As filed with the Securities and Exchange Commission on May 2, 1996
Registration No. 33-____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No.___ [ ] Post-Effective Amendment No.___
PAINEWEBBER SECURITIES TRUST
(Exact name of registrant as specified in charter)
1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 713-2000
DIANNE E. O'DONNELL, ESQ.
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)
Copies to:
SUSAN M. CASEY, ESQ.
BRIAN F. MCNALLY, ESQ.
Kirkpatrick & Lockhart LLP
2nd Floor
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036-1800
Telephone: (202) 778-9000
Approximate Date of Proposed Public Offering: as soon as practicable after
this Registration Statement becomes effective.
The Registrant has filed a declaration registering an indefinite amount of
securities pursuant to Rule 24f-2 under the Investment Company Act of 1940, as
amended. Accordingly, no filing fee is payable herewith. The Registrant filed
on September 28, 1995, the notice required by Rule 24f-2 for its fiscal year
ended July 31, 1995.
It is proposed that this filing will become effective on June 2, 1996
pursuant to Rule 488.
<PAGE>
PAINEWEBBER SECURITIES TRUST
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following papers and documents:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheets
Letter to Shareholders
Notice of Special Meeting
Part A - Prospectus/Proxy Statement
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
PAINEWEBBER SECURITIES TRUST
FORM N-14 CROSS REFERENCE SHEET
Part A Item No. Prospectus/Proxy
and Caption Statement Caption
--------------- -----------------
1. Beginning of Registration Cover Page
Statement and Outside Front
Cover Page of Prospectus
2. Beginning and Outside Back Cover Table of Contents
Page of Prospectus
3. Synopsis Information and Risk Synopsis; Comparison of
Factors Principal Risk Factors
4. Information About the Synopsis; The Proposed
Transaction Transaction
5. Information About the Registrant Synopsis; Comparison of
Principal Risk Factors;
Additional Information
About Value Fund;
Miscellaneous; See also
--------
the Prospectus for
PaineWebber Small Cap
Value Fund, dated April
30, 1996, previously
filed on EDGAR,
Accession Number
0000928385-96-000365
6. Information About the Company Synopsis; Comparison of
Being Acquired Principal Risk Factors;
Miscellaneous; See also,
the Prospectus for
PaineWebber Small Cap
Growth Fund, dated
December 1, 1995, as
supplemented February 9,
1996, previously filed
on EDGAR, Accession
Numbers 0000950117-95-
000478 and 0000950117-96-
000118 respectively
7. Voting Information Voting Information
8. Interest of Certain Persons and Not Applicable
Experts
9. Additional Information Required Not Applicable
for Re-offering by Persons
Deemed to be Underwriters
Part B Item No. Statement of Additional
and Caption Information Caption
----------- -------------------
10. Cover Page Cover Page
11. Table of Contents Not Applicable
12. Additional Information About the Statement of Additional
Registrant Information of
PaineWebber Small Cap
Value Fund, dated April
30, 1996, previously
filed on EDGAR,
Accession Number
0000928385-96-000365
13. Additional Information About the Statement of Additional
Company Being Acquired Information of
PaineWebber Small Cap
Growth Fund, dated
December 1, 1995, as
supplemented March 1,
1996, previously filed
on EDGAR, Accession
Numbers 0000950117-95-
000478 and 889812-96-
000211, respectively
<PAGE>
PAINEWEBBER SECURITIES TRUST
FORM N-14 CROSS REFERENCE SHEET
14. Financial Statements Annual Reports of
PaineWebber Small Cap
Value Fund for Fiscal
Year Ended July 31,
1995, previously filed
on EDGAR, Accession
Number 0000951030-95-
001994; PaineWebber
Small Cap Growth Fund
for Fiscal Year Ended
July 31, 1995,
previously filed on
EDGAR, Accession Number
889812-95-000553
Semi-Annual Reports of
PaineWebber Small Cap
Value Fund for Six
Months Ended January 31,
1996, previously filed
on EDGAR, Accession
Number 0000950130-96-
001115; PaineWebber
Small Cap Growth Fund
for Six Months Ended
January 31, 1996,
previously filed on
EDGAR, Accession Number
889812-96-000322
Part C
- ------
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of this Registration Statement.
<PAGE>
PAINEWEBBER SECURITIES TRUST
PART A
<PAGE>
PAINEWEBBER SMALL CAP GROWTH FUND
(a series of PaineWebber Investment Trust III)
June , 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
has been 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, called PaineWebber Small Cap Value
Fund, in 1993, and chose an outside investment manager as the Fund's
sub-adviser.
While the Funds have 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. (For
example, 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 to be undervalued in the current marketplace--stocks that should move
up in price if certain factors are 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 designed to identify stocks that provide
a combination of value and momentum both price and earnings. Management then
applies fundamental research to identify 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
<PAGE>
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, my goal since 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 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 that 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
- --------------------------- -------------------------- -------------------------- --------------------------
CAPITALIZATION Up to $1 billion Up to $1 billion Up to $1 billion
- --------------------------- -------------------------- -------------------------- --------------------------
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 SECURITIES 10% of assets, may be 25% in U.S. 25% in U.S.
denominated in foreign dollar-denominated dollar-denominated
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 convertible Up to 10% in convertible
securities purchased debt securities rated no debt securities rated no
based on their equity lower than B lower than B
characteristics
</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
<PAGE>
Corporation ("SCC") to ask for your vote. We hope that their telephone call
does not inconvenience you.
I appreciate that the length of this 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,
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 Small Cap Value Fund and Small Cap Growth Fund have identical investment
objectives, they would be competing 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 the
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. Now, with Don Jones on board, Mitchell
Hutchins could propose the merger to the board and your board of trustees
approved the merger proposal.
Q: How will the merger affect the Funds' expenses?
It is important to note that while 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--Combined Fee Table" on page ___
of the proxy statement.)
TOTAL FUND OPERATING EXPENSES
(including advisory fee)
PW SMALL CAP VALUE PW SMALL CAP GROWTH COMBINED FUND
FUND FUND
- -------------- ------------------- --------------------- ---------------
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%
<PAGE>
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 the Fund or by yourself as a
result of your receipt of PaineWebber Small Cap Value Fund shares in the merger.
If you do not wish to receive shares of 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--i.e., experience a taxable event--if you
exchange your Fund shares for shares of a different fund. The only action that
will not result in a taxable event is your remaining in the Fund, so that you
receive the shares of Small Cap Value Fund distributed in the merger.
Also in connection with the merger, the 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 Small Cap Growth Fund you will
receive shares of Small Cap Value Fund that correspond to the class of shares of
Small Cap Growth Fund you now hold. The number of Small Cap Value Fund shares
you will receive will depend on the net asset value (NAV) of each class of each
Fund at the time of the closing of the merger.
For example, on March 31, 1996, the NAV per share of Small Cap
Growth Fund Class A was $12.93 and the NAV per share of Small Cap Value Fund
Class A was $11.11. If the merger had been completed on March 31, 1996, you
would have received 1.1638 Class A shares ($12.93 divided by $11.11) of Small
Cap Value Fund for each Class A share of 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 _____ shares
of PaineWebber Small Cap Growth Fund and the merger had been completed on that
date, you would own ____ shares afterward; _____ shares * $12.93 = _____ or
____ shares * $11.11 = $ _____.
Q: What class of shares will I own?
A: You will own the same class of shares of PW Small Cap Fund that you owned in
PW Small Cap Growth Fund. If you hold Small Cap Growth Fund shares subject to a
contingent deferred sales charge (e.g., 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 PW 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
May __, 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
MAY __, 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 May __, 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 reference. A Prospectus for Value Fund,
dated April 30, 1996 ("Value Fund Prospectus"), and a Statement of Additional
Information for Value Fund, dated April 30, 1996 ("Value Fund SAI"), 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 for Growth Fund, dated
December 1, 1995 (as supplemented February 9, 1996) (collectively, "Growth Fund
Prospectus"), and a Statement of Additional Information for Growth Fund, dated
December 1, 1995 (as supplemented March 1, 1996) ("Growth Fund SAI"), also have
been filed with the SEC and are incorporated herein by this reference. Copies of
the Value Fund
<PAGE>
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, 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
VOTING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SYNOPSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Proposed Reorganization . . . . . . . . . . . . . . . . . . . . . 2
Comparative Fee Table . . . . . . . . . . . . . . . . . . . . . . . . 3
Forms of Organization . . . . . . . . . . . . . . . . . . . . . . . . 6
Investment Objectives and Policies . . . . . . . . . . . . . . . . . . 7
Operations of Value Fund Following the Reorganization . . . . . . . . 8
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Dividends and Other Distributions . . . . . . . . . . . . . . . . . . 10
Federal Income Tax Consequences of the Reorganization . . . . . . . . 11
COMPARISON OF PRINCIPAL RISK FACTORS . . . . . . . . . . . . . . . . . . . . 11
THE PROPOSED TRANSACTION . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Reorganization Plan . . . . . . . . . . . . . . . . . . . . . . . . . 12
Reasons for the Reorganization . . . . . . . . . . . . . . . . . . . . 13
Description of Securities to be Issued . . . . . . . . . . . . . . . . 14
Federal Income Tax Considerations . . . . . . . . . . . . . . . . . . 15
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ADDITIONAL INFORMATION ABOUT VALUE FUND . . . . . . . . . . . . . . . . . . . 17
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . 17
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Available Information . . . . . . . . . . . . . . . . . . . . . . . . 21
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
APPENDIX A - AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION . . . . . A-1
<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 May __, 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 Prospectus/Proxy Statement prior to any such adjournment if
sufficient votes have been received and it is otherwise appropriate.
Broker non-votes are shares held in street name for which the broker
indicates that instructions have not been received from the beneficial owners or
other persons entitled to vote, and 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 in favor of 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.
If you sign, date and return the proxy card, but give no voting
instructions, the duly appointed proxies may, in their discretion, also vote
upon such other matters as may come before the Meeting. You may revoke the proxy
<PAGE>
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 _______ 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
[$____] for soliciting services.
[Except as set forth on Appendix B,] 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 for the Funds, which are incorporated
herein by this 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 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").
2
<PAGE>
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 prior to the Closing Date 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 may 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%.
The Class A, Class B and Class C shares of Growth Fund pay 12b-1 fees that
are identical to those paid by 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 The 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 1.50% of the average
daily value of the shares.
However, certain fees and expenses that Growth Fund's shareholders pay,
directly or indirectly, are different from those incurred by Value Fund
shareholders. Shareholders of Growth Fund are not charged 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.
3
<PAGE>
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>
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>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
Combined Fund
Growth Fund Value Fund (Pro Forma)
------------------- -------------- ------------------
Class Class Class Class Class Class Class Class Class Class Class
A B C Y(5) A B C A B C Y(5)
----- ----- ----- ------ ----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Fees(6)
12b-1 Fees 0.25% 1.00% 1.00% 0.00% 0.25% 1.00% 1.00% 0.25% 1.00% 1.00% 0.00%
Other
Expenses 0.66% 0.64% 0.66% 0.66% 0.72% 0.72% 0.71% 0.53% 0.56% 0.54% 0.53%
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Fund
Operating
Expenses(7) 1.91% 2.64% 2.66% 1.66% 1.97% 2.72% 2.71% 1.78% 2.56% 2.54% 1.53%
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
__________________________________
(1) Sales charge waivers are available for Class A and Class B 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 sales are redeemed within one year of purchase, a
contingent deferred sales charge of 1% will be applied to the redemption.
(3) If Class C shares are redeemed within one year of purchase, a contingent
deferred sales charge of 1% will be applied to the redemption. See
"Purchases."
(4) Class Y shares of either Fund are not exchangeable for shares of other
PaineWebber mutual funds.
(5) Maximum annual 1.50% advisory fee is payable by shareholders holding Class
Y shares through INSIGHT.
4
<PAGE>
(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.
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 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.
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
------ ------- ------ ------
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
5
<PAGE>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
------ ------- ------ ------
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
- ------------------------------
(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.
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.
6
<PAGE>
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.
Under normal circumstances, the Fund expects to maintain securities of at least
100 different issuers in its portfolio.
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 smaller or larger than small cap companies as 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. 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
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
7
<PAGE>
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.
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 trans-
ferred 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 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.
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
8
<PAGE>
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 Class Y shares
subject to Rule 12b-1 distribution or service fees. Effective prior to 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. Value Fund and
Mitchell Hutchins reserve the right to suspend the offering of Class Y
shares for a period of time.
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.
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
9
<PAGE>
recognized stock exchange, (3) other supporting legal documents for
estates, trusts, guardianships, custodianships, partnerships and corporations
and (4) duly endorsed share certificates, if any. Shareholders are responsible
for ensuring that a request for redemption is received in "good order."
A shareholder may have redemption proceeds of $1 million or more wired to
the shareholder's PaineWebber brokerage account or a commercial bank account
designated by the shareholder. Questions about this option, or redemption
requirements generally, should be referred to the shareholder's PaineWebber
investment executive or correspondent firm, 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 __, 1996, so that shares of Growth Fund will no longer be
available for purchase or exchange starting on July __, 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, B and 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.
10
<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.
LENDING PORTFOLIO SECURITIES. Each Fund is authorized to lend its portfolio
securities. In lending such securities, the Fund is subject to risks, which,
like those associated with other extensions of credit, include possible loss of
rights in the collateral should the borrower fail financially.
11
<PAGE>
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 (i) the fact that the skills needed to use
hedging instruments are different from those needed to select securities for the
Funds; (ii) the possibility of imperfect correlation, or even no correlation,
between price movements of hedging instruments and price movements of the
securities being hedged; (iii) possible constraints placed on the 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 (iv) the
possibility that the 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 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
12
<PAGE>
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 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
13
<PAGE>
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 [has been made] for the purpose of registering Class Y shares
of Value Fund with the SEC. Each share in a Class represents an 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 the 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
14
<PAGE>
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;
(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.
[Utilization by Value Fund after the Reorganization of pre-Reorganization
capital losses realized by Growth Fund could be subject to limitation in future
years under the Code.]
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
15
<PAGE>
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) giving effect to
the Reorganization:
Pro Forma
Value Fund Growth Fund Combined
---------- ----------- --------
Net Assets
Class A . . . . . . $19,639,810 $23,872,388 $43,512,198
Class B . . . . . . $40,875,625 $ 26,478 $40,902,103
Class C . . . . . . $11,603,025 $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
16
<PAGE>
ADDITIONAL INFORMATION ABOUT VALUE FUND
FINANCIAL HIGHLIGHTS
The table below provides selected per share data and ratios for one Class A
share, one Class B share and one Class C share for each of the periods shown.
(Class Y shares have been authorized and will be offered prior to the
Reorganization.) This information is supplemented by the financial statements
and accompanying notes appearing in the Fund's Annual Report to Shareholders for
the fiscal year ended July 31, 1995, and the unaudited financial statements and
accompanying notes in Value Fund's Semi-Annual Report to Shareholders for the
six month period ended January 31, 1996, which are incorporated by reference
into the Statement of Additional Information. The financial statements and notes
for the fiscal year ended July 31, 1995, as well as the information appearing in
the table below for the period February 1, 1994 through July 31, 1994 and for
the year ended January 31, 1994 have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon is included in the Annual Report
to Shareholders.
<TABLE>
SMALL CAP VALUE FUND
----------------------------------------------------------------------
Class A
----------------------------------------------------------------------
<CAPTION>
For the Six For the Year For the Period For the Year
Months Ended Ended February 1, Ended
January 31, July 31, 1994 through January 31,
1996 (unaudited) 1995 July 31, 1994 1994
---------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of
period ............. $ 11.30 $ 10.27 $ 10.61 $ 10.00
------- ------- ------- -------
Income from investment
operations:
Net investment
income ............ 0.02 0.05 0.02 0.13
Net realized and
unrealized gains
(losses) from
investment
transactions ...... 0.23 1.50 (0.36) 0.62
---- ---- ----- ----
Total income (loss)
from investment
operations ......... 0.25 1.55 (0.34) 0.75
---- ---- ----- ----
Less dividends and
other distributions to
shareholders from:
Net investment
income ............. -- -- -- (0.12)
Net realized gains
on investment
transactions ....... (0.83) (0.52) -- (0.02)
----- ----- ---- -----
Total dividends and
other distributions .. (0.83) (0.52) 0.00 (0.14)
----- ----- ---- -----
Net asset value, end
of period .......... $ 10.72 $ 11.30 $ 10.27 $ 10.61
======= ======= ======= =======
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
SMALL CAP VALUE FUND
------------------------------------------------------------------
Class A
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total investment
return(1) .......... 2.20% 15.80% (3.20)% 7.58%
==== ===== ===== ====
Ratios/Supplemental
Data:
Net assets, end of
period (000's) ..... $ 19,640 $ 20,494 $ 22,848 $ 25,226
Ratio of expenses to
average net assets . 1.90%* 1.98% 1.91%* 1.75%
Ratio of net
investment income to
average net assets . 0.49%* 0.41% 0.41%* 1.41%
Portfolio turnover
rate ............... 7% 19% 20% 98%
</TABLE>
<TABLE>
<CAPTION>
Class B
----------------------------------------------------------------------
For the Six For the Year For the Period For the Year
Months Ended Ended February 1, Ended
January 31, July 31, 1994 through January 31,
1996 (unaudited) 1995 July 31, 1994 1994
---------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of
period ............. $11.15 $10.22 $10.60 $10.00
------ ------ ------ ------
Income from
investment
operations:
Net investment
income (loss) ..... (0.02) (0.04) (0.02) 0.06
Net realized and
unrealized gains
(losses) from
investment
transactions ...... 0.23 1.49 (0.36) 0.62
---- ---- ----- ----
Total income (loss)
from investment
operations ......... 0.21 1.45 (0.38) 0.68
---- ---- ----- ----
Less dividends and
other
distributions to
shareholders
from:
Net investment
income ............. -- -- -- (0.06)
Net realized gains
on investment
transactions ....... (0.83) (0.52) -- (0.02)
----- ----- ----- -----
Total dividends and
other
distributions ........ (0.83) (0.52) 0.00 (0.08)
----- ----- ---- -----
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Class B
----------------------------------------------------------------------
For the Six For the Year For the Period For the Year
Months Ended Ended February 1, Ended
January 31, July 31, 1994 through January 31,
1996 (unaudited) 1995 July 31, 1994 1994
---------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C>
Net asset value,
end of period .......... $10.53 $11.15 $10.22 $10.60
====== ====== ====== ======
Total investment
return(1) .......... 1.87% 14.86% (3.58)% 6.81%
==== ===== ===== ====
Ratios/Supplemental
Data:
Net assets, end of
period (000's) ..... $ 40,876 $ 46,142 $ 52,624 $ 59,993
Ratio of expenses
to
average net
assets ............... 2.67%* 2.74% 2.69%* 2.50%
Ratio of net
investment income
(loss) to average
net assets ......... (0.28)%* (0.35)% (0.37)%* 0.67%
Portfolio turnover
rate ............... 7% 19% 20% 98%
</TABLE>
<TABLE>
<CAPTION>
Class C(2)
----------------------------------------------------------------------
For the Six For the Year For the Period For the Year
Months Ended Ended February 1, Ended
January 31, July 31, 1994 through January 31,
1996 (unaudited) 1995 July 31, 1994 1994
---------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of
period ............. $11.14 $10.22 $10.59 $10.00
------ ------ ------ ------
Income from
investment
operations:
Net investment
income (loss) ..... (0.02) (0.05) (0.02) 0.06
Net realized and
unrealized gains
(losses) from
investment
transactions ...... 0.23 1.49 (0.35) 0.62
---- ---- ----- ----
Total income (loss)
from investment
operations ......... 0.21 1.44 (0.37) 0.68
---- ---- ----- ----
Less dividends and
other
distributions to
shareholders from:
Net investment
income ............. -- -- -- (0.07)
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Class C(2)
----------------------------------------------------------------------
For the Six For the Year For the Period For the Year
Months Ended Ended February 1, Ended
January 31, July 31, 1994 through January 31,
1996 (unaudited) 1995 July 31, 1994 1994
---------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C>
Net realized gains
on investment
transactions ....... (0.83) (0.52) -- (0.02)
----- ----- -----
Total dividends
and other
distributions ...... (0.83) (0.52) 0.00 (0.09)
----- ----- ---- -----
Net asset value, end
of period .......... $10.52 $11.14 $10.22 $10.59
====== ====== ====== ======
Total investment
return(1) .......... 1.87% 14.76% (3.49)% 6.77%
==== ===== ===== ====
Ratios/Supplemental
Data:
Net assets, end of
period (000's) ..... $11,603 $13,263 $16,285 $20,941
Ratio of expenses
to average net
assets ............ 2.69%* 2.73% 2.69%* 2.50%
Ratio of net
investment income
(loss) to average
net assets ......... (0.31)%* (0.34)% (0.36)%* 0.64%
Portfolio turnover
rate ............... 7% 19% 20% 98%
</TABLE>
_____________________
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment
on the first day of each period reported, reinvestment of all
dividends and capital gain distributions at net asset value on the
payable dates, and a sale at net asset value on the last day of each
period reported. The figures do not include sales charges; results for
each class would be lower if sales charges were included. Total
investment returns for periods of less than one year have not been
annualized. (2) Formerly Class D shares
20
<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 Report 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 four years in
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.
