<PAGE>
PAINEWEBBER SMALL CAP GROWTH FUND
(A SERIES OF PAINEWEBBER INVESTMENT TRUST III)
June 13, 1996
Dear Shareholder:
In 1993, Kidder, Peabody launched your Fund, which focuses on small cap
stocks, and selected an outside investment adviser to manage the Fund's
portfolio. Mitchell Hutchins took over the administration of your Fund -- which
was renamed PaineWebber Small Cap Growth Fund -- early in 1995 as a result of
PaineWebber's acquisition of certain assets of Kidder, Peabody Group Inc.
PaineWebber also launched a small cap fund in 1993, called PaineWebber Small Cap
Value Fund, and chose an outside investment manager as that Fund's sub-adviser.
While the Funds have slightly different names, they have identical
investment objectives and goals: to achieve long-term capital appreciation
through investment in stocks with market capitalizations of less than $1
billion. (Of the 500 stocks in the S&P 500 Index, only 34 have capitalizations
of under $1 billion; however, there are thousands of other stocks that meet this
criteria.) Both managers sought to invest in companies whose stocks they
considered undervalued -- stocks that should move up in price if certain factors
become recognized by the market. Although these managers employed different
strategies to select the stocks held in the portfolios, both Funds generated
performance records that many investors found unsatisfactory. As a result, the
board of each Fund determined to terminate the sub-adviser and turn management
of the Funds' portfolios over to Mitchell Hutchins.
As of April 1, 1996, Donald Jones assumed day-to-day management
responsibility for both Funds, under the direction of Mark Tincher, Chief
Investment Officer for Equities of Mitchell Hutchins. Since that date, the
Funds' management has begun to use an investment process that evaluates
securities using quantitative measures to identify stocks that provide a
combination of value and momentum (both price and earnings). Management then
applies fundamental research to identify those companies with a catalyst that
may cause the stocks' price to move up in the future. These quantifiable
measures, plus fundamental analysis by our research analysts, enable management
to identify stocks that appear undervalued, but that have catalysts that could
close the valuation gap.
Mark Tincher joined Mitchell Hutchins in March 1995 and, since his arrival,
the Mitchell Hutchins equity team has refined the investment process described
above under his leadership. Mark manages PaineWebber Growth and Income Fund
utilizing our proprietary quantitative model. Before joining us, Mark was head
of U.S. Funds Management and Equity Research for the Chase Manhattan Private
Bank, which he joined in 1988. While at Chase, Mark oversaw the management of
all Chase U.S. equity funds, including its small cap portfolios.
Don Jones has been managing both Funds since April 1996, using the
proprietary quantitative models that have been incorporated into the management
of the PaineWebber Stock Funds. Prior to joining Mitchell Hutchins in February
1996, Mr. Jones was vice president in the Asset Management Group of First
Fidelity Bancorporation and a member of that firm's Value Discipline and Small
Capitalization Stock Selection Committees. At First Fidelity since 1983, he
served as a quantitative analyst, assisting the Director of Equity Management in
the design, development and implementation of stock selection models for the
value, growth and small capitalization styles.
As I have written you before, one goal since my joining Mitchell Hutchins
has been, and continues to be, to focus on those types of funds most investors
want by eliminating funds with overlapping objectives. Now that portfolio
management of the Funds has been consolidated at Mitchell Hutchins under the
management of Mark Tincher and Don Jones, the board of trustees of PaineWebber
Small Cap Growth Fund has
<PAGE>
approved Mitchell Hutchins' recommendation to reorganize ("merge") your Fund
into PaineWebber Small Cap Value Fund, and recommends that you vote FOR the
reorganization proposal. The board believes that combining the two Funds will
benefit the shareholders of PaineWebber Small Cap Growth Fund by providing them
with a portfolio that has an identical investment objective and that will have
lower operating expenses as a percentage of net assets. If the merger is
approved, the name of the combined Fund will be changed to "PaineWebber Small
Cap Fund." As I described our investment process, you can see that we are
looking for the right combination of value and growth in the stocks we select,
so we think that a distinction between "growth" or "value" is unnecessary in the
Fund's name.
The table below provides you with a brief summary of both Funds, as well as
of the proposed combined Fund.
<TABLE>
<CAPTION>
PW SMALL CAP PW SMALL CAP COMBINED "PW
GROWTH FUND VALUE FUND SMALL CAP FUND"
<S> <C> <C> <C>
OBJECTIVE Long-term capital Long-term capital Long-term capital
appreciation appreciation appreciation
DEFINITION OF Up to $1 billion Up to $1 billion Up to $1 billion
SMALL CAP
HOLDINGS Primarily securities of At least 65% equity At least 65% equity
small cap companies securities of small cap securities of small cap
companies companies
FOREIGN Up to 10% of assets, Up to 25% in U.S. Up to 25% in U.S.
SECURITIES LIMIT may be denominated in dollar-denominated dollar-denominated
foreign currencies equity securities of equity securities of
foreign issuers traded foreign issuers traded
in U.S. markets in U.S. markets
DEBT SECURITIES Convertible debt Up to 10% in bonds, Up to 10% in bonds,
securities purchased including convertible including convertible
based on their equity debt securities, rated debt securities, rated
characteristics no lower than B no lower than B
</TABLE>
We have retained an outside firm that specializes in proxy solicitation to
assist us in connection with the merger. If we have not received your vote as
the meeting date approaches, you may receive a telephone call from Shareholder
Communications Corporation ("SCC") to ask for your vote. We hope that their
telephone call does not inconvenience you.
I appreciate that the length of the attached document may be daunting, but
we have tried to make it as clear as possible while meeting all the legal
requirements. The Table of Contents has been expanded to make it easier to find
specific topics of interest. Also, we have included a section of questions and
answers that we think will interest most investors.
As always, I thank you for being an investor in our funds. We are committed
to serving your interests and appreciate your trust in us.
Very truly yours,
[SIG]
Margo Alexander
PRESIDENT
PAINEWEBBER SMALL CAP GROWTH FUND
<PAGE>
QUESTIONS & ANSWERS
Q: WHY IS THIS MERGER BEING PROPOSED?
A: If approved by the shareholders of PaineWebber Small Cap Growth Fund, the
combined PaineWebber Small Cap Fund will be better positioned for future growth.
As PaineWebber Small Cap Value Fund and PaineWebber Small Cap Growth Fund have
identical investment objectives, they would compete with each other for the same
pool of potential investors if they remained as they are now. The merger will
also permit Mitchell Hutchins to offer investors one core small cap fund,
managed in a way intended to improve risk-adjusted performance.
Q:WHY WAS THIS MERGER NOT PROPOSED IN THE PROXY STATEMENT I RECEIVED EARLIER
THIS YEAR?
A: Mitchell Hutchins was not in a position to propose the merger at the time
your Fund's board nominated trustees for election and approved the proposals
submitted to shareholders earlier this year. Margo Alexander, President of
Mitchell Hutchins, and Mark Tincher, Chief Investment Officer for Equities, were
conducting a search for a day-to-day portfolio manager with experience in small
cap securities and an investment management style consistent with our
quantitative investment strategy. With Don Jones on board, Mitchell Hutchins
proposed the merger to the board and it approved the merger proposal.
Q: HOW WILL THE MERGER AFFECT THE FUNDS' EXPENSES?
A: It is important to note that while PaineWebber Small Cap Value Fund,
which is the surviving Fund in the merger, has an advisory fee higher than your
Fund's fee, the combined Fund is expected to have lower overall expenses than
your Fund currently has, due to its larger asset base. Larger funds may achieve
economies of scale not attainable by smaller funds. As you can see in the table
below, our analysis indicates that shareholders of both your Fund and
PaineWebber Small Cap Value Fund should benefit from a lower expense ratio.
(Note that operating expenses for the combined Fund are expressed on a pro forma
basis. For more details about fees and expenses, see "Synopsis--Comparative Fee
Table" on pages 3-7 of the proxy statement.)
TOTAL FUND OPERATING EXPENSES
(INCLUDING ADVISORY FEES)
<TABLE>
<CAPTION>
PAINEWEBBER SMALL CAP PAINEWEBBER SMALL CAP COMBINED "PAINEWEBBER
VALUE FUND GROWTH FUND SMALL CAP FUND"
---------------------- ---------------------- -----------------------
<S> <C> <C> <C>
CLASS A 1.97% 1.91% 1.78%
CLASS B 2.72% 2.64% 2.56%
CLASS C 2.71% 2.66% 2.54%
CLASS Y N/A 1.66% 1.53%
</TABLE>
Q: WILL THE MERGER SUBJECT ME TO ANY TAXES?
A: The merger is structured to be a tax-free reorganization, which means
that no gain or loss will be recognized by either Fund or by you as a result of
your acquisition of PaineWebber Small Cap Value Fund shares through the merger.
If you do not wish to receive shares of PaineWebber Small Cap Value Fund in
the merger, you are free to exchange your Fund shares for shares of the same
class of any other PaineWebber fund prior to the closing. However, keep in mind
that you will recognize a gain or loss -- that is, experience a taxable event --
if you exchange your Fund shares for shares of a different fund.
<PAGE>
Also in connection with the merger, PaineWebber Small Cap Growth Fund is
required to declare and pay to its shareholders any distributions of income and
capital gains it has accrued during its fiscal year prior to the closing of the
merger. Accordingly, you can expect to receive a distribution of income (and
capital gains, if any) from the Fund at the end of July. That distribution is
taxable.
Q: HOW MANY SHARES WILL I RECEIVE IN THE MERGER?
A: If the merger is approved, as a holder of PaineWebber Small Cap Growth
Fund, you will receive the class of shares of PaineWebber Small Cap Value Fund
that correspond to the class of shares of PaineWebber Small Cap Growth Fund you
now hold. The number of PaineWebber Small Cap Value Fund shares you will receive
will depend on the net asset value (NAV) of each class of the Funds at the time
of the closing of the merger.
For example, on March 31, 1996, the NAV per share of PaineWebber Small Cap
Growth Fund Class A was $12.93 and the NAV per share of PaineWebber Small Cap
Value Fund Class A was $11.11. If the merger had been completed on that date,
you would have received 1.163816 Class A shares ($12.93 DIVIDED BY $11.11) of
PaineWebber Small Cap Value Fund for each Class A share of PaineWebber Small Cap
Growth Fund you owned. The overall value of your investment would not change,
but the number of shares you own and the NAV per share would differ. For
example, if you owned 1,000 shares of PaineWebber Small Cap Growth Fund and the
merger had been completed on that date, you would own 1,163.816 shares
afterward: 1,000 shares times $12.93 = $12,930 or 1,163.816 shares times $11.11
= $12,930.
Q: WHAT CLASS OF SHARES WILL I OWN?
A: You will own the same class of shares of PaineWebber Small Cap Value Fund
that you owned in PaineWebber Small Cap Growth Fund. If you hold PaineWebber
Small Cap Growth Fund shares subject to a contingent deferred sales charge (for
example, Class B shares purchased within the last six years, or Class C shares
purchased within the last year), you will receive credit for the length of time
that you have held your shares of PaineWebber Small Cap Growth Fund.
Q: WHAT IS MY BOARD'S RECOMMENDATION?
A: Your board of trustees recommends a vote "FOR" the merger.
<PAGE>
PAINEWEBBER SMALL CAP GROWTH FUND
(A SERIES OF PAINEWEBBER INVESTMENT TRUST III)
---------------------
NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS
JULY 19, 1996
---------------------
To the Shareholders:
A special meeting of shareholders ("Meeting") of PaineWebber Small Cap
Growth Fund ("Growth Fund"), a series of PaineWebber Investment Trust III, will
be held on July 19, 1996, at 10:00 a.m., Eastern time, at 1285 Avenue of the
Americas, 38th Floor, New York, New York 10019, for the following purposes:
(1) To consider an Agreement and Plan of Reorganization and Termination
under which PaineWebber Small Cap Value Fund ("Value Fund"), a series of
PaineWebber Securities Trust, would acquire the assets of Growth Fund in
exchange solely for shares of beneficial interest in Value Fund and the
assumption by Value Fund of Growth Fund's liabilities, followed by the
distribution of those shares to the shareholders of Growth Fund, all as
described in the accompanying Prospectus/Proxy Statement; and
(2) To transact such other business as may properly come before the Meeting
or any adjournment thereof.
You are entitled to vote at the Meeting and any adjournment thereof if you
owned shares of Growth Fund at the close of business on May 17, 1996. IF YOU
ATTEND THE MEETING, YOU MAY VOTE YOUR SHARES IN PERSON. IF YOU DO NOT EXPECT TO
ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY
CARD IN THE ENCLOSED POSTAGE PAID ENVELOPE.
By order of the board of trustees,
DIANNE E. O'DONNELL
SECRETARY
June 13, 1996
1285 Avenue of the Americas
New York, New York 10019
YOUR VOTE IS IMPORTANT
NO MATTER HOW MANY SHARES YOU OWN
Please indicate your voting instructions on the enclosed proxy card, date
and sign the card, and return it in the envelope provided. IF YOU SIGN, DATE
AND RETURN THE PROXY CARD BUT GIVE NO VOTING INSTRUCTIONS, YOUR SHARES WILL BE
VOTED "FOR" THE PROPOSAL NOTICED ABOVE. In order to avoid the additional
expense of further solicitation, we ask your cooperation in mailing in your
proxy card promptly. Unless proxy cards submitted by corporations and
partnerships are signed by the appropriate persons as indicated in the voting
instructions on the proxy card, they will not be voted.
<PAGE>
PAINEWEBBER SMALL CAP VALUE FUND
(A SERIES OF PAINEWEBBER SECURITIES TRUST)
PAINEWEBBER SMALL CAP GROWTH FUND
(A SERIES OF PAINEWEBBER INVESTMENT TRUST III)
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(TOLL FREE) 1-800-647-1568
PROSPECTUS/PROXY STATEMENT
JUNE 13, 1996
This Prospectus/Proxy Statement ("Proxy Statement") is being furnished to
shareholders of PaineWebber Small Cap Growth Fund ("Growth Fund"), a series of
PaineWebber Investment Trust III ("Investment Trust"), in connection with the
solicitation of proxies by Investment Trust's board of trustees for use at a
special meeting of Growth Fund shareholders to be held on July 19, 1996, at
10:00 a.m., Eastern time, and at any adjournment thereof ("Meeting").
