<PAGE>
As filed with the Securities and Exchange Commission on November 17, 2000
1933 Act Registration No. 333-___
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-l4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No.______ [ ] Post-Effective Amendment No.______
PAINEWEBBER PACE SELECT ADVISORS TRUST
(Exact name of registrant as specified in charter)
51 West 52nd Street
New York, New York 10019-6114
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 713-2000
AMY R. DOBERMAN, ESQ.
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas, 18th Floor
New York, New York 10019
(Name and address of agent for service)
Copies to:
JON S. RAND, ESQ. ARTHUR J. BROWN, ESQ.
Willkie Farr & Gallagher Kirkpatrick & Lockhart LLP
787 Seventh Avenue 1800 Massachusetts Avenue, N.W., 2nd Floor
New York, New York 10019-6099 Washington D.C. 20036
Telephone: (212) 821-8256 Telephone: (202) 778-9000
Approximate Date of Proposed Public Offering: as soon as practicable after this
Registration Statement becomes effective under the Securities Act of 1933.
It is proposed that this filing will become effective on the 30th day after
filing pursuant to Rule 488.
Title of securities being registered: Class A, Class B, Class C and Class Y
shares of beneficial interest in the series of the Registrant designated PACE
Government Securities Fixed Income Investments.
No filing fee is due because the Registrant is relying on Section 24(f) of the
Investment Company Act of 1940, as amended, pursuant to which it has previously
registered an indefinite number of securities.
<PAGE>
PAINEWEBBER U.S. GOVERNMENT INCOME FUND
(A SERIES OF PAINEWEBBER MANAGED INVESTMENTS TRUST)
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
December [ ], 2000
Dear Shareholder:
The enclosed proxy statement and prospectus asks for your vote on a proposal
that will determine the future of your investment in PaineWebber U.S. Government
Income Fund.
We are seeking shareholder approval to merge U.S. Government Income Fund
into PACE Government Fixed Income Investments ("PACE Fund"). If the merger is
approved, you will receive shares of the corresponding class of the PACE Fund in
exchange for your U.S. Government Income Fund shares, and U.S. Government Income
Fund will cease operations. The expenses of each class of shares of the PACE
Fund following the merger would be no higher than the current expenses of the
corresponding class of U.S. Government Income Fund.
Mitchell Hutchins is the investment manager for both Funds and has retained
Pacific Investment Management Company LLC ("PIMCO"), an unaffiliated firm, to
manage each Fund's assets. The two Funds have similar investment objectives and
policies. Both seek current income. The PACE Fund pursues this objective by
investing primarily in U.S. government bonds and other bonds of varying
maturities, but normally limits its portfolio duration to between one and seven
years. U.S. Government Income Fund invests primarily in U.S. government bonds,
including those backed by mortgages, but without any restrictions on the overall
portfolio duration.
The enclosed document describes the proposed merger more fully and compares
the investment strategies and policies, risk characteristics, operating expenses
and performance histories of the two Funds in more detail. Please read this
document carefully. We have included a "Question and Answer" section that we
believe will be helpful to most investors.
YOUR VOTE IS VERY IMPORTANT. After reviewing the enclosed document, please
complete, date and sign your proxy card and return it TODAY in the enclosed
postage-paid return envelope. Or you may vote your shares by telephone or the
internet. Voting your shares early will avoid costly follow-up mail and
telephone solicitation.
THE BOARD UNANIMOUSLY URGES THAT YOU VOTE "FOR" THE PROPOSED MERGER.
Sincerely,
Brian M. Storms
PRESIDENT
<PAGE>
PAINEWEBBER U.S. GOVERNMENT INCOME FUND PROPOSED MERGER
QUESTIONS AND ANSWERS
On October 6, 2000, the Board of Trustees of PaineWebber Managed Investments
Trust ("Managed Investments Trust"), on behalf of its series, PaineWebber U.S.
Government Income Fund ("U.S. Government Income Fund"), unanimously approved the
merger of U.S. Government Income Fund into PACE Government Securities Fixed
Income Investments ("PACE Government Securities Fixed Income Fund"), a series of
PaineWebber PACE Select Advisors Trust ("PACE Trust"). This merger, however, can
occur only if U.S. Government Income Fund's shareholders approve the
transaction. Here are answers to some of the most commonly asked questions.
WHAT IS A MERGER?
A fund is said to merge with another fund when it transfers its assets and
liabilities to that other fund; subsequently, the old fund ceases to operate.
Shareholders of the old fund become shareholders of the new fund.
WHY IS THIS MERGER BEING PROPOSED?
U.S. Government Income Fund and PACE Government Securities Fixed Income Fund
have similar investment objectives and policies in that both Funds seek current
income and invest primarily in U.S. government bonds. U.S. Government Income
Fund seeks high current income consistent with the preservation of capital and
liquidity, while PACE Government Securities Fixed Income Fund seeks current
income. PACE Government Securities Fixed Income Fund pursues this objective by
investing primarily in U.S. government bonds and other bonds of varying
maturities, but normally limits its portfolio duration to between one and seven
years. U.S. Government Income Fund pursues its objective by investing primarily
in U.S. government bonds, including bonds that are backed by mortgages, but has
no duration policy. U.S. Government Income Fund normally concentrates its
investments in U.S. government and privately issued bonds that are backed by
mortgages or other assets. (See "Comparison of the Funds" on page [ ] of the
Combined Proxy Statement/Prospectus for a more detailed comparison of the
investment objectives and policies of the Funds.)
Pacific Investment Management Company LLC ("PIMCO"), an investment adviser
that is not affiliated with Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins"), has served as sub-adviser for PACE Government Securities Fixed
Income Fund since its inception in August 1995. Effective October 10, 2000,
Mitchell Hutchins also retained PIMCO to serve as sub-adviser for U.S.
Government Income Fund. PIMCO uses the same basic investment strategy for both
Funds. As a result, the two Funds are now managed in a very similar manner.
Mitchell Hutchins and Managed Investments Trust's Board believe that U.S.
Government Income Fund's shareholders will benefit from the merger because the
combined Fund would have a larger asset base to invest, which should provide
greater opportunities for diversifying investments and realizing economies of
scale.
HOW MANY SHARES WILL I RECEIVE AT THE TIME OF THE MERGER?
If the merger is approved, you will receive shares of PACE Government
Securities Fixed Income Fund in exchange for the shares of U.S. Government
Income Fund you hold when the merger is effected. You will receive full and
fractional shares of the corresponding class of PACE Government Securities Fixed
Income Fund having an aggregate net asset value equal to the aggregate net asset
value of your U.S. Government Income Fund shares at the time of the merger.
