of the Class' outstanding shares.
James Lewis Koltes, 5103 Yuma Place NW, Washington, District of
Columbia, 20016-4309, owned 10.75% of the Class' outstanding shares.
Edward J. Scheider, P. O. Box H-5, Fleischmanns, New York 12430, owned
10.75% of the Class' outstanding shares.
Kathleen N. Scheider, P. O. Box H-5, Fleischmanns, New York 12430,
owned 10.75% of the Class' outstanding shares.
Frank J. Fedziuk and Margaret L. Fedziuk, Joint Tenants, 8 Woodhollow
Lane, Northport, New York 11768-2705, owned 8.07% of the Class' outstanding
shares.
Robert E. Dorfmeyer, Trustee, Robert E. Dorfmeyer Trust, 3595 Eldorado
Drive, Rocky River, Ohio 44116-4208, owned 5.57% of the Class' outstanding
shares.
Gilbert C. Powers and Pamela M. Powers, Common Property, 700 Fifth
Avenue, Seattle, Washington 98104-5054, owned 5.37% of the Class'
outstanding shares.
The Fund is not aware as to whether or to what extent shares owned of
record also are owned beneficially.
REDEMPTION OF SHARES
Detailed information on how to redeem shares of the Fund is included in the
Prospectus. The right of redemption of shares of the Fund may be suspended or
the date of payment postponed (1) for any periods during which the New York
Stock Exchange (the 'NYSE') is closed (other than for customary weekend and
holiday closings), (2) when trading in the markets the Fund normally utilizes is
restricted, or an emergency, as defined by the rules and regulations of the SEC,
exists, making disposal of the Fund's investments or determination of each
Class' net asset value not reasonably practicable or (3) for such other periods
as the SEC by order may permit for the protection of the Fund's shareholders.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan (the 'Withdrawal Plan') is available to each Fund
shareholder with $20,000 or more invested in a Class who wishes to receive
redemption payments monthly. Withdrawals of at least $200 monthly may be made
under the Withdrawal Plan by redeeming as many shares of the Class as may be
necessary to cover the stipulated withdrawal payment. To the extent that
withdrawals exceed dividends, distributions and appreciation of a shareholder's
investment in the Class, the value of the shareholder's investment will be
reduced; continued withdrawal payments may further reduce the shareholder's
investment and ultimately exhaust
14
<PAGE>
--------------------------------------------------------------------------------
it. Withdrawal payments should not be considered as income from investment in
the Fund. A shareholder's purchasing of additional shares of the Fund while
participating in the Withdrawal Plan would generally not be advantageous, and
for that reason purchases of shares in amounts less than at least one year's
scheduled withdrawals or $2,400, whichever is greater, by participants in the
Withdrawal Plan will not ordinarily be permitted.
Shareholders who wish to participate in the Withdrawal Plan and who hold
their shares in certificated form must deposit their share certificates with
IFTC, as agent for Withdrawal Plan members. All dividends and distributions on
shares in the Withdrawal Plan are reinvested in shares of the same Class
automatically at net asset value.
DETERMINATION OF NET ASSET VALUE
As noted in the Prospectus, net asset value will not be calculated on certain
holidays. On those days, securities held by the Fund may nevertheless be
actively traded, and the value of each Class' shares could be significantly
affected.
A security that is listed or traded on more than one exchange is valued for
purposes of calculating each Class' net asset value at the quotation on the
exchange determined to be the primary market for the security. In carrying out
the Board's valuation policies, State Street may consult with an independent
pricing service retained by the Trust.
EXCHANGE PRIVILEGE
The exchange privilege described in the Prospectus may be suspended or postponed
if (1) redemption of Fund shares is suspended under Section 22(e) of the 1940
Act or (2) the Trust temporarily delays or ceases the sale of the Fund's shares
because the Fund is unable to invest amounts effectively in accordance with its
investment objective, policies and restrictions.
Shares of each Class may be exchanged for shares of the same Class (or the
sole Class offered) in the following funds in the Kidder Family of Funds, to the
extent shares are offered for sale in the shareholder's state of residence.
Kidder, Peabody Adjustable Rate Government Fund, a series of Kidder,
Peabody Investment Trust ('Trust I'), seeks high current income while
limiting the degree of fluctuation of its net asset value resulting from
movements in interest rates by investing in adjustable rate securities and
Government Securities.
Kidder, Peabody Asset Allocation Fund, a series of Trust I, seeks total
return by following a systematic investment strategy that actively
allocates the fund's assets among common stocks, U.S. Treasury notes and
U.S. Treasury bills.
Kidder, Peabody California Tax Exempt Money Fund, a money market fund
designed for California investors, seeks maximum current income exempt
from federal and California income taxation to the extent consistent with
the preservation of capital and the maintenance of liquidity.
Kidder, Peabody Cash Reserve Fund, Inc., a general purpose money market
fund, seeks maximum current income to the extent consistent with the
preservation of capital and the maintenance of liquidity.
15
<PAGE>
--------------------------------------------------------------------------------
Kidder, Peabody Emerging Markets Equity Fund, a series of the Trust, seeks
long term capital appreciation through an actively managed portfolio
consisting primarily of equity securities of issuers in emerging markets
in Asia, Latin America, the Middle East, Southern Europe, Eastern Europe
and Africa.
Kidder, Peabody Equity Income Fund, Inc. seeks reasonably high current
dividend and interest income and long-term capital appreciation, while
limiting risk to principal, through investments primarily in equity
securities.
Kidder, Peabody Global Equity Fund, a series of Trust I, seeks long-term
growth of capital through investments primarily in foreign equity
securities.
Kidder, Peabody Global Fixed Income Fund, a series of Trust I, seeks total
return through an actively managed portfolio of fixed income securities
issued primarily by governmental authorities, foreign government related
issuers and supranational organizations.
Kidder, Peabody Government Income Fund, Inc. seeks high current income
through investments in Government Securities.
Kidder, Peabody Government Money Fund, Inc., a money market fund, seeks
maximum current income to the extent consistent with the preservation of
capital and the maintenance of liquidity through investment in Government
Securities.
Kidder, Peabody Intermediate Fixed Income Fund, a series of Trust I, seeks
maximum total return through an actively managed portfolio consisting
primarily of intermediate term, fixed income securities rated in the three
highest grades by recognized rating agencies.
Kidder, Peabody Municipal Money Market Series -- Connecticut Series, a
money market fund designed for Connecticut investors, seeks maximum
current income exempt from federal and Connecticut income taxation to the
extent consistent with the preservation of capital and the maintenance of
liquidity.
Kidder, Peabody Municipal Money Market Series -- New Jersey Series, a
money market fund designed for New Jersey investors, seeks maximum current
income exempt from federal and New Jersey income taxation to the extent
consistent with the preservation of capital and the maintenance of
liquidity.
Kidder, Peabody Municipal Money Market Series -- New York Series, a money
market fund designed for New York investors, seeks maximum current income
exempt from federal, New York State and New York City income taxation to
the extent consistent with the preservation of capital and the maintenance
of liquidity.
Kidder, Peabody Premium Account Fund, a general purpose money market fund
for persons subscribing to the Kidder, Peabody Premium Account asset
management system, seeks maximum current income to the extent consistent
with the preservation of capital and the maintenance of liquidity.
Kidder, Peabody Small Cap Equity Fund, a series of Kidder, Peabody
Investment Trust III, seeks long term capital appreciation through
investments primarily in equity securities of small capitalization
companies.
16
<PAGE>
--------------------------------------------------------------------------------
Kidder, Peabody Tax Exempt Money Fund, Inc., a money market fund, seeks
maximum current income exempt from federal income taxation to the extent
consistent with the preservation of capital and the maintenance of
liquidity.
TAXES
Set forth below is a summary of certain income tax considerations generally
affecting the Fund and its shareholders. The summary is not intended as a
substitute for individual tax planning, and shareholders are urged to consult
their tax advisors regarding the application of federal, state, local and
foreign tax laws to their specific tax situations.
As described above and in the Prospectus, the Fund is designed to provide
investors with current income that is excluded from gross income for federal
income tax purposes. The Fund is not intended to be a balanced investment
program and is not designed for investors seeking capital gains or maximum
tax-exempt income irrespective of fluctuations in principal. Investment in the
Fund would not be suitable for tax-exempt institutions, qualified retirement
plans, H.R. 10 plans and individual retirement accounts because those investors
would not gain any additional tax benefit from the receipt of tax-exempt income.
The Fund has qualified for the fiscal period ended June 30, 1994 as a
'regulated investment company' under the Code and intends to continue to qualify
for this treatment for each year. If a Fund (1) is a regulated investment
company and (2) distributes to its shareholders at least 90% of its taxable net
investment income (including, for this purpose, its net realized short-term
capital gains) and 90% of its tax-exempt interest income (reduced by certain
expenses), it will not be liable for federal income taxes to the extent its
taxable net investment income and its net realized long-term and short-term
capital gains, if any, are distributed to its shareholders.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Fund will not be deductible for federal income tax purposes. If a
shareholder receives exempt-interest dividends with respect to any share of the
Fund and if the share is held by the shareholder for six months or less, then
any loss on the sale or exchange of the share may, to the extent of the
exempt-interest dividends, be disallowed. In addition, the Code may require a
shareholder that receives exempt-interest dividends to treat as taxable income a
portion of certain otherwise non-taxable social security and railroad retirement
benefit payments. Furthermore, that portion of any exempt-interest dividend paid
by the Fund that represents income derived from private activity bonds held by
the Fund may not retain its tax-exempt status in the hands of a shareholder who
is a 'substantial user' of a facility financed by the bonds, or a 'related
person' of the substantial user. Moreover, as noted in the Prospectus, (1) some
or all of the Fund's exempt-interest dividends may be a specific preference
item, or a component of an adjustment item, for purposes of the federal
individual and corporate alternative minimum taxes and (2) the receipt of the
Fund's dividends and distributions may affect a corporate shareholder's federal
'environmental' tax liability. In addition, the receipt of the Fund's dividends
and distributions may affect a foreign corporate shareholder's federal 'branch
profits' tax liability and a Subchapter S corporate shareholder's federal
'excess net passive income' tax liability. Shareholders should consult their own
tax advisors to determine whether they are (1) 'substantial users' with respect
to a facility or 'related' to those users within the meaning of the
17
<PAGE>
--------------------------------------------------------------------------------
Code or (2) subject to a federal alternative minimum tax, the federal
'environmental' tax, the federal 'branch profits' tax, or the federal 'excess
net passive income' tax.
As a general rule, the Fund's gain or loss on a sale or exchange of an
investment will be a long-term capital gain or loss if the Fund has held the
investment for more than one year and will be a short-term capital gain or loss
if it has held the investment for one year or less. Furthermore, as a general
rule, a shareholder's gain or loss on a sale or redemption of shares of the Fund
will be a long-term capital gain or loss if the shareholder has held his or her
Fund shares for more than one year and will be a short-term capital gain or loss
if he or she has held his or her Fund shares for one year or less.
Shareholders of the Fund receive, as more fully described in the
Prospectus, an annual statement as to the income tax status of his or her
dividends and distributions for the prior calendar year. Each shareholder will
also receive, if appropriate, various written notices after the close of the
Fund's prior taxable year as to the federal income tax status of the Fund during
the Fund's prior taxable year.
The dollar amount of dividends paid by the Fund that are excluded from
federal income taxation and the dollar amount of dividends paid by the Fund that
are subject to federal income taxation, if any, will vary for each shareholder
depending upon the size and duration of each shareholder's investment in the
Fund. To the extent that the Fund earns taxable net investment income, it
intends to designate as taxable dividends the same percentage of each month's
dividend as its taxable net investment income bears to its total net investment
income earned for that month. Therefore, the percentage of each month's dividend
designated as taxable, if any, may vary from month to month.
Investors considering buying shares of the Fund on or just prior to the
record date for a capital gain distribution should be aware that the amount of
the forthcoming distribution payment will be a taxable distribution payment.
Special rules contained in the Code apply when a Fund shareholder (1)
disposes of shares of the Fund through a redemption or exchange within 90 days
of purchase and (2) subsequently acquires shares of a fund in the Kidder Family
of Funds on which a sales charge normally is imposed without paying a sales
charge in accordance with the exchange privilege described in the Prospectus. In
these cases, any gain on the disposition of the Fund shares will be increased,
or loss decreased, by the amount of the sales charge paid when the shares were
acquired, and that amount will increase the adjusted basis of the fund shares
subsequently acquired. In addition, if shares of the Fund are purchased within
30 days before or after redeeming shares at a loss, the loss will not be
deductible and instead will increase the basis of the newly purchased shares.
If a shareholder fails to furnish to the Trust a correct taxpayer
identification number, fails to report fully dividend or interest income, or
fails to certify that he or she has provided a correct taxpayer identification
number and that he or she is not subject to 'backup withholding,' then the
shareholder may be subject to a 31% 'backup withholding' tax with respect to (1)
taxable dividends and distributions and (2) the proceeds of any redemptions of
shares of the Fund. An individual's taxpayer identification number is his or her
social security number. The 'backup withholding' tax is not an additional tax
and may be credited against a taxpayer's regular federal income tax liability.
18
<PAGE>
--------------------------------------------------------------------------------
The discussion above is only a summary of certain tax considerations
generally affecting the Fund and its shareholders, and is not intended as a
substitute for careful tax planning. Shareholders are urged to consult their tax
advisors with specific reference to their own tax situations, including their
state and local tax liabilities.
DETERMINATION OF PERFORMANCE
As noted in the Prospectus, the Trust, from time to time, may quote the Fund's
performance, in terms of the Classes' yields or total returns, in reports or
other communications to shareholders or in advertising material. To the extent
any advertisement or sales literature of the Fund describes the expenses or
performance of any Class, it will also disclose this information for the other
Classes.
YIELD AND EQUIVALENT TAXABLE YIELD
The 30-day yield figure described in the Prospectus is calculated for a Class
according to a formula prescribed by the SEC, expressed as follows:
YIELD= 2[( a - b +1)'pp'6 -1]
cd
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursement);
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends; and
d = the maximum offering price per share on the last day of the period.
For the purposes of determining the interest earned (variable 'a' in the
formula) on debt obligations that were purchased by the Portfolio at a discount
or premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market values of the debt obligations.
The 30-day equivalent taxable yield is computed by dividing that portion of
the 30-day yield that is tax-exempt by one minus a stated income tax rate and
adding the product to any portion of the yield that is not tax-exempt. The
assumed income tax rate reflected in the 30-day equivalent taxable yield
information set forth below is a 36% rate.
Investors should recognize that in periods of declining interest rates, the
yield will tend to be somewhat higher than prevailing market rates, and in
periods of rising interest rates will tend to be somewhat lower. In addition,
when interest rates are falling, the inflow of net new money to the Fund from
the continuous sale of its shares will likely be invested in instruments
producing lower yields than the balance of its portfolio of securities, thereby
reducing the current yield of the Fund. In periods of rising interest rates the
opposite can be expected to occur.
The average annual total return figures described in the Prospectus are
computed for a Class according to a formula prescribed by the SEC. The formula
can be expressed as follows:
P(1 + T)'pp'n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
19
<PAGE>
--------------------------------------------------------------------------------
ERV = Ending Redeemable Value of a hypothetical $1,000 investment made at the
beginning of a 1-, 5- or 10-year period at the end of a 1-, 5- or 10-year
period (or fractional portion thereof), assuming reinvestment of all
dividends and distributions.
The ERV assumes complete redemption of the hypothetical investment at the
end of the measuring period.
The aggregate total return figures described in the Prospectus represent
the cumulative change in the value of an investment in a Class for the specified
period and are computed by the following formula:
AGGREGATE TOTAL RETURN = ERV - P
P
Where: P = a hypothetical initial payment of $1,000; and
ERV = Ending Redeemable Value of a hypothetical $1,000 investment made at
the beginning of a 1-, 5- or 10-year period at the end of a 1-, 5-
or 10-year period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
Set forth below is performance information for the periods indicated
expressed as a percentage:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------------------------------------- -------------- --------------
30-DAY YIELD
--------------------------------------------------------------------------------
<S> <C> <C> <C>
30 days ended June 30, 1994............... 4.72% 4.31% 5.03%
<CAPTION>
30-DAY EQUIVALENT TAXABLE YIELD
--------------------------------------------------------------------------------
<S> <C> <C> <C>
30 days ended June 30, 1994............... 7.81% 7.14% 8.33%
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
--------------------------------------------------------------------------------
MAXIMUM SALES CHARGE
--------------------------------------------
INCLUDED EXCLUDED
-------------------- --------------------
<S> <C> <C> <C> <C>
Inception (September 8, 1993) to June 30,
1994.................................... (8.11)% (5.96)% (6.34)% (5.95)%
<CAPTION>
ANNUAL TOTAL RETURN
--------------------------------------------------------------------------------
MAXIMUM SALES CHARGE
--------------------------------------------
INCLUDED EXCLUDED
-------------------- --------------------
<S> <C> <C> <C> <C>
Inception (September 8, 1993) to June 30,
1994.................................... (8.11)% (5.96)% (6.34)% (5.95)%
<CAPTION>
AGGREGATE TOTAL RETURN
--------------------------------------------------------------------------------
MAXIMUM SALES CHARGE
--------------------------------------------
INCLUDED EXCLUDED
-------------------- --------------------
<S> <C> <C> <C> <C>
Inception (September 8, 1993) to June 30,
1994.................................... (8.11)% (5.96)% (6.34)% (5.95)%
</TABLE>
Each Class' performance will vary from time to time depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of a Class' performance for any specified
20
<PAGE>
--------------------------------------------------------------------------------
period in the future. In addition, because a Class' performance will fluctuate,
it may not provide a basis for comparing an investment in a Class with certain
bank deposits or other investments that pay a fixed yield for a stated period of
time.