As more fully described in this Proxy Statement, the primary purpose of the
Meeting is to vote on a proposed reorganization ("Reorganization"). Under the
Reorganization, PaineWebber Small Cap Value Fund ("Value Fund"), a series of
PaineWebber Securities Trust ("Securities Trust"), would acquire the assets of
Growth Fund, in exchange solely for shares of beneficial interest in Value Fund
and the assumption by Value Fund of Growth Fund's liabilities. Those Value Fund
shares then would be distributed to the shareholders of Growth Fund, by class,
so that each shareholder of Growth Fund would receive a number of full and
fractional shares of the applicable class of Value Fund having an aggregate
value that, on the effective date of the Reorganization, is equal to the
aggregate net asset value of the shareholder's shares of the corresponding class
in Growth Fund. As soon as practicable following the distribution, Growth Fund
will be terminated.
Value Fund is a diversified series of Securities Trust, which is an open-end
management investment company. Value Fund seeks long-term capital appreciation;
it invests primarily in equity securities of small capitalization companies.
Upon completion of the Reorganization, the name of Value Fund will be changed to
"PaineWebber Small Cap Fund."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
This Proxy Statement, which should be retained for future reference, sets
forth concisely the information about the Reorganization and Value Fund that a
shareholder should know before voting. A Statement of Additional Information,
dated June 13, 1996, relating to the Reorganization and including historical
financial statements, has been filed with the Securities and Exchange Commission
("SEC") and is incorporated herein by this reference. A Prospectus of Value
Fund, dated May 1, 1996 ("Value Fund Prospectus"), and a Statement of Additional
Information of Value Fund, also dated May 1, 1996, and Value Fund's Annual
Report to Shareholders for the fiscal year ended July 31, 1995 ("Value Fund
Annual Report"), also have been filed with the SEC and are incorporated herein
by this reference. Prospectuses of Growth Fund, both
<PAGE>
dated December 1, 1995 (as supplemented February 9, 1996 and May 9, 1996), and a
Statement of
Additional Information of Growth Fund, dated December 1, 1995 (as supplemented
March 1, 1996), also have been filed with the SEC and are incorporated herein by
this reference. Copies of the Value Fund Prospectus and the Value Fund Annual
Report accompany this Prospectus/Proxy Statement. Copies of the other referenced
documents, as well as Growth Fund's Annual Report to Shareholders for the fiscal
year ended July 31, 1995, and each Fund's semi-annual report, may be obtained
without charge, and further inquiries may be made, by contacting your
PaineWebber Incorporated ("PaineWebber") investment executive or PaineWebber's
correspondent firms or by calling toll-free 1-800-647-1568.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
VOTING INFORMATION.................................................................... 1
SYNOPSIS.............................................................................. 2
The Proposed Reorganization....................................................... 2
Comparative Fee Table............................................................. 3
Forms of Organization............................................................. 7
Investment Objectives and Policies................................................ 7
Operations of Value Fund Following the Reorganization............................. 9
Purchases......................................................................... 9
Redemptions....................................................................... 10
Exchanges......................................................................... 11
Dividends and Other Distributions................................................. 11
Federal Income Tax Consequences of the Reorganization............................. 12
COMPARISON OF PRINCIPAL RISK FACTORS.................................................. 12
THE PROPOSED TRANSACTION.............................................................. 13
Reorganization Plan............................................................... 13
Reasons for the Reorganization.................................................... 14
Description of Securities to be Issued............................................ 15
Federal Income Tax Considerations................................................. 16
Capitalization.................................................................... 17
MISCELLANEOUS......................................................................... 18
Available Information............................................................. 18
Legal Matters..................................................................... 18
Experts........................................................................... 18
APPENDIX A -- AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION.................... A-1
</TABLE>
<PAGE>
PAINEWEBBER SMALL CAP GROWTH FUND
(A SERIES OF PAINEWEBBER INVESTMENT TRUST III)
---------------------
PROSPECTUS/PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON
JULY 19, 1996
------------------------
VOTING INFORMATION
This Prospectus/Proxy Statement ("Proxy Statement") is being furnished to
shareholders of PaineWebber Small Cap Growth Fund ("Growth Fund"), a series of
PaineWebber Investment Trust III ("Investment Trust"), in connection with the
solicitation of proxies by its board of trustees for use at a special meeting of
shareholders to be held on July 19, 1996, and at any adjournment thereof
("Meeting"). This Proxy Statement will first be mailed to shareholders on or
about June 13, 1996.
At least thirty percent of Growth Fund's outstanding shares on May 17, 1996,
represented in person or by proxy, must be present for the transaction of
business at the Meeting. If a quorum is not present at the Meeting or a quorum
is present but sufficient votes to approve the proposal are not received, the
persons named as proxies may propose one or more adjournments of the Meeting to
permit further solicitation of proxies. Any such adjournment will require the
affirmative vote of a majority of those shares represented at the Meeting in
person or by proxy. The persons named as proxies will vote those proxies that
they are entitled to vote FOR the proposal in favor of such an adjournment and
will vote those proxies required to be voted AGAINST the proposal against such
adjournment. A shareholder vote may be taken on the proposal in this Proxy
Statement prior to any such adjournment if sufficient votes have been received
and it is otherwise appropriate.
Broker non-votes are shares held in street name for which the broker
indicates that instructions have not been received from the beneficial owners or
other persons entitled to vote, and the broker does not have discretionary
voting authority. Abstentions and broker non-votes will be counted as shares
present for purposes of determining whether a quorum is present but will not be
voted for or against any adjournment or proposal. Accordingly, abstentions and
broker non-votes effectively will be a vote against adjournment and against the
proposal, because the required vote is a percentage of the shares present or
outstanding.
The individuals named as proxies on the enclosed proxy card will vote in
accordance with your direction as indicated thereon, if your proxy card is
received properly executed by you or by your duly appointed agent or
attorney-in-fact. If you sign, date and return the proxy card, but give no
voting instructions, your shares will be voted for approval of the Agreement and
Plan of Reorganization and Termination, dated as of April 24, 1996
("Reorganization Plan"), which is attached to this Proxy Statement as Appendix
A. Under the Reorganization Plan, PaineWebber Small Cap Value Fund ("Value
Fund"), a series of PaineWebber Securities Trust ("Securities Trust"), would
acquire the assets of Growth Fund in exchange solely for shares of beneficial
interest in Value Fund and the assumption by Value Fund of Growth Fund's
liabilities; those Value Fund shares then would be constructively distributed to
Growth Fund's shareholders. (These transactions are collectively referred to
herein as the "Reorganization," and Growth Fund and Value Fund may be referred
to herein individually as a "Fund" or, collectively, as "Funds"). After
completion of the Reorganization, Growth Fund will be terminated.
<PAGE>
If you sign, date and return the proxy card, but give no voting
instructions, the duly appointed proxies may vote your shares, in their
discretion, upon such other matters as may come before the Meeting. You may
revoke the proxy card by giving another proxy or by letter or telegram revoking
the initial proxy. To be effective, such revocation must be received by
Investment Trust prior to the Meeting and must indicate your name and account
number. In addition, if you attend the Meeting in person you may, if you wish,
vote by ballot at the Meeting, thereby canceling any proxy previously given.
As of May 17, 1996 ("Record Date"), Growth Fund had 2,282,796.008 shares of
beneficial interest outstanding. The solicitation of proxies, the cost of which
will be borne by the Funds in proportion to their respective net assets, will be
made primarily by mail but also may include telephone or oral communications by
representatives of Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins"), who will not receive any compensation therefor from the Funds, or by
Shareholder Communications Corporation, professional proxy solicitors retained
by Growth Fund, who will be paid fees and expenses of up to approximately $2,400
for soliciting services.
Management does not know of any single shareholder or "group" (as that term
is used in Section 13(d) of the Securities Exchange Act of 1934) who owns
beneficially more than 5% of the shares of either Fund. Trustees and officers of
Securities Trust own in the aggregate less than 1% of the shares of Value Fund.
Approval of the Reorganization Plan requires the affirmative vote of a
majority of the outstanding voting securities of Growth Fund. As defined in the
Investment Company Act of 1940 ("1940 Act"), "majority of the outstanding voting
securities" means the lesser of (1) 67% of Growth Fund's shares present at a
meeting of shareholders if the owners of more than 50% of Growth Fund's shares
then outstanding are present in person or by proxy or (2) more than 50% of
Growth Fund's outstanding shares. Each outstanding full share of Growth Fund is
entitled to one vote, and each outstanding fractional share thereof is entitled
to a proportionate share of one vote. Although the shareholders of Growth Fund
may exchange or redeem out of the Fund, they do not have appraisal rights.
SYNOPSIS
The following is a summary of certain information contained elsewhere in
this Proxy Statement, the Prospectuses of the Funds, which are incorporated
herein by reference, and the Reorganization Plan. Shareholders should read this
Proxy Statement and the Value Fund Prospectus carefully. As discussed more fully
below, Investment Trust's board of trustees believes that the Reorganization
will benefit Growth Fund's shareholders. Value Fund has an investment objective
that is identical to the investment objective of Growth Fund and has a similar
investment strategy.
THE PROPOSED REORGANIZATION
Investment Trust's board of trustees approved the Reorganization Plan at a
meeting held on April 18, 1996. The Reorganization Plan provides for the
acquisition of the assets of Growth Fund by Value Fund, in exchange solely for
shares of Value Fund and the assumption by Value Fund of the liabilities of
Growth Fund. Growth Fund will then distribute those shares of Value Fund to its
shareholders, by class, so that each Growth Fund shareholder will receive the
number of full and fractional shares of the corresponding Value Fund class (see
below) that is equal in value to the value of such shareholder's holdings in
Growth Fund as of
2
<PAGE>
the Closing Date (defined below). Growth Fund then will be terminated as soon as
practicable thereafter. Upon completion of the Reorganization, the name of Value
Fund will be changed to "PaineWebber Small Cap Fund."
The exchange of Growth Fund's assets for Value Fund shares and Value Fund's
assumption of Growth Fund's liabilities will occur as of 4:00 p.m., Eastern
time, on July 26, 1996, or on a later date when the conditions to the closing
are satisfied ("Closing Date").
Value Fund currently offers for sale three classes of shares (each a "Class"
and, collectively, "Classes"), designated as Class A, Class B and Class C
shares. Value Fund has authorized, and in connection with the Reorganization,
will issue for sale, Class Y shares. Growth Fund has four classes of shares,
designated as Class A, Class B, Class C and Class Y shares. In the
Reorganization, shareholders of Growth Fund Class A, Class B, Class C and Class
Y shares will receive Class A, Class B, Class C and Class Y shares,
respectively, of Value Fund. Shares of Growth Fund which are subject to a
contingent deferred sales charge would be replaced by shares of the
corresponding class of Value Fund without the payment of any contingent deferred
sales charge that might otherwise be due upon a redemption of Growth Fund
shares. For purposes of computing the contingent deferred sales charge that
might be payable upon a disposition of the shares acquired as a result of the
Reorganization, the time holding period for the previously owned shares of
Growth Fund is "tacked" to the holding period for the Value Fund shares received
in the Reorganization. Thus, shareholders would receive credit for the length of
time they have held their shares of Growth Fund.
For the reasons set forth below under "The Proposed Transaction -- Reasons
for the Reorganization," Investment Trust's board of trustees, including the
trustees who are not "interested persons," as that term is defined in the 1940
Act, of either Investment Trust or Securities Trust ("Independent Trustees"),
has determined that the Reorganization is in the best interests of Growth Fund,
that the terms of the Reorganization are fair and reasonable and that the
interests of Growth Fund's shareholders will not be diluted as a result of the
Reorganization. Accordingly, Investment Trust's board of trustees recommends
approval of the transaction. In addition, Securities Trust's board of trustees,
including its Independent Trustees, has determined that the Reorganization is in
the best interests of Value Fund, that the terms of the Reorganization are fair
and reasonable, and that the interests of Value Fund's shareholders will not be
diluted as a result of the Reorganization.
COMPARATIVE FEE TABLE
Each Fund's Class A shares normally are sold with a maximum initial sales
charge of 4.5% of the public offering price. However, the Class A shares of
Value Fund that will be distributed to shareholders of Growth Fund as part of
the Reorganization will not be subject to an initial sales charge. Following the
Reorganization, new purchases of Class A shares of Value Fund will be subject to
an initial sales charge of up to 4.5%.
Shareholders of the Class A, Class B and Class C shares of Growth Fund pay
12b-1 fees that are identical to those paid by shareholders of the Class A,
Class B and Class C shares, respectively, of Value Fund. No 12b-1 fees are paid
by the Class Y shareholders of Growth Fund, or will be paid by Class Y
shareholders of Value Fund, but Class Y shareholders of either Fund who hold (or
who will hold) their Class Y shares through the INSIGHT Investment Advisory
Program-SM- ("INSIGHT") must pay to PaineWebber an annual investment advisory
fee of up to 1.5% of the average daily value of the shares.
However, certain fees and expenses that Value Fund's shareholders pay,
directly or indirectly, are different from those incurred by Growth Fund
shareholders. Shareholders of Growth Fund are not charged
3
<PAGE>
a fee for exchanges of the Fund's shares for shares of a corresponding class of
other PaineWebber mutual funds. Value Fund shareholders pay a $5.00 fee for each
exchange, which fee will continue to be imposed on exchanges from Value Fund
following the Reorganization. Value Fund pays PaineWebber Incorporated
("PaineWebber") an annual fee of $4.00 per active shareholder account held at
PaineWebber for certain services not provided by the Fund's transfer agent.
Growth Fund does not pay this fee.
Mitchell Hutchins is paid an investment management fee for its services to
Value Fund, computed daily and payable monthly, at an annual rate of 1.00% of
Value Fund's average daily net assets. Mitchell Hutchins is paid an investment
management fee for its services to Growth Fund, computed daily and payable
monthly, at an annual rate of 1.00% of Growth Fund's average daily net assets on
assets up to but not including $25 million and .90% thereafter.
The following tables show (1) shareholder transaction expenses currently
incurred by Class A, Class B, Class C and Class Y shares of Growth Fund, and
shareholder transaction expenses that each class issued by Value Fund issued in
the Reorganization will incur after giving effect to the Reorganization, and (2)
the current fees and expenses incurred by the Class A, Class B, Class C and
Class Y shares of Growth Fund and Class A, Class B and Class C shares of Value
Fund for the twelve months ended January 31, 1996 (unaudited), and pro forma
fees for Value Fund's Class A, Class B, Class C and Class Y shares after giving
effect to the Reorganization.