Although the two Funds have different net asset values per share, each class of
shares of PACE Government Securities Fixed Income Fund issued in the merger will
otherwise be substantially identical to the corresponding class of shares of
U.S. Government Income Fund.
2
<PAGE>
IF I CURRENTLY ELECT TO RECEIVE MY U.S. GOVERNMENT INCOME FUND DIVIDEND AS CASH
OR IF I HAVE THE DIVIDEND AUTOMATICALLY REINVESTED INTO THE FUND, WILL MY
DISTRIBUTION CHOICE REMAIN THE SAME FOR MY PACE GOVERNMENT SECURITIES FIXED
INCOME FUND SHARES AFTER THE MERGER?
Yes, your distribution choice will remain the same after the merger.
WILL I HAVE TO PAY TAXES AS A RESULT OF THE MERGER?
The merger has been structured as a tax-free transaction, which means that
no gain or loss will be recognized by either Fund as a direct result of the
merger. This means that you will not realize any gain or loss on your receipt of
PACE Government Securities Fixed Income Fund shares, and that your basis for the
PACE Government Securities Fixed Income Fund shares you receive in the merger
will be the same as the basis for your U.S. Government Income Fund shares.
Immediately prior to the merger, U.S. Government Income Fund will have to
distribute all of its previously undistributed income and net capital gain, if
any, to its shareholders, and that distribution will be taxable to U.S.
Government Income Fund shareholders. You should note, however, that both Funds
expect to distribute their ordinary income for the calendar year and net gain
for the one year period ending October 31, 2000. This distribution will be made
regardless of whether the merger takes place because of tax requirements
applicable to all mutual funds. This means that if you remain a shareholder of
U.S. Government Income Fund, if the merger takes place, you may receive two
distributions of ordinary income and net capital gain, if any, within a short
period of time.
HOW WILL THE MERGER AFFECT FUND EXPENSES?
Although the management fee paid by PACE Government Securities Fixed Income
Fund to Mitchell Hutchins is greater than the management fee paid by U.S.
Government Income Fund, the combined Fund is expected to have overall operating
expenses that are no higher than the current operating expenses of U.S.
Government Income Fund. The overall operating expenses of the combined Fund are
subject to a written management fee waiver and expense reimbursement agreement
between PACE Government Securities Fixed Income Fund and Mitchell Hutchins which
will remain in effect through December 1, 2002. Absent that agreement, it is
expected that the overall operating expenses of the combined Fund would be
higher than the current expenses of U.S. Government Income Fund. (For more
details about fees and expenses of each class of shares, see "Comparative Fee
Table" on page [ ] of the Combined Proxy Statement/Prospectus.)
HOW HAVE PACE GOVERNMENT SECURITIES FIXED INCOME FUND AND U.S. GOVERNMENT INCOME
FUND PERFORMED?
The following tables show the average annual total returns over several time
periods for each class of shares of U.S. Government Income Fund and the Class P
shares of PACE Government Securities Fixed Income Fund (the only outstanding
class of shares during the periods shown). A Fund's past performance does not
necessarily indicate how it will perform in the future. This may be particularly
true for U.S. Government Income Fund because the current sub-adviser did not
manage its assets during the periods shown. The table for U.S. Government Income
Fund reflects sales charges on its Class A, B and C shares and the higher
expenses for these classes due to the fees paid under their Rule 12b-1 plans.
The table for PACE Government Securities Fixed Income Fund does not reflect the
maximum PaineWebber PACE-SM- Select Advisors Program fee of 1.50% (which does
not apply to shares received in the merger). The Class Y shares of U.S.
Government Income Fund and the Class P shares of PACE Government Securities
Fixed Income Fund are not subject to any sales charges or 12b-1 fees. The tables
also compare each Fund's returns to returns of a broad-based market index. The
comparative indices, which are different for the two Funds, are unmanaged and,
therefore, do not include any sales charges or expenses.
3
<PAGE>
PACE GOVERNMENT SECURITIES FIXED INCOME FUND
AVERAGE ANNUAL TOTAL RETURNS
(as of December 31, 1999)
<TABLE>
<CAPTION>
CLASS CLASS P LEHMAN BROTHERS MORTGAGE-
(INCEPTION DATE) (8/24/95) BACKED SECURITIES INDEX
---------------- --------- -------------------------
<S> <C> <C>
One Year................................ 1.01% 1.86%
Life of Class .......................... 5.87% 6.42%
</TABLE>
U.S. GOVERNMENT INCOME FUND
AVERAGE ANNUAL TOTAL RETURNS
(as of December 31, 1999)
<TABLE>
<CAPTION>
LEHMAN BROTHERS
CLASS CLASS A CLASS B* CLASS C CLASS Y GOVERNMENT BOND
(INCEPTION DATE) (8/31/84) (7/1/91) (7/2/92) (9/11/91) INDEX
---------------- --------- -------- -------- --------- ---------------
<S> <C> <C> <C> <C> <C>
One Year................. (6.77)% (8.27)% (4.11)% (2.65)% (2.23)%
Five Years............... 5.40% 5.11% 5.73% 6.58% 7.44%
Ten Years................ 5.20% N/A N/A N/A 7.48%
Life of Class............ 7.09% 4.43% 3.26% 4.85% **
</TABLE>
-------------------
* Assumes conversion of Class B shares to Class A shares after six years.
** Average annual total returns for the Lehman Brothers Government Bond Index
for the life of each class were as follows: Class A -- 9.29%; Class B --
7.35%; Class C -- 6.53%; Class Y -- 7.06%.
WHEN WILL THE PROPOSED MERGER OCCUR?
The Funds expect to merge in February 2001, assuming U.S. Government Income
Fund shareholder approval at the special meeting scheduled to be held on
January 25, 2001.
CAN I SELL OR EXCHANGE MY U.S. GOVERNMENT INCOME FUND SHARES BEFORE THE MERGER?
If you do not wish to receive shares of PACE Government Securities Fixed
Income Fund, you are free to sell or exchange your U.S. Government Income Fund
shares at any time prior to the merger. You will be subject to any applicable
contingent deferred sales charges and taxes if you sell your U.S. Government
Income Fund shares. If you elect to exchange your shares prior to the merger,
you may be subject to taxes. Consult your tax adviser for the tax implications
of an exchange. Please call your Financial Advisor to discuss your investment
options or with any questions.