21
<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 indi-
vidually 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, desig-
nated 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, desig-
nated 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 imposi-
tion of any FESC and are subject 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
(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.
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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 attributable 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. A t 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.
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 Share-
holders' 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
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(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, 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
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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 evi-
dencing 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:
4.1.15. 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;
4.1.16. 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;
4.1.17. Target is a duly established and designated series of
Investment Trust;
4.1.18. 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;
4.1.19. 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;
4.1.20. 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
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Securities Trust;
4.1.21. 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;
4.1.22. 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 con-
dition 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;
4.1.23. 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;
4.1.24. At the Effective Time, the performance of this Agreement shall
have been duly authorized by all necessary action by Target's shareholders;
4.1.25. 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 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;
4.1.26. 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;
4.1.27. The Liabilities were incurred by Target in the ordinary course
of its business;
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4.1.28. 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 Sub-
chapter 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;
4.1.29. 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;
4.1.30. 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
4.1.31. 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 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 addi-
tional 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;
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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 re-
quested 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 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
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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 re-
ceived by the Shareholders, will be approximately equal to the fair market
value of their Target Shares constructively surrendered in exchange
therefor;
4.3.2. Its management (a) is unaware of any plan or intention of
Shareholders to redeem or otherwise dispose of any portion of the Acquiring
Fund Shares to be received by them in the Reorganization and (b) does not
anticipate dispositions of those Acquiring Fund Shares at the time of or
soon after the Reorganization to exceed the usual rate and frequency of
dispositions of shares of Target as a series of an open-end investment
company. Consequently, its management expects that the percentage of
Shareholder interests, if any, that will be disposed of as a result of or
at the time of the Reorganization will be de minimis. Nor does its
management anticipate that there will be extraordinary redemptions of
Acquiring Fund Shares immediately following the Reorganization;
4.3.3. The Shareholders will pay their own expenses, if any, incurred
in connection with the Reorganization;
4.3.4. Immediately following consummation of the Reorganization,
Acquiring Fund will hold substantially the same assets and be subject to
substantially the same liabilities that Target held or was subject to im-
mediately 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
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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.
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 re-
quested 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 pur-
pose 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
A-9
<PAGE>
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 authori-
ties (including the SEC and state securities authorities) deemed necessary by
either Fund to permit consummation, in all material respects, of the transac-
tions 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, insolv-
ency, 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;
A-10
<PAGE>
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 accel-
eration 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
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
A-11
<PAGE>
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
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 Opin-
ion"). In rendering the Tax Opinion, such counsel may rely as to factual
matters, exclusively and without independent verification, on the represen-
tations made in this Agreement (or in separate letters addressed to such coun-
sel) 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 Liabili-
ties, followed by Target's distribution of those shares to the Shareholders
constructively in exchange for the Shareholders' Target Shares, will con-
stitute 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;
A-12
<PAGE>
6.6.4. Acquiring Fund's basis for the Assets will be the same as the
basis thereof in Target's hands immediately before the Reorganization, and
Acquiring Fund's holding period for the Assets will include Target's
holding period therefor;
6.6.5. A Shareholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for Acquiring Fund
Shares pursuant to the Reorganization; and
6.6.6. A Shareholder's basis for the Acquiring Fund Shares to be
received by it in the Reorganization will be the same as the basis for its
Target Shares to be constructively surrendered in exchange for those
Acquiring Fund Shares, and its holding period for those Acquiring Fund
Shares will include its holding period for those Target Shares, provided
they are held as capital assets by the Shareholder at the Effective Time.
Notwithstanding subparagraphs 6.6.2 and 6.6.4, 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.
A-13
<PAGE>
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.
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 Share-
holders' 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 trus-
tees or shareholders.
A-14
<PAGE>
IN WITNESS WHEREOF, each party has caused this Agreement to be executed by
its duly authorized officer.
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
A-15
<PAGE>
PAINEWEBBER SECURITIES TRUST
PART B
<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
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information relates specifically to
the proposed reorganization whereby PaineWebber Small Cap Value Fund
("Value Fund") would acquire the assets of PaineWebber Small Cap
Growth Fund ("Growth Fund") in exchange solely for shares of
beneficial interest in Value Fund and the assumption by Value Fund of
Growth Fund's liabilities. This Statement of Additional Information
consists of this cover page and the following described documents,
each of which is incorporated by reference herein:
(1) The Statement of Additional Information of Value Fund, dated
April 30, 1996, previously filed on EDGAR, Accession Number
000092835-96-000365
(2) The Statement of Additional Information of Growth Fund,
dated December 1, 1995, as supplemented March 1, 1996,
previously filed on EDGAR, Accession Numbers
0000950117-95-000478 and 889812-96-000211, respectively
(3) The Annual Report to Shareholders of Value Fund for the
fiscal year ended July 31, 1995, previously filed on EDGAR,
Accession Number 0000951030-95-001994
(4) The Annual Report to Shareholders of Growth Fund for the
fiscal year ended July 31, 1995, previously filed on EDGAR,
Accession Number 889812-95-000553
(5) The Semi-Annual Report to Shareholders of Value Fund for the
six-months ended January 31, 1996, previously filed on
EDGAR, Accession Number 0000950130-96-001115
(6) The Semi-Annual Report to Shareholders of Growth Fund for
the six-month period ended January 31, 1996, previously
filed on EDGAR, Accession Number 889812-96- 000322
This Statement of Additional Information is not a prospectus and
should be read only in conjunction with the Prospectus/Proxy Statement
dated May __, 1996 relating to the above-referenced matter. A copy of
the Prospectus/Proxy Statement may be obtained by calling any
PaineWebber investment executive or correspondent firm or by calling
toll-free [1-800-647-1568.] This Statement of Additional Information
is dated May __, 1996.
B-1
<PAGE>
Notes To Pro Forma Combined Financial Statements
(unaudited)
Basis of Presentation:
Subject to approval of the Plan of Reorganization by the shareholders of
PaineWebber Small Cap Growth Fund ("Growth Fund"), PaineWebber Small Cap Value
Fund ("Value Fund") would acquire the assets of Growth Fund in exchange solely
for shares of beneficial interest in the Value Fund and the assumption of Growth
Fund's liabilities.
Shares of Value Fund will be distributed to Growth Fund shareholders at the net
asset value per share of Value Fund for the value acquired and Growth Fund will
be terminated as soon as practicable thereafter. Each shareholder of Growth Fund
will receive the number of full and fractional shares of each Class of shares of
Value Fund equal in value to such shareholder's holdings in the corresponding
Class of shares of Growth Fund as of the closing date of the merger.
On or before the closing date of the merger, Growth Fund will declare as a
distribution of substantially all of its net investment income, net capital gain
and net short-term capital gain, if any. 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.
The pro forma combined financial statements reflect the financial position of
Value Fund and Growth Fund at January 31,1996 and the combined results of
operations of Value Fund and Growth Fund for the twelve months ended January 31,
1996. Certain expenses have been adjusted to reflect the expected operations of
the combined entity. Pro forma operating expenses include the actual expenses of
the Funds and the combined Fund, adjusted for certain items.
If the Reorganization is approved, Growth Fund will sell any assets that are
inconsistent with Value Fund's investment policies prior to the effective time
of the Reorganization. The proceeds of any such sales will be held in temporary
investments or reinvested in assets that qualify to be held by 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 realizing losses that would not otherwise
have been realized.
As a result of the Reorganization, investment advisory and administration fees
for Growth Fund will increase due to a higher fee schedule applicable to Value
Fund. Other expenses, in aggregate, will be reduced due to the elimination of
duplicate expenses. It is estimated that costs of approximately $150,000
associated with the merger will be charged to the Funds in proportion to their
respective net assets.
The pro forma combined financial statements are presented for the information of
the reader and may not necessarily be representative of what the actual combined
financial statements would have been had the Reorganization occurred at January
31, 1996. The pro forma combined financial statements should be read in
conjunction with the historical financial statements of the constituent Funds
incorporated by reference into the statement of additional information.
<PAGE>
Portfolio of Investments
January 31, 1996 (unaudited)
<TABLE>
<CAPTION>
PaineWebber PaineWebber Pro Forma
Number of Small Cap Value Small Cap Growth Combined
Shares Fund Fund Value
============= ============= ============= ============
<S> <C> <C> <C> <C>
COMMON STOCKS - 94.56%
Apparel & Footwear - 2.55%
82,800 Delta Woodside Industries Incorporated (New) $558,900 $558,900
24,100 Fab Industries Incorporated 744,087 744,087
45,000 Oshkosh B'Gosh, Incorporated (Class A) 765,000 765,000
15,400 Russell Corporation 423,500 423,500
45,400 Stride Rite Corporation 374,550 374,550
------------- ------------- ------------
2,866,037 $0 2,866,037
------------- ------------- ------------
Building Materials - 1.45%
35,300 CalMat Company 639,812 639,812
36,000 Florida Rock Industries, Incorporated 990,000 990,000
------------- ------------- ------------
1,629,812 0 1,629,812
------------- ------------- ------------
Business Products & Related Services - 5.52%
30,700 Bowne & Company Incorporated 575,625 575,625
20,000 Electronics For Imaging, Incorporated * 725,000 725,000
10,600 John H. Harland Company 233,200 233,200
19,300 McClatchy Newspapers Incorporated (Class A) 439,075 439,075
37,400 Network Equipment Technologies, Incorporated * 1,033,175 1,033,175
18,400 New England Business Services Incorporated 326,600 326,600
30,000 Optical Data Systems, Incorporated * 517,500 517,500
65,000 S3, Incorporated * 788,125 788,125
39,000 Scitex Limited 546,000 546,000
52,800 Standard Register Company 1,016,400 1,016,400
------------- ------------- ------------
3,136,900 3,063,800 6,200,700
------------- ------------- ------------
Chemicals- 2.46%
25,000 Airgas, Incorporated * 871,875 871,875
38,100 Lawter International Incorporated 414,337 414,337
15,000 LeaRonal Incorporated 399,375 399,375
33,500 Quaker Chemical Corporation 443,875 443,875
40,000 Tetra Technologies, Incorporated * 630,000 630,000
------------- ------------- ------------
1,257,587 1,501,875 2,759,462
------------- ------------- ------------
Construction- 0.35%
25,000 Ply-Gem Industries, Incorporated 0 390,625 390,625
------------- ------------- ------------
Consumer Durables - 5.43%
20,000 Arctco Incorporated 222,500 222,500
40,000 Ethan Allen Interiors Incorporated * 935,000 935,000
47,000 Juno Lighting Incorporated 763,750 763,750
32,300 Kimball International, Incorporated (Class B) 912,475 912,475
22,400 La Z Boy Chair Company 705,600 705,600
18,000 National Presto Industries, Incorporated 787,500 787,500
22,200 Sturm Ruger & Company Incorporated 707,625 707,625
77,800 TBC Corporation * 554,325 554,325
97,000 Topps Incorporated * 509,250 509,250
------------- ------------- ------------
6,098,025 0 6,098,025
------------- ------------- ------------
Containers - 0.48%
35,000 ACX Technologies, Incorporated * 0 542,500 542,500
------------- ------------- ------------
Distributors - 1.32%
20,000 Marshall Industries 637,500 637,500
15,500 NCH Corporation 848,625 848,625
------------- ------------- ------------
1,486,125 0 1,486,125
------------- ------------- ------------
Domestic Petroleum Reserves - 0.66%
60,000 Benton Oil & Gas Company * 0 742,500 742,500
------------- ------------- ------------
Drugs, Medicine - 1.53%
15,000 Dura Pharmaceuticals Incorporated * 577,500 577,500
25,000 Watson Pharmaceuticals, Incorporated * 1,143,750 1,143,750
------------- ------------- ------------
0 1,721,250 1,721,250
------------- ------------- ------------
Electronics- 3.50%
20,000 Alliance Semiconductor Corporation * 215,000 215,000
20,000 C Cube Microsystems, Incorporated * 1,200,000 1,200,000
35,000 Credence Systems Corporation * 861,875 861,875
10,000 KLA Instruments Corporation * 295,000 295,000
</TABLE>
<PAGE>
Portfolio of Investments
January 31, 1996 (unaudited)
<TABLE>
<CAPTION>
PaineWebber PaineWebber Pro Forma
Number of Small Cap Value Small Cap Growth Combined
Shares Fund Fund Value
============= ============= ============= ============
<S> <C> <C> <C> <C>
20,000 Lo-Jack Corporation * $198,750 $198,750
35,000 Tencor Instruments * 807,188 807,188
26,000 Trident Microsystems Incorporated 357,500 357,500
------------- ------------- ------------
$0 3,935,313 3,935,313
------------- ------------- ------------
Energy - 3.07%
14,600 Ashland Coal, Incorporated 308,425 308,425
8,450 Barrett Resources Corporation * 215,475 215,475
32,400 Cliffs Drilling Company * 473,850 473,850
20,000 Devon Energy Corporation 492,500 492,500
23,100 Oceaneering International, Incorporated * 303,187 303,187
19,500 Parker & Parsley Petroleum Company 416,812 416,812
12,730 Penn Virginia Corporation 432,820 432,820
20,000 Reading & Bates Corporation * 340,000 340,000
48,000 Santa Fe Energy Resources, Incorporated * 462,000 462,000
------------- ------------- ------------
3,445,069 0 3,445,069
------------- ------------- ------------
Financial Services - 2.00%
22,300 Duff & Phelps Corporation 153,312 153,312
5,766 Duff & Phelps Credit Rating Company 88,652 88,652
15,000 John Nuveen Company 382,500 382,500
14,800 Pioneer Group Incorporated 440,300 440,300
9,500 Raymond James Financial Incorporated 209,000 209,000
18,500 Student Loan Corporation 626,687 626,687
7,000 U.S. Trust Corporation (New) 343,000 343,000
------------- ------------- ------------
2,243,451 0 2,243,451
------------- ------------- ------------
Food & Related Services - 2.43%
6,500 Farmer Bros. Company 864,500 864,500
16,000 Flowers Industries, Incorporated 212,000 212,000
34,600 International Dairy Queen Incorporated * 752,550 752,550
25,500 Lance, Incorporated 433,500 433,500
11,875 Rykoff-Sexton, Incorporated 190,000 190,000
7,210 Tootsie Roll Industries Incorporated 281,190 281,190
------------- ------------- ------------
2,733,740 0 2,733,740
------------- ------------ ------------
Healthcare - 1.85%
15,336 Block Drug Incorporated 605,293 605,293
28,000 Haemonetices Corporation * 486,500 486,500
30,000 Kinetic Concepts Incorporated 371,250 371,250
2,200 Life Technologies Incorporated 56,650 56,650
20,000 Marquette Electronics Incorporated * 380,000 380,000
6,800 Spacelabs Incorporated * 183,600 183,600
------------- ------------- ------------
2,083,293 0 2,083,293
------------- ------------- ------------
Health (Non-Drug)- 5.69%
45,000 Conmed Corporation * 1,012,500 1,012,500
15,000 Health Management Associates, Incorporated, Class A * 451,875 451,875
60,000 Horizon Healthcare Corporation * 1,642,500 1,642,500
20,000 Lincare Holdings, Incorporated * 530,000 530,000
36,900 Maxicare Health Plans, Incorporated * 1,019,362 1,019,362
20,000 Renal Treatment Centers, Incorporated * 915,000 915,000
15,000 Target Therapeutics, Incorporated * 821,250 821,250
------------- ------------- ------------
0 6,392,487 6,392,487
------------- ------------- ------------
Industrial Products & Services- 6.82%
30,000 BWIP Holding Incorporated (Class A) 435,000 435,000
35,000 Camco International, Incorporated 936,250 936,250
15,000 Crompton & Knowles Corporation 206,250 206,250
20,000 Giddings & Lewis Incorporated 307,500 307,500
10,600 Greif Bros. Corporation (Class A) 300,775 300,775
26,200 Kaydon Corporation 766,350 766,350
22,600 Lawson Products Incorporated 542,400 542,400
53,750 Lilly Industries Incorporated (Class A) 692,031 692,031
20,000 Lincoln Electric Company 480,000 480,000
23,500 Oregon Steel Mills Incorporated 331,938 331,938
34,100 P.H. Glatfelter Company 583,963 583,963
17,500 Precision Castparts Corporation 697,813 697,813