SHAREHOLDER TRANSACTION EXPENSES(1)
<TABLE>
<CAPTION>
GROWTH FUND COMBINED FUND
------------------------------------------ ------------------------------------------
CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS
A B C Y A B C Y
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Maximum sales charge
(as a percentage of
public offering
price)............... 4.5% NONE NONE NONE 4.5% NONE NONE NONE
Sales charge on
reinvested
dividends............ NONE NONE NONE NONE NONE NONE NONE NONE
Exchange fee.......... NONE NONE NONE N/A(4) $5.00 $5.00 $5.00 N/A(4)
Maximum contingent
deferred sales charge
(as a percentage of
redemption
proceeds)............ NONE(2) 5% 1%(3) NONE NONE(2) 5% 1%(3) NONE
</TABLE>
4
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
GROWTH FUND VALUE FUND
----------------------------- ---------------------
CLASS CLASS CLASS CLASS CLASS CLASS CLASS
A B C Y(5) A B C
----- ----- ----- ----- ----- ----- -----
Management Fees(6)...................... 0.95% 0.95% 0.95% 0.95% 1.00% 1.00% 1.00%
<S> <C> <C> <C> <C> <C> <C> <C>
12b-1 Fees.............................. 0.25% 1.00% 1.00% 0.00% 0.25% 1.00% 1.00%
Other Expenses.......................... 0.71% 0.69% 0.71% 0.71% 0.72% 0.72% 0.71%
----- ----- ----- ----- ----- ----- -----
Total Fund Operating Expenses(7)........ 1.91% 2.64% 2.66% 1.66% 1.97% 2.72% 2.71%
----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- -----
<CAPTION>
COMBINED FUND
(PRO FORMA)
-----------------------------
CLASS CLASS CLASS CLASS
A B C Y(5)
----- ----- ----- -----
Management Fees(6)...................... 1.00% 1.00% 1.00% 1.00%
<S> <C> <C> <C> <C>
12b-1 Fees.............................. 0.25% 1.00% 1.00% 0.00%
Other Expenses.......................... 0.53% 0.56% 0.54% 0.53%
----- ----- ----- -----
Total Fund Operating Expenses(7)........ 1.78% 2.56% 2.54% 1.53%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
- ------------------------
(1) Sales charge waivers are available for all shares and reduced sales charge
purchase plans are available for Class A shares. The maximum 5% contingent
sales charge of Class B shares applies to redemptions during the first year
after purchase; the charge generally declines by 1% annually thereafter,
reaching zero after six years. See "Purchases."
(2) Purchases of Class A shares of $1 million or more are not subject to a
sales charge. If such sales are redeemed within one year of purchase, a
contingent deferred sales charge of 1% will be applied to most such
redemptions.
(3) If Class C shares are redeemed within one year of purchase, a contingent
deferred sales charge of 1% will be applied to most such redemptions. See
"Purchases."
(4) Class Y shares of either Fund are not exchangeable for shares of other
PaineWebber mutual funds.
(5) Maximum annual 1.5% advisory fee is payable by shareholders holding Class Y
shares through INSIGHT.
(6) The management fees paid by the Funds, although higher than those paid by
most other mutual funds, are believed by Mitchell Hutchins to be within the
range charged to other investment companies that invest in securities of
small capitalization companies.
(7) For the fiscal year ended July 31, 1995, the ratios of total operating
expenses as a percentage of average net assets were 1.72%, 2.48% and 1.48%
for Class A, Class C and Class Y shares, respectively, of Growth Fund and
were 1.98%, 2.74% and 2.73% for Class A, Class B and Class C shares,
respectively, of Value Fund. Class B shares of Growth Fund were not offered
prior to December 1, 1995.
EXAMPLE OF EFFECT ON FUND EXPENSES
The following illustrates the expenses on a $1,000 investment under the fees
and expenses stated above, assuming a 5% annual return. The fees shown below
reflect an initial sales charge of up to 4.5% of the public
5
<PAGE>
offering price that normally is charged in connection with the sale of each
Fund's Class A shares. However, no initial sales charges will be charged in
connection with Class A shares of Value Fund distributed to Class A shareholders
of Growth Fund as part of the Reorganization.
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
--------------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C>
GROWTH FUND
Class A shares(1)................ $ 64 $ 102 $ 144 $ 258
Class B shares:
Assuming a complete redemption
at end of period(2)(3)........ $ 77 $ 112 $ 160 $ 263
Assuming no redemption(3)...... $ 27 $ 82 $ 140 $ 263
Class C shares:
Assuming a complete redemption
at end of period(2)........... $ 37 $ 83 $ 141 $ 299
Assuming no redemption......... $ 27 $ 83 $ 141 $ 299
Class Y shares(4)................ $ 17 $ 52 $ 90 $ 197
VALUE FUND
Class A shares(1)................ $ 64 $ 104 $ 146 $ 264
Class B shares:
Assuming a complete redemption
at end of period(2)(3)........ $ 78 $ 114 $ 164 $ 271
Assuming no redemption(3)...... $ 28 $ 84 $ 144 $ 271
Class C shares:
Assuming a complete redemption
at end of period(2)........... $ 37 $ 84 $ 143 $ 304
Assuming no redemption......... $ 27 $ 84 $ 143 $ 304
COMBINED FUND
Class A shares(1)................ $ 62 $ 99 $ 137 $ 245
Class B shares:
Assuming a complete redemption
at end of period(2)(3)........ $ 76 $ 110 $ 156 $ 253
Assuming no redemption(3)...... $ 26 $ 80 $ 136 $ 253
Class C shares:
Assuming a complete redemption
at end of period(2)........... $ 36 $ 79 $ 135 $ 288
Assuming no redemption......... $ 26 $ 79 $ 135 $ 288
Class Y shares(4)................ $ 16 $ 48 $ 83 $ 182
</TABLE>
- ------------------------
(1) Assumes deduction at the time of purchase of the maximum 4.5% initial sales
charge.
(2) Assumes deduction at the time of redemption of the maximum applicable
contingent deferred sales charge.
(3) Ten-year figures assume conversion of Class B shares to Class A shares at
end of sixth year.
(4) Does not include advisory fees payable by shareholders holding Class Y
shares through INSIGHT.
6
<PAGE>
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by the National Association of
Securities Dealers, Inc. rules regarding investment companies. This Example
assumes that all dividends and other distributions are reinvested and that the
percentage amounts listed under Annual Fund Operating Expenses remain the same
in the years shown. The above tables and the assumption in the Example of a 5%
annual return are required by regulations of the Securities and Exchange
Commission ("SEC") applicable to all mutual funds; the assumed 5% annual return
is not a prediction of, and does not represent, the projected or actual
performance of any Class of the Funds' shares.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND A FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN. The
actual expenses attributable to each Class of a Fund's shares will depend upon,
among other things, the level of average net assets and the extent to which a
Fund incurs variable expenses, such as transfer agency costs.
FORMS OF ORGANIZATION
Securities Trust and Investment Trust (each a "Trust" and, collectively,
"Trusts") are open-end management investment companies organized as
Massachusetts business trusts. Value Fund is a diversified series of Securities
Trust, which is organized under a Declaration of Trust dated December 3, 1992.
Growth Fund is a diversified series of Investment Trust, which is organized
under a Declaration of Trust dated April 8, 1993. Each Trust's Declaration of
Trust authorizes its trustees to create separate series and, within each series,
separate classes, of an unlimited number of shares of beneficial interest, par
value of $.001 per share. Prior to November 1, 1995, Growth Fund was named
"Mitchell Hutchins/Kidder, Peabody Small Cap Growth Fund," and prior to February
13, 1995, its name was "Kidder, Peabody Small Cap Equity Fund." The Trusts are
not required to (and do not) hold annual shareholder meetings. Neither Fund
currently issues share certificates.
Shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable for its obligations. However, the
Declaration of Trust of each Trust expressly disclaims, and provides
indemnification against, such liability. Accordingly, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which a Fund itself would be unable to meet its
obligations, a possibility that Mitchell Hutchins, the investment adviser and
administrator of each Fund, believes is remote and thus does not pose a material
risk.
INVESTMENT OBJECTIVES AND POLICIES
The Funds have identical investment objectives and similar investment
policies. There can be no assurance that either Fund will achieve its investment
objective, and each Fund's net asset value fluctuates based upon changes in the
value of its portfolio securities.
VALUE FUND. The investment objective of Value Fund is long-term capital
appreciation. Value Fund invests primarily in equity securities of small
capitalization ("small cap") companies. Under normal conditions, Value Fund
invests at least 65% of its total assets in equity securities, including common
stocks, convertible preferred stocks, convertible debt securities, warrants and
U.S. dollar-denominated foreign equity securities, including American Depository
Receipts ("ADRs"), of small cap companies. "Small cap" companies are companies
that, at the time of purchase, have market capitalizations of up to $1 billion.
Value Fund may invest up to 35% of its total assets in common stocks,
convertible preferred stocks, convertible debt securities, warrants and ADRs of
companies that are larger than small cap companies as
7
<PAGE>
defined above, non-convertible preferred stocks, non-convertible debt
securities, U.S. government securities and high quality money market instruments
such as U.S. government obligations, commercial paper, certificates of deposit
and bankers' acceptances.
Value Fund may invest up to 25% of its total assets in U.S.
dollar-denominated equity securities of foreign issuers that are traded on
recognized U.S. exchanges or in the U.S. over-the-counter market, including
ADRs. When Mitchell Hutchins believes unusual circumstances warrant a defensive
posture, the Fund temporarily may commit all or a portion of its assets to cash
or money market instruments, including repurchase agreements. Value Fund may
borrow money for temporary purposes and may engage in reverse repurchase
agreements, but not in excess of 10% of its total assets.
Value Fund may invest up to 10% of its total assets in debt securities,
including convertible debt securities, rated below investment grade but no lower
than B by Moody's Investors Service, Inc. ("Moody's") or by Standard & Poor's, a
division of The McGraw-Hill Companies, Inc. ("S&P"), comparably rated by another
nationally recognized statistical rating organization ("NRSRO") or, if unrated,
determined by Mitchell Hutchins to be of comparable quality.
GROWTH FUND. Growth Fund's investment objective is also long-term capital
appreciation. It seeks to achieve this objective by investing primarily in
equity securities of small cap companies, which it considers to be U.S.
companies with stock market capitalizations of up to $1 billion.
In pursuing its objective, Growth Fund invests substantially all, and under
normal conditions not less than 65%, of its assets in common stocks, preferred
stocks, convertible bonds, convertible debentures, convertible notes,
convertible preferred stocks and warrants or rights. To the extent that the Fund
invests in convertible debt securities, those securities will be purchased based
on their equity characteristics and ratings of those securities will not be an
important factor in their selection. The equity securities in which Growth Fund
invests typically are traded in the over-the-counter market or are non-publicly
traded. Growth Fund's investments in non-publicly traded securities (also
commonly referred to as "restricted" securities) may not exceed 10% of the
Fund's assets.
Growth Fund may invest up to 10% of its assets in foreign securities, and
may invest in ADRs and European Depository Receipts ("EDRs"). Under normal
conditions, less than 10% of Growth Fund's total assets may be held in cash
and/or invested in money market instruments for cash management purposes. During
periods in which Mitchell Hutchins believes that investment opportunities in the
equity markets are diminished (due to either fundamental changes in those
markets or an anticipated general decline in the value of equity securities) and
Mitchell Hutchins determines that the adoption of a temporary defensive
investment posture is therefore warranted, the Fund may hold cash and/or invest
in money market instruments without limitation. In addition, Growth Fund may
invest in securities issued by other registered investment companies, up to a
maximum of 10% of its total assets. Growth Fund may invest in repurchase
agreements.
OTHER POLICIES. Each Fund is authorized to use hedging strategies,
including options and futures contracts, although Growth Fund has no current
intention of engaging in futures contracts and options on futures contracts in
the foreseeable future. Each Fund is authorized to lend up to 33 1/3% of the
value of its portfolio securities, and may engage in short sales of securities
"against the box." Each Fund also may invest up to 15% of its net assets in
illiquid securities, and may purchase securities on a when-issued or delayed-
delivery basis.
8
<PAGE>
OPERATIONS OF VALUE FUND FOLLOWING THE REORGANIZATION
There are differences in the investment policies of the Funds. However,
Mitchell Hutchins does not expect Value Fund to revise its investment policies
following the Reorganization to reflect those of Growth Fund. Mitchell Hutchins
believes that most, if not all, of the assets held by Growth Fund will be
consistent with the investment policies of Value Fund and thus could be
transferred to and held by Value Fund. If the Reorganization is approved, Growth
Fund will sell, prior to the effective time of the Reorganization, any assets
that are inconsistent with Value Fund's investment policies. The proceeds of any
such sales will be held in temporary investments or reinvested in assets that
qualify to be held by Value Fund. The possible need for Growth Fund to dispose
of assets prior to the effective time of the Reorganization could result in
selling securities at a disadvantageous time and could result in Growth Fund's
realizing losses that would not otherwise have been realized. Following the
Reorganization, the trustees and officers of Securities Trust and Value Fund's
investment adviser, distributor, exclusive dealer and other outside agents will
continue to serve Value Fund in their current capacities.
PURCHASES
Shares of each Fund are available through PaineWebber and its correspondent
firms or, for investors who are not clients of PaineWebber, through PFPC Inc.,
each Fund's transfer agent ("Transfer Agent"). The minimum investment is $1,000,
and the minimum for additional purchases is $100. The minimums may be waived or
reduced for investments by employees of PaineWebber or its affiliates, by
certain pension plan and retirement accounts and by participants in each Fund's
automatic investment plan. Each Fund and Mitchell Hutchins reserves the right to
reject any purchase order and to suspend the offering of a Fund's shares for a
period of time.
Purchases through PaineWebber investment executives or correspondent firms
may be made in person or by mail, by telephone or, for purchases of $1 million
or more, by wire. PaineWebber investment executives and correspondent firms are
responsible for transmitting purchase requests to PaineWebber's New York City
offices promptly. Investors may pay for a purchase with checks drawn on U.S.
banks or with funds held in brokerage accounts at PaineWebber or its
correspondent firms. Payment is due on the third Business Day after the order is
received at PaineWebber's New York City offices. A "Business Day" is any day,
Monday through Friday, on which the New York Stock Exchange, Inc. ("NYSE") is
open for business.