WHAT IS THE BOARD'S RECOMMENDATION ON THE MERGER?
Your Board of Trustees unanimously recommends a vote "FOR" the merger.
4
<PAGE>
PAINEWEBBER U.S. GOVERNMENT INCOME FUND
(A SERIES OF PAINEWEBBER MANAGED INVESTMENTS TRUST)
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
-------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
JANUARY 25, 2001
-------------------
To the Shareholders:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders ("Meeting") of
PaineWebber U.S. Government Income Fund ("U.S. Government Income Fund"), a
series of PaineWebber Managed Investments Trust ("Managed Investments Trust"),
will be held on January 25, 2001, at 1285 Avenue of the Americas, 14th Floor,
New York, New York, 10019-6028, at 3:00 p.m., Eastern time, for the following
purpose:
To approve or disapprove the Agreement and Plan of Reorganization and
Termination ("Plan") that provides for the reorganization of U.S.
Government Income Fund into PACE Government Securities Fixed Income
Investments ("PACE Government Securities Fixed Income Fund"), a series of
PaineWebber PACE Select Advisors Trust ("PACE Trust"). Pursuant to the
Plan, U.S. Government Income Fund will transfer all its assets to PACE
Government Securities Fixed Income Fund, which will assume all the stated
liabilities of U.S. Government Income Fund, and PACE Trust will issue to
each U.S. Government Income Fund shareholder the number of full and
fractional shares of the applicable class of PACE Government Securities
Fixed Income Fund having an aggregate net asset value that, on the
effective date of the reorganization, is equal to the aggregate net asset
value of the shareholder's shares of U.S. Government Income Fund.
Shareholders of record as of the close of business on November 21, 2000, are
entitled to notice of, and to vote at, the Meeting or any adjournment thereof.
Please execute and return promptly in the enclosed envelope the accompanying
proxy, which is being solicited by the Board of Trustees of Managed Investments
Trust, or vote your shares by telephone or the internet. Returning your proxy
promptly is important to ensure a quorum at the Meeting. You may revoke your
proxy at any time before it is exercised by the subsequent execution and
submission of a revised proxy, by giving written notice of revocation to Managed
Investments Trust or by voting in person at the Meeting.
By Order of the Board of Trustees,
DIANNE E. O'DONNELL
SECRETARY
December [ ], 2000
51 West 52nd Street
New York, New York 10019-6114
<PAGE>
YOUR VOTE IS IMPORTANT
NO MATTER HOW MANY SHARES YOU OWN.
Please indicate your voting instructions on the enclosed proxy card, sign
and date 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 DESCRIBED ABOVE. In order to avoid the additional
expense of further solicitation, we ask your cooperation in mailing your proxy
card promptly. As an alternative to using the paper proxy card to vote, you
may vote shares that are registered in your name, as well as shares held in
"street name" through a broker, via the internet or telephone. To vote in this
manner, you will need the 14-digit "control" number(s) that appear on your
proxy card(s).
To vote via the internet, please access [insert web address] on the World
Wide Web and follow the on-screen instructions.
You may also call [1-888- ] and vote by telephone.
If we do not receive your completed proxy cards after several weeks, our
proxy solicitor, [ ], may contact you. Our proxy solicitor will remind you
to vote your shares or will record your vote over the phone if you choose to
vote in that manner.
ii
<PAGE>
INSTRUCTIONS FOR SIGNING PROXY CARDS
The following general rules for signing proxy cards may be of assistance
to you and avoid the time and expense involved in validating your vote if you
fail to sign your proxy card properly.
1. Individual Accounts: Sign your name exactly as it appears in the
registration on the proxy card.
2. Joint Accounts: Either party may sign, but the name of the party
signing should conform exactly to the name shown in the registration on the
proxy card.
3. All Other Accounts: The capacity of the individual signing the proxy
card should be indicated unless it is reflected in the form of registration.
For example:
<TABLE>
<CAPTION>
REGISTRATION VALID SIGNATURE
------------ ---------------
<C> <S> <C>
Corporate Accounts
(1) ABC Corp................................ ABC Corp.
John Doe, Treasurer
(2) ABC Corp................................ John Doe, Treasurer
(3) ABC Corp. c/o John Doe, Treasurer....... John Doe
(4) ABC Corp. Profit Sharing Plan........... John Doe, Trustee
Partnership Accounts
(1) The XYZ Partnership..................... Jane B. Smith, Partner
(2) Smith and Jones, Limited Partnership.... Jane B. Smith, General Partner
Trust Accounts
(1) ABC Trust Account....................... Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee u/t/d 12/28/78..... Jane B. Doe
Custodial or Estate Accounts
(1) John B. Smith, Cust. f/b/o
John B. Smith, Jr.,
UGMA/UTMA............................... John B. Smith
(2) Estate of John B. Smith................. John B. Smith, Jr., Executor
</TABLE>
iii
<PAGE>
[This page is intentionally left blank.]
iv
<PAGE>
PAINEWEBBER U.S. GOVERNMENT INCOME FUND
(A SERIES OF PAINEWEBBER MANAGED INVESTMENTS TRUST)
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
1-800-647-1568
PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS
(A SERIES OF PAINEWEBBER PACE SELECT ADVISORS TRUST)
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
1-800-647-1568
-------------------
COMBINED PROXY STATEMENT AND PROSPECTUS
DATED: DECEMBER [ ], 2000
-------------------
This Combined Proxy Statement and Prospectus ("Proxy Statement/Prospectus")
is being furnished in connection with a Special Meeting of Shareholders of
PaineWebber U.S. Government Income Fund ("U.S. Government Income Fund"), a
series of PaineWebber Managed Investments Trust ("Managed Investments Trust"), a
Massachusetts business trust, to be held on January 25, 2001, at 1285 Avenue of
the Americas, 14th Floor, New York, New York, 10019-6028, at 3:00 p.m., Eastern
time (such meeting and any adjournments thereof are referred to collectively as
the "Meeting"). At the Meeting, the shareholders of U.S. Government Income Fund
will be asked to consider and approve the following proposal:
To approve or disapprove the Agreement and Plan of Reorganization and
Termination ("Plan") that provides for the reorganization of U.S.