GENERAL INFORMATION
The Trust was organized as an unincorporated business trust under the laws of
The Commonwealth of Massachusetts pursuant to a Declaration of Trust dated
August 10, 1992, as amended from time to time (the 'Declaration'). The Fund
commenced operations on September 8, 1993. In the interest of economy and
convenience, certificates representing shares in the Trust are not physically
issued except upon specific request made by a shareholder to IFTC. IFTC
maintains a record of each shareholder's ownership of Fund shares.
Massachusetts law provides that shareholders of the Trust could, under
certain circumstances, be held personally liable for the obligations of the
Trust. The Declaration disclaims shareholder liability for acts or obligations
of the Trust, however, and requires that notice of the disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a Trustee. The Declaration provides for indemnification from the Trust's
property for all losses and expenses of any shareholder of the Trust held
personally liable for the obligations of the Trust. Thus, the risk of a Fund
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust would be unable to meet its
obligations, a possibility that the Trust's management believes is remote. Upon
payment of any liability incurred by the Trust, the shareholder paying the
liability will be entitled to reimbursement from the general assets of the
Trust. The Trustees intend to conduct the operations of the Trust in such a way
so as to avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Trust.
21
<PAGE>
Kidder, Peabody Municipal Bond Fund
--------------------------------------------------------------------------------
Schedule of Investments as of June 30, 1994
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE % OF NET
AMOUNT COST (NOTE 1a) ASSETS
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------------------------------
ARIZONA
Arizona St. Transportation Bd. Highway Rev., Ref. Sub. Ser. A,
4.750%, 7/01/2011 ................................................ $1,000,000 $ 962,752 $ 843,460 3.6%
--------------------------------------------------------------------------------------------------------------------------
CALIFORNIA
California St. Public Works Bd., Various Univ. Projects, Ser. A,
6.300%, 10/01/2010................................................ 1,000,000 990,083 987,880 4.2
Los Angeles Dept. Wtr. & Pwr. Elec. Plant Rev., 4.750%, 8/15/2011.... 1,000,000 936,142 837,220 3.6
----------- ----------- -----
1,926,225 1,825,100 7.8
--------------------------------------------------------------------------------------------------------------------------
CONNECTICUT
Connecticut St. Hlth. & Educ. Fac. Auth. Rev., (New Britain General
Hosp.), Ser. B, 6.125%, 7/01/2014 (AMBAC
Insured)(a)....................................................... 750,000 745,406 739,372 3.2
--------------------------------------------------------------------------------------------------------------------------
FLORIDA
Hillsborough Cnty. School Bd., 6.000%, 7/01/2014..................... 300,000 294,892 292,503 1.3
Jacksonville Elec. Auth. Rev., (St. John River Pwr.
Ser. 7), 5.75%, 10/01/2012........................................ 1,000,000 991,943 946,980 4.1
----------- ----------- -----
1,286,835 1,239,483 5.4
--------------------------------------------------------------------------------------------------------------------------
HAWAII
Honolulu City & Cnty., Ser. B, 6.000%, 6/01/2010..................... 750,000 742,426 739,380 3.2
--------------------------------------------------------------------------------------------------------------------------
ILLINOIS
Chicago Midway Airport Rev., Ser. A, 6.250%, 1/01/2014 (MBIA
Insured)(a)....................................................... 500,000 491,711 491,160 2.1
--------------------------------------------------------------------------------------------------------------------------
INDIANA
Indiana Univ. Rev., Ser. A, 6.000%, 11/15/2014....................... 500,000 484,580 480,110 2.1
--------------------------------------------------------------------------------------------------------------------------
KANSAS
Kansas Dept. Transportation Hwy. Rev., Ser. A, 6.125%, 9/01/2010..... 1,125,000 1,255,897 1,135,823 4.9
--------------------------------------------------------------------------------------------------------------------------
MARYLAND
University of Maryland Sys. Auxiliary Fac. & Tuition Rev.,
Ser. A, 5.500%, 4/01/2012......................................... 500,000 488,344 466,685 2.0
--------------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS
Boston, Ser. A, 5.000%, 7/01/2010 (AMBAC Insured)(a)................. 1,000,000 922,484 888,680 3.8
--------------------------------------------------------------------------------------------------------------------------
MISSOURI
Missouri St. Environmental Impt. & Energy Res. Auth., Poll. Ctl.
Rev., (American Cyanamid Co.), 5.800%, 9/01/2009.................. 1,200,000 1,200,000 1,165,776 5.0
St. Louis Cnty., Ser. B, 5.500%, 2/01/2013 (MBIA-IBC Insured)(a)..... 1,000,000 958,713 928,590 4.0
----------- ----------- -----
2,158,713 2,094,366 9.0
--------------------------------------------------------------------------------------------------------------------------
NEVADA
Washoe Cnty. School Dist., Ser. A, 5.750%, 6/01/2012 (MBIA
Insured)(a)....................................................... 1,000,000 983,491 941,390 4.0
--------------------------------------------------------------------------------------------------------------------------
NEW JERSEY
New Jersey St., Ser. D., 6.000%, 2/15/2013........................... 1,000,000 1,094,696 993,280 4.3
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
Kidder, Peabody Municipal Bond Fund
--------------------------------------------------------------------------------
Schedule of Investments as of June 30, 1994
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE % OF NET
AMOUNT COST (NOTE 1a) ASSETS
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NEW YORK
New York, Ser. D., 5.750%, 8/15/2007................................. $ 500,000 $ 474,441 $ 471,845 2.0%
New York St. Dorm. Auth. Rev., City University Sys., Ser. C., 6.000%,
7/01/2016......................................................... 500,000 507,684 468,185 2.0
----------- ----------- -----
982,125 940,030 4.0
--------------------------------------------------------------------------------------------------------------------------
NORTH CAROLINA
Wilmington, 5.600%, 6/01/2012........................................ 500,000 487,674 470,370 2.0
--------------------------------------------------------------------------------------------------------------------------
OKLAHOMA
Oklahoma St., Ser. A, 5.200%, 7/15/2018.............................. 1,190,000 1,181,609 1,084,435 4.7
Tulsa Industrial Auth., Hosp. Rev., (St. John's Med. Ctr. Proj.),
6.250%, 2/15/2014................................................. 750,000 733,394 726,900 3.1
----------- ----------- -----
1,915,003 1,811,335 7.8
--------------------------------------------------------------------------------------------------------------------------
OREGON
Oregon St. Dept. Transportation Rev., Regional Light Rail Fd.,
(Westside Proj.), 6.100%, 6/01/2007............................... 1,000,000 993,848 1,032,400 4.4
--------------------------------------------------------------------------------------------------------------------------
RHODE ISLAND
Rhode Island St. Hlth. & Educ. Bldg. Corp. Rev., (Hosp.
Fing-Westerly Hosp.), 5.625%, 7/01/2008........................... 1,000,000 983,703 918,690 3.9
--------------------------------------------------------------------------------------------------------------------------
TEXAS
Dallas Waterworks & Sewer Sys., 5.700%, 4/01/2012.................... 1,000,000 969,562 936,360 4.0
--------------------------------------------------------------------------------------------------------------------------
VIRGINIA
Augusta Cnty. Svc. Auth., Water & Sewer Rev., 5.125%, 11/01/2014..... 1,000,000 972,830 872,500 3.7
Fairfax Cnty., Econ. Dev. Auth. Lease Rev., (Govt. Center
Properties), 5.500%, 5/15/2008.................................... 530,000 518,651 506,219 2.2
Fairfax Cnty., Pub. Impt., Ser. A, 5.625%, 6/01/2012................. 500,000 495,808 476,925 2.0
Peninsula Ports Auth., Healthcare Facs. Rev., (Mary Immaculate
Proj.), 6.875%, 8/01/2010......................................... 500,000 491,646 493,805 2.1
----------- ----------- -----
2,478,935 2,349,449 10.0
--------------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM INVESTMENTS............................................ 22,354,410 21,336,923 91.5
--------------------------------------------------------------------------------------------------------------------------
U. S. GOVERNMENT AGENCY OBLIGATIONS
Federal Home Loan Mortgage Discount Notes 7/01/94.................... 1,500,000 1,500,000 1,500,000 6.4
--------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS...................................................... $23,854,410 22,836,923 97.9
-----------
-----------
OTHER ASSETS LESS LIABILITIES.......................................... 480,696 2.1
----------- -----
NET ASSETS............................................................. $23,317,619 100.0%
----------- -----
----------- -----
</TABLE>
<TABLE>
<CAPTION>
Summary of Combined Ratings (Unaudited)
STANDARD & PERCENTAGE
MOODY'S OR POOR'S OF VALUE
---------- ---------- ----------
<S> <C> <C> <C>
Aaa, Aa AAA, AA 76.7%
A A, A+ 9.0
Baa BBB 8.8
Not
Not Rated Rated 5.5
----------
100.0%
----------
----------
</TABLE>
Notes to Schedule of Investments:
(a) Insured or guaranteed by the respective stated municipal bond insurance
company.
See Notes to Financial Statements.
<PAGE>
Kidder, Peabody Municipal Bond Fund
--------------------------------------------------------------------------------
Statement of Assets and Liabilities as of June 30, 1994
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS
Investments, at value (identified cost-$23,854,410) (Note 1a)................................ $22,836,923
Cash......................................................................................... 59,092
Receivables:
Interest................................................................................ $396,435
Due from manager........................................................................ 162,718
--------
559,153
Prepaid expenses (Note 1d)................................................................... 188,379
-----------
TOTAL ASSETS....................................................... 23,643,547
-----------
LIABILITIES
Payables:
Shares redeemed......................................................................... 247,957
Distribution fees....................................................................... 6,224
Dividends (Note 1b)..................................................................... 5,891 260,072
--------
Accrued expenses............................................................................. 65,856
-----------
TOTAL LIABILITIES.................................................. 325,928
-----------
NET ASSETS
At value..................................................................................... $23,317,619
-----------
-----------
Net assets were comprised of:
Aggregate paid-in capital............................................................... $25,939,828
Undistributed net investment income..................................................... -0-
Accumulated net realized capital losses................................................. (1,604,722)
Net unrealized depreciation on investments.............................................. (1,017,487)
-----------
Net assets................................................................................... $23,317,619
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
----------- ---------- --------
<S> <C> <C> <C>
Net assets.................................................................... $17,007,500 $5,409,877 $900,242
Outstanding shares of beneficial interest, ($.001 par value).................. 1,569,126 499,114 83,053
Net asset values per share.................................................... $10.84 $10.84 $10.84
Maximum offering price per share for class A ($10.84[div].9775)............... $11.09 N/A N/A
</TABLE>
See Notes to Financial Statements.
<PAGE>
Kidder, Peabody Municipal Bond Fund
--------------------------------------------------------------------------------
Statement of Operations for the period ended June 30, 1994`D'
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME
Interest and discounts earned (net of $7,338 amortization of premiums)......... $ 1,035,233
EXPENSES
Investment advisory (Note 2)................................................... $ 123,397
Servicing (Note 2):
Class A................................................................... $37,476
Class B................................................................... 10,915 48,391
-------
Pricing........................................................................ 39,999
Amortization of organization expenses (Note 1d)................................ 36,522
Prospectus and shareholders' reports........................................... 33,468
Distribution -- Class B (Note 2)............................................... 21,831
Transfer agent................................................................. 19,090
Professional................................................................... 18,900
Federal and state registration................................................. 13,657
Trustees' fees and expenses (Note 2)........................................... 8,066
Custodian...................................................................... 7,120
Miscellaneous.................................................................. 830
-----------
TOTAL EXPENSES....................................... 371,271
Expenses absorbed by manager (Note 2).......................................... (330,555)
-----------
NET EXPENSES......................................... 40,716
-----------
NET INVESTMENT INCOME.......................................................... 994,517
REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTE 3)
Realized loss from security transactions (excluding short-term maturities):
Proceeds from sales....................................................... 38,115,035
Cost of securities sold................................................... (39,719,757)
-----------
Net realized loss on investment transactions................................... (1,604,722)
Unrealized depreciation on securities.......................................... (1,017,487)
-----------
NET DECREASE IN NET ASSETS
Resulting from operations...................................................... $(1,627,692)
-----------
-----------
</TABLE>
`D'From September 8, 1993 (Commencement of Operations) to June 30, 1994.
See Notes to Financial Statements.
<PAGE>
Kidder, Peabody Municipal Bond Fund
--------------------------------------------------------------------------------
Statement of Changes in Net Assets
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
JUNE 30, 1994`D'
---------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
Net investment income...................................................................................... $ 994,517
Net realized loss on investment transactions............................................................... (1,604,722)
Unrealized depreciation on securities...................................................................... (1,017,487)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS............................................. (1,627,692)
-----------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME (NOTE 1g)
Class A.................................................................................................... (741,410)
Class B.................................................................................................... (196,353)
Class C.................................................................................................... (56,754)
-----------
TOTAL DISTRIBUTIONS FROM NET INVESTMENT INCOME................................................... (994,517)
-----------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares........................................................................... 38,793,602
Net asset value of shares issued to shareholders in connection with the reinvestment of dividends.......... 809,525
Cost of shares redeemed.................................................................................... (13,713,303)
-----------
NET INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS............................... 25,889,824
-----------
TOTAL INCREASE IN NET ASSETS..................................................................... 23,267,615
NET ASSETS
Beginning of period........................................................................................ 50,004
-----------
End of period.............................................................................................. $23,317,619
-----------
-----------
</TABLE>
`D'From September 8, 1993 (Commencement of Operations) to June 30, 1994.
See Notes to Financial Statements.
<PAGE>
Kidder, Peabody Municipal Bond Fund
--------------------------------------------------------------------------------
Financial Highlights
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------------------------------------------------------------------
PERIOD ENDED JUNE 30, 1994`D'
-------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of
period...................... $12.00 $12.00 $12.00
-------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... 0.46 0.42 0.47
Net realized and unrealized
losses on investments....... (1.16) (1.16) (1.16)
-------------------------------------------------------------------
Total from investment
operations.................. (0.70) (0.74) (0.69)
-------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM (NOTE 1g)
Net investment income......... (0.46) (0.42) (0.47)
-------------------------------------------------------------------
Net asset value, end of
period...................... $10.84 $10.84 $10.84
-------------------------------------------------------------------
-------------------------------------------------------------------
Total return#................. (5.96)% (6.34)% (5.95)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in
thousands).................. $17,007 $5,410 $900
-------------------------------------------------------------------
-------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED)
Expenses, excluding
distribution fees, net of
reimbursement............... 0.07% 0.07% 0.07%
Expenses, including
distribution fees, net of
reimbursement............... 0.09% 0.59% 0.07%
Expenses, before reimbursement
from manager................ 1.72% 2.22% 1.47%
Net investment income......... 4.95% 4.45% 4.97%
PORTFOLIO TURNOVER RATE....... 161.18% 161.18% 161.18%
</TABLE>
`D' From September 8, 1993 (Commencement of Operations) to June 30, 1994.
# Total return does not reflect the effects of a sales charge, and is calculated
by giving effect to the reinvestment of dividends on the dividend payment
date. Since the period covered is less than 12 months, these figures represent
aggregate returns and have not been annualized.
See Notes to Financial Statements.
<PAGE>
Kidder, Peabody Municipal Bond Fund
--------------------------------------------------------------------------------
Notes to Financial Statements
--------------------------------------------------------------------------------
1. The Fund is a series of Kidder, Peabody Investment Trust II, which is
registered under the Investment Company Act of 1940 as a diversified, open-end
investment management company. The Fund commenced operations on September 8,
1993.
The Fund has adopted the Choice Pricing Systemsm. The System offers three
classes of shares. Class A shares are sold subject to a front-end sales load and
a service fee of .25% per annum of average class net assets. Class B shares are
sold at net asset value without a sales load and bear a distribution fee of .50%
per annum and a service fee of .25% per annum of average class net assets. Class
C shares, which are available exclusively to employees of Kidder, Peabody,
directors or trustees of funds in the Kidder Family of Funds, employee benefit
plans of Kidder, Peabody and participants of the Insight Investment Advisory
Program, are sold at net asset value without a sales load and bear no such
distribution or service fees. Classes A and B have exclusive voting rights as to
matters relating to the 12b-1 Distribution Plan. The following is a summary of
significant accounting policies consistently followed by the Fund.
(a) Generally, the Fund's investments are valued at market value or, in the
absence of a market value, at fair value as determined by or under the direction
of the Fund's Board of Trustees. Investments in Government Securities and other
securities traded over-the-counter, other than short-term investments that
mature in 60 days or less, are valued at the average of the quoted bid and asked
prices in the over-the-counter market. Short-term investments that mature in 60
days or less are valued on the basis of amortized cost when the Board of
Trustees has determined that amortized cost represents fair value. A security
that is primarily traded on an exchange is valued at the last sale price on that
exchange or, if no sales occurred during the day, at the current quoted bid
price. An option that is written by the Fund is generally valued at the last
sale price or, in the absence of the last sale price, the last offer price. An
option that is purchased by the Fund is generally valued at the last sale price
or, in the absence of a last sale price, the last bid price. The value of a
futures contract is equal to the unrealized gain or loss on the contract that is
determined by marking the contract to the current settlement price for a like
contract on the valuation date of the futures contract. A settlement price may
not be used if the market makes a limit move with respect to a particular
futures contract or if the securities underlying the futures contract experience
significant price fluctuations after the determination of the settlement price.