Each Fund's Class A shares normally are sold with a maximum initial sales
charge of 4.5% of the public offering price. The Value Fund Class A shares that
will be distributed to shareholders of Growth Fund as part of the Reorganization
will not be subject to an initial sales charge. However, following the
Reorganization, new purchases of Class A shares of Value Fund will be subject to
an initial sales charge up to 4.5%, and any Class B, Class C or Class Y shares
of Value Fund that are purchased by former Growth Fund shareholders will be
subject to their respective terms.
Each Fund's Class B shares are sold subject to a maximum contingent deferred
sales charge ("CDSC") of 5% of redemption proceeds, which declines to zero after
six years. Class B shares automatically convert into Class A shares
approximately six years after purchase.
Class C shares of each Fund currently are sold without an initial sales
charge or CDSC but are subject to higher ongoing expenses than Class A shares
and do not convert to another Class. For Class C shares purchased on or after
November 10, 1995, a CDSC of 1% is imposed on most redemptions made within one
year of the date of purchase.
Class Y shares of Value Fund will be issued to holders of Class Y shares in
Growth Fund in connection with the Reorganization. No initial or contingent
deferred sales charge is imposed on Class Y shares, nor are
9
<PAGE>
Class Y shares subject to Rule 12b-1 distribution or service fees. Effective
after the Closing Date, Class Y shares of Value Fund will also be offered for
sale to participants in INSIGHT and certain other investment advisory programs
that are sponsored by PaineWebber and that may invest in PaineWebber mutual
funds. Value Fund Class Y shares will be sold to eligible investors at the net
asset value next determined after the purchase order is received.
INSIGHT. An investor who purchases $50,000 or more of shares of the
PaineWebber mutual funds that are in the Flexible Pricing System-SM- may
participate in INSIGHT, a total portfolio asset allocation program sponsored by
PaineWebber, and thus become eligible to purchase Value Fund Class Y shares and
Class Y shares of other PaineWebber mutual funds. INSIGHT offers comprehensive
investment services, including a personalized asset allocation investment
strategy using an appropriate combination of funds, professional investment
advice regarding investment among the funds by portfolio specialists, monitoring
of investment performance and comprehensive quarterly reports that cover market
trends, portfolio summaries and personalized account information. Participation
in INSIGHT is subject to payment of an advisory fee to PaineWebber at the
maximum annual rate of 1.5% of assets held through the program (generally
charged quarterly in advance), which covers all INSIGHT program investment
advisory services and program administration fees. Employees of PaineWebber and
its affiliates are entitled to a 50% reduction in the fee otherwise payable for
participation in INSIGHT. INSIGHT clients may elect to have their INSIGHT fees
charged to their PaineWebber accounts (by the automatic redemption of money
market fund shares) or another of their PaineWebber accounts or billed
separately.
REDEMPTIONS
Shareholders of each Fund may submit redemption requests to their investment
executives or correspondent firms in person or by telephone, mail or wire. As
each Fund's agent, PaineWebber may honor a redemption request by repurchasing
shares from a redeeming shareholder at the shares' net asset value next
determined after receipt of the request by PaineWebber's New York City offices.
Within three Business Days after receipt of the request, repurchase proceeds
(less any applicable CDSC) will be paid by check or credited to the
shareholder's brokerage account at the election of the shareholder. PaineWebber
investment executives and correspondent firms are responsible for promptly
forwarding redemption requests to PaineWebber's New York City offices.
PaineWebber reserves the right not to honor any redemption request, in which
case PaineWebber promptly will forward the request to the Transfer Agent for
treatment as described below.
Shareholders of each Fund also may redeem shares through the Transfer Agent.
Shareholders should mail redemption requests directly to the Transfer Agent:
PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington, Delaware
19899. A redemption request will be executed at the net asset value next
computed after it is received in "good order," and redemption proceeds will be
paid within seven days of the receipt of the request. "Good order" means that
the request must be accompanied by the following: (1) a letter of instruction or
a stock assignment specifying the number of shares or amount of investment to be
redeemed (or that all shares credited to the Fund account be redeemed), signed
by all registered owners of the shares in the exact names in which they are
registered, (2) a guarantee of the signature of each registered owner by an
eligible institution acceptable to the Transfer Agent and in accordance with SEC
rules, such as a commercial bank, trust company or member of a recognized stock
exchange, (3) other supporting legal documents for estates, trusts,
guardianships, custodianships, partnerships and corporations and (4) duly
endorsed share certificates, if any. Shareholders are responsible for ensuring
that a request for redemption is received in "good order."
10
<PAGE>
A shareholder may have redemption proceeds of $1 million or more wired to
the shareholder's PaineWebber brokerage account or a commercial bank account
designated by the shareholder. Questions about this option, or redemption
requirements generally, should be referred to the shareholder's PaineWebber
investment executive or correspondent firm, or to the Transfer Agent if the
shares are not held in a PaineWebber brokerage account. If a shareholder
requests redemption of shares which were purchased recently, the Fund may delay
payment until it is assured that good payment has been received. In the case of
purchases by check, this can take up to 15 days.
Because the Funds incur certain fixed costs in maintaining shareholder
accounts, each Fund reserves the right to redeem all Fund shares in any
shareholder account having a net asset value below the lesser of $500 or the
current minimum for initial purchasers. If the Fund elects to do so, it will
notify the shareholder and provide the shareholder the opportunity to increase
the amount invested to the minimum required level or more within 60 days of the
notice. The Fund will not redeem accounts that fall below the minimum required
level solely as a result of a reduction in net asset value per share.
If the Reorganization is approved, shares of Growth Fund will cease to be
offered on July 22, 1996, so that shares of Growth Fund will no longer be
available for purchase or exchange starting on July 23, 1996 (the next Business
Day). If the Meeting is adjourned and the Reorganization is approved on a later
date, Growth Fund shares will no longer be available for purchase or exchange on
the Business Day following the date on which the Reorganization is approved and
all contingencies have been met. Redemptions of Growth Fund's shares and
exchanges of such shares for shares of any other PaineWebber mutual fund may be
effected through the Closing Date.
EXCHANGES
Class A, Class B and Class C shares of each Fund may be exchanged for shares
of the corresponding Class of most other PaineWebber mutual funds, and may be
acquired through an exchange of shares of the corresponding Class of other
PaineWebber mutual funds, as provided in each Fund's prospectus. No initial
sales charge is imposed on the shares being acquired, and no CDSC is imposed on
the shares being disposed of, through an exchange. However, CDSCs may apply to
redemptions of shares acquired through an exchange. As noted above, the $5.00
exchange fee is charged for each exchange of shares of Value Fund for shares of
other PaineWebber mutual funds and will continue to be imposed following the
Reorganization. Class Y shares of each Fund have no exchange privileges.
DIVIDENDS AND OTHER DISTRIBUTIONS
Value Fund pays an annual dividend from its net investment income and net
short-term capital gain, if any. The Fund also distributes substantially all of
its net capital gain (the excess of net long-term capital gain over net
short-term capital loss) with the regular annual dividend. Dividends from net
investment income and distributions of net realized capital gains of Growth
Fund, if any, are distributed annually. Each Fund may make additional
distributions if necessary to avoid a 4% excise tax on certain undistributed
income and capital gain.
Each Fund's dividends and other distributions are paid in additional shares
of the applicable Class at net asset value unless the shareholder has requested
cash payments. Shareholders who wish to receive dividends and/or other
distributions in cash, either mailed to the shareholder by check or credited to
the shareholder's PaineWebber account, should contact their PaineWebber
investment executives or correspondent firms.
11
<PAGE>
On or before the Closing Date, Growth Fund will declare as a distribution
substantially all of its net investment income, net capital gain and net
short-term capital gain in order to continue to maintain its tax status as a
regulated investment company. On or before the Closing Date, Value Fund also may
declare and distribute as a dividend substantially all of any previously
undistributed net investment income.
FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION
Each Trust has received an opinion of Kirkpatrick & Lockhart LLP, its
counsel, to the effect that the Reorganization will constitute a tax-free
reorganization within the meaning of section 368(a)(1)(C) of the Internal
Revenue Code of 1986, as amended ("Code"). Accordingly, no gain or loss will be
recognized to either Fund or its shareholders as a result of the Reorganization.
See "The Proposed Transaction -- Federal Income Tax Considerations."
COMPARISON OF PRINCIPAL RISK FACTORS
Since the investment policies of each Fund are similar, the investment risks
presented by the two Funds are also similar. These risks are those typically
associated with a small cap equity fund. Certain differences are identified
below. See the Value Fund Prospectus for a more detailed discussion of the
investment risks of Value Fund, and see the Growth Fund Prospectus for a more
detailed discussion of the investment risks of Growth Fund.
SMALL CAP COMPANIES. Each Fund invests in small cap companies, which each
Fund considers to be companies that at the time of purchase have stock market
capitalizations of up to $1 billion. Small cap companies may be more vulnerable
than larger companies to adverse business or economic developments. Small cap
companies may also have limited product lines, markets or financial resources,
and may be dependent on a relatively small management group. Securities of such
companies may be less liquid and more volatile than securities of larger
companies or the market averages in general and therefore may involve greater
risk than investing in larger companies. In addition, small cap companies may
not be well-known to the investing public, may not have institutional ownership
and may have only cyclical, static or moderate growth prospects.
FOREIGN SECURITIES. Each Fund may invest in foreign securities. Value Fund
may invest up to 25% of its total assets in the U.S. dollar-denominated equity
securities of foreign issuers, including ADRs. Growth Fund may invest up to 10%
of its assets in foreign securities, and may also invest in securities of
foreign issuers in the form of ADRs and EDRs. Investments in foreign securities
involve special risks, arising both from political and economic developments
abroad and differences between foreign and U.S. regulatory systems. Foreign
economies may differ favorably or unfavorably from the U.S. economy in various
respects, and many foreign securities may be less liquid and their prices more
volatile than comparable U.S. securities.
CURRENCY EXCHANGE RATES. Growth Fund may invest in non-U.S.
dollar-denominated foreign securities. The Fund's share value 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.
12
<PAGE>
LENDING PORTFOLIO SECURITIES. Each Fund may lend its portfolio securities
to qualified broker-dealers or institutional investors. Lending securities
enables a Fund to earn additional income, but could result in a loss or delay in
recovering these securities.
HEDGING STRATEGIES. Each Fund is authorized to use hedging strategies,
including options and futures contracts, although Growth Fund has no current
intention of engaging in futures contracts and options on futures contracts in
the foreseeable future. There can be no assurance that any strategy used will
succeed. If Mitchell Hutchins is incorrect in its judgment on market values,
interest rates or other economic factors in using a hedging strategy, a Fund may
have lower net income and a net loss on the investment. Each of these strategies
involves certain risks, which include (1) the fact that the skills needed to use
hedging instruments are different from those needed to select securities for the
Funds; (2) the possibility of imperfect correlation, or even no correlation,
between price movements of hedging instruments and price movements of the
securities being hedged; (3) possible constraints placed on a Fund's ability to
purchase or sell portfolio investments at advantageous times due to the need for
the Fund to maintain "cover" or to segregate securities; and (4) the possibility
that a Fund is unable to close out or liquidate its hedged position.
THE PROPOSED TRANSACTION
REORGANIZATION PLAN
The terms and conditions under which the proposed transaction may be
consummated are set forth in the Reorganization Plan. Significant provisions of
the Reorganization Plan are summarized below; however, this summary is qualified
in its entirety by reference to the Reorganization Plan, which is attached as
Appendix A to this Proxy Statement.
The Reorganization Plan contemplates: (a) Value Fund's acquiring on the
Closing Date the assets of Growth Fund in exchange solely for Value Fund shares
and the assumption by Value Fund of Growth Fund's liabilities, and (b) the
constructive distribution of Value Fund shares to the shareholders of Growth
Fund, by Class.
The assets of Growth Fund to be acquired by Value Fund include all cash,
cash equivalents, securities, receivables and other property owned by Growth
Fund. Value Fund will assume from Growth Fund all debts, liabilities,
obligations and duties of Growth Fund of whatever kind or nature; provided,
however, that Growth Fund will use its best efforts, to the extent practicable,
to discharge all of its known debts, liabilities, obligations and duties prior
to the Closing Date. Value Fund also will deliver to Growth Fund shares of Value
Fund, which then will be constructively distributed to Growth Fund's
shareholders.
The value of Growth Fund's assets to be acquired, and the amount of its
liabilities to be assumed, by Value Fund and the net asset value of a Class A,
Class B, Class C and Class Y share of Value Fund will be determined as of the
close of regular trading on the NYSE on the Closing Date. Where market
quotations are readily available, portfolio securities will be valued based upon
such market quotations, provided such quotations adequately reflect, in Mitchell
Hutchins' judgment, the fair value of the security. Where such market quotations
are not readily available, such securities will be valued based upon appraisals
received from a pricing service using a computerized matrix system or based upon
appraisals derived from information concerning the security or similar
securities received from recognized dealers in those securities. The amortized
cost method of valuation generally will be used to value debt instruments with
60 days or less remaining to maturity, unless Investment Trust's board of
trustees (with respect to Growth Fund) or
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Securities Trust's board of trustees (with respect to Value Fund) determines
that this does not represent fair value. All other securities and assets will be
valued at fair value as determined in good faith by or under the direction of
each Trust's board of trustees, as applicable.
On, or as soon as practicable after, the Closing Date, Growth Fund will
distribute to its shareholders of record the shares of Value Fund it received,
by Class, so that each shareholder of Growth Fund will receive a number of full
and fractional shares of the corresponding Class of Value Fund equal in value to
the shareholder's holdings in Growth Fund; Growth Fund will be terminated as
soon as practicable thereafter. Such distribution will be accomplished by
opening accounts on the books of Value Fund in the names of Growth Fund
shareholders and by transferring thereto the shares of each Class previously
credited to the account of Growth Fund on those books. Fractional shares in each
corresponding Class of Value Fund will be rounded to the third decimal place.