92,800 Rollins Environmental Services, Incorporated * 208,800 208,800
6,800 Tecumseh Products Company (Class A) 385,900 385,900
27,000 W. H. Brady Company 597,375 597,375
8,000 Wausau Paper Mills Company 188,000 188,000
---------- ------------- -----------
7,660,345 0 7,660,345
---------- ------------- -----------
</TABLE>
<PAGE>
Portfolio of Investments
January 31, 1996 (unaudited)
<TABLE>
<CAPTION>
PaineWebber PaineWebber PaineWebber
Number of Small Cap Value Small Cap Growth Combined
Shares Fund Fund Value
============= ============= ============= ============
<S> <C> <C> <C> <C>
Insurance- 11.54%
3,743 Alleghany Corporation * $750,939 $750,939
29,900 Argonaunt Group, Incorporated 960,538 960,538
10,000 Arthur J. Gallagher & Company 372,500 372,500
7,500 CMAC Investment Corporation 431,250 431,250
9,500 Capital Re Corporation 287,375 287,375
31,000 Commerce Group, Corporation 600,625 600,625
40,700 E.W. Blanch Holdings, Incorporated 986,975 986,975
18,000 Fremont General Corporation 648,000 648,000
8,000 Harleysville Group, Incorporated 240,000 240,000
52,400 Hilb, Rogal & Hamilton Company 681,200 681,200
15,000 Leucadia National Corporation 421,875 421,875
20,706 Orion Capital Corporation 926,594 926,594
18,200 Partner RE Holding 507,325 507,325
6,000 Pennsylvania Manufacturers Corporation 112,500 112,500
25,875 RLI Corporation 653,344 653,344
6,800 Transatlantic Holdings, Incorporated 486,200 486,200
12,400 Trenwick Group Incorporated 672,700 672,700
11,700 W R Berkley Corporation 587,925 587,925
6,300 Wesco Financial Corporation 1,086,750 1,086,750
60,300 Willis Corroon Group, plc, ADR 708,525 708,525
36,000 Zenith National Insurance Corporation 846,000 846,000
----------- ------------- ------------
12,969,140 $0 12,969,140
----------- ------------- ------------
Iron & Steel- 0.32%
20,000 J & L Specialty Steel, Incorporated 0 355,000 355,000
----------- ------------- ------------
Leisure, Luxury- 0.66%
25,000 Grand Casinos, Incorporated * 0 746,875 746,875
----------- ------------- ------------
Mining & Metals- 0.29%
7,500 Cable Design Technologies * 0 330,000 330,000
----------- ------------- ------------
Miscellaneous Finance- 1.25%
15,000 Aames Financial Corporation * 551,250 551,250
60,000 Olympic Financial Limited * 855,000 855,000
----------- ------------- ------------
0 1,406,250 1,406,250
----------- ------------- ------------
Oil Service- 1.37%
60,000 Pride Petroleum Services, Incorporated * 547,500 547,500
30,000 Tidewater, Incorporated 993,750 993,750
----------- ------------- ------------
0 1,541,250 1,541,250
----------- ------------- ------------
Paper- 1.82%
30,000 Chesapeake Corporation 851,250 851,250
62,300 Mercer International, Incorporated * 1,191,488 1,191,488
----------- ------------- ------------
0 2,042,738 2,042,738
----------- ------------- ------------
Photographic-Optical- 0.90%
25,000 Ultratech Stepper, Incorporated * 734,375 734,375
10,000 Zygo Corporation * 276,250 276,250
----------- ------------- ------------
0 1,010,625 1,010,625
----------- ------------- ------------
Pollution Control- 1.12%
63,000 New Park Resources, Incorporated * 0 1,260,000 1,260,000
----------- ------------- ------------
Producers' Goods- 7.43%
20,000 Agco Corporation 975,000 975,000
6,500 DSP Communications, Incorporated * 279,500 279,500
40,000 EIS International, Incorporated * 675,000 675,000
30,000 Electro Scientific Industries, Incorporated * 637,500 637,500
40,000 Electroglas, Incorporated * 825,000 825,000
50,500 FSI International, Incorporated * 782,750 782,750
20,000 JLG Industries, Incorporated 532,500 532,500
25,000 Kulicke & Soffa Industries, Incorporated * 546,875 546,875
21,100 Lam Research Corporation * 902,025 902,025
20,000 Measurex Corporation 592,500 592,500
15,000 Microcom, Incorporated * 373,125 373,125
23,000 Novellus Systems, Incorporated * 1,224,750 1,224,750
----------- ------------- ------------
0 8,346,525 8,346,525
----------- ------------ ------------
</TABLE>
<PAGE>
Portfolio of Investments
January 31, 1996 (unaudited)
<TABLE>
<CAPTION>
PaineWebber PaineWebber Pro Forma
Number of Small Cap Value Small Cap Growth Combined
Shares Fund Fund Value
============= ============== ============= ============
<S> <C> <C> <C> <C>
Real Estate Holdings & Services - 1.44%
10,000 Florida East Coast Industries Incorporated $688,750 $688,750
52,100 Newhall Land & Farming Company LP 924,775 924,775
-------------- ------------- ------------
1,613,525 $0 1,613,525
-------------- ------------- ------------
Retail (All Other) - 1.10%
25,000 Renters Choice, Incorporated * 409,375 409,375
29,700 Sunglass Hut International, Incorporated * 826,031 826,031
-------------- ------------- ------------
0 1,235,406 1,235,406
-------------- ------------- ------------
Retail & Mail Order - 7.40%
18,800 Blair Corporation 592,200 592,200
84,000 Charming Shoppes, Incorporated * 231,000 231,000
29,800 Claire's Stores, Incorporated 569,925 569,925
4,500 Dart Group Corporation (Class A) 425,250 425,250
108,000 Dress Barn * 1,012,500 1,012,500
41,600 Family Dollar Stores, Incorporated 494,000 494,000
15,000 Fingerhut Companies Incorporated 204,375 204,375
35,700 Land's End, Incorporated * 522,113 522,113
14,000 Longs Drug Stores Corporation 633,500 633,500
54,000 Mikasa, Incorporated * 681,750 681,750
32,400 Neiman Marcus Group Incorporated * 583,200 583,200
75,095 Pier 1 Imports, Incorporated 882,366 882,366
32,100 Russ Berrie and Company, Incorporated 421,313 421,313
30,000 Shopko Stores Incorporated 352,500 352,500
26,700 Stanhome, Incorporated 714,225 714,225
-------------- ------------- ------------
8,320,217 0 8,320,217
-------------- ------------- ------------
Services - 7.81%
10,000 Acordia, Incorporated 296,250 296,250
16,800 Angelica Corporation 340,200 340,200
40,750 Comdisco, Incorporated 871,031 871,031
50,000 Computervision Corporation (New) * 618,750 618,750
69,200 Crawford & Company (Class A) 1,141,800 1,141,800
42,200 Dames & Moore, Incorporated 511,675 511,675
9,100 FlightSafety International, Incorporated 453,863 453,863
3,375 Grey Advertising Incorporated 690,188 690,188
9,000 Health Risk Management, Incorporated * 105,750 105,750
20,800 Jenny Craig, Incorporated * 202,800 202,800
20,000 Macromedia, Incorporated * 800,000 800,000
5,000 Mercury Interactive Corporation * 103,750 103,750
10,100 National Service Industries, Incorporated 352,238 352,238
16,400 SEI Corporation 369,000 369,000
80,800 Sotheby's Holdings, Incorporated 1,201,900 1,201,900
20,900 Stone & Webster Incorporated 715,825 715,825
-------------- ------------- ------------
7,146,770 1,628,250 8,775,020
-------------- ------------- ------------
Thrift Institutions- 0.63%
25,000 Coast Savings Financial Incorporated * 0 706,250 706,250
-------------- ------------- ------------
Transportation- 1.75%
26,650 Air Express International Corporation 572,975 572,975
33,400 Arnold Industries Incorporated 486,387 486,387
26,000 Atlantic Southeast Airlines Incorporated 479,375 479,375
24,800 Harper Group 430,900 430,900
-------------- ------------- ------------
1,969,637 0 1,969,637
-------------- ------------- ------------
Trucking, Freight- 0.62%
20,000 Fritz Companies, Incorporated * 0 701,250 701,250
-------------- ------------- ------------
Total Common Stock (cost - $62,609,132, $36,157,098 and
$98,766,230, respectively) 66,659,673 39,600,769 106,260,442
-------------- ------------- ------------
</TABLE>
<PAGE>
Portfolio of Investments
January 31, 1996 (unaudited)
<TABLE>
<CAPTION>
PaineWebber PaineWebber Pro Forma
Number of Small Cap Small Cap Combined
Shares Value Fund Growth Fund Value
============= ============= ============== =============
Principal
Amount Maturity Interest
(000) Dates Rates
================ =========================
<S> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS- 3.47%
$3,900 U.S. Treasury Bills (cost - $2,996,859, 02/08/96 5.385 & 5.420% $2,997,330 $899,030 $3,896,360
$899,051 and $3,895,910, respectively) ------------- -------------- -------------
------------- -------------- -------------
REPURCHASE AGREEMENTS- 3.05%
2,872 Repurchase Agreement dated
01/31/96 with State Street Bank &
Trust Company, collateralized by
$2,830,000 U.S. Treasury Notes,
6.125%, due 05/15/98; proceeds:
$2,872,463 02/01/96 5.800 2,872,000 2,872,000
------------- -------------- -------------
550 Repurchase Agreement dated
01/31/96 with State Street Bank &
Trust Company, collateralized by
$399,148 U.S. Treasury Bonds,
9.250%, due 02/15/16; proceeds:
$550,076 02/01/96 5.000 550,000 550,000
------------- -------------- -------------
Total Repurchase Agreements (cost - $2,872,000,
$550,000 and $3,422,000, respectively) 2,872,000 550,000 3,422,000
------------- -------------- -------------
Total Investments (cost - $68,477,991, $37,606,149
and $106,084,140, respectively) 101.08% 72,529,003 41,049,799 113,578,802
Liabilities in excess of other assets - -1.08% (410,543) (799,224) (1,209,767)
------------- -------------- -------------
Net Assets - 100.00% $72,118,460 $40,250,575 $112,369,035
============= ============== =============
</TABLE>
==================
* Non-income producing security
ADR American Depositary Receipt
See accompanying notes to financial statements
<PAGE>
Pro Forma Capitalization And Ratios
- -----------------------------------
All information provided is as of January 31, 1996
<TABLE>
<CAPTION>
PaineWebber PaineWebber
Small Cap Value Small Cap Growth Pro Forma
Fund Fund Combined
================= =================== ============
<S> <C> <C> <C>
Net Assets $72,118,460 $40,250,575 $112,369,035
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 - $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 - 355,798 434,263
Ratio of expenses to average net assets
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 - 1.66% 1.53%
</TABLE>
<PAGE>
Pro Forma Combined
Statement of Assets and Liabilities
January 31, 1996
(unaudited)
<TABLE>
<CAPTION>
PaineWebber PaineWebber
Small Cap Value Small Cap Growth Pro Forma
Fund Fund Combined
--------------- ----------------- -------------
Assets
<S> <C> <C> <C>
Investments, at value (cost -$68,477,991, $37,606,149 and
$106,084,140, respectively) $72,529,003 $41,049,799 $113,578,802
Other assets 210,793 234,091 444,884
-------------- --------------- --------------
Total assets 72,739,796 41,283,890 114,023,686
-------------- --------------- --------------
Total liabilities 621,336 1,033,315 1,654,651
-------------- --------------- --------------
Beneficial interest shares of $0.001 par value outstanding
(unlimited amount authorized) 67,024,928 36,756,758 103,781,686
Accumulated net investment loss (29,924) (352,510) (382,434)
Accumulated net realized gains from investment transactions 1,072,444 402,677 1,475,121
Net unrealized appreciation of investments 4,051,012 3,443,650 7,494,662
-------------- --------------- --------------
Net assets $72,118,460 $40,250,575 $112,369,035
============== =============== ==============
Class A:
Net assets $19,639,810 $23,872,388 $43,512,198
-------------- --------------- --------------
Shares outstanding 1,831,614 1,869,078 4,058,118
-------------- --------------- --------------
Net asset value and redemption value per share $10.72 $12.77 $10.72
============== =============== ==============
Maximum offering price per share (net asset value plus sales
charges of 4.50% of offering price) $11.23 $13.37 $11.23
============== =============== ==============
Class B:
Net assets $40,875,625 $26,478 $40,902,103
-------------- --------------- --------------
Shares outstanding 3,881,699 2,108 3,884,213
-------------- --------------- --------------
Net asset value and offering price per share $10.53 $12.56 $10.53
============== =============== ==============
Class C:
Net assets $11,603,025 $11,783,151 $23,386,176
-------------- --------------- --------------
Shares outstanding 1,102,701 938,350 2,223,012
-------------- --------------- --------------
Net asset value and offering price per share $10.52 $12.56 $10.52
============== =============== ==============
Class Y:
Net assets N/A $4,568,558 $4,568,558
-------------- --------------- --------------
Shares outstanding N/A 355,798 434,263
-------------- --------------- --------------
Net asset value, offering price and redemption value per share N/A $12.84 $10.52
============== =============== ==============
</TABLE>
See Notes to Pro Forma Combined Financial Statements
<PAGE>
Pro Forma Capitalization
As of January 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
PaineWebber PaineWebber PaineWebber
Small Cap Value Small Cap Growth Small Cap Value
Fund Fund Fund (as adjusted) (1)
-------------- --------------- ---------------------
<S> <C> <C> <C>
Shareholders' Equity:
Beneficial interest shares of $0.001 par value
(unlimited amount authorized) $67,024,928 $36,756,758 $103,781,686 (2) (3)
6,816,014 shares of PaineWebber Small Cap Value Fund (Actual)
3,165,334 shares of PaineWebber Small Cap Growth Fund (Actual)
10,599,606 shares of PaineWebber Small Cap Value Fund (As adjusted)
Accumulated net investment loss (29,924) (352,510) (382,434)
Accumulated net realized gains from investment transactions 1,072,444 402,677 1,475,121
Net unrealized appreciation/depreciation of investments 4,051,012 3,443,650 7,494,662
------------- -------------- ----------------
Net Assets $72,118,460 $40,250,575 $112,369,035
============= ============== ================
</TABLE>
(1) The adjusted balances are presented as if the Reorganization involving the
Funds was effective as of January 31, 1996 and is presented for information
purposes only. The actual effective time of the Reorganization is expected
to be July 1996, at which time the results would be reflective of the
actual composition of shareholders' equity at that date.
(2) Assumes the beneficial interest holders of PaineWebber Small Cap Value Fund
remain unchanged. Assumes the issuance of 3,783,592 shares in exchange for
the net assets applicable to beneficial interest holders of PaineWebber
Small Cap Growth Fund. The exchange is based on the net asset values for
PaineWebber Small Cap Value Fund's Class A, Class B, Class C and Class Y
shares and the net assets applicable to beneficial interest holders of
PaineWebber Small Cap Growth Fund as of January 31, 1996.
(3) Excludes the impact of estimated Reorganization costs of $150,000.
<PAGE>
Pro Forma Combined
Statement of Operations
For the Twelve Months Ended January 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
PaineWebber PaineWebber
Small Cap Value Small Cap Growth Pro Forma
Fund Fund Adjustments Combined
------------------ ---------------- ------------ ------------
<S> <C> <C> <C> <C>
Investment income:
Interest and dividends $1,865,414 $215,894 $0 $2,081,308
------------------ -------------- ------------ ------------
Expenses:
Investment advisory and administration fees 778,145 460,617 23,395 1,262,157
Distribution fees 625,327 211,594 0 836,921
Transfer agency and service fees 106,945 68,088 (43,210) 131,823
Legal and audit fees 64,366 36,548 (30,111) 70,803
Other 387,286 238,787 (142,308) 483,765
------------------ -------------- ------------ ------------
1,962,069 1,015,634 (192,234) 2,785,469
------------------ -------------- ------------ ------------
Net investment income (96,655) (799,740) 192,234 (704,161)
------------------ -------------- ------------ ------------
Realized and unrealized gains (losses) from
investment transactions:
Net realized gains from investment transactions 6,437,683 11,744,329 0 18,182,012
Net change in unrealized appreciation/depreciation of
investments 4,608,491 (721,825) 0 3,886,666
------------------ -------------- ------------ ------------
Net realized and unrealized gains from investment 11,046,174 11,022,504 0 22,068,678
transactions
Net increase in net assets resulting from operations $10,949,519 $10,222,764 $192,234 $21,364,517
================== ============== ============ ============
</TABLE>
See Notes to Pro Forma Combined Financial Statements
<PAGE>
PAINEWEBBER SECURITIES TRUST
PART C
OTHER INFORMATION
Item 15. Indemnification
---------------
Section 3 of Article X of the Declaration of Trust, "Indemnification,"
provides that the appropriate series of the Registrant will indemnify the
trustees and officers of the Registrant to the fullest extent permitted by law
against claims and expenses asserted against or incurred by them by virtue of
being or having been a trustee or officer; provided that no such person shall be
indemnified where there has been an adjudication or other determination, as
described in Article X, that such person is liable to the Registrant or its
shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office or
did not act in good faith in the reasonable belief that his action was in the
best interest of the Registrant. Section 3 of Article X also provides that the
Registrant may maintain insurance policies covering such rights of
indemnification.
Additionally, "Limitation of Liability" in Article X of the Declaration of
Trust provides that the trustees or officers of the Registrant shall not be
personally liable to any person extending credit to, contracting with or having
a claim against the Registrant or a particular series; and that, provided they
have exercised reasonable care and have acted under the reasonable belief that
their actions are in the best interest of the Registrant, the trustees and
officers shall not be liable for neglect or wrongdoing by them or any officer,
agent, employee or investment adviser of the Registrant.
Section 2 of Article XI of the Declaration of Trust additionally provides
that, subject to the provisions of Section 1 of Article XI and to Article X,
trustees shall not be liable for errors of judgement or mistakes of fact or law,
for any act or omission in accordance with advice of counsel or other experts,
or for failing to follow such advice, with respect to the meaning and operation
of the Declaration of Trust.
Article IX of the By-Laws provides that the Registrant may purchase and
maintain insurance on behalf of any person who is or was a trustee, officer or
employee of the Registrant, or is or was serving at the request of the
Registrant as a trustee, officer or employee of a corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity or arising out of his status as
such, whether or not the Registrant would have the power to indemnify him
against such liability to the Registrant or its shareholders, provided that the
Registrant may not purchase or maintain insurance that protects any such person
against any liability to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his office.
Section 9 of the Investment Advisory and Administration Contract
("Contract") with Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins")
provides that Mitchell Hutchins shall not be liable for any error of judgment
or mistake of law or for any loss suffered by any series of the Registrant in
connection with the matters to which the Contract relates, except for a loss
resulting from the willful misfeasance, bad faith, or gross negligence of
Mitchell Hutchins in the performance of its duties or from its reckless
disregard of its obligations and duties under the Contract. Section 10 of the
Contract provides that the Trustees shall not be liable for any obligations of
the Trust or any series under the Contract and that Mitchell Hutchins shall look
only to the assets and property of the Registrant in settlement of such right or
claim and not to the assets and property of the Trustees.