Government Income Fund into PACE Government Securities Fixed Income
Investments ("PACE Government Securities Fixed Income Fund"), a series of
PaineWebber PACE Select Advisors Trust ("PACE Trust"). Pursuant to the
Plan, U.S. Government Income Fund will transfer all its assets to PACE
Government Securities Fixed Income Fund, which will assume all the stated
liabilities of U.S. Government Income Fund, and PACE Trust will issue to
each U.S. Government Income Fund shareholder the number of full and
fractional shares of the applicable class of PACE Government Securities
Fixed Income Fund having an aggregate net asset value that, on the
effective date of the reorganization, is equal to the aggregate net asset
value of the shareholder's shares of U.S. Government Income Fund.
A form of the Plan is attached as Appendix A to this Proxy
Statement/Prospectus. THE BOARD OF TRUSTEES OF MANAGED INVESTMENTS TRUST HAS
UNANIMOUSLY APPROVED THE PLAN AS BEING IN THE BEST INTERESTS OF U.S. GOVERNMENT
INCOME FUND AND ITS SHAREHOLDERS. (U.S. Government Income Fund and PACE
Government Securities Fixed Income Fund sometimes are referred to individually
as a "Fund" and together as "Funds.")
Pursuant to the Plan, U.S. Government Income Fund will transfer all its
assets to PACE Government Securities Fixed Income Fund, which will assume all
the stated liabilities of U.S. Government Income Fund, and PACE Trust will issue
to each U.S. Government Income Fund shareholder the number of full and
fractional shares of beneficial interest of the applicable class of PACE
Government Securities Fixed Income Fund having an aggregate net asset value
("NAV") that, on the effective date of the reorganization, is equal to the
aggregate NAV of the shareholder's shares of beneficial interest in the
corresponding class of U.S. Government Income Fund (the "Reorganization"). The
value of each U.S. Government Income Fund shareholder's account with PACE
Government Securities Fixed Income Fund immediately after the Reorganization
will be the same as the value of such shareholder's account with U.S. Government
Income Fund immediately prior to the Reorganization. As a result of the
Reorganization, shareholders of each class of shares of U.S. Government Income
Fund will become shareholders of the corresponding class of shares of PACE
Government Securities Fixed Income Fund. No sales charges will
<PAGE>
be assessed on the shares of PACE Government Securities Fixed Income Fund issued
in connection with the Reorganization.
PACE Government Securities Fixed Income Fund is a diversified series of PACE
Trust, which is an open-end management investment company currently comprised of
twelve series. PACE Government Securities Fixed Income Fund's investment
objective is current income. The Fund seeks to achieve its investment objective
by investing in U.S. government bonds and other bonds of varying maturities, but
normally limits its portfolio duration to between one and seven years. The Fund
invests primarily in mortgage-backed securities issued or guaranteed by U.S.
government agencies and in other U.S. government securities.
This Proxy Statement/Prospectus sets forth the information that a U.S.
Government Income Fund shareholder should know before voting on the Plan. It
should be read carefully and retained for future reference.
A Statement of Additional Information ("SAI") dated December [ ], 2000,
containing additional information about the Reorganization, including historical
financial statements, has been filed with the Securities and Exchange Commission
("SEC") and is hereby incorporated by reference in its entirety into this Proxy
Statement/Prospectus. PACE Government Securities Fixed Income Fund's Annual
Report to Shareholders for the fiscal year ended July 31, 2000, has been filed
with the SEC and is incorporated by reference in the SAI. Information about U.S.
Government Income Fund is included in its current Prospectus and SAI, each dated
March 31, 2000, as supplemented, which are on file with the SEC and are hereby
incorporated by reference into this Proxy Statement/Prospectus. Copies of the
other referenced documents, as well as U.S. Government Income Fund's Semi-Annual
Report to Shareholders for the six months ended May 31, 2000, and its Annual
Report to Shareholders for the fiscal year ended November 30, 1999, are
available without charge by writing either U.S. Government Income Fund or PACE
Government Securities Fixed Income Fund at the address shown above, or by
calling (800) 647-1568. The SEC maintains an internet web site at
http://www.sec.gov that contains information regarding PACE Trust and Managed
Investments Trust. Copies of such material may also be obtained, after paying a
duplicating fee, from the Public Reference Branch, Office of Consumer Affairs
and Information Services, Securities and Exchange Commission, Washington, DC,
20549, or by electronic request at the following e-mail address:
[email protected]. Additional information about the Funds also may be obtained
on the Web at http://www.painewebber.com.
AS WITH ALL OTHER MUTUAL FUND SECURITIES, THE SEC HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR DETERMINED WHETHER THE INFORMATION IN THIS PROXY
STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANYONE WHO TELLS YOU OTHERWISE IS
COMMITTING A CRIME.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION TITLE PAGE
------------- ----
<S> <C>
INTRODUCTION...................................... 1
PROPOSAL: TO APPROVE OR DISAPPROVE THE AGREEMENT
AND PLAN OF REORGANIZATION AND TERMINATION...... 2
SYNOPSIS.......................................... 2
The Proposed Reorganization..................... 2
Comparative Fee Table........................... 3
Summary Comparison of the Funds................. 4
COMPARISON OF PRINCIPAL RISK FACTORS.............. 5
Primary Difference in the Investment Risks of
the Funds..................................... 6
COMPARISON OF THE FUNDS........................... 6
Investment Objectives........................... 6
Investment Policies............................. 6
Operations of PACE Government Securities Fixed
Income Fund Following the Reorganization...... 8
Performance..................................... 8
Sales Charges................................... 10
Dividends and Other Distributions............... 10
Taxes........................................... 10
FLEXIBLE PRICING: BUYING, SELLING AND EXCHANGING
SHARES OF PACE GOVERNMENT SECURITIES FIXED
INCOME FUND..................................... 11
Flexible Pricing................................ 11
Buying Shares................................... 15
Selling Shares.................................. 16
Exchanging Shares............................... 16
Pricing and Valuation........................... 17
MANAGEMENT........................................ 18
Investment Manager and Investment Adviser....... 18
Sub-Adviser..................................... 18
Advisory Fees and Fund Expenses................. 19
ADDITIONAL INFORMATION ABOUT THE REORGANIZATION... 19
Reasons for the Reorganization.................. 19
Terms of the Reorganization..................... 21
Description of Securities to be Issued.......... 22
Temporary Waiver of Investment Restrictions..... 23
Federal Income Tax Considerations............... 23
Required Vote................................... 24
ORGANIZATION OF THE FUNDS......................... 24
FINANCIAL HIGHLIGHTS.............................. 24
CAPITALIZATION.................................... 26
LEGAL MATTERS..................................... 26
INFORMATION FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION...................................... 27
EXPERTS........................................... 27
OTHER INFORMATION................................. 27
APPENDIX A: Form of Agreement and Plan of
Reorganization and Termination.................. A-1
APPENDIX B: Security Ownership of Certain
Beneficial Owners............................... B-1
APPENDIX C: Management's Discussion of PACE
Government Securities Fixed Income Fund's
Performance..................................... C-1
</TABLE>
iii
<PAGE>
INTRODUCTION
This Proxy Statement/Prospectus is being furnished to shareholders of U.S.