Accordingly, immediately after the Reorganization, each former shareholder
of Growth Fund will own shares of the Class of Value Fund that will equal the
value of that shareholder's shares in the corresponding Class of Growth Fund
immediately prior to the Reorganization. Moreover, because shares of each Class
of Value Fund will be issued at net asset value in exchange for the net assets
applicable to the corresponding Class of Growth Fund, the aggregate net asset
value of shares of each Class of Value Fund so issued will equal the aggregate
net asset value of the shares of the corresponding Class of Growth Fund. The net
asset value per share of Value Fund will be unchanged by the transactions. Thus,
the Reorganization will not result in a dilution of any shareholder interest.
Any transfer taxes payable upon issuance of shares of Value Fund in a name
other than that of the registered holder of the shares on the books of Growth
Fund shall be paid by the person to whom such shares are to be issued as a
condition of such transfer. Any reporting responsibility of Growth Fund will
continue to be its responsibility up to and including the Closing Date and such
later date on which Growth Fund is terminated.
The cost of the Reorganization, including professional fees and the cost of
soliciting proxies for the Meeting, consisting principally of printing and
mailing expenses, together with the cost of any supplementary solicitation, will
be borne by both Funds in proportion to their respective net assets. Mitchell
Hutchins recommended this method of expense allocation to the trustees of the
Trusts. Mitchell Hutchins based its recommendations on its belief that the
method is fair because, for the reasons discussed under "Reasons for the
Reorganization," the transaction has the potential to benefit both Funds. The
trustees of each Trust considered the expense allocation method in approving the
Reorganization and in finding that the Reorganization is in the best interests
of each Fund.
The consummation of the Reorganization is subject to a number of conditions
set forth in the Reorganization Plan, some of which may be waived by each Trust.
In addition, the Reorganization Plan may be amended in any mutually agreeable
manner, except that no amendment may be made subsequent to the Meeting that has
a material adverse effect on the shareholders' interests.
REASONS FOR THE REORGANIZATION
Investment Trust's board of trustees, including a majority of its
Independent Trustees, has determined that the Reorganization is in the best
interests of Growth Fund, that the terms of the Reorganization are fair and
reasonable, and that the interests of the shareholders of Growth Fund will not
be diluted as a result of the Reorganization. Securities Trust's board of
trustees, including a majority of its Independent Trustees, has
14
<PAGE>
determined that the Reorganization is in the best interests of Value Fund, that
the terms of the Reorganization are fair and reasonable, and that the interests
of the shareholders of Value Fund will not be diluted as a result of the
Reorganization.
In considering the Reorganization, the boards of trustees made an extensive
inquiry into a number of factors, including the following:
(1) the compatibility of the investment objectives, policies and
restrictions of the Funds;
(2) the effect of the Reorganization on the expected investment performance
of the Funds;
(3) the effect of the Reorganization on the expense ratio of Value Fund
(after the Reorganization) relative to each Fund's current expense ratio;
(4) the costs to be incurred by each Fund as a result of the Reorganization;
(5) the tax consequences of the Reorganization;
(6) possible alternatives to the Reorganization, including continuing to
operate on a stand-alone basis or liquidation; and
(7) potential benefits of the Reorganization to other persons, especially
Mitchell Hutchins and PaineWebber.
The Reorganization was recommended to the Trusts' boards of trustees by
Mitchell Hutchins at meetings thereof held on April 18, 1996. In recommending
the Reorganization, Mitchell Hutchins advised the boards of trustees that,
following the Reorganization, the total operating expenses as a percentage of
net assets of the combined fund would be lower than they are for each Fund on a
stand-alone basis. Combining the two Funds would eliminate duplicative expenses
and achieve other economies of scale in connection with custody fees, state
registration fees, printing expenses, trustees fees and legal and audit
expenses. Mitchell Hutchins believes there is no reason to continue operating
two similar small cap funds with identical investment objectives.
In approving the Reorganization, the boards of trustees took into account
the fact that the Funds' investment objectives are identical, that their
investment policies are similar, and that Mitchell Hutchins did not consider
there to be a need to offer both Funds to investors. The boards recognized that,
as the larger of the two Funds, Value Fund was the logical survivor in any
combination. In considering the proposed transaction, the boards noted that
Value Fund's overall objective of long-term capital appreciation remains an
appropriate one to offer to investors as part of an overall investment strategy.
THE BOARD OF TRUSTEES RECOMMENDS THAT THE
SHAREHOLDERS OF GROWTH FUND VOTE "FOR" THE
REORGANIZATION.
DESCRIPTION OF SECURITIES TO BE ISSUED
Securities Trust is registered with the SEC as an open-end management
investment company. Its trustees are authorized to issue an unlimited number of
shares of beneficial interest of separate series (par value $.001 per share).
The trustees have established Value Fund as one of Securities Trust's two series
and have authorized the public offering of four Classes of shares of Value Fund.
A separate filing will be made for the purpose of registering Class Y shares of
Value Fund with the SEC. Each share in a Class represents an
15
<PAGE>
equal proportionate interest in Value Fund with each other share in that Class.
Shares of Value Fund entitle their holders to one vote per full share and
fractional votes for fractional shares held, except that each Class of shares
has exclusive voting rights on matters pertaining to its plan of distribution,
if any.
On the Closing Date, Value Fund will have outstanding four Classes of
shares, designated as Class A, Class B, Class C and Class Y shares. Each Class
represents interests in the same assets of the Fund. The Classes differ as
follows: (1) Class A, Class B and Class C shares, unlike Class Y shares, bear
certain fees under plans of distribution and have exclusive voting rights on
matters pertaining to those plans; (2) Class A shares are subject to an initial
sales charge; (3) Class B shares bear ongoing distribution fees, are subject to
a CDSC upon certain redemptions and automatically convert to Class A shares
approximately six years after issuance; (4) Class C shares bear ongoing
distribution fees, are subject to a CDSC upon certain redemptions and do not
convert into another Class; (5) Class Y shares will be subject to neither an
initial sales charge or a CDSC nor ongoing service or distribution fees; and (6)
each Class may bear differing amounts of certain Class-specific expenses. Each
share of each Class of Value Fund is entitled to participate equally in
dividends and other distributions and the proceeds of any liquidation, except
that, because of the higher expenses resulting from the distribution expenses
borne by Class B and Class C shares, dividends on these shares are expected to
be lower than those on Class A and Class Y shares; for the same reason,
dividends on Class B shares are expected to be lower than those on Class C
shares. Dividends on each Class also might be affected differently by the
allocation of other Class-specific expenses.
Securities Trust does not hold annual meetings of shareholders. There will
normally be no meetings of shareholders for the purpose of electing trustees
unless fewer than a majority of the trustees holding office has been elected by
shareholders, at which time the trustees then in office will call a
shareholders' meeting for the election of trustees. Under the 1940 Act,
shareholders of record of at least two-thirds of the outstanding shares of an
investment company may remove a trustee by votes cast in person or by proxy at a
meeting called for that purpose. The trustees are required to call a meeting of
shareholders for the purpose of voting upon the question of removal of any
trustee when requested in writing to do so by the shareholders of record holding
at least 10% of Securities Trust's outstanding shares.
FEDERAL INCOME TAX CONSIDERATIONS
The exchange of Growth Fund's assets for Value Fund shares and Value Fund's
assumption of Growth Fund's liabilities is intended to qualify for federal
income tax purposes as a tax-free reorganization under section 368(a)(1)(C) of
the Code. Each Trust has received an opinion of Kirkpatrick & Lockhart LLP, its
counsel, substantially to the effect that:
(1) Value Fund's acquisition of Growth Fund's assets in exchange solely for
Value Fund shares and Value Fund's assumption of Growth Fund's liabilities,
followed by Growth Fund's distribution of those shares to its shareholders
constructively in exchange for their Growth Fund shares, will constitute a
"reorganization" within the meaning of section 368(a)(1)(C) of the Code, and
each Fund will be "a party to a reorganization" within the meaning of
section 368(b) of the Code;
(2) No gain or loss will be recognized to Growth Fund on the transfer to
Value Fund of its assets in exchange solely for Value Fund shares and Value
Fund's assumption of Growth Fund's liabilities or on the subsequent
distribution of those shares to Growth Fund's shareholders in constructive
exchange for their Growth Fund shares;
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<PAGE>
(3) No gain or loss will be recognized to Value Fund on its receipt of the
transferred assets in exchange solely for Value Fund shares and its
assumption of Growth Fund's liabilities;
(4) Value Fund's basis for the transferred assets will be the same as the
basis thereof in Growth Fund's hands immediately prior to the
Reorganization, and Value Fund's holding period for those assets will
include Growth Fund's holding period therefor;
(5) A Growth Fund shareholder will recognize no gain or loss on the
constructive exchange of all its Growth Fund shares solely for Value Fund
shares pursuant to the Reorganization; and
(6) A Growth Fund shareholder's basis for the Value Fund shares to be
received by it in the Reorganization will be the same as the basis for its
Growth Fund shares to be constructively surrendered in exchange for those
Value Fund shares, and its holding period for those Value Fund shares will
include its holding period for those Growth Fund shares, provided they are
held as capital assets by the shareholder on the Closing Date.
Such opinion may state that no opinion is expressed as to the effect of the
Reorganization on the Funds or any shareholder with respect to any asset as to
which any unrealized gain or loss is required to be recognized for federal
income tax purposes at the end of a taxable year (or on the termination or
transfer thereof) under a mark-to-market system of accounting.
Shareholders of Growth Fund should consult their tax advisers regarding the
effect, if any, of the Reorganization in light of their individual
circumstances. Because the foregoing discussion only relates to the federal
income tax consequences of the Reorganization, those shareholders also should
consult their tax advisers as to state and local tax consequences, if any, of
the Reorganization.
CAPITALIZATION
The following table shows the capitalization of each Fund at January 31,
1996 (unaudited) and on a pro forma combined basis (unaudited) as of that date
giving effect to the Reorganization:
<TABLE>
<CAPTION>
Pro Forma
Value Fund Growth Fund Combined
----------- ------------ ----------
<S> <C> <C> <C>
Net Assets
Class A.................................... 1$9,639,810 $23,872,388 $43,512,198
Class B.................................... 4$0,875,625 $ 26,478 $40,902,103
Class C.................................... 1$1,603,025 $11,783,151 $23,386,176
Class Y.................................... N/A $4,568,558 $4,568,558
Net Asset Value Per Share
Class A.................................... $10.72 $12.77 $10.72
Class B.................................... $10.53 $12.56 $10.53
Class C.................................... $10.52 $12.56 $10.52
Class Y.................................... N/A $12.84 $10.52
Shares Outstanding
Class A.................................... 1,831,614 1,869,078 4,058,118
Class B.................................... 3,881,699 2,108 3,884,213
Class C.................................... 1,102,701 938,350 2,223,012
Class Y.................................... N/A 355,798 434,263
</TABLE>
17
<PAGE>
MISCELLANEOUS
AVAILABLE INFORMATION
Each Trust is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and in accordance therewith files reports,
proxy material and other information with the SEC. Such reports, proxy material
and other information can be inspected and copied at the Public Reference
Facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549, the Midwest Regional Office of the SEC, Northwest Atrium Center, 500 West
Madison Street, Suite 400, Chicago, Illinois 60611, and the Northeast Regional
Office of the SEC, Seven World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can also be obtained from the Public Reference
Branch, Office of Consumer Affairs and Information Services, Securities and
Exchange Commission, Washington, D.C. 20459 at prescribed rates.
LEGAL MATTERS
Certain legal matters in connection with the issuance of Value Fund shares
as part of the Reorganization will be passed upon by Kirkpatrick & Lockhart LLP,
counsel to the Trusts.
EXPERTS
The audited financial statements of Value Fund and Growth Fund, incorporated
by reference herein or in the Statement of Additional Information, have been
audited by Price Waterhouse LLP and Ernst & Young LLP, independent accountants
and auditors, to the extent indicated in their reports thereon, which are
included in the Funds' Annual Reports to Shareholders for the fiscal years ended
July 31, 1995. The financial statements of Growth Fund for the year ended July
31, 1995, insofar as they relate to the statement of changes in net assets for
the year ended July 31, 1994 and financial highlights for the period then ended,
were audited by Deloitte & Touche LLP, independent auditors. The financial
statements audited by Price Waterhouse LLP, Ernst & Young LLP and Deloitte &
Touche LLP have been incorporated by reference herein or in the Statement of
Additional Information in reliance on their reports given on their authority as
experts in auditing and accounting.
18
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
THIS AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION ("Agreement") is
made as of April 24, 1996, between PaineWebber Securities Trust, a Massachusetts
business trust ("Securities Trust"), on behalf of PaineWebber Small Cap Value
Fund, a segregated portfolio of assets ("series") thereof ("Acquiring Fund"),
and PaineWebber Investment Trust III, a Massachusetts business trust
("Investment Trust"), on behalf of its PaineWebber Small Cap Growth Fund series
("Target"). (Acquiring Fund and Target are sometimes referred to herein
individually as a "Fund" and collectively as the "Funds," and Securities Trust
and Investment Trust are sometimes referred to herein individually as an
"Investment Company" and collectively as the "Investment Companies.")
This Agreement is intended to be, and is adopted as, a plan of a
reorganization described in section 368(a)(1)(C) of the Internal Revenue Code of
1986, as amended ("Code"). The reorganization will involve the transfer to
Acquiring Fund of Target's assets solely in exchange for voting shares of
beneficial interest in Acquiring Fund ("Acquiring Fund Shares") and the
assumption by Acquiring Fund of Target's liabilities, followed by the
constructive distribution of the Acquiring Fund Shares to the holders of shares
of beneficial interest in Target ("Target Shares") in exchange therefor, all
upon the terms and conditions set forth herein. The foregoing transactions are
referred to herein as the "Reorganization." All agreements, representations,
actions, and obligations described herein made or to be taken or undertaken by
either Fund are made and shall be taken or undertaken by Securities Trust on
behalf of Acquiring Fund and by Investment Trust on behalf of Target.
Acquiring Fund's shares currently are divided into three classes, designated
Class A, Class B, and Class C shares ("Class A Acquiring Fund Shares," "Class B
Acquiring Fund Shares," and "Class C Acquiring Fund Shares," re-spectively).