When a settlement price cannot be used, futures contracts will be valued at
their fair market value as determined by or under the direction of the Board of
Trustees.
(b) It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
substantially all its tax exempt income to shareholders. Therefore, no Federal
income tax provision is required. Distributions, for purposes of maintaining
regulated investment company status, are made on a Fund level rather than class
level under the requirements of the Internal Revenue Code.
(c) Security transactions are recorded on a trade date basis. Dividend income
and distributions to shareholders are recorded on the ex-dividend dates.
Interest income is earned from settlement date and is recognized on an accrual
basis. Realized gains and losses on security transactions are determined on the
identified cost basis.
(d) Prepaid registration fees are charged income as the related shares are
issued. Organization costs are being amortized evenly over a sixty month period.
(e) When the Fund writes a call or put option, an amount equal to the premium
received is included in the Fund's statement of assets and liabilities as an
asset and an equivalent liability. The amount of the liability is subsequently
'marked to market' to reflect the current market value of the option written. If
an option which the Fund has written expires on its stipulated date, the Fund
realizes a gain in the amount of the premium originally received, and the
liability related to such option is extinguished. If the Fund enters into a
closing purchase transaction, it realizes a gain or loss determined by the
difference between the premium received and the cost of the closing transaction.
If a call option which the Fund has written is exercised, the Fund realizes a
gain or loss from the sale of the underlying security and the proceeds from such
sale are increased by the premium originally received. If a put option which the
Fund has written is exercised, the amount of the premium originally received
reduces the cost of the security which the Fund purchases upon the exercise of
the option. As the writer of an option, the Fund may have no control over
whether the underlying securities are sold (called) or pur-
<PAGE>
Kidder, Peabody Municipal Bond Fund
--------------------------------------------------------------------------------
Notes to Financial Statements
--------------------------------------------------------------------------------
chased (put) and as a result bears the market risk of an unfavorable change in
the price of the security underlying the written option. Written and purchased
options are non-income producing investments.
The premium paid by the Fund for the purchase of a call or put option is
included in the Fund's statement of assets and liabilities as an investment and
subsequently 'marked to market' to reflect the current market value of the
option purchased. If a call or put option which the Fund has purchased expires
on the stipulated expiration date, the Fund realizes a loss in the amount of the
cost of the option. If the Fund enters into a closing sale or transaction, it
realizes a gain or loss, depending on whether the proceeds from the sale are
greater or less than the cost of the option. If the Fund exercises a put option,
it realizes a gain or loss from the sale of the underlying security and the
proceeds from such sale are decreased by the premium originally paid. If the
Fund exercises a call option, the cost of the security which the Fund purchases
upon exercise is increased by the premium originally paid.
(f) A futures contract is an agreement between two parties to buy and sell a
security for a set price on a future date. Initial margin deposits are made upon
entering into futures contracts and can be either cash or securities. During the
period the futures contract is open, changes in the value of the contract are
recognized as unrealized gains or losses by 'marking to market' on a daily basis
to reflect the market value of the contract at the end of each day's trading.
Variation margin payments are made or received, depending upon whether
unrealized gains or losses are incurred. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the proceeds
from (or cost of) the closing transaction and the Fund's basis in the contract.
The Fund invests in futures contracts solely for the purpose of hedging its
existing portfolio securities against fluctuations in value caused by changes in
prevailing market interest rates. Should interest rates move unexpectedly, the
Fund may not achieve the anticipated benefits of the futures contracts and may
realize a loss. The use of futures transactions involves the risk of imperfect
correlation in the movement of the futures contracts and the underlying hedged
asset.
(g) Income and Fund level expenses are allocated to each class on a pro-rata
basis based upon each class' daily settled net assets. Class specific expenses
are charged directly to each class. Dividends from net investment income are
calculated daily based upon the respective classes net investment income.
Distributions of net realized gains are allocated based upon the outstanding
shares of each class.
The Fund distributes monthly substantially all its net investment income. Net
long-term realized gains, if any, will be distributed annually. For book and tax
purposes, as of June 30, 1994, the Fund had an unused capital loss carryforward
of $1,604,722 expiring in 2002, which will be available to offset a like amount
of future taxable gains.
2. The Fund has entered into a management agreement with Kidder Peabody Asset
Management, Inc. ('KPAM'), a wholly-owned subsidiary of Kidder, Peabody & Co.
Incorporated ('KP'). General Electric Capital Services, Inc., a wholly-owned
subsidiary of General Electric Company, ('GE'), has a 100% interest in Kidder,
Peabody Group Inc., the parent company of KP. KPAM serves as the Fund's manager
and receives a fee, accrued daily and paid monthly at the annual rate of .60% of
the Fund's average daily net assets. KPAM in turn employs GE Investment
Management Incorporated ('GEIM'), a wholly-owned subsidiary of GE, as the Fund's
investment adviser, in which capacity GEIM receives from KPAM a fee, accrued
daily and paid monthly, at the annual rate of .30% of the Fund's average daily
net assets. As the Fund's manager, KPAM is generally responsible for furnishing,
or causing to be furnished to the Fund, investment management and administrative
services.
As the Fund's investment adviser, GEIM manages the Fund's portfolio, makes
decisions for the Fund, and places purchase and sale orders for the Fund's
portfolio transactions. GEIM also pays the salaries of all officers and
employees who are employed by both GEIM and the Fund, provides the Fund with
investment officers, and employs a professional staff of portfolio managers who
draw upon a variety of sources for research information for the Fund.
Total annual expenses of the Fund, exclusive of taxes, interest, all brokers'
commissions and other normal charges incidental to the purchase and sale of
portfolio securities, but including fees paid to KPAM, are not expected to
exceed the limits prescribed by any state in which the Fund's shares are offered
for sale. KPAM will reimburse the Fund for any expenses in excess of such
limitations. No expense reimbursement was required for the
<PAGE>
Kidder, Peabody Municipal Bond Fund
--------------------------------------------------------------------------------
Notes to Financial Statements
--------------------------------------------------------------------------------
period ended June 30, 1994, however, KPAM voluntarily reimbursed the Fund for a
portion of its expenses and waived a portion of its fees.
KP is the exclusive distributor of the Fund's shares. Its services include
payment of sales commissions to Investment Executives and various other
promotional and sales-related expenses. KP receives monthly, from the Fund, the
distribution and service fees which are calculated and accrued daily. KP also
receives the proceeds of any front-end sales loads with respect to the purchase
of Class A shares.
Certain officers and/or Trustees of the Fund are officers and/or directors of
KPAM and/or GEIM. Each Trustee who is not an 'affiliated person' of either KPAM
or GEIM receives an annual fee of $1,000 and an attendance fee of $375 per
meeting.
3. Purchases and sales of securities, excluding short-term securities and
maturities, for the period ended June 30, 1994 were $60,069,651 and $36,115,919,
respectively. As of June 30, 1994 net unrealized depreciation, based on costs
for Federal income tax purposes, aggregated $1,017,487, of which $40,710 related
to appreciated securities and $1,058,197 related to depreciated securities. The
aggregated cost of securities at June 30, 1994 for book and Federal income tax
purposes was $23,854,410.
4. The Declaration of Trust of the Fund permits the Trustees to issue an
unlimited number of shares of beneficial interest, par value $.001 per share.
Transactions totaling $38,793,602 from net proceeds from sale of shares,
$13,713,303 representing cost of shares repurchased and $809,525 representing
reinvestment of dividends for the period ended June 30, 1994 were as follows for
each class:
<TABLE>
<CAPTION>
CLASS A SHARES AMOUNT
--------------------------------------------------------------
<S> <C> <C>
For the period September 8,
1993* to June 30, 1994:
Shares sold..................... 2,447,232 $ 29,301,905
Shares issued to shareholders in
connection with the
reinvestment of dividends..... 50,698 581,153
Shares redeemed................. (932,971) (11,019,636)
--------------------------
NET INCREASE............... 1,564,959 $ 18,863,422
--------------------------
--------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES AMOUNT
--------------------------------------------------------------
<S> <C> <C>
For the period September 8,
1993* to June 30, 1994:
Shares sold..................... 650,951 $ 7,735,676
Shares issued to shareholders in
connection with the
reinvestment of dividends..... 15,270 174,587
Shares redeemed................. (167,107) (1,918,882)
--------------------------
NET INCREASE............... 499,114 $ 5,991,381
--------------------------
--------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES AMOUNT
--------------------------------------------------------------
<S> <C> <C>
For the period September 8,
1993* to June 30, 1994:
Shares sold..................... 146,741 $ 1,756,021
Shares issued to shareholders in
connection with the
reinvestment of dividends..... 4,678 53,785
Shares redeemed................. (68,366) (774,785)
--------------------------
NET INCREASE............... 83,053 $ 1,035,021
--------------------------
--------------------------
</TABLE>
5. The Fund's investment strategy is to invest in obligations of various states
and municipalities. Payment of the principal and interest of such securities
depends upon the revenue generated by the property financed by the securities,
and the securities are not necessarily general obligations of the issuer.
Additionally, many of the securities are guaranteed by Letters of Credit issued
from various institutions. If the issuer or guarantor defaults, or if bankruptcy
proceeds are commenced with respect to either entity, the realization of
proceeds may be delayed or limited. (See the Fund's schedule of investments for
information on individual securities and unaudited summary of combined ratings.)
* Commencement of Operations.
<PAGE>
Kidder, Peabody Municipal Bond Fund
--------------------------------------------------------------------------------
Report of Independent Auditors
--------------------------------------------------------------------------------
The Trustees and Shareholders,
Kidder, Peabody Municipal Bond Fund
(one of the portfolios constituting
Kidder, Peabody Investment Trust II):
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Kidder, Peabody Municipal Bond Fund as of June
30, 1994, and the related statements of operations, changes in net assets and
financial highlights for the period from September 8, 1993 (Commencement of
Operations) to June 30, 1994. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned at June 30, 1994 by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Kidder, Peabody
Municipal Bond Fund at June 30, 1994, the results of its operations, the changes
in its net assets and financial highlights for the period presented in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
August 19, 1994
<PAGE>
--------------------------------------------------------------------------------
APPENDIX A
DESCRIPTION OF MOODY'S, STANDARD & POOR'S AND FITCH RATINGS
DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS:
Aaa -- Bonds that are rated Aaa are judged to be of the best quality, carry
the smallest degree of investment risk and are generally referred to as 'gilt
edge.' Interest payments with respect to these bonds are protected by a large or
by an exceptionally stable margin, and principal is secure. Although the various
protective elements applicable to these bonds are likely to change, those
changes are most unlikely to impair the fundamentally strong position of these
bonds.
Aa -- Bonds that are rated Aa are judged to be of high quality by all
standards and together with the Aaa group comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or other elements may be
present that make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds that are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest with respect to these bonds are considered
adequate, but elements may be present that suggest a susceptibility to
impairment sometime in the future.
Baa -- Bonds rated Baa are considered as medium grade obligations, that is
they are neither highly protected nor poorly secured. Interest payment and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. These bonds lack outstanding investment characteristics and may
have speculative characteristics as well.
Moody's applies the numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
DESCRIPTION OF MOODY'S MUNICIPAL NOTE RATINGS:
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade (MIG) and for variable demand
obligations are designated Variable Moody's Investment Grade (VMIG). This
distinction recognizes the differences between short-term credit risk and
long-term risk. Loans bearing the designation MIG 1/VMIG 1 are of the best
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established and broad-based access to the market for
refinancing, or both. Loans bearing the designation MIG 2/VMIG 2 are of high
quality, with margins of protection ample, although not as large as the
preceding group. Loans bearing the designation MIG 3/VMIG 3 are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Market access for refinancing, in particular,
is likely to be less well established.
A-1
<PAGE>
--------------------------------------------------------------------------------
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations. Issuers rated Prime-2 (or related supporting institutions) are
considered to have a strong capacity for repayment of short-term promissory
obligations, normally evidenced by many of the characteristics of issuers rated
Prime-1 but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
DESCRIPTION OF STANDARD & POOR'S MUNICIPAL BOND RATINGS:
AAA -- These bonds are the obligations of the highest quality and have the
strongest capacity for timely payment of debt service.
General Obligation Bonds rated AAA -- In a period of economic stress, the
issuers of these bonds will suffer the smallest declines in income and will be
least susceptible to autonomous decline. Debt burden is moderate. A strong
revenue structure appears more than adequate to meet future expenditure
requirements. Quality of management appears superior.
Revenue Bonds Rated AAA -- Debt service coverage with respect to these
bonds has been, and is expected to remain, substantial. Stability of the pledged
revenues is also exceptionally strong due to the competitive position of the
municipal enterprise or to the nature of the revenues. Basic security provisions
(including rate covenant, earnings test for issuance of additional bonds, debt
service reserve requirements) are rigorous. There is evidence of superior
management.
AA -- The investment characteristics of bonds in this group are only
slightly less marked than those of the prime quality issues. Bonds rated AA have
the second strongest capacity for payment of debt service.
A -- Principal and interest payments on bonds in this category are regarded
as safe although the bonds are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in higher rated
categories. This rating describes the third strongest capacity for payment of
debt service.
General Obligation Bonds rated A -- There is some weakness, either in the
local economic base, in debt burden, in the balance between revenues and
expenditures, or in quality of management. Under certain adverse circumstances,
any one such weakness might impair the ability of the issuer to meet debt
obligations at some future date.
Revenue Bonds rated A -- Debt service coverage is good, but not
exceptional. Stability of the pledged revenues could show some variations
because of increased competition or economic influences on revenues. Basic
security provisions, while satisfactory, are less stringent. Management
performance appearance appears adequate.
BBB -- The bonds in this group are regarded as having an adequate capacity
to pay interest and repay principal. Whereas bonds in this group normally
exhibit adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a
A-2
<PAGE>
--------------------------------------------------------------------------------
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories. Bonds rated BBB have the fourth strongest
capacity for payment of debt service.
Standard & Poor's letter ratings may be modified by the addition of a plus
or a minus sign, which is used to show relative standing within the major rating
categories, except in the AAA category.
DESCRIPTION OF STANDARD & POOR'S MUNICIPAL NOTE RATINGS:
Municipal notes with maturities of three years or less are usually given
note ratings (designated SP-1, -2 or -3) to distinguish more clearly the credit
quality of notes as compared to bonds. Notes rated SP-1 have a very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given the designation of SP-1+.
Notes rated SP-2 have a satisfactory capacity to pay principal and interest.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS:
Commercial paper rated A-1 by Standard & Poor's indicates that the degree
of safety regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are denoted
A-1+. Capacity for timely payment on commercial paper rated A-2 is strong, but
the relative degree of safety is not as high as for issues designated A-1.
DESCRIPTION OF FITCH MUNICIPAL BOND RATINGS:
AAA -- Bonds rated AAA by Fitch are considered to be investment grade and
of the highest credit quality. The obligor has an exceptionally strong ability
to pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA -- Bonds rated AA by Fitch are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated AAA.
Because bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issues
is generally rated F-1+ by Fitch.
A -- Bonds rated A by Fitch are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and repay principal
is considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB -- Bonds rated BBB by Fitch are considered to be investment grade and
of satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse consequences on
these bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for bonds
with higher ratings.
Plus and minus signs are used by Fitch to indicate the relative position of
a credit within a rating category. Plus and minus signs, however, are not used
in the AAA category.
A-3
<PAGE>
--------------------------------------------------------------------------------
DESCRIPTION OF FITCH SHORT-TERM RATINGS:
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch's short-term ratings are as follows:
F-1+ -- Issues assigned this rating are regarded as having the
strongest degree of assurance for timely payment.
F-1 -- Issues assigned this rating reflect an assurance of timely
payment only slightly less in degree than issues rated F-1+.
F-2 -- Issues assigned this rating have a satisfactory degree of
assurance for timely payment but the margin of safety is not as great as
for issues assigned F-1+ and F-1 ratings.
F-3 -- Issues assigned this rating have characteristics suggesting
that the degree of assurance for timely payment is adequate, although
near-term adverse changes could cause these securities to be rated below
investment grade.
LOC -- The symbol LOC indicates that the rating is based on a letter
of credit issued by a commercial bank.
A-4
<PAGE>
<TABLE>
<S> <C>
--------------------------------------------------------
Contents
--------------------------------------------------------
Investment Objective and Policies 2
--------------------------------------------------------
Management of the Fund 8
--------------------------------------------------------
Principal Shareholders 13
--------------------------------------------------------
Redemption of Shares 14
--------------------------------------------------------
Determination of Net Asset Value 15
--------------------------------------------------------
Exchange Privilege 15
--------------------------------------------------------
Taxes
(See in the Prospectus 'Dividends,
Distributions and Taxes') 17
--------------------------------------------------------
Determination of Performance (See in the
Prospectus 'Performance Information') 19
--------------------------------------------------------
General Information 21
--------------------------------------------------------
Financial Statements 22
--------------------------------------------------------
Appendix A-1
--------------------------------------------------------
</TABLE>
KIDDER,
PEABODY
MUNICIPAL
BOND
FUND
STATEMENT OF
ADDITIONAL
INFORMATION
OCTOBER 28, 1994
IN AFFILIATION WITH
GE INVESTMENT MANAGEMENT
<PAGE>
PROSPECTUS OCTOBER 28, 1994
--------------------------------------------------------------------------------
Kidder, Peabody Emerging Markets Equity Fund
60 BROAD STREET NEW YORK, NEW YORK 10004-2350 (212) 656-1737
Kidder, Peabody Emerging Markets Equity Fund (the 'Fund'), a series of Kidder,
Peabody Investment Trust II (the 'Trust'), is designed for investors seeking to
expand their investment horizon beyond the United States. The Fund is a
diversified fund that seeks long term capital appreciation. The Fund attempts to
achieve this objective through an actively managed portfolio consisting
primarily of equity securities of issuers in the securities markets of newly
industrializing countries ('Emerging Markets') in Asia, Latin America, the
Middle East, Southern Europe, Eastern Europe and Africa.