Government Income Fund, a series of Managed Investments Trust, in connection
with the solicitation of proxies by the Board for use at the Meeting. All
properly executed and unrevoked proxies received in time for the Meeting will be
voted as instructed by shareholders. Approval of the proposal requires the
affirmative vote of the lesser of (1) 67% or more of the shares of U.S.
Government Income Fund present at the Meeting, if more than 50% of the
outstanding shares are represented at the Meeting in person or by proxy, or
(2) more than 50% of the outstanding shares entitled to vote at the Meeting. If
you execute your proxy but give no voting instructions, your shares that are
represented by proxies will be voted "FOR" the proposal described in this Proxy
Statement/Prospectus. The presence in person or by proxy of U.S. Government
Income Fund shareholders entitled to cast a majority of all the votes entitled
to be cast at the Meeting will constitute a quorum. 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 the 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.
Broker non-votes are shares held in "street name" for which the broker
indicates that instructions have not been received from the beneficial owners or
other persons entitled to vote and for which the broker does not have
discretionary voting authority. Abstentions and broker non-votes will be counted
as shares present at the Meeting for quorum purposes but will not be
(i) considered votes cast at the Meeting or (ii) voted for or against any
adjournment or proposal. Abstentions and broker non-votes are effectively votes
against the proposal.
Any person giving a proxy has the power to revoke it at any time prior to
its exercise by executing a superseding proxy or by submitting a written notice
of revocation to the Secretary of Managed Investments Trust ("Secretary"). To be
effective, such revocation must be received by the Secretary prior to the
Meeting. In addition, although mere attendance at the Meeting will not revoke a
proxy, a shareholder present at the Meeting may withdraw his or her proxy by
voting in person.
Mitchell Hutchins (not the Funds) will bear the expenses of the
Reorganization. Managed Investments Trust intends to first mail this Proxy
Statement/Prospectus and the accompanying proxy card on or about December [ ],
2000. Shareholders of record as of the close of business on November 21, 2000
("Record Date"), are entitled to vote at the Meeting. On the Record Date, U.S.
Government Income Fund had [ ] shares issued and outstanding, consisting
of [ ] Class A shares, [ ] Class B shares, [ ] Class C
shares, and [ ] Class Y shares. Shareholders are entitled to one vote
for each full share held and a fractional vote for each fractional share held.
[Except as set forth in Appendix B,] as of the Record Date, Mitchell Hutchins,
the investment manager, administrator and distributor of both Funds, does not
know of any other person who owns beneficially or of record 5% or more of any
class of shares of either Fund. [As of that same date, the Trustees and
officers, as a group, owned less than 1% of any class of either Fund's
outstanding shares.]
Managed Investments Trust has engaged the services of [ ] to assist
it in the solicitation of proxies for the Meeting. Managed Investments Trust
expects to solicit proxies by mail, telephone and via the internet. Managed
Investments Trust officers and employees of Mitchell Hutchins who assist in the
proxy solicitation will not receive any additional or special compensation for
any such efforts. [ ] will be paid approximately [$ ] for proxy
solicitation services. Managed Investments Trust will request broker/dealer
firms, custodians, nominees and fiduciaries to forward proxy materials to the
beneficial owners of the shares held of record by such persons. Mitchell
Hutchins may reimburse such broker/dealer firms, custodians, nominees and
fiduciaries for their reasonable expenses incurred in connection with such proxy
solicitation.
1
<PAGE>
PROPOSAL: TO APPROVE OR DISAPPROVE THE AGREEMENT AND PLAN OF REORGANIZATION AND
TERMINATION.
SYNOPSIS
The following is a summary of certain information contained elsewhere in
this Proxy Statement/ Prospectus, the Statement of Additional Information, and
the Plan. As discussed more fully below, Managed Investments Trust's Board
believes that the proposed Reorganization will benefit U.S. Government Income
Fund's shareholders.
THE PROPOSED REORGANIZATION
The Boards of PACE Trust and Managed Investments Trust, including their
respective Trustees who are not "interested persons," as that term is defined in
the Investment Company Act of 1940, as amended ("1940 Act") ("Independent
Trustees"), considered and approved the Plan at meetings held on September 13,
2000 and October 6, 2000, respectively. The Plan provides for the acquisition by
PACE Government Securities Fixed Income Fund of all of U.S. Government Income
Fund's assets in exchange for PACE Government Securities Fixed Income Fund
shares and the assumption by PACE Government Securities Fixed Income Fund of all
of U.S. Government Income Fund's stated liabilities. U.S. Government Income Fund
will then distribute the PACE Government Securities Fixed Income Fund shares to
U.S. Government Income Fund's shareholders, by class, so that each U.S.
Government Income Fund shareholder will receive the number of full and
fractional shares of the corresponding class of PACE Government Securities Fixed
Income Fund equal in aggregate value to the aggregate value of the shares of
U.S. Government Income Fund that the shareholder held at the time of the
Reorganization. These transactions are scheduled to occur as of 4:00 p.m.,
Eastern time, on February 2, 2001, or on such later date as the conditions to
consummation of the Reorganization are satisfied ("Closing Date"). U.S.
Government Income Fund will be terminated as soon as is practicable after the
Closing Date. See "Additional Information About the Reorganization," below.
Managed Investments Trust and PACE Trust will each receive an opinion of
Kirkpatrick & Lockhart LLP to the effect that the Reorganization will constitute
a tax-free reorganization within the meaning of section 368(a)(1)(D) of the
Internal Revenue Code of 1986, as amended ("Code"). Accordingly, neither Fund
nor any of its shareholders will recognize any gain or loss for federal income
tax purposes as a direct result of the Reorganization. To the extent U.S.
Government Income Fund sells securities prior to the Closing Date, it may
recognize net gains or losses. Any such net recognized gains would increase the
amount of any distribution made to shareholders of U.S. Government Income Fund
prior to the Closing Date. See "Additional Information About the
Reorganization--Federal Income Tax Considerations," below.