Acquiring Fund also has authorized, and by the Effective Time (as defined in
paragraph 3.1) will issue for sale, a fourth class of shares, designated Class Y
shares ("Class Y Acquiring Fund Shares"). Except as noted in the following
sentence, these classes differ only with respect to the sales charges imposed on
the purchase of shares and the fees ("12b-1 fees") payable by each class
pursuant to plans adopted under Rule 12b-1 promulgated under the Investment
Company Act of 1940, as amended ("1940 Act"), as follows:
(1) Class A Acquiring Fund Shares are offered at net asset value ("NAV")
plus a front-end sales charge ("FESC") (if applicable), are subject to a
12b-1 service fee at the annual rate of 0.25% of the average daily net
assets attributable to the class ("average class assets"), and are subject
to a 1% contingent deferred sales charge ("CDSC") on most redemptions of
shares purchased within one year before the redemption;
(2) Class B Acquiring Fund Shares are offered at NAV without imposition
of any FESC and are sub-ject to a CDSC of up to 5% of redemption proceeds
and 12b-1 service and distribution fees at the respective annual rates of
0.25% and 0.75% of average class assets;
(3) Class C Acquiring Fund Shares are offered at NAV without imposition
of any FESC, are subject to 12b-1 service and distribution fees at the
respective annual rates of 0.25% and 0.50% of average class assets, and (for
shares purchased on or after November 10, 1995) are subject to a 1% CDSC on
most redemptions of shares purchased within one year before the redemption;
and
A-1
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(4) Class Y Acquiring Fund Shares will be offered to a limited class of
offerees at NAV without imposition of any FESC and will not be subject to
any 12b-1 fee.
These classes also may differ from one another with respect to the allocation of
certain class-specific expenses other than 12b-1 fees.
Target's shares also are divided into four classes, designated Class A,
Class B, Class C, and Class Y shares ("Class A Target Shares," "Class B Target
Shares," "Class C Target Shares," and "Class Y Target Shares," respectively).
These classes are identical to the correspondingly designated classes of
Acquiring Fund Shares.
In consideration of the mutual promises herein, the parties covenant and
agree as follows:
1. PLAN OF REORGANIZATION AND TERMINATION OF TARGET
1.1. Target agrees to assign, sell, convey, transfer, and deliver all of
its assets described in paragraph 1.2 ("Assets") to Acquiring Fund. Acquiring
Fund agrees in exchange therefor --
(a) to issue and deliver to Target the number of full and fractional (i)
Class A Acquiring Fund Shares determined by dividing the net value of Target
(computed as set forth in paragraph 2.1) ("Target Value") attributable to
the Class A Target Shares by the NAV (computed as set forth in paragraph
2.2) of a Class A Acquiring Fund Share, (ii) Class B Acquiring Fund Shares
determined by dividing the Target Value attribut-able to the Class B Target
Shares by the NAV (as so computed) of a Class B Acquiring Fund Share, (iii)
Class C Acquiring Fund Shares determined by dividing the Target Value
attributable to the Class C Target Shares by the NAV (as so computed) of a
Class C Acquiring Fund Share, and (iv) Class Y Acquiring Fund Shares
determined by dividing the Target Value attributable to the Class Y Target
Shares by the NAV (as so computed) of a Class Y Acquiring Fund Share; and
(b) to assume all of Target's liabilities described in paragraph 1.3
("Liabilities").
Such transactions shall take place at the Closing (as defined in paragraph 3.1).
1.2. The Assets shall include, without limitation, all cash, cash
equivalents, securities, receivables (including interest and dividends
receivable), claims and rights of action, rights to register shares under
applicable securities laws, books and records, deferred and prepaid expenses
shown as assets on Target's books, and other property owned by Target at the
Effective Time.
1.3. The Liabilities shall include (except as otherwise provided herein)
all of Target's liabilities, debts, obligations, and duties of whatever kind or
nature, whether absolute, accrued, contingent, or otherwise, whether or not
arising in the ordinary course of business, whether or not determinable at the
Effective Time, and whether or not specifically referred to in this Agreement,
including without limitation Target's share of the expenses described in
paragraph 7.2. Notwithstanding the foregoing, Target agrees to use its best
efforts to discharge all of its known Liabilities prior to the Effective Time.
1.4. At or immediately before the Effective Time, Target shall declare and
pay to its shareholders a dividend and/or other distribution in an amount large
enough so that it will have distributed substantially all (and in any event not
less than 90%) of its investment company taxable income (computed without regard
to any deduction for dividends paid) and substantially all of its realized net
capital gain, if any, for the current taxable year through the Effective Time.
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1.5. At the Effective Time (or as soon thereafter as is reasonably
practicable), Target shall constructively distribute the Acquiring Fund Shares
received by it pursuant to paragraph 1.1 to Target's shareholders of record,
determined as of the Effective Time (collectively "Shareholders" and
individually a "Shareholder"), in exchange for their Target Shares. Such
distribution shall be accomplished by the Funds' transfer agent ("Transfer
Agent") opening accounts on Acquiring Fund's share transfer books in the
Shareholders' names and transferring such Acquiring Fund Shares thereto. Each
Shareholder's account shall be credited with the respective PRO RATA number of
full and fractional (rounded to the third decimal place) Acquiring Fund Shares
due that Shareholder, by class (I.E., the account for a Shareholder of Class A
Target Shares shall be credited with the respective PRO RATA number of Class A
Acquiring Fund Shares due that Shareholder, the account for a Shareholder of
Class B Target Shares shall be credited with the respective PRO RATA number of
Class B Acquiring Fund Shares due that Shareholder, the account for a
Shareholder of Class C Target Shares shall be credited with the respective PRO
RATA number of Class C Acquiring Fund Shares due that Shareholder, and the
account for a Shareholder of Class Y Target Shares shall be credited with the
respective PRO RATA number of Class Y Acquiring Fund Shares due that
Shareholder). All outstanding Target Shares, including any represented by
certificates, shall simultaneously be canceled on Target's share transfer books.
Acquiring Fund shall not issue certificates representing the Acquiring Fund
Shares in connection with the Reorganization.
1.6. As soon as reasonably practicable after distribution of the Acquiring
Fund Shares pursuant to paragraph 1.5, Target shall be terminated as a series of
Investment Trust and any further actions shall be taken in connection therewith
as required by applicable law.
1.7. Any reporting responsibility of Target to a public authority is and
shall remain its responsibility up to and including the date on which it is
terminated.
1.8. Any transfer taxes payable upon issuance of Acquiring Fund Shares in a
name other than that of the registered holder on Target's books of the Target
Shares constructively exchanged therefor shall be paid by the person to whom
such Acquiring Fund Shares are to be issued, as a condition of such transfer.
2. VALUATION
2.1. For purposes of paragraph 1.1(a), Target's net value shall be (a) the
value of the Assets computed as of the close of regular trading on the New York
Stock Exchange, Inc. ("NYSE") on the date of the Closing ("Valuation Time"),
using the valuation procedures set forth in Target's then-current prospectus and
statement of additional information less (b) the amount of the Liabilities as of
the Valuation Time.
2.2. For purposes of paragraph 1.1(a), the NAV of a share of each class of
Acquiring Fund Shares shall be computed as of the Valuation Time, using the
valuation procedures set forth in Acquiring Fund's then-current prospectus and
statement of additional information.
2.3. All computations pursuant to paragraphs 2.1 and 2.2 shall be made by
or under the direction of Mitchell Hutchins Asset Management Inc.
3. CLOSING AND EFFECTIVE TIME
3.1. The Reorganization, together with related acts necessary to consummate
the same ("Closing"), shall occur at the Funds' principal office on July 26,
1996, or at such other place and/or on such other date as the parties may agree.
All acts taking place at the Closing shall be deemed to take place
simultaneously as of the close of business on the date thereof or at such other
time as the parties may agree ("Effective Time"). If,
A-3
<PAGE>
immediately before the Valuation Time, (a) the NYSE is closed to trading or
trading thereon is restricted or (b) trading or the reporting of trading on the
NYSE or elsewhere is disrupted, so that accurate appraisal of the net value of
Target and the NAV per Acquiring Fund Share is impracticable, the Effective Time
shall be postponed until the first business day after the day when such trading
shall have been fully resumed and such reporting shall have been restored.
3.2. Investment Trust shall deliver to Securities Trust at the Closing a
schedule of the Assets as of the Effective Time, which shall set forth for all
portfolio securities included therein their adjusted tax basis and holding
period by lot. Target's custodian shall deliver at the Closing a certificate of
an authorized officer stating that (a) the Assets held by the custodian will be
transferred to Acquiring Fund at the Effective Time and (b) all necessary taxes
in conjunction with the delivery of the Assets, including all applicable federal
and state stock transfer stamps, if any, have been paid or provision for payment
has been made.
3.3. Investment Trust shall deliver to Securities Trust at the Closing a
list of the names and addresses of the Shareholders and the number (by class) of
outstanding Target Shares owned by each Shareholder, all as of the Effective
Time, certified by the Secretary or Assistant Secretary of Investment Trust. The
Transfer Agent shall deliver at the Closing a certificate as to the opening on
Acquiring Fund's share transfer books of accounts in the Shareholders' names.
Securities Trust shall issue and deliver a confirmation to Investment Trust
evidencing the Acquiring Fund Shares (by class) to be credited to Target at the
Effective Time or provide evidence satisfactory to Investment Trust that such
Acquiring Fund Shares have been credited to Target's account on Acquiring Fund's
books. At the Closing, each party shall deliver to the other such bills of sale,
checks, assignments, stock certificates, receipts, or other documents as the
other party or its counsel may reasonably request.
3.4. Each Investment Company shall deliver to the other at the Closing a
certificate executed in its name by its President or a Vice President in form
and substance satisfactory to the recipient and dated the Effective Time, to the
effect that the representations and warranties it made in this Agreement are
true and correct at the Effective Time except as they may be affected by the
transactions contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1. Target represents and warrants as follows:
4.1.1. Investment Trust is an unincorporated voluntary association with
transferable shares organized as a business trust under a written instrument
("Business Trust"); it is duly organized, validly existing, and in good
standing under the laws of the Commonwealth of Massachusetts; and a copy of
its Declaration of Trust is on file with the Secretary of the Commonwealth
of Massachusetts;
4.1.2. Investment Trust is duly registered as an open-end management
investment company under the 1940 Act, and such registration will be in full
force and effect at the Effective Time;
4.1.3. Target is a duly established and designated series of Investment
Trust;
4.1.4. At the Closing, Target will have good and marketable title to
the Assets and full right, power, and authority to sell, assign, transfer,
and deliver the Assets free of any liens or other encumbrances; and upon
delivery and payment for the Assets, Acquiring Fund will acquire good and
marketable title thereto;
A-4
<PAGE>
4.1.5. Target's current prospectus and statement of additional
information conform in all material respects to the applicable requirements
of the Securities Act of 1933 ("1933 Act") and the 1940 Act and the rules
and regulations thereunder and do not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
4.1.6. Target is not in violation of, and the execution and delivery of
this Agreement and consummation of the transactions contemplated hereby will
not conflict with or violate, Massachusetts law or any provision of
Investment Trust's Declaration of Trust or By-Laws or of any agreement,
instrument, lease, or other undertaking to which Target is a party or by
which it is bound or result in the acceleration of any obligation, or the
imposition of any penalty, under any agreement, judgment, or decree to which
Target is a party or by which it is bound, except as previously disclosed in
writing to and accepted by Securities Trust;
4.1.7. Except as otherwise disclosed in writing to and accepted by
Securities Trust, all material contracts and other commitments of or
applicable to Target (other than this Agreement and investment contracts,
including options, futures, and forward contracts) will be terminated, or
provision for discharge of any liabilities of Target thereunder will be
made, at or prior to the Effective Time, without either Fund's incurring any
liability or penalty with respect thereto and without diminishing or
releasing any rights Target may have had with respect to actions taken or
omitted to be taken by any other party thereto prior to the Closing;
4.1.8. Except as otherwise disclosed in writing to and accepted by
Securities Trust, no litigation, administrative proceeding, or investigation
of or before any court or governmental body is presently pending or (to
Target's knowledge) threatened against Investment Trust with respect to
Target or any of its properties or assets that, if adversely determined,
would materially and adversely affect Target's financial condition or the
conduct of its business; Target knows of no facts that might form the basis
for the institution of any such litigation, proceeding, or investigation and
is not a party to or subject to the provisions of any order, decree, or
judgment of any court or governmental body that materially or adversely
affects its business or its ability to consummate the transactions
contemplated hereby;
4.1.9. The execution, delivery, and performance of this Agreement has
been duly authorized as of the date hereof by all necessary action on the
part of Investment Trust's board of trustees, which has made the
determinations required by Rule 17a-8(a) under the 1940 Act; and, subject to
approval by Target's shareholders and receipt of any necessary exemptive
relief or no-action assurances requested from the Securities and Exchange
Commission ("SEC") or its staff with respect to sections 17(a) and 17(d) of
the 1940 Act, this Agreement will constitute a valid and legally binding
obligation of Target, enforceable in accordance with its terms, except as
the same may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium, and similar laws relating to or affecting
creditors' rights and by general principles of equity;
4.1.10. At the Effective Time, the performance of this Agreement shall
have been duly authorized by all necessary action by Target's shareholders;
4.1.11. No governmental consents, approvals, authorizations, or filings
are required under the 1933 Act, the Securities Exchange Act of 1934 ("1934
Act"), or the 1940 Act for the execution or performance of this Agreement by
Investment Trust, except for (a) the filing with the SEC of a registration
statement by Securities Trust on Form N-14 relating to the Acquiring Fund
Shares issuable
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hereunder, and any supplement or amendment thereto ("Registration
Statement"), including therein a prospectus/proxy statement ("Proxy
Statement"), (b) receipt of the exemptive relief referenced in subparagraph
4.1.9, and (c) such consents, approvals, authorizations, and filings as have
been made or received or as may be required subsequent to the Effective
Time;
4.1.12. On the effective date of the Registration Statement, at the
time of the shareholders' meeting referred to in paragraph 5.2, and at the
Effective Time, the Proxy Statement will (a) comply in all material respects
with the applicable provisions of the 1933 Act, the 1934 Act, and the 1940
Act and the regulations thereunder and (b) not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading;
provided that the foregoing shall not apply to statements in or omissions
from the Proxy Statement made in reliance on and in conformity with
information furnished by Securities Trust for use therein;
4.1.13. The Liabilities were incurred by Target in the ordinary course
of its business;
4.1.14. Target is a "fund" as defined in section 851(h)(2) of the Code;
it qualified for treatment as a regulated investment company under
Subchapter M of the Code ("RIC") for each past taxable year since it
commenced operations and will continue to meet all the requirements for such
qualification for its current taxable year; and it has no earnings and
profits accumulated in any taxable year in which the provisions of
Subchapter M did not apply to it. The Assets shall be invested at all times
through the Effective Time in a manner that ensures compliance with the
foregoing;
4.1.15. Target is not under the jurisdiction of a court in a proceeding
under Title 11 of the United States Code or similar case within the meaning
of section 368(a)(3)(A) of the Code;
4.1.16. Not more than 25% of the value of Target's total assets
(excluding cash, cash items, and U.S. government securities) is invested in
the stock and securities of any one issuer, and not more than 50% of the
value of such assets is invested in the stock and securities of five or
fewer issuers; and
4.1.17. Target will be terminated as soon as reasonably practicable
after the Reorganization, but in all events within six months after the
Effective Time.