Section 9 of each Distribution Contract provides that the Trust will
indemnify Mitchell Hutchins and its officers, directors and controlling persons
against all liabilities arising from any alleged untrue statement of material
fact in the Registration Statement or from any alleged omission to state in the
Registration Statement a material fact
1
<PAGE>
required to be stated in it or necessary to make the statements in it, in light
of the circumstances under which they were made, not misleading, except insofar
as liability arises from untrue statements or omissions made in reliance upon
and in conformity with information furnished by Mitchell Hutchins to the Trust
for use in the Registration Statement; and provided that this indemnity
agreement shall not protect any such persons against liabilities arising by
reason of their bad faith, gross negligence or willful misfeasance; and shall
not inure to the benefit of any such persons unless a court of competent
jurisdiction or controlling precedent determines that such result is not against
public policy as expressed in the Securities Act of 1933. Section 9 of each
Distribution Contract also provides that Mitchell Hutchins agrees to indemnify,
defend and hold the Trust, its officers and Trustees free and harmless of any
claims arising out of any alleged untrue statement or any alleged omission of
material fact contained in information furnished by Mitchell Hutchins for use in
the Registration Statement or arising out of an agreement between Mitchell
Hutchins and any retail dealer, or arising out of supplementary literature or
advertising used by Mitchell Hutchins in connection with the Distribution
Contract. Section 10 of each Distribution Contract contains provisions similar
to Section 10 of the Investment Advisory and Administration Contract, with
respect to Mitchell Hutchins and PaineWebber Incorporated ("PaineWebber"), as
appropriate.
Section 9 of each Exclusive Dealer Agreement contains provisions similar to
Section 9 of each Distribution Contract, with respect to PaineWebber.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be provided to trustees, officers and controlling
persons of the Registrant, pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding or payment pursuant to any insurance policy) is
asserted against the Registrant by such trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Item 16. Exhibits
--------
(1) (a) Declaration of Trust 1/
-
(b) Amendment effective December 10, 1992 to Declaration of Trust 2/
-
(c) Amendment effective November 29, 1993 to Declaration of Trust 5/
-
(d) Amendment effective July 20, 1995 to Declaration of Trust (filed
herewith)
(e) Amendment effective November 10, 1995 to Declaration of Trust
(filed herewith)
(2) (a) By-Laws 1/
-
(b) Amendment dated September 28, 1994 to By-Laws 7/
-
(3) Voting trust agreement - none
(4) Agreement and Plan of Reorganization and Termination (filed herewith)
(5) All instruments defining the rights of holders of Registrant's shares
of beneficial interest 8/
-
(6) Investment Advisory and Administration Contract 3/
-
(7) (a) Distribution Contract with respect to Class A Shares 4/
-
(b) Distribution Contract with respect to Class B Shares 4/
-
(c) Distribution Contract with respect to Class C Shares 9/
-
(d) Form of Distribution Contract with respect to Class Y Shares
(filed herewith)
(e) Exclusive Dealer Agreement with respect to Class A Shares 4/
-
(f) Exclusive Dealer Agreement with respect to Class B Shares 4/
-
(g) Exclusive Dealer Agreement with respect to Class C Shares 9/
-
(h) Form of Exclusive Dealer Agreement with respect to Class Y Shares
(filed herewith)
2
<PAGE>
(8) Bonus, profit sharing or pension plans - none
(9) Custodian Agreement 4/
-
(10) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class A Shares 3/
-
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to Class
B Shares 3/
-
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to Class
C Shares 3/
-
(d) Plan pursuant to Rule 18f-3 9/
-
(11) Opinion and consent of Kirkpatrick & Lockhart LLP regarding the
legality of securities being registered (filed herewith)
(12) Opinion and Consent of Kirkpatrick & Lockhart LLP regarding certain
tax matters (filed herewith)
(13) Form of Transfer Agency Agreement 6/
-
(14) (a) Consent of Price Waterhouse LLP (filed herewith)
(b) Consent of Ernst & Young LLP (filed herewith)
(c) Consent of Deloitte & Touche LLP (filed herewith)
(15) Financial statements omitted from Part B - none
(16) Copies of manually signed Powers of Attorney - none
(17) Additional Exhibits
(a) Declaration of Rule 24f-2 (filed herewith)
(b) Proxy Cards (filed herewith)
(27) Financial Data Schedules (filed herewith)
_____________
1/ Incorporated by reference from Registrant's initial Registration Statement,
- - SEC File No. 33-55374, filed December 3, 1992.
2/ Incorporated by reference from Pre-Effective Amendment No. 1 to the
- - Registration Statement, SEC File No. 33-55374, filed January 7, 1993.
3/ Incorporated by reference from Post-Effective Amendment No. 1 to the
- - Registration Statement, SEC File No. 33-55374, filed August 13, 1993.
4/ Incorporated by reference from Post-Effective Amendment No. 2 to the
- - Registration Statement, SEC File No. 33-55374, filed November 29, 1993.
5/ Incorporated by reference from Post-Effective Amendment No. 3 to the
- - Registration Statement, SEC File No. 33-55374, filed June 1, 1994.
6/ Incorporated by reference from Post-Effective Amendment No. 6 to the
- - Registration Statement, SEC File No. 33-55374, filed December 1, 1994.
7/ Incorporated by reference from Post-Effective Amendment No. 7 to the
- - Registration Statement, SEC File No. 33-55374, filed June 1, 1995.
8/ Incorporated by reference from Articles III, VIII, IX, X and XI of
- - Registrant's Declaration of Trust, as amended effective December 10,
1992, November 29, 1993, July 20, 1995 and November 10, 1995, and from
Articles II, VII and X of Registrant's By-Laws, as amended September
28, 1994.
9/ Incorporated by reference from Post-Effective Amendment No. 8 to the
- - Registration Statement, SEC File No. 33-55374, filed November 14, 1995.
3
<PAGE>
Item 17. Undertakings
------------
(1) The undersigned Registrant agrees that prior to any public re-offering
of the securities registered through the use of the prospectus which
is a part of this Registration Statement by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c) of the
Securities Act of 1933, the re-offering prospectus will contain the
information called for by the applicable registration form for re-
offering by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to
the Registration Statement and will not be used until the amendment is
effective, and that, in determining any liability under the Securities
Act of 1933, each post-effective amendment shall be deemed to be a new
Registration Statement for the securities offered therein, and the
offering of the securities at that time shall be deemed to be the
initial bona fide offering of them.
4
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, as amended, this Registration
Statement has been signed on behalf of the Registrant, in the City of New York
and the State of New York, on this 18th day of April, 1996.
PAINEWEBBER SECURITIES TRUST
By: /s/ Dianne E. O'Donnell
--------------------------------
Dianne E. O'Donnell
Vice President, Secretary
Each of the undersigned trustees and officers of PaineWebber Securities
Trust ("Trust") hereby severally constitutes and appoints Victoria E. Schonfeld,
Dianne E. O'Donnell, Elinor W. Gammon and Susan M. Casey, and each of them
singly, our true and lawful attorneys, with full power to them to sign for each
of us, and in each of our names and in the capacities indicated below, any and
all amendments to the Registration Statement of the Trust, and all instruments
necessary or desirable in connection therewith, filed with the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by said attorney to any and all amendments to said Registration
Statement.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Margo N. Alexander President (Chief April 18, 1996
--------------------------- Executive Officer)
Margo N. Alexander
/s/ E. Garrett Bewkes, Jr. Trustee, Chairman of April 18, 1996
--------------------------- the Board of Trustees
E. Garrett Bewkes, Jr.
/s/ Richard Q. Armstrong Trustee April 18, 1996
---------------------------
Richard Q. Armstrong
/s/ Richard Burt Trustee April 18, 1996
------------------------
Richard Burt
/s/ John R. Torell III Trustee April 18, 1996
---------------------------
John R. Torell III
/s/ Mary C. Farrell Trustee April 18, 1996
--------------------------
Mary C. Farrell
/s/ Meyer Feldberg Trustee April 18, 1996
--------------------------
Meyer Feldberg
/s/ George W. Gowen Trustee April 18, 1996
--------------------------
George W. Gowen
5
<PAGE>
SIGNATURES (continued)
Signature Title Date
--------- ----- ----
/s/ Frederic V. Malek Trustee April 18, 1996
--------------------------
Frederic V. Malek
/s/ Carl W. Schafer Trustee April 18, 1996
--------------------------
Carl W. Schafer
/s/ Julian F. Sluyters Vice President and April 18, 1996
-------------------------- Treasurer (Principal
Julian F. Sluyters Financial Officer)
6
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS FILED WITH
FORM N-14
REGISTRATION STATEMENT UNDER [X]
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
---
POST-EFFECTIVE AMENDMENT NO.
----
PaineWebber Securities Trust
File No. 33-______
7
<PAGE>
<TABLE>
<CAPTION>
PAINEWEBBER SECURITIES TRUST
EXHIBIT INDEX
--------------------------------------------
Exhibit
Number Page
- ------- ----
<S> <C> <C> <C>
(1)(a) Declaration of Trust 1/
-
(b) Amendment effective December 10, 1992 to Declaration of Trust 2/
-
(c) Amendment effective November 29, 1993 to Declaration of Trust 5/
-
(d) Amendment effective July 20, 1995 to Declaration of Trust (filed
herewith)
(e) Amendment effective November 10, 1995 to Declaration of Trust
(filed herewith)
(2)(a) By-Laws 1/
-
(b) Amendment dated September 28, 1994 to By-Laws 7/
-
(3) Voting trust agreement - none
(4) Agreement and Plan of Reorganization and Termination (filed
herewith)
(5) All instruments defining the rights of holders of Registrant's
shares of
beneficial interest 8/
-
(6) Investment Advisory and Administration Contract 3/
-
(7)(a) Distribution Contract with respect to Class A Shares 4/
-
(b) Distribution Contract with respect to Class B Shares 4/
-
(c) Distribution Contract with respect to Class C Shares 9/
-
(d) Form of Distribution Contract with respect to Class Y Shares (filed
herewith)
(e) Exclusive Dealer Agreement with respect to Class A Shares 4/
-
(f) Exclusive Dealer Agreement with respect to Class B Shares 4/
-
(g) Exclusive Dealer Agreement with respect to Class C Shares 9/
-
(h) Form of Exclusive Dealer Agreement with respect to Class Y Shares
(filed
herewith)
(8) Bonus, profit sharing or pension plans - none
(9) Custodian Agreement 4/
-
(10)(a) Plan of Distribution pursuant to Rule 12b-1 with respect to Class
A Shares 3/
-
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to Class B
Shares 3/
-
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to Class C
Shares 3/
-
(d) Plan pursuant to Rule 18f-3 9/
-
(11) Opinion and consent of Kirkpatrick & Lockhart LLP regarding the
legality of
securities being registered (filed herewith)
(12) Opinion and Consent of Kirkpatrick & Lockhart LLP regarding certain
tax
matters (filed herewith)
(13) Form of Transfer Agency Agreement 6/
-
(14)(a) Consent of Price Waterhouse LLP (filed herewith)
(b) Consent of Ernst & Young LLP (filed herewith)
(c) Consent of Deloitte & Touche LLP (filed herewith)
(15) Financial statements omitted from Part B - none
(16) Copies of manually signed Powers of Attorney - none
(17) Additional Exhibits
(a) Declaration of Rule 24f-2 (filed herewith)
(b) Proxy Cards (filed herewith)
(27) Financial Data Schedules (filed herewith)
</TABLE>
_____________
1/ Incorporated by reference from Registrant's initial Registration Statement,
- - SEC File No. 33-55374, filed December 3, 1992.
2/ Incorporated by reference from Pre-Effective Amendment No. 1 to the
- - Registration Statement, SEC File No. 33-55374, filed January 7, 1993.
3/ Incorporated by reference from Post-Effective Amendment No. 1 to the
- - Registration Statement, SEC File No. 33-55374, filed August 13, 1993.
8
<PAGE>
4/ Incorporated by reference from Post-Effective Amendment No. 2 to the
- - Registration Statement, SEC File No. 33-55374, filed November 29, 1993.
5/ Incorporated by reference from Post-Effective Amendment No. 3 to the
- - Registration Statement, SEC File No. 33-55374, filed June 1, 1994.
6/ Incorporated by reference from Post-Effective Amendment No. 6 to the
- - Registration Statement, SEC File No. 33-55374, filed December 1, 1994.
7/ Incorporated by reference from Post-Effective Amendment No. 7 to the
- - Registration Statement, SEC File No. 33-55374, filed June 1, 1995.
8/ Incorporated by reference from Articles III, VIII, IX, X and XI of
- - Registrant's Declaration of Trust, as amended effective December 10, 1992,
November 29, 1993, July 20, 1995 and November 10, 1995, and from Articles
II, VII and X of Registrant's By-Laws, as amended September 28, 1994.
9/ Incorporated by reference from Post-Effective Amendment No. 8 to the
- - Registration Statement, SEC File No. 33-55374, filed November 14, 1995.
9
Exhibit 1(d)
PAINEWEBBER SECURITIES TRUST
CERTIFICATE OF VICE PRESIDENT AND ASSISTANT SECRETARY
I, Gregory K. Todd, Vice President and Assistant Secretary of
PaineWebber Securities Trust ("Trust"), hereby certify that the
trustees of the Trust, by vote at a meeting held on July 20, 1995,
adopted the following resolutions, which became effective on that
date:
RESOLVED, that the board hereby establishes an unlimited number
of shares of beneficial interest of the Series of the Trust known as
the PaineWebber Small Cap Value Fund as Class C shares; and be it
further
RESOLVED, that the Class A, Class B, Class C, and Class D shares
of the Series of the Trust shall have the same preferences,
conversion and other rights, voting powers, restrictions, limitations
as to dividends, qualifications and terms and conditions of
redemption of shares, except as provided in the Trust's Declaration
of Trust and as set forth in resolutions previously adopted by the
board with respect to such shares.
Dated: August 23, 1995 By: /s/ Gregory K. Todd
----------------------
Gregory K. Todd
Vice President and
Assistant Secretary
PaineWebber Securities Trust
New York, New York (ss)
Subscribed and sworn before me this 23rd day of August, 1995.
/s/ Karyn Freeman
- ------------------------
Notary Public
Exhibit 1(e)
PAINEWEBBER SECURITIES TRUST
CERTIFICATE OF VICE PRESIDENT AND SECRETARY
I, Dianne E. O'Donnell, Vice President and Secretary of PaineWebber
Securities Trust ("Trust"), hereby certify that the board of trustees of the
Trust adopted the following resolutions which became effective on November 10,
1995;
RESOLVED, that the unlimited number of shares of beneficial interest
previously known as the "Class D shares" of PaineWebber Strategic Income Fund be
renamed the "Class C" shares of that Fund; and be it further
RESOLVED, that the unlimited number of shares of beneficial interest
previously known as the "Class C shares" of PaineWebber Strategic Income Fund be
renamed the "Class Y" shares of that Fund; and be it further
RESOLVED, that the unlimited number of shares of beneficial interest
previously known as the "Class D shares" of PaineWebber Small Cap Value Fund be
renamed the "Class C" shares of that Fund; and be it further
RESOLVED, that the unlimited number of shares of beneficial interest
previously known as the "Class C shares" of PaineWebber Small Cap Value Fund be
renamed the "Class Y" shares of that Fund.
Dated: December 15, 1995 By: /s/ Dianne E. O'Donnell
---------------------------
Dianne E. O'Donnell
Vice President and Secretary
PaineWebber Securities Trust
New York, New York (ss)
Subscribed and sworn to before me this 15th day of December, 1995.
/s/ Karyn Freeman
- -----------------------
Notary Public
EXHIBIT 4
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 indi-
vidually 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, desig-
nated 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, desig-
nated 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%
<PAGE>
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 imposi-
tion of any FESC and are subject 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
(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 attributable 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 attribut-
- 2 -
<PAGE>
able 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.
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 Share-
holders' 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
- 3 -
<PAGE>
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 out-
standing 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.
- 4 -
<PAGE>
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, 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 evi-
dencing 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.
- 5 -
<PAGE>
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;
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
- 6 -
<PAGE>
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 con-
dition 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 hereunder, and any supple-
- 7 -
<PAGE>
ment 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 Sub-
chapter 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.
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<PAGE>
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 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 addi-
tional 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,
- 9 -
<PAGE>
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 re-
quested 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 material fact
- 10 -
<PAGE>
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
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<PAGE>
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 re-
ceived by the Shareholders, will be approximately equal to the fair market
value of their Target Shares constructively surrendered in exchange
therefor;
4.3.2. Its management (a) is unaware of any plan or intention of
Shareholders to redeem or otherwise dispose of any portion of the Acquiring
Fund Shares to be received by them in the Reorganization and (b) does not
anticipate dispositions of those Acquiring Fund Shares at the time of or
soon after the Reorganization to exceed the usual rate and frequency of
dispositions of shares of Target as a series of an open-end investment
company. Consequently, its management expects that the percentage of
Shareholder interests, if any, that will be disposed of as a result of or
at the time of the Reorganization will be de minimis. Nor does its
management anticipate that there will be extraordinary redemptions of
Acquiring Fund Shares immediately following the Reorganization;
4.3.3. The Shareholders will pay their own expenses, if any, incurred
in connection with the Reorganization;
4.3.4. Immediately following consummation of the Reorganization,
Acquiring Fund will hold substantially the same assets and be subject to
substantially the same liabilities that Target held or was subject to im-
mediately prior thereto, plus any liabilities and expenses of the parties
incurred in connection with the Reorganization;
4.3.5. The fair market value on a going concern basis of the Assets
will equal or exceed the Liabilities to be assumed by Acquiring Fund and
those to which the Assets are subject;
4.3.6. There is no intercompany indebtedness between the Funds that
was issued or acquired, or will be settled, at a discount;
4.3.7. Pursuant to the Reorganization, Target will transfer to
Acquiring Fund, and Acquiring Fund will acquire, at least 90% of the fair
market value of the net assets, and at least 70% of the fair market value
of the gross assets, held by Target immediately before the Reorganization.
For the purposes of this representation, any amounts used by Target to pay
its Reorganization expenses and redemptions and distribu-
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<PAGE>
tions 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.
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.
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<PAGE>
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 re-
quested 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 pur-
pose 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
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<PAGE>
under the 1933 Act, no stop orders suspending the effectiveness thereof shall
have been issued, and the SEC shall not have issued an unfavorable report with
respect to the Reorganization under section 25(b) of the 1940 Act nor instituted
any proceedings seeking to enjoin consummation of the transactions contemplated
hereby under section 25(c) of the 1940 Act. All consents, orders, and permits of
federal, state, and local regulatory authorities (including the SEC and state
securities authorities) deemed necessary by either Fund to permit consummation,
in all material respects, of the transactions contemplated hereby shall have
been obtained, except where failure to obtain same would not involve a risk of a
material adverse effect on the assets or properties of either Fund, provided
that either Fund may for itself waive any of such conditions.
6.3. At the Effective Time, no action, suit, or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or to obtain damages or other relief in connection with,
the transactions contemplated hereby.
6.4. 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, insolv-
ency, 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;
- 15 -
<PAGE>
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 accel-
eration 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
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.