For the reasons set forth below under "Additional Information About the
Reorganization--Reasons for the Reorganization," the Board of Managed
Investments Trust has determined that the Reorganization is in the best
interests of U.S. Government Income Fund and that the interests of existing U.S.
Government Income Fund shareholders will not be diluted as a result of the
Reorganization. ACCORDINGLY, MANAGED INVESTMENTS TRUST'S BOARD UNANIMOUSLY
RECOMMENDS APPROVAL OF THE TRANSACTION.
2
<PAGE>
COMPARATIVE FEE TABLE
The table below describes the fees and expenses that you would pay if you
buy and hold U.S. Government Income Fund shares or PACE Government Securities
Fixed Income Fund shares before the Reorganization, and PACE Government
Securities Fixed Income Fund shares after the Reorganization. The "Annual Fund
Operating Expenses" set forth below are based on the fees and expenses for the
fiscal year ended July 31, 2000, for PACE Government Securities Fixed Income
Fund and for the six months ended May 31, 2000 (annualized), for U.S. Government
Income Fund. The PRO FORMA information reflects the anticipated effects of the
Reorganization as well as the proposed reorganization of PaineWebber Low
Duration U.S. Government Income Fund with PACE Government Securities Fixed
Income Fund, which is expected to occur at approximately the same time as the
Reorganization.
<TABLE>
<CAPTION>
PACE GOVERNMENT SECURITIES FIXED
U.S. GOVERNMENT INCOME FUND INCOME FUND
---------------------------------------------- ----------------------------------------------
CLASS A CLASS B CLASS C CLASS Y CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES (FEES PAID
DIRECTLY FROM YOUR
INVESTMENT)
Maximum Sales Charge
(load) Imposed on
Purchases (AS A
PERCENTAGE OF OFFERING
PRICE)................. 4% None None None 4% None None None
Maximum Deferred Sales
Charge (load) (AS A
PERCENTAGE OF ORIGINAL
PURCHASE PRICE OR
REDEMPTION PROCEEDS,
WHICHEVER IS LESS)..... None 5% 0.75% None None 5% 0.75% None
Exchange Fee............. None None None None None None None None
ANNUAL FUND OPERATING
EXPENSES (FEES THAT ARE
DEDUCTED FROM FUND
ASSETS)
Management Fees**........ 0.50% 0.50% 0.50% 0.50% 0.70% 0.70% 0.70% 0.70%
Distribution and/or
Service (12b-1) Fees... 0.25% 1.00% 0.75% None 0.25% 1.00% 0.75% None
Other Expenses***........ 0.22% 0.28% 0.24% 0.15% 0.20% 0.22% 0.21% 0.19%
-------- -------- -------- -------- -------- -------- -------- --------
Total Annual Fund
Operating Expenses..... 0.97% 1.78% 1.49% 0.65% 1.15% 1.92% 1.66% 0.89%
======== ======== ======== ======== ======== ======== ======== ========
Management Fee
Waiver/Expense
Reimbursements+........ N/A N/A N/A N/A (0.04)% (0.04)% (0.04)% (0.04)%
-------- -------- -------- -------- -------- -------- -------- --------
Net Expenses+............ 0.97% 1.78% 1.49% 0.65% 1.11% 1.88% 1.62% 0.85%
======== ======== ======== ======== ======== ======== ======== ========
<CAPTION>
COMBINED PACE GOVERNMENT
SECURITIES FIXED INCOME FUND
PRO FORMA*
----------------------------------------------
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES (FEES PAID
DIRECTLY FROM YOUR
INVESTMENT)
Maximum Sales Charge
(load) Imposed on
Purchases (AS A
PERCENTAGE OF OFFERING
PRICE)................. 4% None None None
Maximum Deferred Sales
Charge (load) (AS A
PERCENTAGE OF ORIGINAL
PURCHASE PRICE OR
REDEMPTION PROCEEDS,
WHICHEVER IS LESS)..... None 5% 0.75% None
Exchange Fee............. None None None None
ANNUAL FUND OPERATING
EXPENSES (FEES THAT ARE
DEDUCTED FROM FUND
ASSETS)
Management Fees**........ 0.70% 0.70% 0.70% 0.70%
Distribution and/or
Service (12b-1) Fees... 0.25% 1.00% 0.75% None
Other Expenses***........ 0.15% 0.17% 0.16% 0.12%
-------- -------- -------- --------
Total Annual Fund
Operating Expenses..... 1.10% 1.87% 1.61% 0.82%
======== ======== ======== ========
Management Fee
Waiver/Expense
Reimbursements+........ (0.13)% (0.13)% (0.13)% (0.17)%
-------- -------- -------- --------
Net Expenses+............ 0.97% 1.74% 1.48% 0.65%
======== ======== ======== ========
</TABLE>
---------------------------
* The PRO FORMA expense information assumes that shareholders of U.S.
Government Income Fund and PaineWebber Low Duration U.S. Government Income
Fund approve the proposed reorganizations. If shareholders of U.S.
Government Income Fund approve the Reorganization and shareholders of
PaineWebber Low Duration U.S. Government Income Fund do not approve its
reorganization, the PRO FORMA "Net Expenses" for each class of shares of
PACE Government Securities Fixed Income Fund would be the same as shown
above due to the fee waiver and expense reimbursement arrangement in effect
for the combined Fund.
** For both Funds, "Management Fees" include fees paid to Mitchell Hutchins
for administrative services.
*** "Other Expenses" for PACE Government Securities Fixed Income Fund are
estimated based on the "other expenses" of the Fund's outstanding Class P
shares for the fiscal year ended July 31, 2000, as adjusted to reflect
estimated transfer agency expenses for each new class. "Other Expenses" for
each class of the combined Fund are based on the combined assets of U.S.
Government Income Fund and Low Duration U.S. Government Income Fund.
+ PACE Trust and Mitchell Hutchins have entered into a written agreement with
respect to PACE Government Securities Fixed Income Fund under which
Mitchell Hutchins is contractually obligated to waive its management fees
and/or reimburse the Fund to the extent that the total operating expenses
of each class through December 1, 2002 otherwise would exceed the sum of
0.85% (the expense cap for the Fund's Class P shares) plus the 12b-1 fees,
if any, and any higher transfer agency fees applicable to the class. The
Fund has agreed to repay Mitchell Hutchins for any reimbursed expenses if
it can do so over the following three fiscal years without causing the
Fund's expenses in any of those three years to exceed these expense caps.