4.2 Acquiring Fund represents and warrants as follows:
4.2.1. Securities Trust is a Business Trust; it is duly organized,
validly existing, and in good standing under the laws of the Commonwealth of
Massachusetts; and a copy of its Declaration of Trust is on file with the
Secretary of the Commonwealth of Massachusetts;
4.2.2. Securities Trust is duly registered as an open-end management
investment company under the 1940 Act, and such registration will be in full
force and effect at the Effective Time;
4.2.3. Acquiring Fund is a duly established and designated series of
Securities Trust;
4.2.4. No consideration other than Acquiring Fund Shares (and Acquiring
Fund's assumption of the Liabilities) will be issued in exchange for the
Assets in the Reorganization;
4.2.5. The Acquiring Fund Shares to be issued and delivered to Target
hereunder will, at the Effective Time, have been duly authorized and, when
issued and delivered as provided herein, will be duly and validly issued and
outstanding shares of Acquiring Fund, fully paid and non-assessable, except
to the extent that under Massachusetts law shareholders of a Business Trust
may, under certain
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circumstances, be held personally liable for its obligations. Except as
contemplated by this Agreement, Acquiring Fund does not have outstanding any
options, warrants, or other rights to subscribe for or purchase any of its
shares, nor is there outstanding any security convertible into any of its
shares;
4.2.6. Acquiring Fund's current prospectus and statement of additional
information conform in all material respects to the applicable requirements
of the 1933 Act and the 1940 Act and the rules and regulations thereunder
and do not include any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading;
4.2.7. Acquiring Fund is not in violation of, and the execution and
delivery of this Agreement and consummation of the transactions contemplated
hereby will not conflict with or violate, Massachusetts law or any provision
of Securities Trust's Declaration of Trust or By-Laws or of any provision of
any agreement, instrument, lease, or other undertaking to which Acquiring
Fund is a party or by which it is bound or result in the acceleration of any
obligation, or the imposition of any penalty, under any agreement, judgment,
or decree to which Acquiring Fund is a party or by which it is bound, except
as previously disclosed in writing to and accepted by Investment Trust;
4.2.8. Except as otherwise disclosed in writing to and accepted by
Investment Trust, no litigation, administrative proceeding, or investigation
of or before any court or governmental body is presently pending or (to
Acquiring Fund's knowledge) threatened against Securities Trust with respect
to Acquiring Fund or any of its properties or assets that, if adversely
determined, would materially and adversely affect Acquiring Fund's financial
condition or the conduct of its business; Acquiring Fund knows of no facts
that might form the basis for the institution of any such litigation,
proceeding, or investigation and is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental
body that materially or adversely affects its business or its ability to
consummate the transactions contemplated hereby;
4.2.9 The execution, delivery, and performance of this Agreement has
been duly authorized as of the date hereof by all necessary action on the
part of Securities Trust's board of trustees, which has made the
determinations required by Rule 17a-8(a) under the 1940 Act; and, subject to
receipt of any necessary exemptive relief or no-action assurances requested
from the SEC or its staff with respect to sections 17(a) and 17(d) of the
1940 Act, this Agreement will constitute a valid and legally binding
obligation of Acquiring Fund, enforceable in accordance with its terms,
except as the same may be limited by bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium, and similar laws relating to or
affecting creditors' rights and by general principles of equity;
4.2.10. No governmental consents, approvals, authorizations, or filings
are required under the 1933 Act, the 1934 Act, or the 1940 Act for the
execution or performance of this Agreement by Securities Trust, except for
(a) the filing with the SEC of the Registration Statement and a
post-effective amendment to Securities Trust's registration statement on
Form N1-A, (b) receipt of the exemptive relief referenced in subparagraph
4.2.9, and (c) such consents, approvals, authorizations, and filings as have
been made or received or as may be required subsequent to the Effective
Time;
4.2.11. On the effective date of the Registration Statement, at the
time of the shareholders' meeting referred to in paragraph 5.2, and at the
Effective Time, the Proxy Statement will (a) comply in all material respects
with the applicable provisions of the 1933 Act, the 1934 Act, and the 1940
Act and the regulations thereunder and (b) not contain any untrue statement
of a material fact or omit to state a
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material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which such
statements were made, not misleading; provided that the foregoing shall not
apply to statements in or omissions from the Proxy Statement made in
reliance on and in conformity with information furnished by Investment Trust
for use therein;
4.2.12. Acquiring Fund is a "fund" as defined in section 851(h)(2) of
the Code; it qualified for treatment as a RIC for each past taxable year
since it commenced operations and will continue to meet all the requirements
for such qualification for its current taxable year; Acquiring Fund intends
to continue to meet all such requirements for the next taxable year; and it
has no earnings and profits accumulated in any taxable year in which the
provisions of Subchapter M of the Code did not apply to it;
4.2.13. Acquiring Fund has no plan or intention to issue additional
Acquiring Fund Shares following the Reorganization except for shares issued
in the ordinary course of its business as a series of an open-end investment
company; nor does Acquiring Fund have any plan or intention to redeem or
otherwise reacquire any Acquiring Fund Shares issued to the Shareholders
pursuant to the Reorganization, other than through redemptions arising in
the ordinary course of that business;
4.2.14. Acquiring Fund (a) will actively continue Target's business in
substantially the same manner that Target conducted that business
immediately before the Reorganization, (b) has no plan or intention to sell
or otherwise dispose of any of the Assets, except for dispositions made in
the ordinary course of that business and dispositions necessary to maintain
its status as a RIC, and (c) expects to retain substantially all the Assets
in the same form as it receives them in the Reorganization, unless and until
subsequent investment circumstances suggest the desirability of change or it
becomes necessary to make dispositions thereof to maintain such status;
4.2.15. There is no plan or intention for Acquiring Fund to be
dissolved or merged into another corporation or business trust or any "fund"
thereof (within the meaning of section 851(h)(2) of the Code) following the
Reorganization;
4.2.16. Immediately after the Reorganization, (a) not more than 25% of
the value of Acquiring Fund's total assets (excluding cash, cash items, and
U.S. government securities) will be invested in the stock and securities of
any one issuer and (b) not more than 50% of the value of such assets will be
invested in the stock and securities of five or fewer issuers; and
4.2.17. Acquiring Fund does not own, directly or indirectly, nor at the
Effective Time will it own, directly or indirectly, nor has it owned,
directly or indirectly, at any time during the past five years, any shares
of Target.
4.3. Each Fund represents and warrants as follows:
4.3.1. The fair market value of the Acquiring Fund Shares, when
received by the Shareholders, will be approximately equal to the fair market
value of their Target Shares constructively surrendered in exchange
therefor;
4.3.2. Its management (a) is unaware of any plan or intention of
Shareholders to redeem or otherwise dispose of any portion of the Acquiring
Fund Shares to be received by them in the Reorganization and (b) does not
anticipate dispositions of those Acquiring Fund Shares at the time of or
soon after the Reorganization to exceed the usual rate and frequency of
dispositions of shares of Target as a series of an open-end investment
company. Consequently, its management expects that the percentage
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of Shareholder interests, if any, that will be disposed of as a result of or
at the time of the Reorganization will be DE MINIMIS. Nor does its
management anticipate that there will be extraordinary redemptions of
Acquiring Fund Shares immediately following the Reorganization;
4.3.3. The Shareholders will pay their own expenses, if any, incurred
in connection with the Reor-ganization;
4.3.4. Immediately following consummation of the Reorganization,
Acquiring Fund will hold substantially the same assets and be subject to
substantially the same liabilities that Target held or was subject to
immediately prior thereto, plus any liabilities and expenses of the parties
incurred in connection with the Reorganization;
4.3.5. The fair market value on a going concern basis of the Assets
will equal or exceed the Liabilities to be assumed by Acquiring Fund and
those to which the Assets are subject;
4.3.6. There is no intercompany indebtedness between the Funds that was
issued or acquired, or will be settled, at a discount;
4.3.7. Pursuant to the Reorganization, Target will transfer to
Acquiring Fund, and Acquiring Fund will acquire, at least 90% of the fair
market value of the net assets, and at least 70% of the fair market value of
the gross assets, held by Target immediately before the Reorganization. For
the purposes of this representation, any amounts used by Target to pay its
Reorganization expenses and redemptions and distributions made by it
immediately before the Reorganization (except for (a) distributions made to
conform to its policy of distributing all or substantially all of its income
and gains to avoid the obligation to pay federal income tax and/or the
excise tax under section 4982 of the Code and (b) redemptions not made as
part of the Reorganization) will be included as assets thereof held
immediately before the Reorganization;
4.3.8 None of the compensation received by any Shareholder who is an
employee of Target will be separate consideration for, or allocable to, any
of the Target Shares held by such Shareholder-employee; none of the
Acquiring Fund Shares received by any such Shareholder-employee will be
separate consideration for, or allocable to, any employment agreement; and
the consideration paid to any such Shareholder-employee will be for services
actually rendered and will be commensurate with amounts paid to third
parties bargaining at arm's-length for similar services; and
4.3.9. Immediately after the Reorganization, the Shareholders will not
own shares constituting "control" of Acquiring Fund within the meaning of
section 304(c) of the Code.
5. COVENANTS
5.1. Each Fund covenants to operate its respective business in the ordinary
course between the date hereof and the Closing, it being understood that (a)
such ordinary course will include declaring and paying customary dividends and
other distributions and such changes in operations as are contemplated by each
Fund's normal business activities and (b) each Fund will retain exclusive
control of the composition of its portfolio until the Closing; provided that
Target shall not dispose of more than an insignificant portion of its historic
business assets during such period without Acquiring Fund's prior consent.
5.2. Target covenants to call a shareholders' meeting to consider and act
upon this Agreement and to take all other action necessary to obtain approval of
the transactions contemplated hereby.
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5.3. Target covenants that the Acquiring Fund Shares to be delivered
hereunder are not being acquired for the purpose of making any distribution
thereof, other than in accordance with the terms hereof.
5.4. Target covenants that it will assist Securities Trust in obtaining
such information as Securities Trust reasonably requests concerning the
beneficial ownership of Target Shares.
5.5. Target covenants that Target's books and records (including all books
and records required to be maintained under the 1940 Act and the rules and
regulations thereunder) will be turned over to Securities Trust at the Closing.
5.6. Each Fund covenants to cooperate in preparing the Proxy Statement in
compliance with applicable federal securities laws.
5.7. Each Fund covenants that it will, from time to time, as and when
requested by the other Fund, execute and deliver or cause to be executed and
delivered all such assignments and other instruments, and will take or cause to
be taken such further action, as the other Fund may deem necessary or desirable
in order to vest in, and confirm to, (a) Acquiring Fund, title to and possession
of all the Assets, and (b) Target, title to and possession of the Acquiring Fund
Shares to be delivered hereunder, and otherwise to carry out the intent and
purpose hereof.
5.8. Acquiring Fund covenants to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act, and such
state securities laws it may deem appropriate in order to continue its
operations after the Effective Time.
5.9. Subject to this Agreement, each Fund covenants to take or cause to be
taken all actions, and to do or cause to be done all things, reasonably
necessary, proper, or advisable to consummate and effectuate the transactions
contemplated hereby.
6. CONDITIONS PRECEDENT
Each Fund's obligations hereunder shall be subject to (a) performance by the
other Fund of all the obligations to be performed hereunder at or before the
Effective Time, (b) all representations and warranties of the other Fund
contained herein being true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated
hereby, as of the Effective Time, with the same force and effect as if made at
and as of the Effective Time, and (c) the following further conditions that, at
or before the Effective Time:
6.1. This Agreement and the transactions contemplated hereby shall have
been duly adopted and approved by Investment Trust's board of trustees and shall
have been approved by Target's shareholders in accordance with applicable law.
6.2. All necessary filings shall have been made with the SEC and state
securities authorities, and no order or directive shall have been received that
any other or further action is required to permit the parties to carry out the
transactions contemplated hereby. The Registration Statement shall have become
effective under the 1933 Act, no stop orders suspending the effectiveness
thereof shall have been issued, and the SEC shall not have issued an unfavorable
report with respect to the Reorganization under section 25(b) of the 1940 Act
nor instituted any proceedings seeking to enjoin consummation of the
transactions contemplated hereby under section 25(c) of the 1940 Act. All
consents, orders, and permits of federal, state, and local regulatory
authorities (including the SEC and state securities authorities) deemed
necessary by either Fund
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to permit consummation, in all material respects, of the transactions
contemplated hereby shall have been obtained, except where failure to obtain
same would not involve a risk of a material adverse effect on the assets or
properties of either Fund, provided that either Fund may for itself waive any of
such conditions.
6.3. At the Effective Time, no action, suit, or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or to obtain damages or other relief in connection with,
the transactions contemplated hereby.