This Prospectus briefly sets forth certain information about the Fund, including
applicable operating expenses, that prospective investors should know before
investing. Investors are advised to read this Prospectus and retain it for
future reference.
Additional information about the Fund, contained in a Statement of Additional
Information dated the same date as this Prospectus, has been filed with the
Securities and Exchange Commission (the 'SEC') and is available to investors
upon request and without charge by calling or writing the Trust at the telephone
number or address listed above. The Statement of Additional Information is
incorporated in its entirety by reference into this Prospectus.
--------------------------------------------------------------------------------
MANAGER
Kidder Peabody Asset Management, Inc.
INVESTMENT ADVISER
Emerging Markets Management
DISTRIBUTOR
Kidder, Peabody & Co. Incorporated
--------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
--------------------------------------------------------------------------------
FEE TABLE
The table below shows the costs and expenses that an investor would incur,
either directly or indirectly, as a shareholder of the Fund, based upon the
Fund's annual operating expenses.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases of Shares (as a percentage of
offering price)......................................................... 5.75% 0% 0%
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of
offering price)......................................................... 0% 0% 0%
Maximum Contingent Deferred Sales Charge (as a percentage of redemption
proceeds)............................................................... 0% 1.00% 0%
Maximum Exchange Fee...................................................... 0% 0% 0%
Maximum Annual Investment Advisory Fee Payable by Shareholders Holding
Class C Shares through the Insight Investment Advisory Program (as a
percentage of average daily value of shares held)....................... 0% 0% 1.50%
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees........................................................... 1.62% 1.62% 1.62%
Rule 12b-1 Fees........................................................... .25 1.00 0
Other Expenses............................................................ .60 .60 .60
------- ------- -------
Total Fund Operating Expenses.................................... 2.47% 3.22% 2.22%
------- ------- -------
------- ------- -------
</TABLE>
The nature of the services provided to, and the aggregate management fees
paid by, the Fund are described below under 'Management of the Fund.' The Fund
bears an annual Rule 12b-1 service fee of .25% of the value of the average daily
net assets of Class A shares and an annual Rule 12b-1 fee of 1.00% of the value
of the average daily net assets of Class B shares, consisting of a .25% service
fee and a .75% distribution fee. Long-term shareholders of Class B Shares may
pay more than the economic equivalent of the maximum front-end sales charge
currently permitted by the rules of the National Association of Securities
Dealers, Inc. governing investment company sales charges. See 'Distributor.'
The percentage of 'Other Expenses' in the table above is based on amounts
incurred during the Fund's most recent fiscal year; these expenses include fees
for shareholder services, custodial fees, legal and accounting fees, printing
costs and registration fees, the costs of regulatory compliance, a portion of
the costs associated with maintaining the Trust's legal existence and the costs
involved in communicating with the Fund's shareholders.
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical $1,000 investment in the Fund assuming (1) a 5% annual return,
(2) payment of the shareholder transaction expenses and annual Fund operating
expenses set forth in the table above and (3) complete redemption at the end of
the period. Investors in Class B shares would bear the same amount of expenses
during the same periods and under the same assumptions but without redemption at
the end of the period.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Class A................................ $ 81 $ 130 $ 181 $ 322
Class B................................ $ 43 $ 110 $ 179 $ 364
Class C................................ $ 33 $ 80 $ 130 $ 269
</TABLE>
The above example is intended to assist an investor in understanding
various costs and expenses that the investor would bear upon becoming a
shareholder of the Fund. The example should not be considered to be a
representation of past or future expenses. Actual expenses of the Fund may be
greater or less than those shown above. The assumed 5% annual return shown in
the example is hypothetical and should not be considered to be a representation
of past or future annual return; the actual return of the Fund may be greater or
less than the assumed return.
2
<PAGE>
--------------------------------------------------------------------------------
HIGHLIGHTS
<TABLE>
<S> <C>
---------------------------------------------------------------------------------------------------------------------------
The Trust
The Trust is an open-end management investment company. See 'General Information.'
---------------------------------------------------------------------------------------------------------------------------
The Fund
The Fund, one of several series of the Trust currently offering interests to the public, is a
diversified fund that seeks long term capital appreciation. The Fund seeks to achieve this
objective through an actively managed portfolio consisting of equity securities of issuers in
Emerging Markets in Asia, Latin America, the Middle East, Southern Europe, Eastern Europe and
Africa. See 'Investment Objective and Policies' and 'General Information.'
---------------------------------------------------------------------------------------------------------------------------
Benefits of
Investing
in the
Fund
Mutual funds, such as the Fund, are flexible investment tools that are increasingly
popular -- one of four American households now owns shares of at least one mutual fund -- for
very sound reasons. The Fund offers investors the following important benefits:
Emerging Markets Investing
When used in connection with investments in developed market securities, the Fund offers
investors the opportunity for enhanced returns and decreased volatility by participating in
the equity markets of a number of the world's developing countries. In the view of Emerging
Markets Management, the Fund's investment adviser (the 'Adviser'), the low return correlations
between Emerging Markets and developed markets allow construction of a portfolio consisting of
both Emerging Market securities and developed market securities that has historically provided
enhanced returns with lower volatility than a portfolio consisting exclusively of non-U.S.
developed market securities.
Emerging Market Growth
The market capitalization of Emerging Markets has multiplied more than 24-fold since 1982,
growing from $67 billion in 1982 to over $1.729 trillion as of September 30, 1994. In 1981,
Emerging Markets accounted for 3% of the world's stock market capitalization; at September 30,
1994 they comprised approximately 13%. Data collected by the World Bank show that developing
countries are experiencing more rapid economic growth than industrialized countries. The
Adviser expects this trend to continue. The World Bank projects that during the next decade
developing countries will grow an average of 4.7% a year in contrast to the 2.7% growth rate
forecasted for the seven largest industrial countries. Generally, Emerging Markets possess one
or more common characteristics that contribute to this above-average economic growth, such as
high savings rates, low labor costs, abundant natural resources and aggressive governmental
programs pursuing industry privatization and lower inflation.
Professional Management
By pooling the monies of many investors, the Fund enables shareholders to
</TABLE>
3
<PAGE>
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
obtain the benefits of full-time professional management and an array of investments that are
typically beyond the means of most investors. The Adviser reviews the fundamental
characteristics of far more securities than can a typical individual investor and may employ
portfolio management techniques that are not frequently used by individual or many
institutional investors. Among other things, the Adviser utilizes proprietary quantitative
models, monitors over 1,200 issuers in 42 countries and performs over 1,000 visits to issuers
annually. The Fund also provides investors with a means of dealing with certain difficulties
generally involved in international investing, such as limited access to foreign markets and
typically high transaction costs. See 'Investment Objective and Policies' and 'Management of
the Fund.'
Transaction Savings
By investing in the Fund, an investor is able to acquire ownership in a portfolio of
securities without paying the higher transaction costs generally associated with a series of
small securities purchases.
Convenience
Fund shareholders are relieved of the administrative and recordkeeping burdens normally
associated with direct ownership of securities, and complicated by ownership of foreign
securities.
Liquidity
The Fund's convenient purchase and redemption procedures provide share-holders 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.'
Choice Pricing System
Under the Choice Pricing System'sm', the Fund presently offers three classes of shares
('Classes') that provide different methods of purchasing shares and allow investment
flexibility and a wider range of investment choices. See 'Purchase of Shares.'
Exchange Privilege
Shareholders of the Fund may exchange all or a portion of their shares for shares of the same
Class or the sole outstanding Class of specified funds in the Kidder Family of Funds. Class B
shares held less than one year may not be exchanged. See 'Exchange Privilege.'
Total Portfolio Approach
The funds in the Kidder Family of Funds are designed to be strategically combined as part of
a total portfolio approach. This investment philosophy acknowledges the interplay of a
shareholder's many different investing needs and preferences and recognizes that every
investment move a shareholder makes alters the balance of his or her overall financial
profile. The Fund may
</TABLE>
4
<PAGE>
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
be used in conjunction with other funds in the Kidder Family of Funds to build a portfolio
that maximizes the potential of available assets while meeting many different -- and
changing -- financial needs.
---------------------------------------------------------------------------------------------------------------------------
Purchase
of Shares
Kidder, Peabody & Co. Incorporated ('Kidder, Peabody'), a major full-line investment services
firm serving the United States and foreign securities markets, acts as distributor of the
Fund's shares. The Fund presently offers three Classes of Shares that differ principally in
terms of the sales charges and rate of expenses to which they are subject and are designed to
provide an investor with the flexibility of selecting an investment best suited to the
investor's needs. See 'Purchase of Shares' and 'Distributor.'
Class A Shares
The public offering price of Class A shares is the current net asset value per share next
determined after a purchase order is received, plus a maximum sales charge of 5.75% (6.08% of
the net amount invested). Investors purchasing $50,000 or more, certain employee benefit plans
and employees of Kidder, Peabody's affiliates are eligible for reduced sales charges. The Fund
pays Kidder, Peabody a service fee with respect to Class A shares at the annual rate of .25%
of the value of the average daily net assets attributable to this Class.
Class B Shares
The public offering price of Class B shares is the net asset value per share next determined
after a purchase order is received, without imposition of a sales charge. The Fund pays
Kidder, Peabody a service fee at the annual rate of .25%, and a distribution fee at the annual
rate of .75%, of the average daily net assets attributable to this Class.
In order to realize the full benefits of the Fund, investors should plan to hold their shares
through several market cycles. In order to discourage short term investments in Class B
shares, the Fund imposes a contingent deferred sales charge ('CDSC') on Class B shares held
less than one year equal to 1% of the net asset value of the shares redeemed at the time of
purchase or the time of redemption, whichever is lower. Class B shares held one year or longer
and Class B shares acquired through reinvestment of dividends or distributions are not subject
to the CDSC.
Class C Shares
The public offering price of Class C shares is the net asset value per share next determined
after a purchase order is received, without imposition of a sales charge. This Class bears no
service or distribution fees. Class C shares are available exclusively to: (1) employees of
Kidder, Peabody and their associated accounts; (2) directors or trustees of any fund in the
Kidder Family of Funds; (3) employee benefit plans of Kidder, Peabody; (4) participants in the
INSIGHT Investment Advisory Program'sm' ('INSIGHT'); and (5) employees of the Adviser and its
affiliates, employee benefit plans, individual retirement
</TABLE>
5
<PAGE>
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
accounts ('IRAs') and employer-sponsored individual retirement plans for those employees, and
the spouses and minor children of those employees when orders on their behalf are placed by
those employees (collectively, 'Adviser Employees'). Participation in INSIGHT is subject to
payment of an advisory fee at the maximum annual rate of 1.50% of assets held through INSIGHT,
generally charged quarterly in advance.
Investment Minimums
The minimum initial investment in the Fund is $1,000 and the minimum subsequent investment is
$50, except that for any tax-qualified retirement plan and accounts established pursuant to
the Uniform Gifts to Minors Act, the minimum initial investment is $250 and the minimum
subsequent investment is $1.00.
---------------------------------------------------------------------------------------------------------------------------
Management
Kidder Peabody Asset Management, Inc. ('KPAM'), a wholly-owned subsidiary of Kidder, Peabody,
serves as the Fund's manager and receives a fee, accrued daily and paid monthly, at the annual
rate of 1.62% of the Fund's average daily net assets on assets up to $100 million and 1.50%
thereafter. KPAM in turn employs the Adviser as the Fund's investment adviser in which capacity
the Adviser receives from KPAM a fee, accrued daily and paid monthly, at the annual rate of
1.12% of the Fund's average daily net assets on assets up to $100 million and .90% thereafter.
This rate of fee, although higher than that paid by most other registered investment companies,
reflects the need to devote the specialized resources contemplated by investing in Emerging
Markets and is believed by KPAM to be within the range charged to other investment companies
that purchase these investments. General Electric Capital Services, Inc., a wholly-owned
subsidiary of General Electric Company ('GE'), owns all the outstanding stock of Kidder,
Peabody Group Inc. ('Kidder Group'), the parent company of Kidder, Peabody. The Adviser is a
general partnership, the managing partner of which is Emerging Markets Investors Corporation
('EMI'). See 'Management of the Fund' and 'Distributor.'
---------------------------------------------------------------------------------------------------------------------------
Risk Factors
and Special
Considera-
tions
No assurance can be given that the Fund will achieve its investment objective. Investing in an
investment company that invests in Emerging Markets involves risks that go beyond the usual
risks inherent in an investment company limiting its holdings to domestic investments.
Investing in Emerging Markets involves exposure to economic structures that are generally less
diverse and mature than, and to political systems that can be expected to have less stability
than, those of developed countries. Other characteristics of Emerging Markets that may affect
investment in their markets include certain national policies that may restrict investment by
foreigners in issuers or industries deemed sensitive to relevant national interests and the
absence of developed legal structures governing private and foreign investments and private
property. The typically small size of the markets for securities issued by companies located in
Emerging Markets and the possibility of a low or nonexistent volume of trading in those
securities may
</TABLE>
6
<PAGE>
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
also result in a lack of liquidity and in price volatility of those securities. Moreover, the
Fund's assets will be held primarily in securities denominated in one or more foreign
currencies, which will result in the Fund's bearing the risk that those currencies may lose
value in relation to the U.S. dollar. The Fund may also be subject to certain risks in entering
into transactions involving foreign currencies, lending portfolio securities, entering into
repurchase agreements and using certain investment techniques and strategies, such as forward
currency contracts and purchasing securities on a when-issued or delayed-delivery basis. See
'Investment Objective and Policies -- Risk Factors and Special Considerations' at page 16 of
this Prospectus.
</TABLE>
7
<PAGE>
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audit of the financial statements of the Trust with respect to
the Fund by Deloitte & Touche LLP. Financial statements for the fiscal period
ended June 30, 1994 and the report of independent auditors' thereon are included
in the Statement of Additional Information.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
PERIOD PERIOD PERIOD
ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30,
1994`D' 1994`D' 1994`D'
------- ------- -------
<S> <C> <C> <C>
Net asset value, beginning of period........................... $ 12.00 $ 12.00 $ 12.00
------- ------- -------
Income from Investment Operations:
Net investment income..................................... 0.04 -- 0.05
Net realized and unrealized loss on investments........... (1.25) (1.25) (1.25)
------- ------- -------
Total from investment operations............................... (1.21) (1.25) (1.20)
------- ------- -------
Net asset value, end of period................................. $ 10.79 $ 10.75 $ 10.80
------- ------- -------
------- ------- -------
Total return #................................................. (10.08)% (10.42)% (10.00)%
Ratios/Supplemental Data:
Net assets, end of period (in thousands).................. $46,758 $26,721 $15,435
------- ------- -------
------- ------- -------
Ratios to Average Net Assets (Annualized):
Expenses, excluding distribution fees..................... 2.22% 2.22% 2.22%
Expenses, including distribution fees..................... 2.47% 3.22% 2.22%
Net investment income.......................................... 0.72% (0.03)% 0.97%
Portfolio turnover rate........................................ 8.11% 8.11% 8.11%
</TABLE>
------------------------
`D' From January 19, 1994 (Commencement of Operations) to June 30, 1994.
# Total return does not reflect the effects of a sales charge. Since the period
covered is less than 12 months, these figures represent aggregate returns and
have not been annualized.
8
<PAGE>
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
OBJECTIVE
The Fund's investment objective is long term capital appreciation. No assurance
can be given that the Fund will be able to achieve its investment objective,
which may be changed only with the approval of a majority of the Fund's
outstanding voting securities, which in turn is defined in the Investment
Company Act of 1940, as amended (the '1940 Act'), as the lesser of (1) 67% or
more of the shares present at a Fund meeting, if the holders of more than 50% of
the outstanding shares of the Fund are present or represented by proxy or (2)
more than 50% of the outstanding shares of the Fund.
The Fund's annual report for the fiscal year ended June 30, 1994 contains
information regarding those factors, including the relevant market conditions
and the investment strategies and techniques pursued by the Adviser during such
fiscal year, and is available to shareholders without charge upon request made
to the Fund at the address listed on the front cover page of this Prospectus.
INVESTMENT SELECTION PROCESS
The Fund seeks to achieve its objective through investment in a diversified
portfolio consisting primarily of equity securities of issuers in Emerging
Markets in Asia, Latin America, the Middle East, Southern Europe, Eastern Europe
and Africa.
The Adviser's efforts focus primarily on asset allocation among selected
Emerging Markets and, secondarily, on issuer selection within those markets. In
addition to considerations relating to a particular market's investment
restrictions and tax barriers, this asset allocation is based on other relevant
factors including the outlook for economic growth, currency exchange rates,
commodity prices, interest rates, political factors and the stage of the local
market cycle in the market. The Adviser expects to spread the Fund's investments
over geographic as well as economic sectors. Generally, the Adviser does not
intend to invest more than two-thirds of the Fund's total assets in any single
region (Asia, Latin America, Middle East, Southern Europe, Eastern Europe or
Africa) or 35% in any single country. Under no circumstances will the Adviser
invest more than 25% of the Fund's total assets in any single industry. Within
each Emerging Market, the Fund will be diversified through investments in a
number of local companies characterized by attractive valuation relative to
expected growth.