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<PAGE>
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, judg-
ment, 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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<PAGE>
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 Opin-
ion"). In rendering the Tax Opinion, such counsel may rely as to factual
matters, exclusively and without independent verification, on the represen-
tations made in this Agreement (or in separate letters addressed to such coun-
sel) 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 Liabili-
ties, followed by Target's distribution of those shares to the Shareholders
constructively in exchange for the Shareholders' Target Shares, will con-
stitute 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;
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<PAGE>
6.6.3. No gain or loss will be recognized to Acquiring Fund on its
receipt of the Assets in exchange solely for Acquiring Fund Shares and its
assumption of the Liabilities;
6.6.4. Acquiring Fund's basis for the Assets will be the same as the
basis thereof in Target's hands immediately before the Reorganization, and
Acquiring Fund's holding period for the Assets will include Target's
holding period therefor;
6.6.5. A Shareholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for Acquiring Fund
Shares pursuant to the Reorganization; and
6.6.6. A Shareholder's basis for the Acquiring Fund Shares to be
received by it in the Reorganization will be the same as the basis for its
Target Shares to be constructively surrendered in exchange for those
Acquiring Fund Shares, and its holding period for those Acquiring Fund
Shares will include its holding period for those Target Shares, provided
they are held as capital assets by the Shareholder at the Effective Time.
Notwithstanding subparagraphs 6.6.2 and 6.6.4, 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) ex-
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<PAGE>
penses 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.
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 Share-
holders' interests.
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<PAGE>
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 trus-
tees or shareholders.
IN WITNESS WHEREOF, each party has caused this Agreement to be executed by
its duly authorized officer.
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
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Exhibit 7(d)
PAINEWEBBER SECURITIES TRUST
DISTRIBUTION CONTRACT
CLASS Y SHARES
CONTRACT made as of June , 1996 between PAINEWEBBER SECURITIES TRUST, a
Massachusetts business trust ("Fund"), and MITCHELL HUTCHINS ASSET MANAGEMENT
INC., a Delaware corporation ("Mitchell Hutchins").
WHEREAS the Fund is registered under the Investment Company Act of l940, as
amended ("l940 Act"), as an open-end management investment company and currently
offers for public sale two distinct series of shares of beneficial interest
("Series"), which correspond to distinct portfolios and have been designated as
the PaineWebber Small Cap Value Fund and PaineWebber Strategic Income Fund; and
WHEREAS the Fund's board of trustees ("Board") has established an unlimited
number of shares of beneficial interest of the above-referenced Series as Class
Y shares ("Class Y Shares"); and
WHEREAS the Fund desires to retain Mitchell Hutchins as principal
distributor in connection with the offering and sale of the Class Y Shares of
the above-referenced Series and of such other Series as may hereafter be
designated by the Board and have Class Y Shares established; and
WHEREAS Mitchell Hutchins is willing to act as principal distributor of the
Class Y Shares of each such Series on the terms and conditions hereinafter set
forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Fund hereby appoints Mitchell Hutchins as its
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exclusive agent to be the principal distributor to sell and to arrange for the
sale of the Class Y Shares on the terms and for the period set forth in this
Contract. Mitchell Hutchins hereby accepts such appointment and agrees to act
hereunder. It is understood, however, that this appointment does not preclude
sales of the Class Y Shares directly through the Fund's transfer agent in the
manner set forth in the Registration Statement. As used in this Contract, the
term "Registration
<PAGE>
Statement" shall mean the currently effective registration statement of the
Fund, and any supplements thereto, under the Securities Act of 1933, as amended
("1933 Act"), and the 1940 Act.
2. Services and Duties of Mitchell Hutchins.
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(a) Mitchell Hutchins agrees to sell Class Y Shares on a best efforts
basis from time to time during the term of this Contract as agent for the Fund
and upon the terms described in the Registration Statement.
(b) Upon the later of the date of this Contract or the initial
offering of the Class Y Shares by a Series, Mitchell Hutchins will hold itself
available to receive purchase orders, satisfactory to Mitchell Hutchins, for
Class Y Shares of that Series and will accept such orders on behalf of the Fund
as of the time of receipt of such orders and promptly transmit such orders as
are accepted to the Fund's transfer agent. Purchase orders shall be deemed
effective at the time and in the manner set forth in the Registration Statement.
(c) Mitchell Hutchins in its discretion may enter into agreements to
sell Class Y Shares to such registered and qualified retail dealers, including
but not limited to PaineWebber Incorporated ("PaineWebber"), as it may select.
In making agreements with such dealers, Mitchell Hutchins shall act only as
principal and not as agent for the Fund.
(d) The offering price of the Class Y Shares of each Series shall be
the net asset value per Share as next determined by the Fund following receipt
of an order at Mitchell Hutchins' principal office. The Fund shall promptly
furnish Mitchell Hutchins with a statement of each computation of net asset
value.
(e) Mitchell Hutchins shall not be obligated to sell any certain
number of Class Y Shares.
(f) To facilitate redemption of Class Y Shares by shareholders
directly or through dealers, Mitchell Hutchins is authorized but not required on
behalf of the Fund to repurchase Class Y Shares presented to it by shareholders
and dealers at the price determined in accordance with, and in the manner set
forth in, the Registration Statement.
(g) Mitchell Hutchins shall have the right to use any list of
shareholders of the Fund or any other list of investors which it obtains in
connection with its provision of services under this Contract; provided,
however, that Mitchell Hutchins shall not sell or knowingly provide such list or
lists to any unaffiliated person.
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<PAGE>
3. Authorization to Enter into Exclusive Dealer Contracts and to Delegate
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Duties as Distributor. With respect to the Class Y Shares of any or all Series,
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Mitchell Hutchins may enter into an exclusive dealer agreement with PaineWebber
or any other registered and qualified dealer with respect to sales of the Class
Y Shares. In a separate contract or as part of any such exclusive dealer agree-
ment, Mitchell Hutchins also may delegate to PaineWebber or another registered
and qualified dealer ("sub-distributor") any or all of its duties specified in
this Contract, provided that such separate contract or exclusive dealer
agreement imposes on the sub-distributor bound thereby all applicable duties and
conditions to which Mitchell Hutchins is subject under this Contract, and
further provided that such separate contract or exclusive dealer agreement meets
all requirements of the 1940 Act and rules thereunder.
4. Services Not Exclusive. The services furnished by Mitchell Hutchins
----------------------
hereunder are not to be deemed exclusive and Mitchell Hutchins shall be free to
furnish similar services to others so long as its services under this Contract
are not impaired thereby. Nothing in this Contract shall limit or restrict the
right of any director, officer or employee of Mitchell Hutchins, who may also be
a trustee, officer or employee of the Fund, to engage in any other business or
to devote his or her time and attention in part to the management or other
aspects of any other business, whether of a similar or a dissimilar nature.
5. Compensation and Reimbursement of Distribution Expenses. The Fund
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shall have no obligation to compensate or reimburse Mitchell Hutchins for any
services performed by it hereunder.
6. Duties of the Fund.
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(a) The Fund reserves the right at any time to withdraw offering
Class Y Shares of any or all Series by written notice to Mitchell Hutchins at
its principal office.
(b) The Fund shall determine in its sole discretion whether
certificates shall be issued with respect to the Class Y Shares. If the Fund
has determined that certificates shall be issued, the Fund will not cause
certificates representing Class Y Shares to be issued unless so requested by
shareholders. If such request is transmitted by Mitchell Hutchins, the Fund
will cause certificates evidencing Class Y Shares to be issued in such names and
denominations as Mitchell Hutchins shall from time to time direct.
(c) The Fund shall keep Mitchell Hutchins fully informed of its
affairs and shall make available to Mitchell Hutchins copies of all information,
financial statements, and
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<PAGE>
other papers which Mitchell Hutchins may reasonably request for use in
connection with the distribution of Class Y Shares, including, without
limitation, certified copies of any financial statements prepared for the Fund
by its independent public accountant and such reasonable number of copies of the
most current prospectus, statement of additional information, and annual and
interim reports of any Series as Mitchell Hutchins may request, and the Fund
shall cooperate fully in the efforts of Mitchell Hutchins to sell and arrange
for the sale of the Class Y Shares of the Series and in the performance of
Mitchell Hutchins under this Contract.
(d) The Fund shall take, from time to time, all necessary action,
including payment of the related filing fee, as may be necessary to register the
Class Y Shares under the 1933 Act to the end that there will be available for
sale such number of Class Y Shares as Mitchell Hutchins may be expected to sell.
The Fund agrees to file, from time to time, such amendments, reports, and other
documents as may be necessary in order that there will be no untrue statement of
a material fact in the Registration Statement, nor any omission of a material
fact which omission would make the statements therein misleading.
(e) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of Class Y Shares of each Series for sale
under the securities laws of such states or other jurisdictions as Mitchell
Hutchins and the Fund may approve, and, if necessary or appropriate in
connection therewith, to qualify and maintain the qualification of the Fund as a
broker or dealer in such jurisdictions; provided that the Fund shall not be
required to amend its Declaration of Fund or By-Laws to comply with the laws of
any jurisdiction, to maintain an office in any jurisdiction, to change the terms
of the offering of the Class Y Shares in any jurisdiction from the terms set
forth in its Registration Statement, to qualify as a foreign corporation in any
jurisdiction, or to consent to service of process in any jurisdiction other than
with respect to claims arising out of the offering of the Class Y Shares.
Mitchell Hutchins shall furnish such information and other material relating to
its affairs and activities as may be required by the Fund in connection with
such qualifications.
7. Expenses of the Fund. The Fund shall bear all costs and expenses of
---------------------
registering the Class Y Shares with the Securities and Exchange Commission and
state and other regulatory bodies, and shall assume expenses related to
communications with shareholders of each Series, including (i) fees and
disbursements of its counsel and independent public accountant; (ii) the
preparation, filing and printing of registration statements and/or prospectuses
or statements of additional information required under the federal securities
laws; (iii) the preparation and mailing of annual and interim reports,
prospectuses, state-
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<PAGE>
ments of additional information and proxy materials to shareholders; and (iv)
the qualifications of Class Y Shares for sale and of the Fund as a broker or
dealer under the securities laws of such jurisdictions as shall be selected by
the Fund and Mitchell Hutchins pursuant to Paragraph 6(e) hereof, and the costs
and expenses payable to each such jurisdiction for continuing qualification
therein.
8. Expenses of Mitchell Hutchins. Mitchell Hutchins shall bear all costs
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and expenses of (i) preparing, printing and distributing any materials not
prepared by the Fund and other materials used by Mitchell Hutchins in connection
with the sale of Class Y Shares under this Contract, including the additional
cost of printing copies of prospectuses, statements of additional information,
and annual and interim shareholder reports other than copies thereof required
for distribution to existing shareholders or for filing with any federal or
state securities authorities; (ii) any expenses of advertising incurred by
Mitchell Hutchins in connection with such offering; (iii) the expenses of
registration or qualification of Mitchell Hutchins as a broker or dealer under
federal or state laws and the expenses of continuing such registration or
qualification; and (iv) all compensation paid to Mitchell Hutchins' employees
and others for selling Class Y Shares, and all expenses of Mitchell Hutchins,
its employees and others who engage in or support the sale of Class Y Shares as
may be incurred in connection with their sales efforts.
9. Indemnification.
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(a) The Fund agrees to indemnify, defend and hold Mitchell Hutchins,
its officers and directors, and any person who controls Mitchell Hutchins within
the meaning of Section 15 of the 1933 Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which Mitchell Hutchins, its officers,
directors or any such controlling person may incur under the 1933 Act, or under
common law or otherwise, arising out of or based upon any alleged untrue state-
ment of a material fact contained in the Registration Statement or arising out
of or based upon any alleged omission to state a material fact required to be
stated in the Registration Statement or necessary to make the statements therein
not misleading, except insofar as such claims, demands, liabilities or expenses
arise out of or are based upon any such untrue statement or omission or alleged
untrue statement or omission made in reliance upon and in conformity with
information furnished in writing by Mitchell Hutchins to the Fund for use in the
Registration Statement; provided, however, that this indemnity agreement shall
not inure to the benefit of any person who is also an officer or trustee of the
Fund or who controls the Fund
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<PAGE>
within the meaning of Section 15 of the 1933 Act, unless a court of competent
jurisdiction shall determine, or it shall have been determined by controlling
precedent, that such result would not be against public policy as expressed in
the 1933 Act; and further provided, that in no event shall anything contained
herein be so construed as to protect Mitchell Hutchins against any liability to
the Fund or to the shareholders of any Series to which Mitchell Hutchins would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of its reckless disre-
gard of its obligations under this Contract. The Fund shall not be liable to
Mitchell Hutchins under this indemnity agreement with respect to any claim made
against Mitchell Hutchins or any person indemnified unless Mitchell Hutchins or
other such person shall have notified the Fund in writing of the claim within a
reasonable time after the summons or other first written notification giving
information of the nature of the claim shall have been served upon Mitchell
Hutchins or such other person (or after Mitchell Hutchins or the person shall
have received notice of service on any designated agent). However, failure to
notify the Fund of any claim shall not relieve the Fund from any liability which
it may have to Mitchell Hutchins or any person against whom such action is
brought otherwise than on account of this indemnity agreement. The Fund shall
be entitled to participate at its own expense in the defense or, if it so
elects, to assume the defense of any suit brought to enforce any claims subject
to this indemnity agreement. If the Fund elects to assume the defense of any
such claim, the defense shall be conducted by counsel chosen by the Fund and
satisfactory to indemnified defendants in the suit whose approval shall not be
unreasonably withheld. In the event that the Fund elects to assume the defense
of any suit and retain counsel, the indemnified defendants shall bear the fees
and expenses of any additional counsel retained by them. If the Fund does not
elect to assume the defense of a suit, it will reimburse the indemnified defend-
ants for the reasonable fees and expenses of any counsel retained by the
indemnified defendants. The Fund agrees to notify Mitchell Hutchins promptly of
the commencement of any litigation or proceedings against it or any of its
officers or trustees in connection with the issuance or sale of any of its Class
Y Shares.
(b) Mitchell Hutchins agrees to indemnify, defend, and hold the Fund,
its officers and trustees, and any person who controls the Fund within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities and expenses (including the cost of
investigating or defending against such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Fund, its trustees or
officers, or any such controlling person may incur under the 1933 Act or under
common law or otherwise arising out of or based upon any alleged untrue
statement of a
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<PAGE>
material fact contained in information furnished in writing by Mitchell Hutchins
to the Fund for use in the Registration Statement, arising out of or based upon
any alleged omission to state a material fact in connection with such infor-
mation required to be stated in the Registration Statement necessary to make
such information not misleading, or arising out of any agreement between
Mitchell Hutchins and any retail dealer, or arising out of any supplemental
sales literature or advertising used by Mitchell Hutchins in connection with its
duties under this Contract. Mitchell Hutchins shall be entitled to participate,
at its own expense, in the defense or, if it so elects, to assume the defense of
any suit brought to enforce the claim, but if Mitchell Hutchins elects to assume
the defense, the defense shall be conducted by counsel chosen by Mitchell
Hutchins and satisfactory to the indemnified defendants whose approval shall not
be unreasonably withheld. In the event that Mitchell Hutchins elects to assume
the defense of any suit and retain counsel, the defendants in the suit shall
bear the fees and expenses of any additional counsel retained by them. If
Mitchell Hutchins does not elect to assume the defense of any suit, it will
reimburse the indemnified defendants in the suit for the reasonable fees and
expenses of any counsel retained by them.
10. Limitation of Liability of the Trustees and Shareholders of the Fund.
--------------------------------------------------------------------
The trustees of the Fund and the shareholders of any Series shall not be liable
for any obligations of the Fund or any Series under this Contract, and Mitchell
Hutchins agrees that, in asserting any rights or claims under this Contract, it
shall look only to the assets and property of the Fund or the particular Series
in settlement of such right or claims, and not to such trustees or shareholders.
11. Services Provided to the Fund by Employees of Mitchell Hutchins. Any
---------------------------------------------------------------
person, even though also an officer, director, employee or agent of Mitchell
Hutchins, who may be or become an officer, trustee, employee or agent of the
Fund, shall be deemed, when rendering services to the Fund or acting in any
business of the Fund, to be rendering such services to or acting solely for the
Fund and not as an officer, director, employee or agent or one under the control
or direction of Mitchell Hutchins even though paid by Mitchell Hutchins.
12. Duration and Termination.
------------------------
(a) This Contract shall become effective upon the date hereabove
written, provided that, with respect to any Series, this Contract shall not take
effect unless such action has first been approved by vote of a majority of the
Board and by vote of a majority of those trustees of the Fund who are not
interested persons of the Fund, and have no direct or indirect financial
interest in this Contract or in any agreements related thereto (all such
Trustees collectively being referred to herein as the
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<PAGE>
"Independent Trustees"), cast in person at a meeting called for the purpose of
voting on such action.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for one year from the above written date. Thereafter, if not
terminated, this Contract shall continue automatically for successive periods of
twelve months each, provided that such continuance is specifically approved at
least annually (i) by a vote of a majority of the Independent Trustees, cast in
person at a meeting called for the purpose of voting on such approval, and (ii)
by the Board or with respect to any given Series by vote of a majority of the
outstanding voting securities of the Class Y Shares of such Series.
(c) Notwithstanding the foregoing, with respect to any Series, this
Contract may be terminated at any time, without the payment of any penalty, by
vote of the Board, by vote of a majority of the Independent Trustees or by vote
of a majority of the outstanding voting securities of the Class Y Shares of such
Series on sixty days' written notice to Mitchell Hutchins or by Mitchell
Hutchins at any time, without the payment of any penalty, on sixty days' written
notice to the Fund or such Series. This Contract will automatically terminate
in the event of its assignment.
(d) Termination of this Contract with respect to any given Series
shall in no way affect the continued validity of this Contract or the
performance thereunder with respect to any other Series.
13. Amendment of this Contract. No provision of this Contract may be
--------------------------
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
14. Governing Law. This Contract shall be construed in accordance with the
-------------
laws of the State of Delaware and the 1940 Act, provided, however, that Section
10 above will be construed in accordance with the laws of the Commonwealth of
Massachusetts. To the extent that the applicable laws of the State of Delaware
or the Commonwealth of Massachusetts conflict with the applicable provisions of
the l940 Act, the latter shall control.
15. Notice. Any notice required or permitted to be given by either party
------
to the other shall be deemed sufficient upon receipt in writing at the other
party's principal offices.
16. Miscellaneous. The captions in this Contract are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Contract shall
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<PAGE>
be held or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Contract shall not be affected thereby. This Contract shall
be binding upon and shall inure to the benefit of the parties hereto and their
respective successors. As used in this Contract, the terms "majority of the
outstanding voting securities," "interested person" and "assignment" shall have
the same meaning as such terms have in the l940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Contract to be
executed by their officers designated as of the day and year first above
written.
ATTEST: PAINEWEBBER SECURITIES TRUST
By:
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ATTEST: MITCHELL HUTCHINS ASSET MANAGEMENT INC.
By:
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Exhibit 7(h)
EXCLUSIVE DEALER AGREEMENT
CLASS Y SHARES OF PAINEWEBBER SECURITIES TRUST
AGREEMENT made as of June , 1996 between Mitchell Hutchins Asset
Management Inc. ("Mitchell Hutchins"), a Delaware corporation, and PaineWebber
Incorporated ("PaineWebber"), a Delaware corporation.