PACE Trust and Mitchell Hutchins have entered into an additional written
agreement with respect to PACE Government Securities Fixed Income Fund that
becomes effective if the merger takes place. Under that agreement, Mitchell
Hutchins is contractually obligated to waive its management fees and/or
reimburse the Fund to the extent that the total operating expenses of each
class through December 1, 2002 otherwise would exceed the current operating
expenses of U.S. Government Income Fund as shown under "Total Annual Fund
Operating Expenses" and "Net Expenses" above. This is the expense cap
reflected in the "Net Expenses" for the combined Fund. The Fund has agreed
to repay Mitchell Hutchins for any reimbursed expenses if it can do so over
the following three fiscal years without causing the Fund's expenses in any
of those three years to exceed these expense caps.
3
<PAGE>
The example below is intended to help you compare the costs of investing in
each Fund, both before and after the Reorganization.
The example below assumes that you invest $10,000 in each Fund (including
the combined Fund) for the time periods indicated and then sell all of your
shares at the end of those periods. The example also assumes that your
investments each have a 5% return each year and that each Fund's operating
expenses remain the same, except for the two-year period when PACE Government
Securities Fixed Income Fund's and the combined Fund's expenses are lower due to
the agreements with Mitchell Hutchins. Although your actual returns and costs
may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT INCOME FUND
Class A....................... $495 $697 $ 915 $1,542
Class B (assuming sale of all
shares at end of period).... 681 860 1,164 1,685
Class B (assuming no sale of
shares)..................... 181 560 964 1,685
Class C (assuming sale of all
shares at end of period).... 227 471 813 1,779
Class C (assuming no sale of
shares)..................... 152 471 813 1,779
Class Y....................... 66 208 362 810
PACE GOVERNMENT SECURITIES
FIXED INCOME FUND
Class A....................... $509 $743 $1,000 $1,735
Class B (assuming sale of all
shares at end of period).... 691 895 1,229 1,852
Class B (assuming no sale of
shares)..................... 191 595 1,029 1,852
Class C (assuming sale of all
shares at end of period).... 240 515 894 1,958
Class C (assuming no sale of
shares)..................... 165 515 894 1,958
Class Y....................... 87 276 485 1,089
PRO FORMA PACE GOVERNMENT
SECURITIES FIXED INCOME FUND
Class A....................... $495 $710 $ 957 $1,664
Class B (assuming sale of all
shares at end of period).... 677 862 1,186 1,782
Class B (assuming no sale of
shares)..................... 177 562 986 1,782
Class C (assuming sale of all
shares at end of period).... 226 482 851 1,889
Class C (assuming no sale of
shares)..................... 151 482 851 1,889
Class Y....................... 66 227 421 981
</TABLE>
SUMMARY COMPARISON OF THE FUNDS
INVESTMENT OBJECTIVES AND POLICIES
U.S. Government Income Fund and PACE Government Securities Fixed Income Fund
have similar investment objectives, policies and overall risk characteristics in
that both Funds seek current income by investing primarily in U.S. government
bonds. PACE Government Securities Fixed Income Fund seeks current income, while
U.S. Government Income Fund seeks high current income consistent with the
preservation of capital and liquidity. PACE Government Securities Fixed Income
Fund invests primarily in U.S. government bonds and other bonds of varying
maturities, but normally limits its portfolio duration to between one and seven
years. U.S. Government Income Fund invests primarily in U.S. government bonds,
including bonds that are backed by mortgages, but has no duration policy. U.S.
Government Income Fund normally concentrates its investments in U.S. government
and privately issued bonds that are backed by mortgages or other assets.
INVESTMENT ADVISORY SERVICES
Mitchell Hutchins has served as investment manager and administrator for
PACE Government Securities Fixed Income Fund since its inception in August 1995.
As investment manager for the Fund, Mitchell Hutchins provides portfolio
management oversight rather than directly managing the Fund's
4
<PAGE>
investments. Mitchell Hutchins provides portfolio management oversight
principally by performing initial reviews of prospective sub-advisers and
supervising and monitoring the performance of the sub-advisers thereafter.
Mitchell Hutchins also recommends to the Board of PACE Trust whether agreements
with sub-advisers should be renewed, modified or terminated. The Fund's current
sub-adviser -- PIMCO -- has managed the Fund's investment portfolio since it
commenced operations on August 24, 1995.
Mitchell Hutchins has served as investment manager or investment adviser and
as administrator for U.S. Government Income Fund since its inception on August
31, 1984 and directly managed the Fund's assets until October 10, 2000. On that
date, the Fund's current sub-adviser -- PIMCO -- assumed responsibility for
managing the assets of the Fund.
PURCHASE AND REDEMPTION PROCEDURES
Funds in the PaineWebber Flexible Pricing-SM- System generally offer
Class A, Class B, Class C and Class Y shares. PACE Government Securities Fixed
Income Fund did not offer Class A, Class B, Class C and Class Y shares to the
public prior to November [ ], 2000. The purchase and redemption procedures for
PACE Government Securities Fixed Income Fund's Class A, Class B, Class C and
Class Y shares would be the same as those currently in effect for the
corresponding classes of shares of U.S. Government Income Fund. You may exchange
Class A, Class B or Class C shares of PACE Government Securities Fixed Income
Fund for shares of the same class of most other PACE funds. Exchanges between
PaineWebber funds and PACE funds will not be activated until on or around
March 1, 2001. You may not exchange Class Y shares.
COMPARISON OF PRINCIPAL RISK FACTORS
Both Funds are subject to substantially similar risk factors associated with
their investments in bonds. An investment in either Fund is not guaranteed; an
investor may lose money by investing in either Fund. The principal risks
presented by the Funds are:
INTEREST RATE RISK -- The value of bonds generally can be expected to fall
when interest rates rise and to rise when interest rates fall. Interest rate
risk is the risk that interest rates will rise so that the value of a Fund's
investments in bonds will fall. Interest rate risk is the primary source of risk
for U.S. government and usually for other very high quality bonds. The impact of
changes in the general level of interest rates on lower quality bonds may be
greater or less than the impact on higher quality bonds.
Some corporate bonds, particularly those issued at relatively high interest
rates, provide that the issuer may repay them earlier than the maturity date.
The issuers of these bonds are most likely to exercise these "call" provisions
if prevailing interest rates are lower than they were when the bonds were
issued. A Fund then may have to reinvest the repayments at lower interest rates.