MARKET SELECTION. As of September 30, 1994, there were over 60 newly
industrializing and developing countries having equity markets. The 18 most
accessible of these markets had a total market capitalization of approximately
U.S. $1.729 trillion and over 7,700 listed stocks. A number of the Emerging
Markets are not yet easily accessible to foreign investors and have unattractive
tax barriers or insufficient liquidity to make significant investments by the
Fund feasible or attractive. However, many of the largest of the Emerging
Markets have, in recent years, liberalized access and the Adviser expects more
to do so over the coming few years.
Selections are made among Emerging Markets based on various factors
including:
MARKET FACTORS -- including the relative attractiveness of the market
in comparison with its historic performance and with the performance of
other emerging and world
9
<PAGE>
--------------------------------------------------------------------------------
markets on the basis of fundamental values (e.g., price/earnings,
price/book value, earnings momentum, volatility, dividend yield and
debt/equity). The Adviser employs a computerized global and emerging market
asset allocation model as one of its methods to assess the relative
attractiveness of each Emerging Market based on these factors.
MACRO-ECONOMIC FACTORS -- including the outlook for currencies,
interest rates, commodities, economic growth, inflation, business
confidence and private sector initiative.
POLITICAL FACTORS -- including the stability of the current
government and its attitudes towards foreign investment, private sector
initiative and development of capital markets.
MARKET DEVELOPMENT -- the development of the market relative to North
American markets in terms of market capitalization, level of trading
activity, sophistication of capital market activities and shareholder
protection.
INVESTMENT RESTRICTIONS -- including the level of foreign ownership
allowed, the method of investment allowed (e.g., direct investment or
through authorized investment funds), required holding periods, ability to
repatriate earnings and applicable tax legislation.
Based on these and other factors, the portfolio is evaluated and, if
necessary, adjusted on at least a quarterly basis to ensure that it conforms to
the objective and policies of the Fund. Each of the Emerging Markets in which
the Fund may invest is also monitored on a continuous basis and tactical shifts
in portfolio allocation are made, when required, based on new developments.
Emerging Markets in which the Fund intends to invest are currently expected
to be selected from the following 27 Emerging Markets and republics:
<TABLE>
<S> <C>
ASIA: Bangladesh, China, Hong Kong, India, Indonesia, Korea, Malaysia,
Pakistan, Papua New Guinea, Philippines, Singapore, Sri Lanka, Republic
of China (Taiwan), Thailand
LATIN AMERICA: Argentina, Bolivia, Brazil, Chile, Columbia, Mexico, Peru, Venezuela
EUROPE/MIDDLE EAST: The Czech Republic, Commonwealth of Independent States, Greece, Hungary,
Jordan, Poland, Portugal, Turkey
AFRICA: Mauritius, Morocco
</TABLE>
The foregoing list of Emerging Markets is not exhaustive. As used in this
Prospectus, the countries that will not be considered Emerging Markets include:
Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland,
Italy, Japan, Luxembourg, Netherlands, New Zealand, Spain, Norway, Sweden,
Switzerland, United Kingdom and the United States. Under normal market
conditions, the Fund will invest a minimum of 65% of its total assets in equity
securities of issuers in Emerging Markets and will maintain investments in at
least three Emerging Markets. In a number of the countries, investment is
presently allowed exclusively or predominantly through existing or newly formed
authorized investment funds. See 'Types of Portfolio Investments' below. These
restrictions are gradually easing and the Fund anticipates that it will be able
to make investments in individual stocks in these countries as their attitude
towards foreign investment improves. The Adviser expects that over the coming
years a number of countries other than those listed above are likely to become
potential candidates for investment by the Fund, including Uruguay, Ivory Coast,
Jamaica, Kenya, Nigeria, Slovakia and Zimbabwe.
10
<PAGE>
--------------------------------------------------------------------------------
INVESTMENT SELECTION. Within each Emerging Market, the Fund invests in a
selection of companies that are characterized by attractive valuation. Using
various data bases and sources of investment information the Adviser screens
each market for companies available for investment. In order to be considered
for investment, companies must legally permit investment by foreigners, have a
market capitalization of over $15 million and show sufficient liquidity based on
trading volume and shares outstanding. From among this group, investments are
systematically screened for fundamental value based on a number of standards,
including price to earnings ratio, price to book value ratio, earnings momentum,
dividend yield and debt to equity ratio. The purpose of this screening is to
eliminate investments in companies considered inappropriate due to inadequate
liquidity or unacceptable risk factors. Decisions on issuer selection are often
influenced by on-site visits to issuers. The resulting selection of investments
is intended to provide a broad group of attractively valued investments
available to foreign investors in each Emerging Market.
USE OF QUANTITATIVE TECHNIQUES. The Adviser has developed and will use a
proprietary asset allocation model to assist in the selection of markets and
individual stocks. Making use of long term historical data on at least 1,000 of
the most actively traded stocks in the target markets as well as additional data
for recent years and earnings forecasts, the Adviser estimates the relationship
between the fair value and price levels of markets based on a variety of
fundamental indicators. Statistical techniques are employed that help determine
those indicators that are relevant in particular cases. The model evaluates
markets in historical and prospective terms taking into consideration interest
rates, inflation and currency developments. While following a disciplined,
systematic approach to investment selection, the Adviser combines the results
from computerized screening techniques with market, industry, economic and
political information.
TYPES OF PORTFOLIO INVESTMENTS
An equity security of an issuer in an Emerging Market is defined as common stock
and preferred stock (including convertible preferred stock); bonds, notes and
debentures convertible into common or preferred stock; stock purchase warrants
and rights; equity interests in trusts and partnerships; and depositary receipts
of companies: (1) the principal securities trading market for which is in an
Emerging Market; (2) whose principal trading market is in any country, provided
that, alone or on a consolidated basis, they derive 50% or more of their annual
revenue from either goods produced, sales made or services performed in Emerging
Markets; or (iii) that are organized under the laws of, and with a principal
office in, an Emerging Market. Determinations as to eligibility are made by the
Adviser based on publicly available information and inquiries made to the
companies.
The Fund may invest in securities of foreign issuers in the form of
American Depositary Receipts ('ADRs'), which are U.S. dollar-denominated
receipts typically issued by domestic banks or trust companies, and which
represent the deposit with those entities of securities of a foreign issuer.
ADRs are publicly traded on exchanges or over-the-counter in the United States
and are issued through 'sponsored' or 'unsponsored' arrangements. In a sponsored
ADR arrangement, the foreign issuer assumes the obligation to pay some or all of
the depositary's transaction fees, whereas under an unsponsored arrangement, the
foreign issuer assumes no
11
<PAGE>
--------------------------------------------------------------------------------
obligations and the depositary's transaction fees are paid directly by the ADR
holders. The Fund may invest in ADRs through both sponsored and unsponsored
arrangements.
The Fund, in addition to investing in foreign securities in the form of
ADRs, may purchase European Depositary Receipts ('EDRs'), which are sometimes
referred to as Continental Depositary Receipts ('CDRs'). EDRs and CDRs are
generally issued by foreign banks and evidence ownership of either foreign or
domestic securities.
In certain countries that currently prohibit direct foreign investment in
the securities of their companies, indirect foreign investment in the securities
of companies listed and traded on the stock exchanges in these countries is
permitted through investment funds that have been specifically authorized to
invest directly in the relevant market. The Fund may invest in these investment
funds and registered investment companies subject to the provisions of the 1940
Act. Under the 1940 Act, the Fund, subject to certain exceptions, may invest a
maximum of 10% of its total assets in the securities of other investment
companies, not more than 5% of the Fund's total assets may be invested in the
securities of any one investment company and the Fund may not own more than 3%
of the securities of any one investment company. If the Fund invests in
investment companies, the Fund will bear its proportionate share of the costs
incurred by such companies, including investment advisory fees, if any.
Although the Fund does not intend to do so in the foreseeable future, the
Fund may hedge all or a portion of its portfolio investments through stock
options, stock index options, futures contracts and options thereon and short
sales and may hedge all or a portion of its exposure to foreign currencies in
which its investments are, or are anticipated to be, denominated through
currency futures contracts and options thereon, and options on foreign
currencies. Currently, these financial instruments are only rarely available in
Emerging Markets and the Fund will not engage in transactions involving these
instruments prior to providing appropriate disclosure to investors. Although it
has no intention of doing so in an amount exceeding 5% of its total assets in
the foreseeable future, the Fund may lend its portfolio securities, as described
in the Statement of Additional Information. The Fund intends to engage in
transactions involving forward currency contracts. See 'Investment Techniques
and Strategies' below.
Up to 15% of the value of the Fund's total assets may be invested in
illiquid securities, which are securities lacking readily available markets,
including: (1) repurchase agreements not maturing within seven days and (2) time
deposits with maturities in excess of seven days. Securities that are restricted
but nonetheless liquid may be purchased without limitation.
In anticipation of investments in Emerging Markets or pending settlement of
those transactions, the Fund may hold up to 10% of its total assets in short
term accounts with banks in the relevant market determined to involve minimal
credit risk. The Fund may hold up to 35% of its total assets in cash or invest
in money market instruments and in excess of that amount when the Adviser
determines that unstable market, economic, political or currency conditions
abroad warrant adoption of a temporary defensive posture. To the extent that it
holds cash or invests in money market instruments, the Fund may not achieve its
investment objective.
Pending the investment of funds resulting from the sale of Fund shares or
the liquidation of portfolio holdings, or during temporary defensive periods or
in order to have available highly liquid assets to meet anticipated redemptions
of Fund shares or to pay the Fund's operating expenses, the Fund may invest in
the following types of money market instruments: securities
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issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities ('Government Securities'); bank obligations (including
certificates of deposit, time deposits and bankers' acceptances of foreign or
domestic banks and other banking institutions having total assets in excess of
$500 million); commercial paper, including variable and floating rate notes,
rated no lower than A-1 by Standard & Poor's Corporation or Prime-1 by Moody's
Investors Service, Inc., or the equivalent rating from another major rating
service, or, if unrated, of an issuer having an outstanding unsecured debt issue
then rated within the three highest rating categories; and repurchase agreements
meeting the conditions described below under 'Investment Techniques and
Strategies -- Repurchase Agreements.' Except during temporary defensive periods,
the Fund will not invest more than 35% of its assets in money market
instruments. At no time will the Fund's investments in bank obligations,
including time deposits, exceed 25% of the value of its assets.
The Fund is authorized to invest in obligations of foreign banks or foreign
branches of domestic banks that are traded in the United States or outside the
United States, but that are denominated in U.S. dollars. These obligations
entail risks that are different from those of investments in obligations in
domestic banks, including foreign economic and political developments outside
the United States, foreign governmental restrictions that may adversely affect
payment of principal and interest on the obligations, foreign exchange controls
and foreign withholding or other taxes on income. Foreign branches of domestic
banks are not necessarily subject to the same or similar regulatory requirements
that apply to domestic banks, such as mandatory reserve requirements, loan
limitations and accounting, auditing and financial recordkeeping requirements.
In addition, less information may be publicly available about a foreign branch
of a domestic bank than about a domestic bank.
Among the Government Securities that may be held by the Fund are
instruments that are supported by the full faith and credit of the United
States; instruments that are supported by the right of the issuer to borrow from
the U.S. Treasury; and instruments that are supported solely by the credit of
the instrumentality. The Fund may invest up to 5% of its total assets in
exchange rate-related Government Securities, which are described in the
Statement of Additional Information.
INVESTMENT TECHNIQUES AND STRATEGIES
The Fund, in seeking to meet its investment objective, is authorized to engage
in any one or more of the specialized investment techniques and strategies
described below:
FORWARD CURRENCY TRANSACTIONS. The Fund may hold currencies to meet
settlement requirements for foreign securities and may engage in currency
exchange transactions to protect against uncertainty in the level of future
exchange rates between a particular foreign currency and the U.S. dollar or
between foreign currencies in which the Fund's securities are or may be
denominated. Forward currency contracts are agreements to exchange one currency
for another at a future date. The date (which may be any agreed-upon fixed
number of days in the future), the amount of currency to be exchanged and the
price at which the exchange takes place will be negotiated and fixed for the
term of the contract at the time that the Fund enters into the contract. Forward
currency contracts (1) are traded in a market conducted directly between
currency traders (typically, commercial banks or other financial institutions)
and their customers,
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(2) generally have no deposit requirements and (3) are typically consummated
without payment of any commissions. The Fund, however, may enter into forward
currency contracts requiring deposits or involving the payment of commissions.
Upon maturity of a forward currency contract, the Fund may (1) pay for and
receive the underlying currency, (2) negotiate with the dealer to rollover the
contract into a new forward currency contract with a new future settlement date
or (3) negotiate with the dealer to terminate the forward contract by entering
into an offset with the currency trader providing for the Fund's paying or
receiving the difference between the exchange rate fixed in the contract and the
then current exchange rate. The Fund may also be able to negotiate such an
offset prior to maturity of the original forward contract. No assurance can be
given that new forward contracts or offsets will always be available to the
Fund.
The Fund's dealings in forward foreign exchange is limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of one forward foreign currency for another
currency with respect to specific receivables or payables of the Fund accruing
in connection with the purchase and sale of its portfolio securities, the sale
and redemption of shares of the Fund or the payment of dividends and
distributions by the Fund. Position hedging is the purchase or sale of one
forward foreign currency for another currency with respect to portfolio security
positions denominated or quoted in the foreign currency to offset the effect of
an anticipated substantial appreciation or depreciation, respectively, in the
value of the currency relative to the U.S. dollar. In this situation, the Fund
also may, for example, enter into a forward contract to sell or purchase a
different foreign currency for a fixed U.S. dollar amount where it is believed
that the U.S. dollar value of the currency to be sold or bought pursuant to the
forward contract will fall or rise, as the case may be, whenever there is a
decline or increase, respectively, in the U.S. dollar value of the currency in
which portfolio securities of the Fund are denominated (this practice being
referred to as a 'cross-hedge').
In hedging a specific transaction, the Fund may enter into a forward
contract with respect to either the currency in which the transaction is
denominated or another currency deemed appropriate by the Adviser. The amount
the Fund may invest in forward currency contracts is limited to the amount of
the Fund's aggregate investments in foreign currencies. See the Statement of
Additional Information for a further discussion of forward currency contracts.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase agreement
transactions with respect to instruments in which the Fund is authorized to
invest. The Fund may engage in repurchase agreement transactions with certain
member banks of the Federal Reserve System and with certain dealers listed on
the Federal Reserve Bank of New York's list of reporting dealers. Under the
terms of a typical repurchase agreement, the Fund would acquire an underlying
debt obligation for a relatively short period (usually not more than seven days)
subject to an obligation of the seller to repurchase, and the Fund to resell,
the obligation at an agreed-upon price and time, thereby determining the yield
during the Fund's holding period. Thus, repurchase agreements are considered to
be collateralized loans. This arrangement results in a fixed rate of return that
is not subject to market fluctuations during the Fund's holding period. The
value of the securities underlying a repurchase agreement of the Fund are
monitored on an ongoing basis by the Adviser or KPAM to ensure that the value is
at least equal at all times
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to the total amount of the repurchase obligation, including interest. The
Adviser or KPAM also monitors, on an ongoing basis to evaluate potential risks,
the creditworthiness of those banks and dealers with which the Fund enters into
repurchase agreements.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. To secure prices deemed
advantageous at a particular time, the Fund may purchase securities on a
when-issued or delayed-delivery basis, in which case delivery of the securities
occurs beyond the normal settlement period; payment for or delivery of the
securities would be made prior to the reciprocal delivery or payment by the
other party to the transaction. The Fund enters into when-issued or
delayed-delivery transactions for the purpose of acquiring securities and not
for the purpose of leverage. When-issued securities purchased by the Fund may
include securities purchased on a 'when, as and if issued' basis under which the
issuance of the securities depends on the occurrence of a subsequent event, such
as approval of a merger, corporate reorganization or debt restructuring. The
Fund will establish with its custodian, or with a designated sub-custodian, a
segregated account consisting of cash, Government Securities or other liquid
high-grade debt obligations in an amount equal to the amount of its when-issued
or delayed-delivery purchase commitments.
INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental investment restrictions with respect
to the Fund that may not be changed without approval of a majority of the Fund's
outstanding voting securities (as defined in the 1940 Act). Included among those
fundamental restrictions are the following:
1. The Fund will not purchase securities (other than Government
Securities) of any issuer if, as a result of the purchase, more than 5% of
the value of the Fund's total assets would be invested in the securities of
the issuer, except that up to 25% of the value of the Fund's total assets
may be invested without regard to this 5% limitation.
2. The Fund will not purchase more than 10% of the voting securities
of any one issuer, except that this limitation is not applicable to the
Fund's investments in Government Securities, and up to 25% of the Fund's
assets may be invested without regard to this 10% limitation.
3. The Fund will not lend money to other persons, except through
purchasing debt obligations, lending portfolio securities in an amount not
to exceed 33- 1/3% of the value of the Fund's total assets and entering
into repurchase agreements.
4. The Fund will invest no more than 25% of the value of its total
assets in securities of issuers in any one industry. For purposes of this
restriction, the term industry will be deemed to include (a) the government
of any country other than the United States, but not the United States
Government, and (b) all supranational organizations.