WHEREAS PaineWebber Securities Trust ("Fund") is a Massachusetts business
trust registered under the Investment Company Act of 1940, as amended ("1940
Act"), as an open-end management investment company; and
WHEREAS the Fund currently offers for public sale two distinct series of
shares of beneficial interest ("Series"), which correspond to distinct
portfolios and have been designated as the PaineWebber Small Cap Value Fund and
PaineWebber Strategic Income Fund; and
WHEREAS the Fund's board of trustees ("Board") has established an unlimited
number of shares of beneficial interest of the above-referenced Series as Class
Y shares ("Class Y Shares") (previously known as Class C shares); and
WHEREAS Mitchell Hutchins has entered into a Distribution Contract with the
Fund ("Distribution Contract") pursuant to which Mitchell Hutchins serves as
principal distributor in connection with the offering and sale of the Class Y
Shares of the above-referenced Series and of such other Series as may hereafter
be designated by the Board and have Class Y Shares established; and
WHEREAS Mitchell Hutchins desires to retain PaineWebber as its exclusive
agent in connection with the offering and sale of the Class Y Shares of each
such Series and to delegate to PaineWebber performance of certain of the
services which Mitchell Hutchins provides to the Fund under the Distribution
Contract; and
WHEREAS PaineWebber is willing to act as Mitchell Hutchins' exclusive agent
in connection with the offering and sale of such Class Y Shares and to perform
such services on the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein, Mitchell Hutchins and PaineWebber agree as follows:
<PAGE>
1. Appointment. Mitchell Hutchins hereby appoints PaineWebber as its
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exclusive agent to sell and to arrange for the sale of the Class Y Shares on the
terms and for the period set forth in this Contract. Mitchell Hutchins also
appoints PaineWebber as its agent for the performance of certain other services
set forth herein which Mitchell Hutchins provides to the Fund under the
Distribution Contract. PaineWebber hereby accepts such appointments and agrees
to act hereunder. It is understood, however, that these appointments do not
preclude sales of Class Y Shares directly through the Fund's transfer agent in
the manner set forth in the Registration Statement. As used in this Contract,
the term "Registration Statement" shall mean the currently effective
Registration Statement of the Fund, and any supplements thereto, under the
Securities Act of 1933, as amended ("1933 Act"), and the 1940 Act.
2. Services, Duties and Representations of PaineWebber.
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(a) PaineWebber agrees to sell the Class Y Shares on a best efforts
basis from time to time during the term of this Agreement as agent for Mitchell
Hutchins and upon the terms described in this Contract and the Registration
Statement.
(b) Upon the later of the date of this Contract or the initial
offering of Class Y Shares by a Series, PaineWebber will hold itself available
to receive orders, satisfactory to PaineWebber and Mitchell Hutchins, for the
purchase of Class Y Shares and will accept such orders on behalf of Mitchell
Hutchins and the Fund as of the time of receipt of such orders and will promptly
transmit such orders as are accepted to the Fund's transfer agent. Purchase
orders shall be deemed effective at the time and in the manner set forth in the
Registration Statement.
(c) PaineWebber in its discretion may sell Class Y Shares to (i) its
correspondent firms and customers of such firms and (ii) such other registered
and qualified retail dealers as it may select, subject to the approval of
Mitchell Hutchins. In making agreements with such dealers, PaineWebber shall
act only as principal and not as agent for Mitchell Hutchins or the Fund.
(d) The offering price of the Class Y Shares of each Series shall be
the net asset value per Share as next determined by the Fund following receipt
of an order at PaineWebber's principal office. Mitchell Hutchins shall promptly
furnish or arrange for the furnishing to PaineWebber of a statement of each
computation of net asset value.
(e) PaineWebber shall not be obligated to sell any certain number of
Class Y Shares.
(f) To facilitate redemption of Class Y Shares by shareholders
directly or through dealers, PaineWebber is
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<PAGE>
authorized but not required on behalf of Mitchell Hutchins and the Fund to
repurchase Class Y Shares presented to it by shareholders, its correspondent
firms and other dealers at the price determined in accordance with, and in the
manner set forth in, the Registration Statement.
(g) PaineWebber represents and warrants that: (i) it is a member in
good standing of the National Association of Securities Dealers, Inc. and agrees
to abide by the Rules of Fair Practice of such Association; (ii) it is
registered as a broker-dealer with the Securities and Exchange Commission; (iii)
it will maintain any filings and licenses required by federal and state laws to
conduct the business contemplated under this Agreement;
and (iv) it will comply with all federal and state laws and regulations
applicable to the offer and sale of the Class Y Shares.
(h) PaineWebber shall not incur any debts or obligations on behalf of
Mitchell Hutchins or the Fund. PaineWebber shall bear all costs that it incurs
in selling the Class Y Shares and in complying with the terms and conditions of
this Contract as more specifically set forth in paragraph 8.
(i) PaineWebber shall not permit any employee or agent to offer or
sell Class Y Shares unless such person is duly licensed under applicable federal
and state laws and regulations.
(j) PaineWebber shall not (i) furnish any information or make any
representations concerning the Class Y Shares other than those contained in the
Registration Statement or in sales literature or advertising that has been
prepared or approved by Mitchell Hutchins as provided in paragraph 6 or (ii)
offer or sell the Class Y Shares in jurisdictions in which they have not been
approved for offer and sale.
3. Services Not Exclusive. The services furnished by PaineWebber
----------------------
hereunder are not to be deemed exclusive and PaineWebber shall be free to
furnish similar services to others so long as its services under this Contract
are not impaired thereby. Nothing in this Contract shall limit or restrict the
right of any director, officer or employee of PaineWebber who may also be a
director, trustee, officer or employee of Mitchell Hutchins or the Fund, to
engage in any other business or to devote his or her time and attention in part
to the management or other aspects of any other business, whether of a similar
or a dissimilar nature.
4. Compensation.
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Mitchell Hutchins shall not be obligated to pay any compensation to
PaineWebber hereunder nor to reimburse any of PaineWebber's expenses incurred
hereunder.
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<PAGE>
5. Duties of Mitchell Hutchins.
---------------------------
(a) It is understood that the Fund reserves the right at any time to
withdraw all offerings of Class Y Shares of any or all Series by written notice
to Mitchell Hutchins.
(b) Mitchell Hutchins shall keep PaineWebber fully informed of the
Fund's affairs and shall make available to PaineWebber copies of all
information, financial statements and other papers which PaineWebber may
reasonably request for use in connection with the distribution of Class Y
Shares, including, without limitation, certified copies of any financial
statements prepared for the Fund by its independent public accountant and such
reasonable number of copies of the most current prospectus, statement of
additional information, and annual and interim reports of any Series as
PaineWebber may request, and Mitchell Hutchins shall cooperate fully in the
efforts of PaineWebber to sell and arrange for the sale of the Class Y Shares
and in the performance of PaineWebber under this Contract.
(c) Mitchell Hutchins shall comply with all state and federal laws
and regulations applicable to a distributor of the Class Y Shares.
6. Advertising. Mitchell Hutchins agrees to make available such sales
-----------
and advertising materials relating to the Class Y Shares as Mitchell Hutchins in
its discretion determines appropriate. PaineWebber agrees to submit all sales
and advertising materials developed by it relating to the Class Y Shares to
Mitchell Hutchins for approval. PaineWebber agrees not to publish or distribute
such materials without first receiving such approval in writing. Mitchell
Hutchins shall assist PaineWebber in obtaining any regulatory approvals of such
materials that may be required of or desired by PaineWebber.
7. Records. PaineWebber agrees to maintain all records required by
-------
applicable state and federal laws and regulations relating to the offer and sale
of the Class Y Shares. Mitchell Hutchins and its representatives shall have
access to such records during normal business hours for review or copying.
8. Expenses of PaineWebber. PaineWebber shall bear all costs and
-----------------------
expenses of (i) preparing, printing, and distributing any materials not prepared
by the Fund or Mitchell Hutchins and other materials used by PaineWebber in
connection with its offering of Class Y Shares for sale to the public; (ii) any
expenses of advertising incurred by PaineWebber in connection with such
offering; (iii) the expenses of registration or qualification of PaineWebber as
a dealer or broker under federal or state laws and the expenses of continuing
such registration or qualification; and (iv) all compensation paid to
PaineWebber's investment executives or other employees and others for selling
Class Y
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<PAGE>
Shares, and all expenses of PaineWebber, its investment executives and employees
and others who engage in or support the sale of Class Y Shares as may be
incurred in connection with their sales efforts. PaineWebber shall bear such
additional costs and expenses as it and Mitchell Hutchins may agree upon, such
agreement to be evidenced in a writing signed by both parties. Mitchell
Hutchins shall advise the Board of any such agreement as to additional costs and
expenses borne by PaineWebber at their first regular meeting held after such
agreement but shall not be required to obtain prior approval for such agreements
from the Board.
9. Indemnification.
---------------
(a) Mitchell Hutchins agrees to indemnify, defend, and hold
PaineWebber, its officers and directors, and any person who controls PaineWebber
within the meaning of Section 15 of the 1933 Act, free and harmless from and
against any and all claims, demands, liabilities, and expenses (including the
cost of investigating or defending such claims, demands, or liabilities and any
counsel fees incurred in connection therewith) which PaineWebber, its officers,
directors, or any such controlling person may incur under the 1933 Act, under
common law or otherwise, arising out of or based upon any alleged untrue
statement of a material fact contained in the Registration Statement; arising
out of or based upon any alleged omission to state a material fact required to
be stated in the Registration Statement thereof or necessary to make the state-
ments in the Registration Statement thereof not misleading; or arising out of
any sales or advertising materials with respect to the Class Y Shares provided
by Mitchell Hutchins to PaineWebber. However, this indemnity agreement shall
not apply to any claims, demands, liabilities, or expenses that arise out of or
are based upon any such untrue statement or omission or alleged untrue statement
or omission made in reliance upon and in conformity with information furnished
in writing by PaineWebber to Mitchell Hutchins or the Fund for use in the
Registration Statement or in any sales or advertising material; and further
provided, that in no event shall anything contained herein be so construed as to
protect PaineWebber against any liability to Mitchell Hutchins or the Fund or to
the shareholders of any Series to which PaineWebber would otherwise be subject
by reason of willful misfeasance, bad faith, or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its obliga-
tions under this Contract.
(b) PaineWebber agrees to indemnify, defend, and hold Mitchell
Hutchins and its officers and directors, the Fund, its officers and trustees,
and any person who controls Mitchell Hutchins or the Fund within the meaning of
Section 15 of the 1933 Act, free and harmless from and against any and all
claims, demands, liabilities and expenses (including the cost of investi-
- 5 -
<PAGE>
gating or defending against such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which Mitchell Hutchins or its officers
or directors or the Fund, its officers or trustees, or any such controlling
person may incur under the 1933 Act, under common law or otherwise arising out
of or based upon any alleged untrue statement of a material fact contained in
information furnished in writing by PaineWebber to Mitchell Hutchins or the Fund
for use in the Registration Statement; arising out of or based upon any alleged
omission to state a material fact in connection with such information required
to be stated in the Registration Statement or necessary to make such information
not misleading; or arising out of any agreement between PaineWebber and a
correspondent firm or any other retail dealer; or arising out of any sales or
advertising material used by PaineWebber in connection with its duties under
this Contract.
10. Duration and Termination.
------------------------
(a) This Contract shall become effective upon the date
written above, provided that, with respect to any Series, this Contract shall
not take effect unless such action has first been approved by vote of a majority
of the Board and by vote of a majority of those trustees of the Fund who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the operation of this Contract or in any agreements related thereto
(all such trustees collectively being referred to herein as the "Independent
Trustees"), cast in person at a meeting called for the purpose of voting on such
action.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for one year from the above written date. Thereafter, if not
terminated, this Contract shall continue automatically for successive periods of
twelve months each, provided that such continuance is specifically approved at
least annually (i) by a vote of a majority of the Independent Trustees, cast in
person at a meeting called for the purpose of voting on such approval, and (ii)
by the Board with respect to any given Series or by vote of a majority of the
outstanding voting securities of the Class Y Shares of such Series.
(c) Notwithstanding the foregoing, with respect to any Series this
Contract may be terminated at any time, without the payment of any penalty, by
either party, upon the giving of 30 days' written notice. Such notice shall be
deemed to have been given on the date it is received in writing by the other
party or any officer thereof. This Contract may also be terminated at any time,
without the payment of any penalty, by vote of the Board, by vote of a majority
of the Independent Trustees or by vote of a majority of the outstanding voting
securities of the Class Y Shares of such Series on 30 days' written notice to
Mitchell Hutchins and PaineWebber.
- 6 -
<PAGE>
(d) Termination of this Contract with respect to any given Series
shall in no way affect the continued validity of this Contract or the
performance thereunder with respect to any other Series. This Contract will
automatically terminate in the event of its assignment or in the event that the
Distribution contract is terminated.
11. Amendment of this Agreement. No provision of this Contract may be
---------------------------
amended, changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought.
12. Use of PaineWebber Name. PaineWebber hereby authorizes Mitchell
-----------------------
Hutchins to use the name "PaineWebber Incorporated" or any name derived
therefrom in any sales or advertising materials prepared and/or used by Mitchell
Hutchins in connection with its duties as distributor of the Class Y Shares, but
only for so long as this Contract or any extension, renewal or amendment hereof
remains in effect, including any similar agreement with any organization which
shall have succeeded to the business of PaineWebber.
13. Governing Law. This Contract shall be construed in accordance with
-------------
the laws of the State of Delaware and the 1940 Act. To the extent that the
applicable laws of the State of Delaware conflict with the applicable provisions
of the 1940 Act, the latter shall control.
14. Miscellaneous. The captions in this Contract are included for
-------------
convenience of reference only and in no way define
or delimit any of the provisions hereof or otherwise affect their construction
or effect. If any provision of this Contract shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Contract shall
not be affected thereby. This Contract shall be binding upon and shall inure to
the benefit of the parties hereto and their respective successors. As used in
this Contract, the terms "majority of the
- 7 -
<PAGE>
outstanding voting securities," "interested person" and "assignment" shall have
the same meaning as such terms have in the 1940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Contract to be
executed by their officers designated as of the day and year first written
above.
MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
Attest: _______________________ By: ________________________
PAINEWEBBER INCORPORATED
Attest: _______________________ By: _________________________
- 8 -
Exhibit 11
Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W. 2nd Floor
Washington, D.C. 20036-1800
ELINOR W. GAMMON
(202) 778-9090
[email protected]
April 25, 1996
PaineWebber Securities Trust
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
You have requested our opinion as to certain matters regarding the issuance
by PaineWebber Securities Trust ("Trust") of Class A, Class B, Class C and Class
Y shares of beneficial interest (the "Shares") of PaineWebber Small Cap Value
Fund ("Value Fund"), a series of the Trust, pursuant to an Agreement and Plan of
Reorganization and Termination ("Plan") between the Trust, on behalf of Value
Fund, and PaineWebber Small Cap Growth Fund ("Growth Fund"), a series of
PaineWebber Investment Trust III. Under the Plan, Value Fund would acquire the
assets of Growth Fund in exchange for the Shares and the assumption by Value
Fund of Growth Fund's liabilities. In connection with the Plan, the Trust is
about to file a Registration Statement on Form N-14 (the "N-14") for the purpose
of registering the Shares under the Securities Act of 1933, as amended ("1933
Act") to be issued pursuant to the Plan.
We have examined originals or copies believed by us to be genuine of the
Trust's Declaration of Trust and By-Laws, minutes of meetings of the Trust's
board of trustees, the form of Plan, and such other documents relating to the
authorization and issuance of the Shares as we have deemed relevant. Based upon
that examination, we are of the opinion that the Shares being registered by the
N-14 may be issued in accordance with the Plan and the Trust's Declaration of
Trust and By-Laws, subject to compliance with the 1933 Act, the Investment
Company Act of 1940, as amended, and applicable state laws regulating the
distribution of securities, and when so issued, those Shares will be legally
issued, fully paid and non-assessable.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, Trust
<PAGE>
shareholders could, under certain circumstances, be held personally liable for
the obligations of the Trust or a series of the Trust, including Value Fund
(each, a "Series"). The Declaration of Trust states that the creditors of,
contractors with, and claimants against, the Trust or a Series shall look only
to the assets of the Trust or such Series for payment. It also requires that
notice of such disclaimer be given in each note, bond, contract, certificate,
undertaking or instrument made or issued by the officers or the trustees of the
Trust on behalf of the Trust or a Series. The Declaration of Trust further
provides: (i) for indemnification from Trust or Series assets, as appropriate,
for all losses and expenses of any shareholder held personally liable for the
obligations of the Trust or Series solely by virtue of ownership of Shares of a
Series; and (ii) for a Series to assume the defense of any claim against the
shareholder for any act or obligation of the Series. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust or a Series would be unable to meet
its obligations.
We hereby consent to this opinion accompanying the Form N-14 that the Trust
plans to file with the Securities and Exchange Commission and to the reference
to our firm under the caption "Miscellaneous -- Legal Matters" in the
Prospectus/Proxy Statement filed as part of the Form N-14.
Sincerely yours,
KIRKPATRICK & LOCKHART LLP
By: /s/ Elinor W. Gammon
---------------------------
Elinor W. Gammon
Exhibit 12
April 25, 1996
PaineWebber Investment Trust III
PaineWebber Securities Trust
1285 Avenue of the Americas
New York, NY 10019
Ladies and Gentlemen:
PaineWebber Securities 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 ("Investment Trust"),
on behalf of PaineWebber Small Cap Growth Fund ("Target"), a series thereof,1/
-
have requested our opinion as to certain federal income tax consequences of the
proposed acquisition of Target by Acquiring Fund pursuant to an Agreement and
Plan of Reorganization and Termination between them dated as of April 24, 1996
("Plan"), attached as an exhibit to the prospectus/proxy statement to be
furnished in connection with the solicitation of proxies by Investment Trust's
board of trustees for use at a special meeting of Target shareholders ("Special
Meeting") to be held on July 19, 1996 ("Proxy"), included in the registration
statement on Form N-14 to be filed with the Securities and Exchange Commission
("SEC") on or about the date hereof ("Registration Statement"). Specifically,
each Investment Company has requested our opinion:
(1) that the acquisition by Acquiring Fund of Target's assets in
exchange solely for voting shares of beneficial interest in Acquiring
Fund and the assumption by Acquiring Fund of Target's liabilities,
followed by the distribution of those shares by Target pro rata to its
shareholders of record as of the close of regular trading on the New
York Stock Exchange, Inc. on the date of the Closing (as hereinafter
defined) ("Shareholders") constructively in exchange for their shares
of beneficial interest in Target ("Target Shares") (such transaction
some
- --------------------
1/ 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."
<PAGE>
PaineWebber Investment Trust III
PaineWebber Securities Trust
April 25, 1996
Page 2
times being referred to herein as the "Reorganization"), will constitute a
"reorganization" within the meaning of section 368(a)(1)(C)2/ and that
-
each Fund will be a "party to a reorganization" within the meaning of
section 368(b),
(2) that Target, the Shareholders, and Acquiring Fund will
recognize no gain or loss upon the Reorganization, and
(3) regarding the basis and holding period after the Reorganiza-
tion of the transferred assets and the shares of Acquiring Fund issued
pursuant thereto.