6.4. Investment Trust shall have received an opinion of Kirkpatrick &
Lockhart LLP, counsel to Securities Trust, substantially to the effect that:
6.4.1. Acquiring Fund is a duly established series of Securities Trust,
a Business Trust duly organized and validly existing under the laws of the
Commonwealth of Massachusetts with power under its Declaration of Trust to
own all of its properties and assets and, to the knowledge of such counsel,
to carry on its business as presently conducted;
6.4.2. This Agreement (a) has been duly authorized, executed, and
delivered by Securities Trust on behalf of Acquiring Fund and (b) assuming
due authorization, execution, and delivery of this Agreement by Investment
Trust on behalf of Target, is a valid and legally binding obligation of
Securities Trust with respect to Acquiring Fund, enforceable in accordance
with its terms, except as the same may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium, and similar laws relating
to or affecting creditors' rights and by general principles of equity;
6.4.3. The Acquiring Fund Shares to be issued and distributed to the
Shareholders under this Agreement, assuming their due delivery as
contemplated by this Agreement, will be duly authorized and validly issued
and outstanding and fully paid and non-assessable, except to the extent that
under Massachusetts law shareholders of a Business Trust may, under certain
circumstances, be held personally liable for its obligations, and no
shareholder of Acquiring Fund has any preemptive right to subscribe for or
purchase such shares;
6.4.4. The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate Securities Trust's Declaration of Trust or By-Laws or any provision
of any agreement (known to such counsel, without any independent inquiry or
investigation) to which Securities Trust (with respect to Acquiring Fund) is
a party or by which it is bound or (to the knowledge of such counsel,
without any independent inquiry or investigation) result in the acceleration
of any obligation, or the imposition of any penalty, under any agreement,
judgment, or decree to which Securities Trust (with respect to Acquiring
Fund) is a party or by which it is bound, except as set forth in such
opinion or as previously disclosed in writing to and accepted by Investment
Trust;
6.4.5. To the knowledge of such counsel (without any independent
inquiry or investigation), no consent, approval, authorization, or order of
any court or governmental authority is required for the consummation by
Securities Trust on behalf of Acquiring Fund of the transactions
contemplated herein, except such as have been obtained under the 1933 Act,
the 1934 Act, and the 1940 Act and such as may be required under state
securities laws;
6.4.6. Securities Trust is registered with the SEC as an investment
company, and to the knowledge of such counsel no order has been issued or
proceeding instituted to suspend such registration; and
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6.4.7. To the knowledge of such counsel (without any independent
inquiry or investigation), (a) no litigation, administrative proceeding, or
investigation of or before any court or governmental body is pending or
threatened as to Securities Trust (with respect to Acquiring Fund) or any of
its properties or assets attributable or allocable to Acquiring Fund and (b)
Securities Trust (with respect to Acquiring Fund) is not a party to or
subject to the provisions of any order, decree, or judgment of any court or
governmental body that materially and adversely affects Acquiring Fund's
business, except as set forth in such opinion or as otherwise disclosed in
writing to and accepted by Investment Trust.
In rendering such opinion, such counsel may (i) rely, as to matters governed by
the laws of the Commonwealth of Massachusetts, on an opinion of competent
Massachusetts counsel, (ii) make assumptions regarding the authenticity,
genuineness, and/or conformity of documents and copies thereof without
independent verification thereof, (iii) limit such opinion to applicable federal
and state law, and (iv) define the word "knowledge" and related terms to mean
the knowledge of attorneys then with such firm who have devoted substantive
attention to matters directly related to this Agreement and the Reorganization.
6.5. Securities Trust shall have received an opinion of Kirkpatrick &
Lockhart LLP, counsel to Investment Trust, substantially to the effect that:
6.5.1. Target is a duly established series of Investment Trust, a
Business Trust duly organized and validly existing under the laws of the
Commonwealth of Massachusetts with power under its Declaration of Trust to
own all of its properties and assets and, to the knowledge of such counsel,
to carry on its business as presently conducted;
6.5.2. This Agreement (a) has been duly authorized, executed, and
delivered by Investment Trust on behalf of Target and (b) assuming due
authorization, execution, and delivery of this Agreement by Securities Trust
on behalf of Acquiring Fund, is a valid and legally binding obligation of
Investment Trust with respect to Target, enforceable in accordance with its
terms, except as the same may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium, and similar laws relating
to or affecting creditors' rights and by general principles of equity;
6.5.3. The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate Investment Trust's Declaration of Trust or By-Laws or any provision
of any agreement (known to such counsel, without any independent inquiry or
investigation) to which Investment Trust (with respect to Target) is a party
or by which it is bound or (to the knowledge of such counsel, without any
independent inquiry or investigation) result in the acceleration of any
obligation, or the imposition of any penalty, under any agreement, judgment,
or decree to which Investment Trust (with respect to Target) is a party or
by which it is bound, except as set forth in such opinion or as previously
disclosed in writing to and accepted by Securities Trust;
6.5.4. To the knowledge of such counsel (without any independent
inquiry or investigation), no consent, approval, authorization, or order of
any court or governmental authority is required for the consummation by
Investment Trust on behalf of Target of the transactions contemplated
herein, except such as have been obtained under the 1933 Act, the 1934 Act,
and the 1940 Act and such as may be required under state securities laws;
6.5.5. Investment Trust is registered with the SEC as an investment
company, and to the knowledge of such counsel no order has been issued or
proceeding instituted to suspend such registration; and
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6.5.6. To the knowledge of such counsel (without any independent
inquiry or investigation), (a) no litigation, administrative proceeding, or
investigation of or before any court or governmental body is pending or
threatened as to Investment Trust (with respect to Target) or any of its
properties or assets attributable or allocable to Target and (b) Investment
Trust (with respect to Target) is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental
body that materially and adversely affects Target's business, except as set
forth in such opinion or as otherwise disclosed in writing to and accepted
by Securities Trust.
In rendering such opinion, such counsel may (i) rely, as to matters governed by
the laws of the Commonwealth of Massachusetts, on an opinion of competent
Massachusetts counsel, (ii) make assumptions regarding the authenticity,
genuineness, and/or conformity of documents and copies thereof without
independent verification thereof, (iii) limit such opinion to applicable federal
and state law, and (iv) define the word "knowledge" and related terms to mean
the knowledge of attorneys then with such firm who have devoted substantive
attention to matters directly related to this Agreement and the Reorganization.
6.6. Each Investment Company shall have received an opinion of Kirkpatrick
& Lockhart LLP, its counsel, addressed to and in form and substance satisfactory
to it, as to the federal income tax consequences mentioned below ("Tax
Opinion"). In rendering the Tax Opinion, such counsel may rely as to factual
matters, exclusively and without independent verification, on the
representations made in this Agreement (or in separate letters addressed to such
counsel) and the certificates delivered pursuant to paragraph 3.4. The Tax
Opinion shall be substantially to the effect that, based on the facts and
assumptions stated therein, for federal income tax purposes:
6.6.1. Acquiring Fund's acquisition of the Assets in exchange solely
for Acquiring Fund Shares and Acquiring Fund's assumption of the
Liabilities, followed by Target's distribution of those shares to the
Share-holders constructively in exchange for the Shareholders' Target
Shares, will constitute a reorganization within the meaning of section
368(a)(1)(C) of the Code, and each Fund will be "a party to a
reorganization" within the meaning of section 368(b) of the Code;
6.6.2. No gain or loss will be recognized to Target on the transfer to
Acquiring Fund of the Assets in exchange solely for Acquiring Fund Shares
and Acquiring Fund's assumption of the Liabilities or on the subsequent
distribution of those shares to the Shareholders in constructive exchange
for their Target Shares;
6.6.3. No gain or loss will be recognized to Acquiring Fund on its
receipt of the Assets in exchange solely for Acquiring Fund Shares and its
assumption of the Liabilities;
6.6.4. Acquiring Fund's basis for the Assets will be the same as the
basis thereof in Target's hands immediately before the Reorganization, and
Acquiring Fund's holding period for the Assets will include Target's holding
period therefor;
6.6.5. A Shareholder will recognize no gain or loss on the constructive
exchange of all its Target Shares solely for Acquiring Fund Shares pursuant
to the Reorganization; and
6.6.6. A Shareholder's basis for the Acquiring Fund Shares to be
received by it in the Reorganization will be the same as the basis for its
Target Shares to be constructively surrendered in exchange for those
Acquiring Fund Shares, and its holding period for those Acquiring Fund
Shares will include its holding period for those Target Shares, provided
they are held as capital assets by the Shareholder at the Effective Time.
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Notwithstanding subparagraphs 6.6.2 and 6.6.4, the Tax Opinion may state that no
opinion is expressed as to the effect of the Reorganization on the Funds or any
Shareholder with respect to any asset as to which any unrealized gain or loss is
required to be recognized for federal income tax purposes at the end of a
taxable year (or on the termination or transfer thereof) under a mark-to-market
system of accounting.
At any time before the Closing, (a) Acquiring Fund may waive any of the
foregoing conditions if, in the judgment of Securities Trust's board of
trustees, such waiver will not have a material adverse effect on its
shareholders' interests, and (b) Target may waive any of the foregoing
conditions if, in the judgment of Investment Trust's board of trustees, such
waiver will not have a material adverse effect on the Shareholders' interests.
7. BROKERAGE FEES AND EXPENSES
7.1. Each Investment Company represents and warrants to the other that
there are no brokers or finders entitled to receive any payments in connection
with the transactions provided for herein.
7.2. Except as otherwise provided herein, all expenses incurred in
connection with the transactions contemplated by this Agreement (whether or not
they are consummated) will be borne by the Funds proportionately, as follows:
each such expense will be borne by the Funds in proportion to their respective
net assets as of the close of business on the last business day of the month in
which such expense was incurred. Such expenses include (a) expenses incurred in
connection with entering into and carrying out the provisions of this Agreement,
(b) expenses associated with preparing and filing the Registration Statement,
(c) registration or qualification fees and expenses of preparing and filing such
forms as are necessary under applicable state securities laws to qualify the
Acquiring Fund Shares to be issued in connection herewith in each state in which
Target's shareholders are resident as of the date of the mailing of the Proxy
Statement to such shareholders, (d) printing and postage expenses, (e) legal and
accounting fees, and (f) solicitation costs.
8. ENTIRE AGREEMENT; SURVIVAL
Neither party has made any representation, warranty, or covenant not set
forth herein, and this Agreement constitutes the entire agreement between the
parties. The representations, warranties, and covenants contained herein or in
any document delivered pursuant hereto or in connection herewith shall survive
the Closing.
9. TERMINATION OF AGREEMENT
This Agreement may be terminated at any time at or prior to the Effective
Time, whether before or after approval by Target's shareholders:
9.1. By either Fund (a) in the event of the other Fund's material breach of
any representation, warranty, or covenant contained herein to be performed at or
prior to the Effective Time, (b) if a condition to its obligations has not been
met and it reasonably appears that such condition will not or cannot be met, or
(c) if the Closing has not occurred on or before October 31, 1996; or
9.2. By the parties' mutual agreement.
In the event of termination under paragraphs 9.1.(c) or 9.2, there shall be no
liability for damages on the part of either Fund, or the trustees or officers of
either Investment Company, to the other Fund.
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10. AMENDMENT
This Agreement may be amended, modified, or supplemented at any time,
notwithstanding approval thereof by Target's shareholders, in such manner as may
be mutually agreed upon in writing by the parties; provided that following such
approval no such amendment shall have a material adverse effect on the
Shareholders' interests.
11. MISCELLANEOUS
11.1. This Agreement shall be governed by and construed in accordance with
the internal laws of the Commonwealth of Massachusetts; provided that, in the
case of any conflict between such laws and the federal securities laws, the
latter shall govern.
11.2. Nothing expressed or implied herein is intended or shall be construed
to confer upon or give any person, firm, trust, or corporation other than the
parties and their respective successors and assigns any rights or remedies under
or by reason of this Agreement.
11.3. The parties acknowledge that each Investment Company is a Business
Trust. Notice is hereby given that this instrument is executed on behalf of each
Investment Company's trustees solely in their capacity as trustees, and not
individually, and that each Investment Company's obligations under this
instrument are not binding on or enforceable against any of its trustees,
officers, or shareholders, but are only binding on and enforceable against the
respective Funds' assets and property. Each Fund agrees that, in asserting any
rights or claims under this Agreement, it shall look only to the other Fund's
assets and property in settlement of such rights or claims and not to such
trustees or shareholders.
IN WITNESS WHEREOF, each party has caused this Agreement to be executed by
its duly authorized officer.
<TABLE>
<S> <C> <C> <C>
ATTEST: PAINEWEBBER SECURITIES TRUST,
on behalf of its series,
PAINEWEBBER SMALL CAP VALUE FUND
/s/ Ilene Shore By: /s/ Dianne E. O'Donnell
- ------------------------ ------------------------
Assistant Secretary Vice President
ATTEST: PAINEWEBBER INVESTMENT TRUST III,
on behalf of its series,
PAINEWEBBER SMALL CAP GROWTH FUND
/s/ Ilene Shore By: /s/ Keith A. Weller
- ------------------------ ------------------------
Assistant Secretary Vice President
</TABLE>
A-15
<PAGE>
PROXY
-----
PAINEWEBBER INVESTMENT TRUST III -- PAINEWEBBER SMALL CAP GROWTH FUND
Special Meeting of Shareholders - July 19, 1996
The undersigned hereby appoints as proxies Dianne E. O'Donnell and Ilene
Shore and each of them (with power of substitution) to vote for the
undersigned all shares of beneficial interest in the undersigned at the
aforesaid meeting and any adjournment thereof with all the power the
undersigned would have if personally present. The shares represented by this
proxy will be voted as instructed. Unless indicated to the contrary, this
proxy shall be deemed to indicate authority to vote "For" all proposals.
This proxy is solicited on behalf of the board of trustees of Painewebber
Investment Trust III.
YOUR VOTE IS IMPORTANT
This proxy will not be voted unless it is dated and signed exactly as
instructed below.
If the shares are held jointly, each
Shareholder named should sign. If only
one signs, his or her signature will be
binding. If the Shareholder is a
corporation, the President or Vice
President should sign in his or her own
name, indicating title. If the
shareholder is a partnership, a partner
should sign in his or her own name,
indicating that he or she is a "Partner."
Sign exactly as name appears hereon.
Dated: _____________________________, 1996
__________________________________________
Signature of Shareholder
__________________________________________
Signature of Co-owner
<PAGE>
PLEASE INDICATE YOUR VOTE BY FILLING IN THE APPROPRIATE BOX BELOW.
THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR"
1. Approval of an Agreement and Plan of Reorganization and Termination
between PaineWebber Small Cap Value Fund and PaineWebber Small Cap Growth
Fund.
FOR _______ AGAINST _______ ABSTAIN ______
PLEASE SIGN AND DATE THIS PROXY ON THE REVERSE SIDE AND RETURN IT
IN THE ENCLOSED ENVELOPE TO PAINEWEBBER MUTUAL FUNDS,
PO BOX 104, SMITHTOWN, NY 11787-8617