The Fund may borrow from banks for leveraging purposes (although it
has no intention of doing so in the foreseeable future), as well as the
meeting of redemption requests and cash payments of dividends and
distributions that might otherwise require the untimely disposition of
securities, in an amount not to exceed 33- 1/3% of the value of the Fund's
total assets (including the amount borrowed) valued at market less
liabilities (not including the amount borrowed) at the time the borrowing
is made. The risks of borrowing for investment
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purposes, as well as certain other investment restrictions adopted by the
Trust with respect to the Fund, are described in the Statement of
Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investing in the Fund involves risks and special considerations, such as those
described below:
GENERAL. An investment in shares of the Fund should not be considered to be
a complete investment program. The value of the Fund's investments, and as a
result the net asset values of the Fund's shares, will fluctuate in response to
changes in the market and economic conditions as well as the financial condition
and prospects of issuers in which the Fund invests. Issuers in Emerging Markets
typically are subject to a greater degree of change in earnings and business
prospects than are companies in developed markets. In addition, securities of
issuers in Emerging Markets are traded in lower volume and are more volatile
than those issued by companies in developed markets. In light of these
characteristics of issuers in Emerging Markets and their securities, the Fund
may be subject to greater investment risk than that assumed by other investment
companies. Because of the risks associated with the Fund's investments, the Fund
is intended to be a long term investment vehicle and is not designed to provide
investors with a means of speculating on short term stock market movements.
INVESTMENT IN FOREIGN SECURITIES. Investing in securities issued by foreign
issuers involves considerations and potential risks not typically associated
with investing in obligations issued by domestic issuers. Less information may
be available about foreign issuers than about domestic issuers and foreign
issuers generally are not subject to uniform accounting, auditing and financial
reporting standards or to other regulatory practices and requirements comparable
to those applicable to domestic issuers. The values of foreign investments are
affected by changes in currency rates or exchange control regulations,
restrictions or prohibitions on the repatriation of foreign currencies,
application of foreign tax laws, including withholding taxes, changes in
governmental administration or economic or monetary policy (in the United States
or abroad) or changed circumstances in dealings between nations. Costs are also
incurred in connection with conversions between various currencies. In addition,
foreign brokerage commissions are generally higher than those charged in the
United States and foreign securities markets may be less liquid, more volatile
and less subject to governmental supervision than in the United States.
Investments in foreign countries could be affected by other factors not present
in the United States, including expropriation, confiscatory taxation, lack of
uniform accounting and auditing standards and potential difficulties in
enforcing contractual obligations and could be subject to extended clearance and
settlement periods.
INVESTING IN EMERGING MARKETS. Investing in securities of issuers in
Emerging Markets involves exposure to economic structures that are generally
less diverse and mature than, and to political systems that can be expected to
have less stability than, those of developed countries. Other characteristics of
Emerging Markets that may affect investment in their markets include certain
national policies that may restrict investment by foreigners and the absence of
developed legal structures governing private and foreign investments and private
property. The typically small size of the markets for securities issued by
issuers located in Emerging Markets and the possibility of a low or nonexistent
volume of trading in those securities may also result in a lack of liquidity and
in price volatility of those securities.
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Included among the Emerging Markets in which the Fund may invest are the
formerly communist countries of Eastern Europe, the Commonwealth of Independent
States (formerly the Soviet Union) and the People's Republic of China
(collectively, 'Communist Countries'). Upon the accession to power of Communist
regimes approximately 40 to 70 years ago, the governments of a number of
Communist Countries expropriated a large amount of property. The claims of many
property owners against those governments were never finally settled. There can
be no assurance that the Fund's investments in Communist Countries, if any,
would not also be expropriated, nationalized or otherwise confiscated, in which
case the Fund could lose its entire investment in the Communist Country
involved. In addition, any change in the leadership or policies of Communist
Countries may halt the expansion of or reverse the liberalization of foreign
investment policies now occurring.
CURRENCY EXCHANGE RATES. The Fund's share values may change significantly
when the currencies, other than the U.S. dollar, in which the Fund's portfolio
investments are denominated strengthen or weaken against the U.S. dollar.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries as seen from an international perspective. Currency exchange
rates can also be affected unpredictably by the intervention of the U.S.
government, foreign governments or central banks, the imposition of currency
controls or other political developments in the United States or abroad.
WARRANTS. Because a warrant, which is a security permitting, but not
obligating, its holder to subscribe for another security, does not carry with it
the right to dividends or voting rights with respect to the securities that the
warrant holder is entitled to purchase, and because a warrant does not represent
any rights to the assets of the issuer, a warrant may be considered more
speculative than certain other types of investments. In addition, the value of a
warrant does not necessarily change with the value of the underlying security
and a warrant ceases to have value if it is not exercised prior to its
expiration date. The investment by the Fund in warrants, valued at the lower of
cost or market, may not exceed 5% of the value of the Fund's net assets.
Included within that amount, but not to exceed 2% of the value of the Fund's net
assets, may be warrants that are not listed on the New York Stock Exchange, Inc.
('NYSE') or the American Stock Exchange. Warrants acquired by the Fund in units
or attached to securities may be deemed to be without value.
NON-PUBLICLY TRADED AND ILLIQUID SECURITIES. Non-publicly traded securities
may be less liquid than publicly traded securities. Although these securities
may be resold in privately negotiated transactions, the prices realized from
these sales could be less than those originally paid by the Fund. In addition,
companies whose securities are not publicly traded are not subject to the
disclosure and other investor protection requirements that may be applicable if
their securities were publicly traded. The Fund's investments in illiquid
securities are subject to the risk that, should the Fund desire to sell any of
these securities when a ready buyer is not available at a price that the Adviser
deems representative of their value, the value of the Fund's net assets could be
adversely affected.
FORWARD CURRENCY CONTRACTS. In entering into forward currency contracts,
the Fund is subject to a number of risks and special considerations. The market
for forward currency contracts, for example, may be limited with respect to
certain currencies. The existence of a limited market may in turn restrict the
Fund's ability to hedge against the risk of devaluation of
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currencies in which the Fund holds a substantial quantity of securities. The
successful use of forward currency contracts as a hedging technique draws upon
the Adviser's special skills and experience with respect to those instruments
and usually depends on the Adviser's ability to forecast currency exchange rate
movements correctly. Should exchange rates move in an unexpected manner, the
Fund may not achieve the anticipated benefits of forward currency contracts or
may realize losses and thus be in a less advantageous position than if those
strategies had not been used. Many forward currency contracts are subject to no
daily price fluctuation limits so that adverse market movements could continue
with respect to those contracts to an unlimited extent over a period of time. In
addition, the correlation between movements in the prices of those contracts and
movements in the prices of the currencies hedged or used for cover will not be
perfect.
The Fund's ability to dispose of its positions in forward currency
contracts depends on the availability of active markets in those instruments and
the Adviser cannot now predict the amount of trading interest that may exist in
the future in forward currency contracts. Forward currency contracts may be
closed out only by the parties entering into an offsetting contract. As a
result, no assurance can be given that the Fund will be able to utilize these
contracts effectively for the purposes described above.
REPURCHASE AGREEMENTS. In entering into a repurchase agreement, the Fund
bears a risk of loss in the event that the other party to the transaction
defaults on its obligations and the Fund is delayed or prevented from exercising
its rights to dispose of the underlying securities, including the risk of a
possible decline in the value of the underlying securities during the period in
which the Fund seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or a
part of the income from the agreement.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. Securities purchased on a
when-issued or delayed-delivery basis may expose the Fund to risk because the
securities may experience fluctuations in value prior to their actual delivery.
The Fund does not accrue income with respect to a when-issued or
delayed-delivery security prior to its stated delivery date. Purchasing
securities on a when-issued or delayed-delivery basis can involve the additional
risk that the yield available in the market when the delivery takes place may be
higher than that obtained in the transaction itself. When the Fund engages in
when-issued or delayed-delivery securities transactions, it relies on the other
party to consummate the trade. Failure of the seller to do so may result in the
Fund incurring a loss or missing on opportunity to obtain a price considered to
be advantageous.
PORTFOLIO TRANSACTIONS AND TURNOVER
Decisions to buy and sell securities for the Fund are made by the Adviser,
subject to review by the Board of Trustees and KPAM, and are placed with brokers
or dealers selected by the Adviser. The Trustees have determined that, to the
extent consistent with applicable provisions of the 1940 Act and rules and
exemptions adopted thereunder, transactions for the Fund may be executed through
Kidder, Peabody if, in the judgment of the Adviser, the use of Kidder, Peabody
is likely to result in price and execution at least as favorable to the Fund as
those obtainable through other qualified broker-dealers, and if, in the
transaction, Kidder, Peabody charges the Fund a fair and reasonable rate
consistent with that charged to comparable unaffiliated customers in similar
transactions.
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The Fund's portfolio is actively managed. For the period January 19, 1994
(commencement of operations) through the fiscal year ended June 30, 1994, the
Fund's portfolio turnover rate was 8.11%. An annual turnover rate of 100% would
occur if all of the securities held by the fund are replaced once during a
period of one year. Higher portfolio turnover rates can result in corresponding
increases in transaction costs, may make it more difficult for the Fund to
qualify as a regulated investment company for federal income tax purposes and
may cause shareholders of the Fund to recognize gains for federal income tax
purposes. See 'Dividends, Distributions and Taxes -- Taxes.'
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Trust's Board of Trustees, and the day-to-day operations of the Fund are
conducted through or under the direction of officers of the Trust. The Statement
of Additional Information contains general background information regarding each
Trustee and officer of the Trust.
MANAGER
KPAM, located at 60 Broad Street, New York, New York 10004-2350, serves as the
Fund's manager. A wholly-owned subsidiary of Kidder, Peabody, and a registered
investment adviser under the Investment Advisers Act of 1940, as amended (the
'Advisers Act'), KPAM currently provides investment management, investment
advisory and administrative services to a wide variety of individual and
institutional clients. The Kidder, Peabody Asset Management Group of Companies
(of which KPAM is the primary entity) provides advisory and consulting services
to more than $18 billion in assets as of September 30, 1994. General Electric
Capital Services, Inc., a wholly-owned subsidiary of GE, owns all of the
outstanding stock of Kidder Group, the parent company of Kidder, Peabody.
Under an agreement dated as of October 17, 1994, GE and Kidder Group agreed
to sell to PaineWebber Group Inc. certain assets of Kidder Group, including
certain of Kidder Group's subsidiaries, including Kidder, Peabody and KPAM. The
consummation of this transaction, which is subject to a number of conditions and
cannot be assured, will result in the deemed assignment and automatic
termination of the agreements pursuant to which Kidder, Peabody serves as the
principal underwriter of the Fund's shares and KPAM serves as the Fund's
manager. Institution of new arrangements with Kidder, Peabody's and KPAM's
successors following the consummation of the transaction will require approval
of the Board of Trustees and the separate approval of the majority of the
Trustees who are not 'interested persons' of the Fund within the meaning of the
1940 Act. In addition, the Fund's new management arrangements will require
approval of a 'majority of the outstanding voting securities' of the Fund, as
defined in the 1940 Act. No assurance can be given that any of the foregoing
required approvals will be obtained and, if they are not, the Board will take
such action as it determines to be appropriate and in the best interests of the
Fund and its shareholders.
As the Fund's manager, KPAM, subject to the supervision and direction of
the Trust's Board of Trustees, is generally responsible for furnishing, or
causing to be furnished to the Fund, investment advisory and management
services. Included among the specific services provided
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by KPAM as manager are: the selection and compensation of an investment adviser
to the Fund; the review of all purchases and sales of portfolio instruments made
by the Fund to assess compliance with its stated investment objective and
policies; the monitoring of the selection of brokers and dealers effecting
transactions on behalf of the Fund; the maintaining and furnishing of all
required records or reports pertaining to the Fund to the extent those records
or reports are not maintained or furnished by the Fund's transfer agent,
custodian or other agents employed by the Fund; the providing of general
administrative services to the Fund not otherwise provided by the Fund's
transfer agent, custodian or other agents employed by the Fund; and the payment
of reasonable salaries and expenses of those of the Fund's officers and
employees, and the fees and expenses of those members of the Trust's Board of
Trustees, who are directors, officers or employees of KPAM.
For the period January 19, 1994 (commencement of operations) through the
fiscal year ended June 30, 1994, the Fund paid KPAM a fee of 1.62% (annualized)
of the Fund's average daily net assets. The rate of fee paid to KPAM, although
higher than that paid by most other investment companies registered under the
1940 Act, is believed by KPAM to be within the range charged to other investment
companies that invest in Emerging Markets and reflects the need to devote
additional time and incur added expense in developing the specialized resources
contemplated by investing in these markets. For the period January 19, 1994
(commencement of operations) through the fiscal year ended June 30, 1994, Class
A shares', Class B shares' and Class C shares' total expenses represented on an
annualized basis 2.47%, 3.22% and 2.22%, respectively, of the Class' average
daily net assets. From time to time, KPAM in its sole discretion may waive all
or a portion of its fee and/or reimburse all or a portion of the Fund's
operating expenses.
INVESTMENT ADVISER
Under the terms of an investment advisory agreement among KPAM, the Trust and
the Adviser, KPAM employs the Adviser as the Fund's investment adviser. The
Adviser, located at 1001 Nineteenth Street North, Arlington, Virginia
22209-1722, is a registered investment adviser under the Advisers Act and
concentrates its investment advisory activities in the area of Emerging Markets.
The Adviser is an investment management firm registered under the Advisers Act
and organized as a general partnership under the laws of the District of
Columbia. The managing partner of the Adviser is EMI, a Delaware Corporation
that is also registered under the Advisers Act, which is controlled by Antoine
van Agtmael. Mr. Agtmael is ultimately responsible for all investment decisions
made by the Adviser and EMI. Mr. van Agtmael serves as the Fund's Chief
Investment Officer and in that capacity is the individual primarily responsible
for the management of the Fund's assets. Mr. van Agtmael has been the President
of the Adviser for more than the past five years. EMI directly and through the
Adviser provides its investment advisory services to a variety of clients having
total assets under its management exceeding $ billion as of September 30, 1994.
The Adviser has not previously served as an investment adviser to a registered
investment company.
As the Fund's investment adviser, the Adviser, subject to the supervision
and direction of the Trust's Board of Trustees, and subject to review by KPAM,
manages the Fund's portfolio in accordance with the investment objective and
stated policies of the Fund, makes investment decisions for the Fund and places
purchase and sale orders for the Fund's portfolio transactions.
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The Adviser also pays the salaries of all officers and employees who are
employed by both it and the Trust, provides the Fund with investment officers
who are authorized by the Board of Trustees to execute purchases and sales of
securities on behalf of the Fund and employs a professional staff of portfolio
managers who draw upon a variety of sources for research information for the
Fund.
For the period January 19, 1994 (commencement of operations) through the
fiscal year ended June 30, 1994, KPAM paid the Adviser a fee for services
provided by the Adviser to the Fund of 1.12% (annualized) of the value of the
Fund's average daily net assets. The Fund pays no direct fee to the Adviser.
From time to time, the Adviser in its sole discretion may waive all or a portion
of its fee.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the Adviser, 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 the Adviser 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 the Adviser 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.
EXPENSES
Each Class bears its own expenses, which generally include all costs not
specifically borne by KPAM and the Adviser. Included among a Class' expenses are
costs incurred in connection with the Class' and the Fund's organization;
management and investment advisory fees; any distribution and/or service fees;
fees for necessary professional and brokerage services; fees for any pricing
service used in connection with the valuation of shares; the costs of regulatory
compliance; and a portion of the costs associated with maintaining the Trust's
legal existence and corresponding with shareholders of the Fund. The Trust's
agreement with KPAM provides that KPAM will reduce its fees to the Fund to the
extent required by applicable state laws for certain expenses that are described
in the Statement of Additional Information.
PURCHASE OF SHARES
GENERAL INFORMATION
Shares of the Fund must be purchased and maintained through a Kidder, Peabody
brokerage account (an 'Account'). An investor who wishes to purchase shares but
who has no existing Account must establish one. Kidder, Peabody charges no
maintenance fee in connection with an Account through which an investor
purchases or holds shares of the Fund.
The minimum initial purchase for shares of the Fund is $1,000 and the
minimum subsequent investment is $50, except that for any tax-qualified
retirement plan and accounts established pursuant to the Uniform Gifts to Minors
Act, the minimum initial investment is $250 and the minimum subsequent
investment is $1.00. The Fund may vary the minimum initial or subsequent
investment amounts with respect to any purchaser or class of purchasers upon
appropriate disclosure to investors.
Purchases of Fund shares are effected at the public offering price next
determined after a purchase order is received. Payment for shares is due at
Kidder, Peabody (unless the investor has
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'good funds' available in an existing Account that can be applied to the
purchase) on the 'settlement date,' which is generally the fifth business day
after the order for purchase is placed. 'Good funds' as used in this Prospectus
means cash, Federal funds, or certified checks drawn on a U.S. bank. The Trust
reserves the right to reject any purchase order for shares of the Fund and to
suspend the offering for any period of time.
Purchase orders for shares of the Fund that are received prior to the close
of regular trading on the NYSE on a particular day (currently 4:00 p.m., New
York time) are priced according to the net asset values determined on that day.
Purchase orders received after the close of regular trading on the NYSE are
priced as of the time each Class' net asset value per share is next determined.
See 'Determination of Net Asset Value' below for a description of the times at
which each Class' net asset value per share is determined.
Under the Choice Pricing System, the Fund presently offers three methods of
purchasing shares, enabling investors to choose the Class that best suits their
needs, given the amount of purchase and intended length of investment. Kidder,
Peabody Investment Executives and other persons remunerated on the basis of
sales of shares may receive different levels of compensation for selling one
Class of shares over another. When purchasing shares of the Fund, investors must
specify whether the purchase is for Class A shares, Class B shares or Class C
shares, as described below.