In rendering this opinion, we have examined (1) Target's currently
effective prospectuses (one relating to Class A Target Shares, Class B Target
Shares, and Class C Target Shares (all as defined below) and the other relating
to Class Y Target Shares (as defined below)), both dated December 1, 1995 (as
supplemented February 9, 1996), and statement of additional information ("SAI"),
also dated December 1, 1995 (as supplemented March 1, 1996), (2) Acquiring
Fund's currently effective prospectus, dated November 14, 1995 (as supplemented
February 9, 1996), and SAI, also dated November 14, 1995 (as supplemented March
1, 1996), (3) the Proxy, (4) the Plan, and (5) such other documents as we have
deemed necessary or appropriate for the purposes hereof. As to various matters
of fact material to this opinion, we have relied, exclusively and without
independent verification, on statements of responsible officers of each
Investment Company and the representations described below and made in the Plan
(as contemplated in paragraph 6.6 thereof) (collectively "Representations").
FACTS
-----
Securities Trust is an unincorporated voluntary association with
transferable shares formed as a business trust under the laws of the
Commonwealth of Massachusetts (commonly referred to as a "Massachusetts business
trust") pursuant to a Declaration of Trust dated December 3, 1992; Acquiring
Fund commenced operations as a series thereof on February 1, 1994. Investment
Trust is a Massachusetts business trust formed pursuant to a Declaration of
Trust dated April 8, 1993; Target commenced operations as a series thereof on
November 4, 1993. Each Investment Company is registered with the SEC as an
open-end management investment company under the Investment Company Act of 1940,
as amended ("1940 Act"). Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins"), a wholly owned subsidiary of Paine
- --------------------
2/ All section references are to the Internal Revenue Code of 1986, as amended
- -
("Code"), and all "Treas. Reg. Sec." references are to the regulations under
the Code ("Regulations").
<PAGE>
PaineWebber Investment Trust III
PaineWebber Securities Trust
April 25, 1996
Page 3
Webber Incorporated, serves as investment adviser and administrator to each Fund
and is the distributor of each Fund's shares.
Target currently offers for sale four classes of shares, 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," respec-
tively). These classes differ only with respect to (1) the sales charges
imposed on the purchase of shares, (2) the fees payable by each class pursuant
to plans adopted under Rule 12b-1 promulgated under the 1940 Act ("12b-1 fees")
payable by each class, and (3) possible differences resulting from the
allocation of certain class-specific expenses other than 12b-1 fees.
Acquiring Fund's shares currently are divided into three classes, desig-
nated 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 below) will issue for sale, a fourth class of shares, designated Class Y
shares ("Class Y Acquiring Fund Shares"). These classes are identical to the
correspondingly designated classes of Target Shares.
At or immediately before the close of business on the date on which the
Reorganization, together with all related acts necessary to consummate the same
("Closing") occurs, scheduled for July 26, 1996 (or on such other date or at
such other time as the parties may agree) ("Effective Time"), Target shall
declare and pay to its shareholders a dividend and/or other distribution in an
amount large enough so that it will have distributed substantially all (and in
any event not less than 90%) of its investment company taxable income (computed
without regard to any deduction for dividends paid) and realized net capital
gain, if any, for the current taxable year through the Effective Time.
The Funds' investment objectives, which are identical, and their investment
policies, which are similar, are described in the Proxy and their respective
prospectuses and SAIs. Although there are some differences in the Funds'
investment policies, Mitchell Hutchins does not expect Acquiring Fund to revise
its investment policies following the Reorganization to reflect those of Target.
Mitchell Hutchins believes that most, if not all, of the assets held by Target
will be consistent with Acquiring Fund's investment policies and thus could be
transferred to and held by Acquiring Fund. If the Reorganization is approved,
Target will sell prior to the Effective Time any assets that are inconsistent
with Acquiring 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 Acquiring Fund.
<PAGE>
PaineWebber Investment Trust III
PaineWebber Securities Trust
April 25, 1996
Page 4
The Reorganization was recommended by Mitchell Hutchins to each Investment
Company's board of trustees (each a "board") at meetings thereof held on April
18, 1996. In considering the Reorganization, each board made an extensive in-
quiry into a number of factors (which are described in the Proxy, together with
Mitchell Hutchins's advice and recommendations to the boards and the purposes of
the Reorganization). Pursuant thereto, each board approved the Plan, subject to
approval of Target's shareholders. In doing so, each board, including a major-
ity of its members who are not "interested persons" (as that term is defined in
the 1940 Act) of either Investment Company, determined that the Reorganization
is in its Fund's best interests, that the terms of the Reorganization are fair
and reasonable, and that its Fund's shareholders' interests will not be diluted
as a result of the Reorganization.
The Plan, which specifies that it is intended to be, and is adopted as, a
plan of a reorganization described in section 368(a)(1)(C), provides in relevant
part for the following:
(1) The acquisition by Acquiring Fund of all cash, cash
equivalents, securities, receivables (including 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 (collectively "Assets") in
exchange solely for
(a) the number of full and fractional (i) Class A
Acquiring Fund Shares determined by dividing the net value
of Target ("Target Value") attributable to the Class A
Target Shares by the net asset value ("NAV") of a Class A
Acquiring Fund Share, (ii) Class B Acquiring Fund Shares
determined by dividing the Target Value attributable to the
Class B Target Shares by the NAV 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 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 of a Class Y Acquiring Fund Share, and
(b) Acquiring Fund's assumption of all of Target's lia-
bilities, 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
<PAGE>
PaineWebber Investment Trust III
PaineWebber Securities Trust
April 25, 1996
Page 5
referred to in the Plan, including without limitation
Target's share of the expenses incurred in connection with
the Reorganization (collectively "Liabilities") (Target
having agreed in the Plan to use its best efforts to
discharge all of its known liabilities and obligations prior
to the Effective Time),
(2) The constructive distribution of such Acquiring Fund Shares
to the Shareholders, and
(3) The subsequent termination of Target.
The distribution described in (2) will be accomplished by transferring the
Acquiring Fund Shares then credited to Target's account on Acquiring Fund's
share transfer records to open accounts on those records established in the
Shareholders' names, with each Shareholder's account being credited with the re-
spective pro rata number of full and fractional (rounded to three decimal
places) Acquiring Fund Shares due such Shareholder, by class. All outstanding
Target Shares, including any represented by certificates, simultaneously will be
canceled on Target's share transfer records.
REPRESENTATIONS
---------------
The representations enumerated below have been made to us by appropriate
officers of each Investment Company.
Each of Securities Trust, on behalf of Acquiring Fund, and Investment
Trust, on behalf of Target, has represented and warranted to us as follows:
1. The fair market value of the Acquiring Fund Shares, when received
by the Shareholders, will be approximately equal to the fair market value
of their Target Shares constructively surrendered in exchange therefor;
2. Its management (a) is unaware of any plan or 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 com-
pany. Consequently, its management expects that the percentage of
Shareholder interests, if any, that will be disposed of as a result of or
at the time of the Reorganization
<PAGE>
PaineWebber Investment Trust III
PaineWebber Securities Trust
April 25, 1996
Page 6
will be de minimis. Nor does its management anticipate that there will
be extraordinary redemptions of Acquiring Fund Shares immediately
following the Reorganization;
3. The Shareholders will pay their own expenses, if any, incurred in
connection with the Reorganization;
4. Immediately following consummation of the Reorganization,
Acquiring Fund will hold substantially the same assets and be subject to
substantially the same liabilities that Target held or was subject to im-
mediately prior thereto, plus any liabilities and expenses of the parties
incurred in connection with the Reorganization;
5. The fair market value on a going concern basis of the Assets will
equal or exceed the Liabilities to be assumed by Acquiring Fund and those
to which the Assets are subject;
6. There is no intercompany indebtedness between the Funds that was
issued or acquired, or will be settled, at a discount;
7. Pursuant to the Reorganization, Target will transfer to Acquiring
Fund, and Acquiring Fund will acquire, at least 90% of the fair market
value of the net assets, and at least 70% of the fair market value of the
gross assets, held by Target immediately before the Reorganization. For
the 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 and (b) redemptions not made as part of
the Reorganization) will be included as assets thereof held immediately
before the Reorganization;
8. None of the compensation received by any Shareholder who is an
employee of Target will be separate consideration for, or allocable to, any
of the Target Shares held by such Shareholder-employee; none of the
Acquiring Fund Shares received by any such Shareholder-employee will be
separate consideration for, or allocable to, any employment agreement; and
the consideration paid to any such Shareholder-employee will be for
services actually rendered and will be commensurate with amounts paid to
third parties bargaining at arm's-length for similar services; and
9. Immediately after the Reorganization, the Shareholders will not
own shares constituting "control" of Acquiring Fund within the meaning of
section 304(c).
<PAGE>
PaineWebber Investment Trust III
PaineWebber Securities Trust
April 25, 1996
Page 7
Investment Trust also has represented and warranted to us on behalf of
Target as follows:
1. The Liabilities were incurred by Target in the ordinary course of
its business;
2. Target is a "fund" as defined in section 851(h)(2); it qualified
for treatment as a regulated investment company ("RIC") under Subchapter M
of the Code ("Subchapter M") for each past taxable year since it commenced
operations and will continue to meet all the requirements for such quali-
fication 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;
3. Target is not under the jurisdiction of a court in a proceeding
under Title 11 of the United States Code or similar case within the meaning
of section 368(a)(3)(A);
4. Not more than 25% of the value of Target's total assets (excluding
cash, cash items, and U.S. government 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
5. Target will be terminated as soon as reasonably practicable after
the Reorganization, but in all events within six months after the Effective
Time.
Securities Trust also has represented and warranted to us on behalf of
Acquiring Fund as follows:
1. 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;
2. Acquiring Fund is a "fund" as defined in section 851(h)(2); it
qualified for treatment as a RIC under Subchapter M for each past taxable
year since it commenced operations and will continue to meet all the
requirements for such qualification for its current taxable year; Acquiring
Fund intends to continue to meet all such requirements for the next taxable
year; and it has no earnings and profits accumulated in any taxable year in
which the provisions of Subchapter M did not apply to it;
3. 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
<PAGE>
PaineWebber Investment Trust III
PaineWebber Securities Trust
April 25, 1996
Page 8
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. Acquiring Fund (a) will actively continue Target's business in
substantially the same manner that Target conducted that business immedi-
ately before the Reorganization, (b) has no plan or intention to sell or
otherwise dispose of any of the Assets, except for dispositions made in the
ordinary course of that business and dispositions necessary to maintain its
status as a RIC under Subchapter M, 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;
5. There is no plan or intention for Acquiring Fund to be dissolved
or merged into another corporation or business trust or any "fund" thereof
(within the meaning of section 851(h)(2)) following the Reorganization;
6. 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
7. Acquiring Fund does not own, directly or indirectly, nor at the
Effective Time will it own, directly or indirectly, nor has it owned,
directly or indirectly, at any time during the past five years, any shares
of Target.
OPINION
-------
Based solely on the facts set forth above, and conditioned on (1) the
Representations being true at the time of Closing and (2) the Reorganization
being consummated in accordance with the Plan, our opinion (as explained more
fully in the next section of this letter) is as follows:
1. Acquiring Fund's acquisition of the Assets in exchange solely for
the Acquiring Fund Shares and Acquiring Fund's assumption of the Lia-
bilities, followed by Target's distribution of those shares pro rata to the
Shareholders constructively in
<PAGE>
PaineWebber Investment Trust III
PaineWebber Securities Trust
April 25, 1996
Page 9
exchange for their Target Shares, will constitute a reorganization within
the meaning of section 368(a)(1)(C), and each Fund will be "a party to a
reorganization" within the meaning of section 368(b);
2. No gain or loss will be recognized to Target on the transfer of
the Assets to Acquiring Fund in exchange solely for the Acquiring Fund
Shares and Acquiring Fund's assumption of the Liabilities or upon the
subsequent distribution of those shares to the Shareholders in constructive
exchange for their Target Shares (section 361);
3. No gain or loss will be recognized to Acquiring Fund on its
receipt of the Assets in exchange solely for the Acquiring Fund Shares and
its assumption of the Liabilities (section 1032(a));
4. Acquiring Fund's basis for the Assets will be the same as the
basis thereof in Target's hands immediately before the Reorganization
(section 362(b)), and Acquiring Fund's holding period for the Assets will
include Target's holding period therefor (section 1223(2));
5. A Shareholder will recognize no gain or loss on the constructive
exchange of all its Target Shares solely for Acquiring Fund Shares pursuant
to the Reorganization (section 354(a)); and
6. A Shareholder's basis for the Acquiring Fund Shares to be received
by it in the Reorganization will be the same as the basis for its Target
Shares to be constructively surrendered in exchange for those Acquiring
Fund Shares (section 358(a)), and its holding period for those Acquiring
Fund Shares will include its holding period for those Target Shares, pro-
vided they are held as capital assets by the Shareholder on the Closing
Date (section 1223(1)).
The foregoing opinion (1) is based on, and is conditioned on the continued
applicability of, the provisions of the Code and the Regulations, judicial
decisions, and rulings and other pronouncements of the Internal Revenue Service
("Service") in existence on the date hereof and (2) is applicable only to the
extent each Fund is solvent. We express no opinion about the tax treatment of
the transactions described herein if either Fund is insolvent.
<PAGE>
PaineWebber Investment Trust III
PaineWebber Securities Trust
April 25, 1996
Page 10
ANALYSIS
--------
I. The Reorganization Will Be a Reorganization under Section 368(a)(1)(C), and
---------------------------------------------------------------------------
Each Fund Will Be a Party to a Reorganization.
---------------------------------------------
A. Each Fund Is a Separate Corporation.
-----------------------------------
A reorganization under section 368(a)(1)(C) (a "C reorganization") involves
the acquisition by one corporation, in exchange solely for all or a part of its
voting stock, of substantially all of the properties of another corporation.
For the transaction to qualify under that section, therefore, both entities in-
volved therein must be corporations (or associations taxable as corporations).
Each Investment Company, however, is a Massachusetts business trust, not a
corporation, and each Fund is a separate series thereof.
Treasury Regulation section 301.7701-4(b) provides that certain
arrangements known as trusts (because legal title is conveyed to trustees for
the benefit of beneficiaries) will not be classified as trusts for purposes of
the Code because they are not simply arrangements to protect or conserve the
property for the beneficiaries. These "business or commercial trusts" are
created simply as devices to carry on profit-making businesses that normally
would have been carried on through corporations or partnerships. Treasury
Regulation section 301.7701-4(c) further provides that an "`investment' trust
will not be classified as a trust if there is a power under the trust agreement
to vary the investment of the certificate holders." See Commissioner v. North
--- ---------------------
American Bond Trust, 122 F.2d 545 (2d Cir. 1941), cert. denied, 314 U.S. 701
- ------------------- ------------
(1942).
Based on these criteria, neither Investment Company qualifies as a trust
for federal income tax purposes. While each Investment Company is an "invest-
ment trust," it does not have a fixed pool of assets -- each Fund has been a
managed portfolio of securities, and its investment adviser has had the
authority to buy and sell securities for it. Neither Investment Company is
simply an arrangement to protect or conserve property for the beneficiaries, but
each is designed to carry on a profit-making business. In addition, the word
"association" has long been held to include "Massachusetts business trusts,"
such as the Investment Companies. See Hecht v. Malley, 265 U.S. 144 (1924).
--- ---------------
Accordingly, we believe that each Investment Company will be treated as a corpo-
ration for federal income tax purposes.
Neither Investment Company as such, however, is participating in the Reor-
ganization, but rather series of each of them are the participants. Ordinarily,
a transaction involving segregated pools of assets (such as the Funds) could not
qualify as a reorganization, because the pools would not be corporations. Under
section 851(h), however, each Fund is treated as a separate
<PAGE>
PaineWebber Investment Trust III
PaineWebber Securities Trust
April 25, 1996
Page 11
corporation for all purposes of the Code save the definitional requirement of
section 851(a) (which is satisfied by each Investment Company). Thus, we
believe that each Fund will be a separate corporation, and each Fund's shares
will be treated as shares of corporate stock, for purposes of section
368(a)(1)(C).
B. Satisfaction of Section 368(a)(2)(F).
------------------------------------
Under section 368(a)(2)(F), if two or more parties to a transaction
described in section 368(a)(1) (other than subparagraph (E) thereof) are
"investment companies," the transaction will not be considered a reorganization
with respect to any such investment company or its shareholders unless, among
other things, the investment company is a RIC or --
(1) not more than 25% of the value of its total assets is
invested in the stock and securities of any one issuer and
(2) not more than 50% of the value of its total assets is
invested in the stock and securities of five or fewer
issuers.
Each Fund will meet the requirements for qualification and treatment as a RIC
for its respective current taxable year, and the foregoing percentage tests will
be satisfied by each Fund. Accordingly, we believe that section 368(a)(2)(F)
will not cause the Reorganization to fail to qualify as a C reorganization with
respect to either Fund.
C. Transfer of "Substantially All" of the Properties.
-------------------------------------------------
For an acquisition to qualify as a C reorganization, the acquiring
corporation must acquire "substantially all of the properties" of the transferor
corporation solely in exchange for all or part of the acquiring corporation's
stock. For purposes of issuing private letter rulings, the Service considers
the transfer of at least 70% of the transferor's gross assets, and at least 90%
of its net assets, held immediately before the reorganization to satisfy the
"substantially all" requirement. Rev. Proc. 77-37, 1977-2 C.B. 568. The
Reorganization will involve such a transfer. Accordingly, we believe that the
Reorganization will involve the transfer to Acquiring Fund of substantially all
of Target's properties.
D. Qualifying Consideration.
------------------------
For an acquisition to qualify as a C reorganization, the acquiring
corporation must acquire at least 80% (by fair market value) of the transferor's
property solely in exchange for voting stock. Section 368(a)(2)(B)(iii). The
assumption of liabilities by the acquiring
<PAGE>
PaineWebber Investment Trust III
PaineWebber Securities Trust
April 25, 1996
Page 12
corporation or its acquisition of property subject to liabilities normally are
disregarded (section 368(a)(1)(C)), but the amount of any such liabilities will
be treated as money paid for the transferor's property if the acquiring
corporation exchanges any money or property (other than its voting stock) there-
for. Section 368(a)(2)(B). Because Acquiring Fund will exchange only the
Acquiring Fund Shares, and no money or other property, for the Assets, we
believe that the Reorganization will satisfy the solely-for-voting-stock
requirement to qualify as a C reorganization.
E. Requirements of Continuity.
--------------------------
Treasury Regulation section 1.368-1(b) sets forth two prerequisites to a
valid reorganization: (1) a continuity of the business enterprise under the
modified corporate form ("continuity of business") and (2) a continuity of
interest therein on the part of those persons who, directly or indirectly, were
the owners of the enterprise prior to the reorganization ("continuity of inter-
est").
1. Continuity of Business.
----------------------
The continuity of business enterprise test as set forth in Treas. Reg. Sec.
1.368-1(d)(2) requires that the acquiring corporation must either (i) continue
the acquired corporation's historic business ("business continuity") or (ii) use
a significant portion of the acquired corporation's historic business assets in
a business ("asset continuity").
While there is no authority that deals directly with the requirement of
continuity of business in the context of a transaction such as the Reorgan-
ization, Rev. Rul. 87-76, 1987-2 C.B. 84, deals with a somewhat similar
situation. In that ruling, P was a RIC that invested exclusively in municipal
securities. P acquired the assets of T in exchange for P common stock in a
transaction that was intended to qualify as a C reorganization. Prior to the
exchange, T sold its entire portfolio of corporate securities and purchased a
portfolio of municipal bonds. The Service held that this transaction did not
qualify as a reorganization for the following reasons: (1) because T had sold
its historic assets prior to the exchange, there was no asset continuity; and
(2) the failure of P to engage in the business of investing in corporate
securities after the exchange caused the transaction to lack business continuity
as well.
The Funds' investment objectives are identical, and their investment
policies are similar. Furthermore, Acquiring Fund will actively continue
Target's business in the same manner that Target conducted it immediately before
the Reorganization. Accordingly, there will be business continuity.
<PAGE>
PaineWebber Investment Trust III
PaineWebber Securities Trust
April 25, 1996
Page 13
Acquiring Fund not only will continue Target's historic business, but
Acquiring Fund also (1) has no plan or intention to sell or otherwise dispose of
any of the Assets, except for dispositions made in the ordinary course of its
business and dispositions necessary to maintain its status as a RIC, and
(2) expects to retain substantially all the Assets in the same form as it
receives them in the Reorganization, unless and until subsequent investment cir-
cumstances suggest the desirability of change or it becomes necessary to make
dispositions thereof to maintain such status. Accordingly, there will be asset
continuity as well.
For all the foregoing reasons, we believe that the Reorganization will meet
the continuity of business requirement.
2. Continuity of Interest.
----------------------
For purposes of issuing private letter rulings, the Service considers the
continuity of interest requirement of Treas. Reg. Sec. 1.368-1(b) satisfied if
ownership in an acquiring corporation on the part of a transferor corporation's
former shareholders is equal in value to at least 50% of the value of all the
formerly outstanding shares of the transferor corporation. Rev. Proc. 77-37,
supra; but see Rev. Rul. 56-345, 1956-2 C.B. 206 (continuity of interest was
- ----- --- ---
held to exist in a reorganization of two RICs where immediately after the reor-
ganization 26% of the shares were redeemed in order to allow investment in a
third RIC); also see Reef Corp. v. Commissioner, 368 F.2d 125 (5th Cir. 1966),
---- --- --------------------------
cert. denied, 386 U.S. 1018 (1967) (a redemption of 48% of a transferor corpora-
- ------------
tion's stock was not a sufficient shift in proprietary interest to disqualify a
transaction as a reorganization under section 368(a)(2)(F) ("F Reorganization"),
even though only 52% of the transferor's shareholders would hold all the
transferee's stock); Aetna Casualty and Surety Co. v. U.S., 568 F.2d 811, 822-23
-------------------------------------
(2d Cir. 1976) (redemption of a 38.39% minority interest did not prevent a
transaction from qualifying as an F Reorganization); Rev. Rul. 61-156, 1961-2
C.B. 62 (a transaction qualified as an F Reorganization even though the
transferor's shareholders acquired only 45% of the transferee's stock, while the
remaining 55% of that stock was issued to new shareholders in a public under-
writing immediately after the transfer).
No minimum holding period for shares of an acquiring corporation is imposed
under the Code on the acquired corporation's shareholders. Rev. Rul. 66-23,
1966-1 C.B. 67, provides generally that "unrestricted rights of ownership for a
period of time sufficient to warrant the conclusion that such ownership is
definite and substantial" will suffice and that "ordinarily, the Service will
treat five years of unrestricted . . . ownership as a sufficient period" for
continuity of interest purposes.
<PAGE>
PaineWebber Investment Trust III
PaineWebber Securities Trust
April 25, 1996
Page 14
A preconceived plan or arrangement by or among an acquired corporation's
shareholders to dispose of more than 50% of an acquiring corporation's shares
could be problematic. Shareholders with no such preconceived plan or
arrangement, however, are basically free to sell any part of the shares received
by them in the reorganization without fear of breaking continuity of interest,
because the subsequent sale will be treated as an independent transaction from
the reorganization.
Neither Fund (1) is aware of any plan or intention of Shareholders to
dispose of any portion of the Acquiring Fund Shares to be received by them in
the Reorganization or (2) anticipates dispositions thereof at the time of or
soon after the Reorganization to exceed the usual rate and frequency of
dispositions of shares of Target as a series of an open-end investment company.
Consequently, each Fund expects that the percentage of Shareholder interests, if
any, that will be disposed of as a result of or at the time of the Reorgani-
zation will be de minimis. Accordingly, we believe that the Reorganization will
meet the continuity of interest requirement of Treas. Reg. Sec. 1.368-1(b).
F. Distribution by Target.
----------------------
Section 368(a)(2)(G)(i) provides that a transaction will not qualify as a C
reorganization unless the corporation whose properties are acquired distributes
the stock it receives and its other property in pursuance of the plan of reor-
ganization. Under the Plan -- which we believe constitutes a "plan of reorgani-
zation" within the meaning of Treas. Reg. Sec. 1.368-2(g) -- Target will
distribute all the Acquiring Fund Shares to its shareholders in constructive
exchange for their Target Shares; as soon as is reasonably practicable
thereafter, Target will be terminated. Accordingly, we believe that the
requirements of section 368(a)(2)(G)(i) will be satisfied.
G. Business Purpose.
----------------
All reorganizations must meet the judicially imposed requirements of the
"business purpose doctrine," which was established in Gregory v. Helvering, 293
--------------------
U.S. 465 (1935), and is now set forth in Treas. Reg. Sec.Sec. 1.368-1(b), -1(c),
and-2(g) (the last of which provides that, to qualify as a reorganization, a
transaction must be "undertaken for reasons germane to the continuance of the
business of a corporation a party to the reorganization"). Under that doctrine,
a transaction must have a bona fide business purpose (and not a purpose to avoid
federal income tax) to constitute a valid reorganization. The substantial
business purposes of the Reorganization are described in the Proxy. According-
ly, we believe that the Reorganization is being undertaken for bona fide
business purposes (and not a purpose to avoid federal income tax) and therefore
meets the requirements of the business purpose doctrine.
<PAGE>
PaineWebber Investment Trust III
PaineWebber Securities Trust
April 25, 1996
Page 15
For all the foregoing reasons, we believe that the Reorganization will
constitute a reorganization within the meaning of section 368(a)(1)(C).
H. Both Funds are Parties to the Reorganization.
--------------------------------------------
Section 368(b)(2) and Treas. Reg. Sec. 1.368-1(f) provide that if one
corporation transfers substantially all of its properties to a second
corporation in exchange for all or a part of the voting stock of the second
corporation, then both corporations are parties to a reorganization. Target is
transferring substantially all of its properties to Acquiring Fund in exchange
for Acquiring Fund Shares. Accordingly, we believe that each Fund will be "a
party to a reorganization."
II. No Gain or Loss Will Be Recognized to Target.
--------------------------------------------
Under sections 361(a) and (c), no gain or loss will be recognized to a
corporation that is a party to a reorganization (1) on the exchange of property,
pursuant to the plan of reorganization, solely for stock or securities in
another corporate party to the reorganization or (2) on the distribution to its
shareholders, pursuant to that plan, of stock in such other corporation that was
received by the distributing corporation in the exchange. (Such a distribution
is required by section 368(a)(2)(G)(i) for a reorganization to qualify as a C
reorganization.) Section 361(c)(4) provides that specified provisions requiring
recognition of gain on certain distributions shall not apply to a distribution
described in (2) above.
Section 357(a) provides in pertinent part that, except as provided in sec-
tion 357(b), if a taxpayer receives property that would be permitted to be
received under section 361 without recognition of gain if it were the sole
consideration and, as part of the consideration, another party to the exchange
assumes a liability of the taxpayer or acquires from the taxpayer property sub-
ject to a liability, then that assumption or acquisition shall not be treated as
money or other property and shall not prevent the exchange from being within
section 361. Section 357(b) applies where the principal purpose of the
assumption or acquisition was a tax avoidance purpose or not a bona fide
business purpose.
As noted above, the Reorganization will constitute a C reorganization, each
Fund will be a party to a reorganization, and the Plan constitutes a plan of
reorganization. Target will exchange the Assets solely for the Acquiring Fund
Shares and Acquiring Fund's assumption of the Liabilities and then will be
terminated pursuant to the Plan, distributing those shares to its shareholders
in constructive exchange for their Target Shares. As also noted above, we
believe that the Reorganization is being undertaken for bona fide business
purposes (and not a purpose to
<PAGE>
PaineWebber Investment Trust III
PaineWebber Securities Trust
April 25, 1996
Page 16
avoid federal income tax); we also do not believe that the principal purpose of
Acquiring Fund's assumption of the Liabilities is avoidance of federal income
tax on the proposed transaction. Accordingly, we believe that no gain or loss
will be recognized to Target on the Reorganization.3/
-
III. No Gain or Loss Will Be Recognized to Acquiring Fund.
----------------------------------------------------
Section 1032(a) provides that no gain or loss will be recognized to a
corporation on the receipt by it of money or other property in exchange for its
shares. Acquiring Fund will issue the Acquiring Fund Shares to Target in
exchange for the Assets, which consist of money and securities. Accordingly, we
believe that no gain or loss will be recognized to Acquiring Fund on the Reor-
ganization.
IV. Acquiring Fund's Basis for the Assets Will Be a Carryover Basis, and Its
------------------------------------------------------------------------
Holding Period Will Include Target's Holding Period.
---------------------------------------------------
Section 362(b) provides that property acquired by a corporation in
connection with a reorganization will have the same basis in that corporation's
hands as the basis of the property in the transferor corporation's hands
immediately before the exchange, increased by any gain recognized to the
transferor on the transfer. As noted above, the Reorganization will constitute
a C reorganization and Target will recognize no gain on the Reorganization under
section 361(a). Accordingly, we believe that Acquiring Fund's basis for the
Assets will be the same as the basis thereof in Target's hands immediately
before the Reorganization.
Section 1223(2) provides that where property acquired in an exchange has a
carryover basis, the property will have a holding period in the hands of the
acquiror that includes the holding period of the property in the transferor's
hands. As stated above, Acquiring Fund's basis for the Assets will be a carry-
over basis. Accordingly, we believe that Acquiring Fund's holding period for
the Assets will include Target's holding period therefor.
- --------------------
3/ Notwithstanding anything herein to the contrary, 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.
<PAGE>
PaineWebber Investment Trust III
PaineWebber Securities Trust
April 25, 1996
Page 17
V. No Gain or Loss Will Be Recognized to a Shareholder.
---------------------------------------------------
Under section 354(a), no gain or loss is recognized to a shareholder who
exchanges shares for other shares pursuant to a plan of reorganization, where
the shares exchanged, as well as the shares received, are those of a corporation
that is a party to the reorganization. As stated above, the Reorganization will
constitute a C reorganization, the Plan constitutes a plan of reorganization,
and each Fund will be a party to a reorganization. Accordingly, we believe that
under section 354 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.
VI. A Shareholder's Basis for Acquiring Fund Shares Will Be a Substituted
---------------------------------------------------------------------
Basis, and its Holding Period therefor Will Include its Holding Period for
--------------------------------------------------------------------------
its Target Shares.
-----------------
Section 358(a)(1) provides, in part, that in the case of an exchange to
which section 354 applies, the basis of any shares received in the transaction
without the recognition of gain is the same as the basis of the property
transferred in exchange therefor, decreased by, among other things, the fair
market value of any other property and the amount of any money received in the
transaction and increased by the amount of any gain recognized on the exchange
by the shareholder.
As noted above, the Reorganization will constitute a C reorganization and
under section 354 no gain or loss will be recognized to a Shareholder on the
constructive exchange of its Target Shares for Acquiring Fund Shares in the
Reorganization. No property will be distributed to the Shareholders other than
the Acquiring Fund Shares, and no money will be distributed to them pursuant to
the Reorganization. Accordingly, we believe that a Shareholder's basis for the
Acquiring Fund Shares to be received by it in the Reorganization will be the
same as the basis for its Target Shares to be constructively surrendered in
exchange for those Acquiring Fund Shares.
Under section 1223(1), the holding period of property received in an
exchange includes the holding period of the property exchanged therefor if the
acquired property has, for the purpose of determining gain or loss, the same
basis in the holder's hands as the property exchanged therefor ("substituted
basis") and such property was a capital asset. As noted above, a Shareholder
will have a substituted basis for the Acquiring Fund Shares it receives in the
Reorganization; accordingly, provided that the Shareholder held its Target
Shares as capital assets
<PAGE>
PaineWebber Investment Trust III
PaineWebber Securities Trust
April 25, 1996
Page 18
on the Closing Date, we believe its holding period for those Acquiring Fund
Shares will include its holding period for those Target Shares.
We hereby consent to this opinion accompanying the Registration Statement
and to the references to our firm under the captions "Synopsis -- Federal Income
Tax Consequences of the Reorganization" and "The Proposed Transaction -- Federal
Income Tax Considerations" in the Proxy.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By: /s/ Theodore L. Press
-----------------------------------
Theodore L. Press
Exhibit 14(a)
Consent of Independent Accounts
We hereby consent to the incorporation in the Prospectus/Proxy Statement
constituting part of this registration statement on Form N-14 (the "N-14
Registration Statement") of our report dated September 20, 1995, relating
to the financial statements and financial highlights of Paine Webber Small
Cap Value Fund appearing in the July 31, 1995 Annual Report to Shareholders,
which are incorporated by reference in the Prospectus and Statement of
Additional Information constituting parts of Post-Effective Amendment No 10
to the Registration Statement of Form N-1A of such Fund, which is incorporated
by reference in such Prospectus/Proxy Statement. We also consent to the
references to us under the headings "Additional Information About Value
Fund - Financial Highlights" and "Miscellaneous - Experts" in such
Prospectus/Proxy Statement of the N-14 Registration Statement.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
May 1, 1996
Exhibit 14(b)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts"
in the Prospectus/Proxy Statement and to the incorporation by reference
of our report for the PaineWebber Small Cap Growth Fund (formerly Mitchell
Hutchins/Kidder Peabody Small Cap Growth Fund) dated September 21, 1995,
in this Registration Statement (Form N-14) of PaineWebber Securities Trust.
/s/Ernst & Young LLP
ERNST & YOUNG LLP
New York, New York
April 29, 1996
Exhibit 14(c)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Registration Statement on
Form N-14 of our report on the PaineWebber Small Cap Growth Fund (formerly
known as Mitchell Hutchins/Kidder, Peabody Small Cap Equity Fund) dated
September 9, 1994 appearing in the annual report to shareholders for the year
ended July 31, 1994.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
New York, New York
May 1, 1996
Exhibit 17(a)
As filed with the Securities and Exchange Commission on January 28, 1993
1933 Act Registration No. 33-55374
1940 Act Registration No. 811-7374
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-lA
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
-----
Pre-Effective Amendment No. 2 [ X ]
----- -----
Post-Effective Amendment No. [ ]
----- -----
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
-----
Amendment No. 2 [ X ]
----- -----
(Check appropriate box or boxes.)
PAINEWEBBER SECURITIES TRUST
(Exact name of registrant as specified in charter)
1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 713-2712
DIANNE E. O'DONNELL, Esq.
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)
Copies to:
ARTHUR J. BROWN, Esq.
NANCY L. HANSBROUGH, Esq.
Kirkpatrick & Lockhart
South Lobby - 9th Floor
1800 M Street, N.W.
Washington, D.C. 20036-5891
Telephone: (202) 778-9000
Approximate Date of Proposed Public Offering: As soon as practicable
after the effective date of this Registration Statement.
Pursuant to the provisions of Rule 24f-2 under the Investment Company
Act of 1940, an indefinite number of shares of beneficial interest is being
registered by this Registration Statement.
Exhibit 17(b)
PROXY
- -----
PAINEWEBBER SMALL CAP GROWTH FUND
Special Meeting of Shareholders - July 11, 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
Please date and sign this proxy on the reverse side and return it in the
enclosed envelope to Alamo Direct Mail Services, Inc., 10 Lucon Drive,
Deer Park, NY 11729.
This proxy will not be voted unless it is dated and
signed exactly as instructed below.
<TABLE>
Sign exactly as name appears hereon.
<S> <C>
___________________________(L.S.)
___________________________(L.S.) Date _________, 1996 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."
<PAGE>
Please indicate your vote by an "X" in the appropriate box below.
The board of directors 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 the reverse side of this card
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000894632
<NAME> PAINEWEBBER SECURITIES TRUST
<SERIES>
<NUMBER> 1
<NAME> PAINEWEBBER SMALL CAP VALUE FUND-CLASS A
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JAN-31-1996
<INVESTMENTS-AT-COST> 18,648
<INVESTMENTS-AT-VALUE> 19,752
<RECEIVABLES> 18
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 39
<TOTAL-ASSETS> 19,809
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 169
<TOTAL-LIABILITIES> 169
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 18,253
<SHARES-COMMON-STOCK> 1,832
<SHARES-COMMON-PRIOR> 1,814
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 8
<ACCUMULATED-NET-GAINS> 292
<OVERDISTRIBUTION-GAINS> 0
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<NET-ASSETS> 19,640
<DIVIDEND-INCOME> 198
<INTEREST-INCOME> 52
<OTHER-INCOME> 0
<EXPENSES-NET> 200
<NET-INVESTMENT-INCOME> 49
<REALIZED-GAINS-CURRENT> 762
<APPREC-INCREASE-CURRENT> (351)
<NET-CHANGE-FROM-OPS> 460
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 1,468
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 158
<NUMBER-OF-SHARES-REDEEMED> (271)
<SHARES-REINVESTED> 130
<NET-CHANGE-IN-ASSETS> (838)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 942
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 104
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 200
<AVERAGE-NET-ASSETS> 20,556
<PER-SHARE-NAV-BEGIN> 11.30
<PER-SHARE-NII> 0.02
<PER-SHARE-GAIN-APPREC> 0.23
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0.83
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.72
<EXPENSE-RATIO> 1.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000894632
<NAME> PAINEWEBBER SECURITIES TRUST
<SERIES>
<NUMBER> 2
<NAME> PAINEWEBBER SMALL CAP VALUE FUND-CLASS B
<MULTIPLIER> 1,000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JAN-31-1996
<INVESTMENTS-AT-COST> 38,812
<INVESTMENTS-AT-VALUE> 41,108
<RECEIVABLES> 36
<ASSETS-OTHER> 1
<OTHER-ITEMS-ASSETS> 83
<TOTAL-ASSETS> 41,228
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 352
<TOTAL-LIABILITIES> 352
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 37,989
<SHARES-COMMON-STOCK> 3,882
<SHARES-COMMON-PRIOR> 4,139
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (17)
<ACCUMULATED-NET-GAINS> 608
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,296
<NET-ASSETS> 40,876
<DIVIDEND-INCOME> 412
<INTEREST-INCOME> 107
<OTHER-INCOME> 0
<EXPENSES-NET> 581
<NET-INVESTMENT-INCOME> (62)
<REALIZED-GAINS-CURRENT> 1,586
<APPREC-INCREASE-CURRENT> (731)
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<NAME> PAINEWEBBER SMALL CAP VALUE FUND-CLASS C
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