CLASS A SHARES
The public offering price of Class A shares is the net asset value per Class A
share next determined after a purchase order is received plus a sales charge, if
applicable. Class A shares are subject to a service fee at the annual rate of
.25% of the value of the Fund's average daily net assets attributable to this
Class. See 'Distributor.' The sales charges applicable to purchases of Class A
shares vary with the amount of purchase as shown in the table set forth below:
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
-----------------------------------------------
AMOUNT OF PURCHASE AS PERCENTAGE AS PERCENTAGE
AT OFFERING PRICE OF OFFERING PRICE OF NET AMOUNT INVESTED
---------------------- --------------------- ----------------------
<S> <C> <C>
Less than $50,000........................................ 5.75% 6.08%
$50,000 but less than $100,000........................... 4.50% 4.75%
$100,000 but less than $250,000.......................... 3.50% 3.67%
$250,000 but less than $500,000.......................... 2.50% 2.58%
$500,000 but less than $1,000,000........................ 2.00% 2.00%
$1,000,000 or more....................................... 0% 0%
</TABLE>
INSTANCES OF A REDUCED OR WAIVED SALES CHARGE. Class A shares are sold
subject to a reduction of 20% in the sales charges shown in the table above to:
(1) employees of GE and other affiliates of Kidder, Peabody, (2) IRAs for those
employees, (3) other employee benefit plans for those employees and (4) the
spouses and minor children of those employees when orders on their behalf are
placed by the employees.
Class A shares are sold without a sales charge to tax exempt organizations
enumerated in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended
(the 'Code'), and retirement plans qualified under Sections 401(a) or 403(b)(7)
of the Code having 1,000 or more participants ('Qualified Plans'). Employees
eligible to participate in Qualified Plans sponsored by the same
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organization or its affiliates may be aggregated in determining the sales charge
applicable to an investment made by a Qualified Plan.
No sales charge is imposed on Class A shares purchased through reinvestment
of dividends or capital gains distributions. Clients of a newly-employed Kidder,
Peabody Investment Executive are eligible to purchase Class A shares subject to
no sales charge for a period of 90 days after the Investment Executive first
becomes employed by Kidder, Peabody, so long as the following conditions are
met: (1) the purchase is made within 30 days of, and with the proceeds from, a
redemption of shares of a mutual fund sponsored by the Investment Executive's
previous employer; (2) the Investment Executive served as the client's broker on
the purchase of the shares of the mutual fund; and (3) the shares of the mutual
fund sold were subject to a sales charge. Clients of a Kidder, Peabody
Investment Executive are also eligible to purchase Class A shares subject to no
sales charge so long as the following conditions are met: (1) the purchase is
made within 30 days of, and with the proceeds from, a redemption of shares of a
mutual fund that were purchased through Kidder, Peabody acting as a selected
dealer for the shares pursuant to an agreement between Kidder, Peabody and the
mutual fund's principal underwriter; (2) the mutual fund invested primarily in
Emerging Markets; (3) the Investment Executive served as the client's broker on
the purchase of the shares of the mutual fund sold; and (4) the shares of the
mutual fund sold were subject to a sales charge. Class A shares may also be
offered without a sales charge to any investment company, other than a company
for which Kidder, Peabody serves as distributor, in connection with the
combination of the company with the Fund by merger, acquisition of assets or
otherwise.
VOLUME DISCOUNTS. Any investor meeting certain requirements, including the
signing of a Letter of Intent (a 'Letter'), is eligible to obtain a reduced
sales charge for purchasing Fund shares by combining purchases made over a
13-month period of Class A shares and shares of other mutual funds in the Kidder
Family of Funds with respect to which the investor previously paid, or is
subject to the payment of, a sales charge (collectively referred to as 'Eligible
Shares'). Purchases of Fund shares by eligible investors must aggregate at least
$50,000 and must include a minimum initial investment of at least $1,000 and
minimum subsequent investments of at least $50. For purposes of the procedure
contemplated by a Letter, Eligible Shares owned by an investor will be valued at
their original cost in determining the size of a purchase and the applicable
sales charge.
An investor's purchase of Eligible Shares not originally made pursuant to a
Letter may be included under a Letter subsequently executed within 90 days of
the purchase, so long as the investor informs Kidder, Peabody in writing within
the 90-day period of the investor's desired use of a Letter. The original cost
of an investor's Eligible Shares not purchased pursuant to a Letter may be
included under a Letter subsequently executed within 90 days of the purchase, so
long as the investor informs Kidder, Peabody in writing within the 90-day period
of the investor's desire for that treatment to be applicable. The original cost
of Eligible Shares not purchased pursuant to a Letter may be included as a
credit toward the fulfillment of the terms of the Letter; the reduced sales
charge contemplated by the Letter, however, will apply only to the purchases of
Eligible Shares made after the execution of the Letter, which purchases, as
noted above, must aggregate at least $50,000.
A Letter must provide for 5% of the dollar amount of the intended
investment to be held in escrow by Investors Fiduciary Trust Company ('IFTC') in
the form of Eligible Shares in an
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account registered in the name of the shareholder. If the total amount of any
Eligible Shares owned at the time a Letter is signed plus all purchases made
under the terms of the Letter less redemptions (the 'investment') are at least
equal to the intended investment, the amount in escrow will be released to the
shareholder. If the investment is more than $50,000 but less than the intended
investment, a remittance of the difference in the dollar amount of sales charge
paid and the sales charge that would have been paid if the investment had been
made at a single time will be made upon request. If the remittance is not sent
within 20 days after such a request, IFTC will redeem an appropriate number of
Eligible Shares held in escrow in order to realize the difference. Amounts
remaining in the escrow account will be released to the shareholder's account.
If the total investment is more than the intended investment and the total is
sufficient to qualify for an additional sales charge reduction, a retroactive
price adjustment will be made for all purchases made under a Letter to reflect
the sales charge applicable to the aggregate amount of the purchases during the
13-month period. A Letter is not a binding obligation to purchase the indicated
amount, and Kidder, Peabody is not obligated to sell the indicated amount.
Reinvested dividends and capital gains are not applied toward the completion of
the purchases contemplated by a Letter.
RIGHT OF ACCUMULATION. Reduced sales charges on Class A shares are
available under a combined right of accumulation permitting an investor to
combine the value of Eligible Shares and the value of Fund shares being
purchased,to qualify for a reduced sales charge. Before a shareholder may take
advantage of the right of accumulation, the shareholder must provide Kidder,
Peabody at the time of purchase with sufficient information to permit Kidder,
Peabody to confirm that the shareholder is qualified for the right; acceptance
of the shareholder's purchase order is subject to that confirmation. The right
of accumulation may be amended or terminated at any time by the Trust.
DEFINITION OF PURCHASE. For purposes of the volume discounts and right of
accumulation described above, a 'purchase' refers to: a single purchase of
Eligible Shares by an individual; concurrent purchases by an individual, his or
her spouse and their children under the age of 21 years purchasing Eligible
Shares for his, her or their own account; and single purchases by a trustee or
other fiduciary purchasing Eligible Shares for a single trust estate or single
fiduciary account, including a pension, profit-sharing or other employee benefit
trust created pursuant to a plan qualified under Section 401 of the Code, even
though more than one beneficiary is involved. The term 'purchase' also includes
purchases by any 'company,' as that term is defined in the 1940 Act, but does
not include: purchases by any such company that has not been in existence for at
least six months or that has no purpose other than the purchase of Eligible
Shares or shares of other investment companies registered under the 1940 Act at
a discount; or purchases by any group of individuals whose participants are
related by virtue of being credit cardholders of a company, policyholders of an
insurance company, customers of either a bank or broker-dealer or clients of an
investment adviser. The term 'purchase' also includes purchases by employee
benefit plans not qualified under Section 401 of the Code, including purchases
by employees or by employers on behalf of employees by means of a payroll
deduction plan, or otherwise, of Eligible Shares. Purchases by such a company or
non-qualified employee benefit plan will qualify for the volume discounts
offered with respect to the Fund's shares only if the Trust and Kidder, Peabody
are able to realize economies of scale in sales efforts and sales-related
expenses by means of the company's, the employer's or the plan's making the
Prospectus available to
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individual investors or employees and forwarding investments by those persons to
the Trust, and by any such employer's or plan's bearing the expense of any
payroll deduction plan. The term 'purchase' also includes any purchase of
Eligible Shares by or on behalf of certain members of the same family, including
spouses, children (adult and minor), parents, grandparents and siblings,
provided, however, that the following conditions are met: (1) following
consummation of the purchase, the family has, in the aggregate, (a) at least $5
million invested in Eligible Shares of one or more funds within the Kidder
Family of Funds or (b) at least $10 million in cash and/or securities in Kidder,
Peabody Accounts; and (2) the Trust and Kidder, Peabody are able to realize
economies of scale in sales effort and sales-related expenses by means of
dealing with a common decision-maker or otherwise being able to treat the
accounts as a single relationship.
REINSTATEMENT PRIVILEGE. The Fund offers a reinstatement privilege under
which a shareholder that has redeemed Class A shares may reinvest the proceeds
from the redemption without imposition of a sales charge, provided the
reinvestment is made within 60 days of the redemption. The tax status of a gain
realized on a redemption will not be affected by exercise of the reinstatement
privilege but a loss will be nullified if the reinvestment is made within 30
days of the redemption. See the Statement of Additional Information for the tax
consequences when, within 90 days of a purchase of Class A shares, the shares
are redeemed and reinvested in the Fund or another mutual fund.
CLASS B SHARES
The public offering price of Class B shares is the net asset value per share
next determined after a purchase order is received without imposition of any
sales charge. Class B shares are subject to a service fee at the annual rate of
.25%, and a distribution fee at the annual rate of .75%, of the value of the
Fund's average daily net assets attributable to this Class. See 'Distributor.'
Kidder, Peabody has adopted guidelines, in view of the relative sales charges,
service fees and distribution fees, directing Investment Executives that all
purchases of shares should be for Class A shares when the purchase is for
$1,000,000 or more by an investor not eligible to purchase Class C shares.
Kidder, Peabody reserves the right to vary these guidelines at any time.
CLASS C SHARES
The public offering price of Class C shares is the net asset value per share
next determined after a purchase order is received without imposition of any
sales charge. Class C shares, which are not subject to any service fee or
distribution fee, are available exclusively to: (1) employees of Kidder, Peabody
and their associated accounts; (2) directors or trustees of any fund in the
Kidder Family of Funds; (3) employee benefit plans of Kidder, Peabody; (4)
participants in INSIGHT when shares are purchased through that program; and (5)
Adviser Employees. Investors eligible to purchase Class C shares may not
purchase any other Class of shares.
INSIGHT. An investor purchasing $50,000 or more of shares of funds in the
Kidder Family of Funds may participate in INSIGHT, KPAM's total portfolio asset
allocation program, and receive Class C shares. INSIGHT offers comprehensive
investment services, including a personalized asset allocation investment
strategy using an appropriate combination of funds in the Kidder Family of
Funds, professional investment advice regarding investment among the
25
<PAGE>
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funds in the Kidder Family of Funds by KPAM portfolio specialists, monitoring of
investment performance and comprehensive quarterly reports that cover market
trends, portfolio summaries and personalized account information. Participation
in INSIGHT is subject to payment of an advisory fee to KPAM at the maximum
annual rate of 1.5% of assets held through the program (generally charged
quarterly in advance), which covers all INSIGHT investment advisory services and
program administration fees. The INSIGHT advisory fee may be paid separately or,
except in the case of IRAs, by automatic redemption of money market fund shares
held through INSIGHT, if authorized by the participant. Employees of Kidder,
Peabody are entitled to a 50% reduction in the fee otherwise payable for
participation in INSIGHT.
REDEMPTION OF SHARES
A shareholder may redeem Fund shares on any day that the Fund's net asset values
are determined by following the procedures described below.
REDEMPTION THROUGH KIDDER, PEABODY
Shares may be redeemed through Kidder, Peabody, which provides the terms of any
redemption request properly received prior to 4:00 p.m., New York time, on a
given day, to the Fund's transfer agent. The trade date of a redemption so
received is considered to be that day, and the trade date of any redemption
request received at or after 4:00 p.m., New York time, is considered to be the
next business day. If shares to be redeemed were issued in certificate form, the
certificates for the shares to be redeemed must be submitted to the transfer
agent in accordance with the procedures described in items (1) through (4) under
'Redemption by Mail' below.
REDEMPTION BY MAIL
Shares may be redeemed by submitting a written request in 'good order' to the
Fund's transfer agent at the following address:
Kidder, Peabody Emerging Markets Equity Fund
Class A, B or C (please specify)
c/o Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
The transfer agent transmits any redemption request that it receives to
Kidder, Peabody, and the request is then treated as if it had been made through
Kidder, Peabody. 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;
(3) if the shares to be redeemed were issued in certificate form, the
certificates are endorsed by the shareholder for transfer (or are
themselves accompanied by an endorsed stock power) and accompany the
redemption request, which should be sent by registered mail for the
protection of the shareholder; and
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<PAGE>
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(4) the signatures on either the written redemption request or the
certificates (or the accompanying stock power) have been guaranteed by a
bank, broker-dealer, municipal securities broker and dealer, government
securities dealer and broker, credit union, a member firm of a national
securities exchange, registered securities association or clearing agency,
and 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 of Fund
shares by corporations, executors, administrators, trustees and guardians.
CONTINGENT DEFERRED SALES CHARGE -- CLASS B SHARES
In order to discourage short term investments in Class B shares, the Fund
imposes a CDSC on Class B shares held less than one year equal to 1% of the net
asset value of such shares redeemed at the time of purchase or the time of
redemption, whichever is lower. Class B shares held one year or longer and Class
B shares acquired through reinvestment of dividends or distributions are not
subject to the CDSC. Certain procedures are applicable in determining whether a
CDSC will apply to a redemption of Class B shares. The Fund will redeem shares
in the following order: first, Class B shares acquired through reinvestment of
dividends and distributions; second, Class B shares purchased and held for at
least one year; and third, Class B shares purchased and held less than one year.
If the redemption involves Class B shares held less than one year and the Class
B shares were purchased at different times, the Class B shares held for the
longest period of time will be redeemed first. The CDSC, if any, will be waived
in the case of (1) redemptions of Class B shares held at the time a shareholder
dies or becomes disabled, including the Class B shares of a shareholder who owns
the shares with his or her spouse as joint tenants with right of survivorship,
provided that the redemption is requested within one year of the death or
initial determination of disability and (2) redemptions in connection with the
following retirement plan distributions: (a) lump-sum or other distributions
from a qualified retirement plan following retirement; (b) distributions from an
IRA, Keogh plan or custodial account under Section 403(b)(7) of the Code
following attainment of age 59 1/2; and (c) a tax-free return of an excess
contribution to an IRA. Proceeds of the CDSC are payable to Kidder, Peabody.
OTHER REDEMPTION POLICIES
Signature guarantees are required in connection with (1) any redemption of Fund
shares made by mail and (2) share ownership transfer requests. These
requirements may be waived by the Trust in certain instances.
Any redemption request made by a shareholder of the Fund will be effected
at the net asset value per share next determined after proper redemption
instructions are received. See 'Determination of Net Asset Value' below. The
proceeds of the redemption generally are credited to the shareholder's Account,
or sent to the shareholder, as applicable, on the fifth business day following
the date after the redemption request was received in good order, but in no
event later than seven days following that date. A shareholder who pays for Fund
shares by personal check will be credited with the proceeds of a redemption of
those shares only after the
27
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check used for the purchase has cleared, which may take up to 15 days or more.
If shares are purchased with good funds, no delay in redemption will occur. The
amount of redemption proceeds received by a Fund shareholder will in no way be
affected by any delay in the crediting of those proceeds.
A Fund account that is reduced by redemptions, and not by reason of market
fluctuations, to a value of $500 or less may be redeemed by the Fund, but only
after the shareholder has been given at least 30 days in which to increase the
balance in the account to more than $500. Proceeds of such a redemption will be
mailed to the shareholder.
DISTRIBUTIONS IN KIND
If the Trustees determine that it would be detrimental to the best interests of
the Fund's shareholders to make a redemption payment wholly in cash, the Fund
may pay, in accordance with rules adopted by the SEC, any portion of a
redemption in excess of the lesser of $250,000 or 1% of the Fund's net assets by
a distribution in kind of readily marketable portfolio securities in lieu of
cash. Redemptions failing to meet this threshold must be made in cash.
Shareholders receiving distributions in kind of portfolio securities may incur
brokerage commissions when subsequently disposing of those securities.
SYSTEMATIC WITHDRAWAL PLAN
The Trust offers a systematic withdrawal plan (the 'Withdrawal Plan') under
which a shareholder of the Fund with $20,000 or more invested in a Class, and
whose shares have been held one year or longer, may elect periodic redemption
payments to the shareholder or a designated payee on a monthly basis. Payments
pursuant to the Withdrawal Plan normally are made within the last ten days of
the month. The minimum rate of withdrawal is $200 per month and the maximum
annual withdrawal is 12% of current account value in the Class as of the
commencement of participation in the Withdrawal Plan (less the amount of any
subsequent redemption outside the Withdrawal Plan). A shareholder participating
in the Withdrawal Plan must reinvest all income and capital gains distributions,
and may not continue to participate if the shareholder redeems outside the
Withdrawal Plan or exchanges to another fund an amount that would cause the
account value in the Class to fall below $20,000. The Trust may amend or
terminate the Withdrawal Plan, and a shareholder may terminate participation in
the Withdrawal Plan at any time.
DETERMINATION OF NET ASSET VALUE
Each Class' net asset value per share is calculated by IFTC, the Fund's
custodian, on each day, Monday through Friday, except that net asset value is
not computed on a day in which no orders to purchase, sell, exchange or redeem
Fund shares have been received, any day on which there is not sufficient trading
in the Fund's portfolio securities that the Fund's net asset values per share
might be materially affected by changes in the value of such portfolio
securities or on days on which the NYSE is closed. The NYSE is currently
scheduled to be closed on New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving and
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Christmas, and on the preceding Friday when one of those holidays falls on a
Saturday or on the subsequent Monday when one of those holidays falls on a
Sunday.
Net asset value per share of a Class is determined as of the close of
regular trading on the NYSE, and is computed by dividing the value of the Fund's
net assets attributable to that Class by the total number of shares outstanding
of that Class. Generally, the Fund's investments are valued at market value or,
in the absence of a market value, at fair value as determined by or under the
direction of the Trustees.
Investments in Government Securities and other securities traded
over-the-counter, other than short term investments that mature in 60 days or
less, are valued at the average of the quoted bid and asked prices in the
over-the-counter market. Short term investments that mature in 60 days or less
are valued on the basis of amortized cost (which involves valuing an investment
at its cost and, thereafter, assuming a constant amortization to maturity of any
discount or premium, regardless of the effect of fluctuating interest rates on
the market value of the investment) when the Board of Trustees has determined
that amortized cost represents fair value. Securities that are primarily traded
on foreign exchanges that close prior to the close of regular trading on the
NYSE (currently 4:00 p.m., New York time) are generally valued for purposes of
calculating the Fund's net asset values at the preceding closing values of the
securities on their respective exchanges, except that, when an occurrence
subsequent to the time a value was so established is likely to have changed that
value, the fair market value of those securities will be determined by
consideration of other factors by or under the direction of the Board of
Trustees. Securities that are primarily traded on foreign exchanges that close
after the close of regular trading on the NYSE are generally valued at sale
prices as of a time reasonably proximate to the close of regular trading on the
NYSE or, if no sales occurred previously during that day, at the then-current
bid price. A security that is primarily traded on a domestic stock exchange is
valued at the last sale price on that exchange or, if no sales occurred during
the day, at the current quoted bid price. An option that is written by the Fund
is generally valued at the last sale price or, in the absence of the last sale
price, the last offer price. An option that is purchased by the Fund is
generally valued at the last sale price or, in the absence of the last sale
price, the last bid price. The value of a futures contract is equal to the
unrealized gain or loss on the contract that is determined by marking the
contract to the current settlement price for a like contract on the valuation
date of the futures contract. A settlement price may not be used if the market
makes a limit move with respect to a particular futures contract or if the
securities underlying the futures contract experience significant price
fluctuations after the determination of the settlement price. When a settlement
price cannot be used, futures contracts will be valued at their fair market
value as determined by or under the direction of the Board of Trustees.
For purposes of calculating a Class' net asset value per share, assets and
liabilities initially expressed in foreign currency values are converted into
U.S. dollar values based on a formula prescribed by the Trust or, if the
information required by the formula is unavailable, as determined in good faith
by the Trustees. Corporate actions by issuers of securities held by the Fund,
such as the payment of dividends or distributions, are reflected in each Class'
net asset value on the ex-dividend date therefor, except that they will be so
reflected on the date the Fund is actually advised of the corporate action if
subsequent to the ex-dividend date. In carrying out the Fund's valuation
policies, IFTC may consult with an independent pricing service retained by
29
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the Trust. Further information regarding the Fund's valuation policies is
contained in the Statement of Additional Information.
EXCHANGE PRIVILEGE
Shares of each Class may be exchanged for shares of the same Class (or the sole
Class offered) in certain funds in the Kidder Family of Funds, to the extent
shares are offered for sale in the shareholder's state of residence. Class B
shares held less than one year may not be exchanged. For a list and a
description of the funds in the Kidder Family of Funds for which shares may be
exchanged, see 'Exchange Privilege' in the Statement of Additional Information.
Under the Choice Pricing System, an exchange of shares of the Fund with other
funds' shares will be limited to shares of the same class or the sole class
(money market funds only) of shares of a fund from or to which the exchange is
to be effected. For example, if a holder of Class A shares of Kidder, Peabody
Global Equity Fund ('Global Equity Fund') exchanges his shares for shares of
Kidder, Peabody Cash Reserve Fund, Inc. ('Cash Reserve Fund') (a money market
fund) and thereafter wishes to exchange those shares for shares of Kidder,
Peabody Government Income Fund, Inc., he may receive only Class A shares in the
latter transaction. As another example, if a holder of shares of Cash Reserve
Fund acquired as a result of an initial investment and not from an exchange with
shares of another fund wishes to exchange his shares for shares of Global Equity
Fund, he may receive Class A shares, Class B shares or Class C shares (depending
on his eligibility for Class C shares) in the exchange transaction. Thereafter,
any further exchanges would be subject to the principal described above limiting
subsequent exchanges to the same class or the sole class of shares of other
funds. If Class A shares acquired in an exchange are subject to payment of a
sales charge higher than the sales charge paid on the shares relinquished in the
exchange (or any predecessor of those shares), the exchange will be subject to
payment of an amount equal to the difference, if any, between the sales charge
previously paid and the sales charge payable on the Class A shares acquired in
the exchange.
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 1940 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 total 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
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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 Kidder, Peabody 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. Kidder, Peabody reserves the right to reject any exchange
request at any time. Prior to or concurrently with the delivery of a
confirmation a shareholder's exchange transaction, Kidder, Peabody will deliver
to that shareholder a copy of the prospectus of the fund into which the exchange
is being made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income and distributions of net realized capital
gains of the Fund, if any, are distributed annually after the close of the
fiscal year in which they are earned. Unless a shareholder instructs the Fund
that dividends and capital gains distributions on shares of any Class should be
paid in cash and credited to the shareholder's Account, dividends and capital
gains distributions are reinvested automatically at net asset value in
additional shares of the same Class. The Fund is subject to a 4% nondeductible
excise tax measured with respect to certain undistributed amounts of net
investment income and capital gains. If necessary to avoid the imposition of
this tax, and if in the best interests of its shareholders, the Fund will
declare and pay dividends of its net investment income and distributions of its
net capital gains more frequently than stated above. The per share dividends and
distributions on Class C shares are higher than those on Class A shares, which
in turn are higher than those on Class B shares, as a result of the different
service, distribution and transfer agency fees applicable to the Classes. See
'Fee Table,' 'Purchase of Shares,' 'Distributor' and 'General Information.'
TAXES
The Fund has qualified for the fiscal year ended June 30, 1994 as a regulated
investment company within the meaning of the Code and intends to qualify for
this treatment in each year. To qualify as a regulated investment company for
federal income tax purposes, the Fund will limit its income and investments so
that (1) less than 30% of its gross income is derived from the sale or
disposition of stocks, other securities and certain financial instruments
(including certain forward contracts) that were held for less than three months
and (2) at the close of each quarter of the taxable year (a) not more than 25%
of the market value of the Fund's total assets is invested in the securities of
a single issuer or of two or more issuers controlled by the Fund (within the
meaning of Section 852(a)(2) of the Code) that are engaged in the same or
similar trades or businesses or in related trades or businesses (other than
Government Securities and securities of other regulated investment companies)
and (b) at least 50% of the market value of the Fund's total assets is
represented by (i) cash and cash items, (ii) Government Securities and (iii)
other securities limited in respect of any one issuer to an amount not greater
in value than 5% of the market value of the Fund's total assets and to not more
than 10% of the outstanding
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voting securities of the issuer. The requirements for qualification may cause
the Fund to restrict the degree to which it sells or otherwise disposes of
stocks, other securities and certain financial instruments held for less than
three months. If the Fund qualifies as a regulated investment company and meets
certain distribution requirements, the Fund will not be subject to federal
income and excise taxes on its net investment income and net realized capital
gains that it distributes to its shareholders.
Dividends paid by the Fund out of net investment income and distributions
of net realized short term capital gains will be taxable to shareholders as
ordinary income, whether received in cash or reinvested in additional Fund
shares. Distributions of net realized long term capital gains will be taxable to
shareholders as long term capital gain, regardless of how long shareholders have
held their shares and whether the distributions are received in cash or
reinvested in additional shares. Dividends and distributions paid by the Fund
will generally not qualify for the federal dividends received deduction for
corporate shareholders.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other foreign taxes. The payment of these taxes will
reduce the amount of dividends and distributions paid to the Fund's
shareholders. The Fund expects to elect, for federal income tax purposes, to
treat certain foreign income taxes it pays as having been paid by its
shareholders.
Statements as to the tax status of each Fund shareholder's dividends and
distributions will be mailed annually. Shareholders will also receive, as
appropriate, various written notices after the close of the Fund's taxable year
regarding the tax status of certain dividends and distributions that were paid
(or that are treated as having been paid) by the Fund to its shareholders during
the preceding taxable year, including the amount of dividends that represent
interest derived from Government Securities.
Shareholders are urged to consult their tax advisors regarding the
application of federal, state, local and foreign tax laws to their specific
situations before investing in the Fund.
DISTRIBUTOR
Kidder, Peabody, a major full-line investment services firm serving foreign and
domestic securities markets, located at 10 Hanover Square, New York, New York
10005-3592, serves as the distributor of the Fund's shares and is paid monthly
fees by the Fund in connection with (1) the servicing of shareholder accounts in
Class A shares and Class B shares and (2) providing distribution related
services in respect of Class B shares. A monthly service fee, authorized
pursuant to a Shareholder Servicing and Distribution Plan (the 'Plan') adopted
by the Trust with respect to the Fund pursuant to Rule 12b-1 under the 1940 Act,
is calculated at the annual rate of .25% of the value of the average daily net
assets of the Fund attributable to each of Class A shares and Class B shares and
is used by Kidder, Peabody to provide compensation for ongoing servicing and/or
maintenance of shareholder accounts and an allocation of overhead and other
Kidder, Peabody branch office expenses related to servicing shareholder
accounts. Compensation is paid by Kidder, Peabody to persons, including Kidder,
Peabody employees, who respond to inquiries of shareholders of the Fund
regarding their ownership of shares or their accounts with the Fund or who
provide other similar services not otherwise required to be provided by the
Fund's manager, investment adviser or transfer agent.
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In addition, pursuant to the Plan, the Fund pays to Kidder, Peabody a
monthly distribution fee at the annual rate of .75% of the Fund's average daily
net assets attributable to Class B shares. The distribution fee is used by
Kidder, Peabody to provide initial and ongoing sales compensation to its
Investment Executives in respect of sales of Class B shares; costs of printing
and distributing the Fund's Prospectus, Statement of Additional Information and
sales literature to prospective investors of Class B shares; costs associated
with any advertising relating to Class B shares; an allocation of overhead and
other Kidder, Peabody branch office expenses related to distribution of Class B
shares; and payments to, and expenses of, persons who provide support services
in connection with the distribution of Class B shares.
Payments under the Plan are not tied exclusively to the service and/or
distribution expenses actually incurred by Kidder, Peabody, and the payments may
exceed expenses actually incurred by Kidder, Peabody. The Trustees evaluate the
appropriateness of the Plan and its payment terms on a continuing basis and in
doing so consider all relevant factors, including expenses borne by Kidder,
Peabody and amounts it receives under the Plan.
PERFORMANCE INFORMATION
From time to time, the Trust may advertise the Fund's 'average annual total
return' over various periods of time for each Class. Total return figures, which
are based on historical earnings and are not intended to indicate future
performance, show the average percentage change in value of an investment in the
Class from the beginning date of a measuring period to the end of that period.
These figures reflect changes in the price of shares and assume that any income
dividends and/or capital gains distributions made by the Fund during the period
were reinvested in shares of the same Class. Total return figures will be given
for the most recent one-and five-year periods, or for the life of the Class to
the extent that it has not been in existence for the full length of those
periods, and may be given for other periods as well, such as on a year-by-year
basis. The average annual total return for any one year in a period longer than
one year might be greater or less than the average for the entire period.
The Trust may quote 'aggregate total return' figures with respect to the
Fund for various periods, representing the cumulative change in value of an
investment for the specific period and reflecting changes in share prices and
assuming reinvestment of dividends and distributions. Aggregate total return may
be calculated either with or without the effect of the sales charge to which
Class A shares are subject and may be shown by means of schedules, charts or
graphs, and may indicate subtotals of the various components of total return
(that is, changes in value of initial investment, income dividends and capital
gains distributions). Reflecting compounding over a longer period of time,
aggregate total return data generally will be higher than average annual total
return data.
The Trust may, in addition to quoting the Classes' average annual and
aggregate total returns, advertise actual annual and annualized total return
performance data for various periods of time. Actual annual and annualized total
returns may be calculated either with or without the effect of the sales charge
to which Class A shares are subject and may be shown by means of schedules,
charts or graphs. Actual annual or annualized total return data generally will
be lower than average annual total return data, which reflects compounding of
return.
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In reports or other communications to Fund shareholders and in advertising
material, the Trust may compare the Classes' performance with (1) the
performance of other mutual funds (or classes thereof) as listed in rankings
prepared by Lipper Analytical Services Inc., Micropal, Inc. or similar
investment services that monitor the performance of mutual funds or as set out
in the nationally recognized publications listed below, (2) the IFC Index, or
(3) other appropriate indexes of investment securities or with data developed by
the Adviser or KPAM derived from those indexes. The Trust may also include in
communications to Fund shareholders evaluations of the Fund published by
nationally recognized ranking services and by financial publications that are
nationally recognized, such as Barron's, Business Week, Forbes, Institutional
Investor, Investor's Daily, Kiplinger's Personal Finance Magazine, Money,
Morningstar Mutual Fund Values, The New York Times, USA Today and The Wall
Street Journal. Any given performance comparison should not be considered as
representative of the Fund's performance for any future period.
GENERAL INFORMATION
ORGANIZATION OF THE TRUST
The Trust is registered under the 1940 Act as an open-end management investment
company and was formed as a business trust pursuant to a Declaration of Trust,
as amended from time to time (the 'Declaration'), under the laws of The
Commonwealth of Massachusetts on August 10, 1992. The Fund commenced operations
on January 19, 1994. The Declaration authorizes the Trustees to create separate
series, and within each series separate Classes, of an unlimited number of
shares of beneficial interest, par value $.001 per share. As of the date of this
Prospectus, the Trustees have established several such series, representing
interests in, among others, the Fund described in this Prospectus. See 'Exchange
Privilege' in the Statement of Additional Information.
When issued, Fund shares will be fully paid and non-assessable. Shares are
freely transferable and have no pre-emptive, subscription or conversion rights.
Each Class represents an identical interest in the Fund's investment portfolio.
As a result, the Classes have the same rights, privileges and preferences,
except with respect to: (1) the designation of each Class; (2) the effect of the
respective sales charges, if any, for each Class; (3) the distribution and/or
service fees, if any, borne by each Class; (4) the expenses allocable
exclusively to each Class; (5) voting rights on matters exclusively affecting a
single Class; and (6) the exchange privilege of each Class. The Board of
Trustees does not anticipate that there will be any conflicts among the
interests of the holders of the different Classes. The Trustees, on an ongoing
basis, will consider whether any conflict exists and, if so, take appropriate
action. Certain aspects of the shares may be changed, upon notice to Fund
shareholders, to satisfy certain tax regulatory requirements, if the change is
deemed necessary by the Trust's Board of Trustees.
Shareholders of the Fund are entitled to one vote for each full share held
and fractional votes for fractional shares held. Voting rights are not
cumulative and, as a result, the holders of more than 50% of the aggregate
shares of the Trust may elect all of the Trustees. Generally, shares of the
Trust are voted on a Trust-wide basis on all matters except those affecting only
the interests of one series, such as the Fund's investment advisory agreement.
In turn, shares of the Fund are voted on a Fund-wide basis on all matters except
those affecting only the interests of one Class, such as the terms of the Plan
as it relates to a Class.
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The Trust does not intend to hold annual meetings of shareholders for the
purpose of electing Trustees unless, and until such time as, less than a
majority of the Trustees holding office have been elected by shareholders.
Shareholders of record of no less than two-thirds of the outstanding shares of
the Trust may remove a Trustee through a declaration in writing or by vote cast
in person or by proxy at a meeting called for that purpose. A meeting will be
called for the purpose of voting on the removal of a Trustee at the written
request of holders of 10% of the Trust's outstanding shares. Shareholders of the
Fund who satisfy certain criteria will be assisted by the Trust in communicating
with other shareholders in seeking the holding of the meeting.
REPORTS TO SHAREHOLDERS
The Trust sends Fund shareholders audited semi-annual and annual reports, each
of which includes a list of the investment securities held by the Fund as of the
end of the period covered by the report.
CUSTODIAN AND TRANSFER, DIVIDEND AND RECORDKEEPING AGENT
IFTC, located at 127 West 10th Street, Kansas City, Missouri 64105, serves as
the Fund's custodian and transfer, dividend and recordkeeping agent.
35
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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 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 the 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 8
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Investment Objective and Policies 9
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Management of the Fund 19
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Purchase of Shares 21
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Redemption of Shares 26
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Determination of Net Asset Value 28
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Exchange Privilege 30
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Dividends, Distributions and Taxes 31
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Distributor 32
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Performance Information 33
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General Information 34
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Custodian and Transfer, Dividend and
Recordkeeping Agent 35
--------------------------------------------------------
</TABLE>
Kidder,
Peabody
Emerging
Markets
Equity
Fund
Prospectus
October 28, 1994
STATEMENT OF DIFFERENCES
The service mark symbol shall be expressed as 'sm'
The dagger footnote symbol shall be expressed as 'D'
Mathematical powers normally expressed as superscript shall be preceded by 'pp'