Bonds subject to call provisions may not benefit fully from the rise in value
that generally occurs for bonds when interest rates fall.
PREPAYMENT RISK -- Payments on bonds that are backed by mortgage loans or
similar assets may be received earlier or later than expected due to changes in
the rate at which underlying loans are prepaid. Faster prepayments often happen
when market interest rates are falling. As a result, a Fund may need to reinvest
these early payments at those lower interest rates, thus reducing its income.
Conversely, when interest rates rise, prepayments may happen more slowly,
causing the underlying loans to be outstanding for a longer time than
anticipated. This can cause the market value of the security to fall because the
market may view its interest rate as too low for a longer term investment.
LEVERAGE RISK -- Leverage involves increasing the total assets in which a
Fund can invest beyond the level of its net assets. Because leverage increases
the amount of a Fund's assets, it can magnify the effect on the Fund of changes
in the market values. As a result, while leverage can increase a Fund's income
and potential for gain, it also can increase expenses and the risk of loss. Each
Fund uses leverage by investing in
5
<PAGE>
when-issued and delayed delivery securities and attempts to limit the potential
magnifying effect of the leverage by managing portfolio duration.
CREDIT RISK -- Credit risk is the risk that the issuer of a bond will not
make principal or interest payments when they are due. Even if an issuer does
not default on a payment, a bond's value may decline if the market believes that
the issuer has become less able, or less willing, to make payments on time. Even
high quality bonds are subject to some credit risk. However, credit risk is
greater for lower quality bonds. Bonds that are not investment grade involve
high credit risk and are considered speculative. Some of these low quality bonds
may be in default when purchased by a Fund. Low quality bonds may fluctuate in
value more than higher quality bonds and, during periods of market volatility,
may be more difficult to sell at the time and price a Fund desires.
DERIVATIVES RISK -- The value of "derivatives" -- so-called because their
value "derives" from the value of an underlying asset, reference rate or
index -- may rise or fall more rapidly than other investments. For some
derivatives, it is possible for a Fund to lose more than the amount it invested
in the derivative. Options and futures contracts are examples of derivatives. A
Fund's use of derivatives may not succeed for various reasons, including
unexpected changes in the values of the derivatives or the assets underlying
them. Also, if a Fund uses derivatives to adjust or "hedge" the overall risk of
its portfolio, the hedge may not succeed if changes in the values of the
derivatives are not matched by opposite changes in the values of the assets
being hedged.
PRIMARY DIFFERENCE IN THE INVESTMENT RISKS OF THE FUNDS
CONCENTRATION RISK -- U.S. Government Income Fund normally invests at least
25% of its total assets in U.S. government and privately issued mortgage- and
asset-backed securities. Concentration increases the Fund's exposure to the
risks of these securities and might cause the Fund's net asset value to change
more than it otherwise would. Some types of mortgage-backed securities,
including "interest only," "principal only" and inverse floating classes of
these securities, can be extremely volatile and may become illiquid. PACE
Government Securities Fixed Income Fund does not concentrate its investments
and, as a result, is not subject to this risk.
COMPARISON OF THE FUNDS
INVESTMENT OBJECTIVES
The Funds have similar investment objectives. PACE Government Securities
Fixed Income Fund seeks current income. U.S. Government Income Fund seeks high
current income consistent with the preservation of capital and liquidity.
INVESTMENT POLICIES
The Funds also have similar investment policies. PACE Government Securities
Fixed Income Fund invests in U.S. government bonds and other bonds of varying
maturities, but normally limits its portfolio duration to between one and seven
years. "Duration" is a measure of the Fund's exposure to interest rate risk. A
longer duration means that changes in market interest rates are likely to have a
larger effect on the value of the assets in a portfolio.
PACE Government Securities Fixed Income Fund invests primarily in
mortgage-backed securities issued or guaranteed by U.S. government agencies and
in other U.S. government securities. The Fund also invests, to a lesser extent,
in investment grade bonds of private issuers, including those backed by
mortgages or other assets. These privately issued bonds generally have one of
the two highest credit ratings, although the Fund may invest to a limited extent
in privately issued bonds with the third highest credit rating.
U.S. Government Income Fund invests primarily in U.S. government bonds,
including bonds that are backed by mortgages, but has no duration policy. The
Fund also invests, to a lesser extent, in non-
6
<PAGE>
government bonds that have the highest credit ratings and that are backed by
mortgages or other assets. U.S. Government Income Fund normally concentrates its
investments in U.S. government and privately issued bonds that are backed by
mortgages or other assets.
Each Fund may invest in when-issued or delayed delivery bonds to increase
its return, giving rise to a form of leverage.
In selecting investments for each Fund, PIMCO establishes duration targets
for each Fund's portfolio based on its expectations for changes in interest
rates and then positions each Fund to take advantage of yield curve shifts.
PIMCO decides to buy or sell specific bonds based on an analysis of their values
relative to other similar bonds. PIMCO monitors the prepayment experience of the
Fund's mortgage-backed bonds and also will buy and sell securities to adjust a
Fund's average portfolio duration, yield curve and sector and prepayment
exposure, as appropriate.
DERIVATIVES. The Funds have similar policies with respect to the use of
options, futures, and other derivatives. PACE Government Securities Fixed Income
Fund may (but is not required to) use options, futures and other derivatives as
part of its investment strategy or to help manage portfolio risks. U.S.
Government Income Fund uses interest rate futures contracts and other
derivatives to help manage its portfolio duration.
TEMPORARY DEFENSIVE POSITIONS; CASH RESERVES. Each Fund may take a
defensive position that is different from its normal investment strategy to
protect itself from adverse market conditions. This means that each Fund may
temporarily invest a larger-than-normal part, or even all, of its assets in cash
or money market instruments. In addition, each Fund may increase its cash
reserves to facilitate the transition to the investment style and strategies of
a new sub-adviser. Because these investments provide relatively low income, a
defensive or transitional position may not be consistent with achieving a Fund's
investment objective. PACE Government Securities Fixed Income Fund is normally
fully invested in accordance with its investment objective and policies.
However, with the concurrence of Mitchell Hutchins, PACE Government Securities
Fixed Income Fund may take a defensive position that is different from its
normal investment strategy.
Each Fund may invest to a limited extent in money market instruments as a
cash reserve for liquidity or other purposes.
OTHER INVESTMENT POLICIES. Each Fund may invest up to 15% of its net assets
in illiquid securities. Both Funds may purchase securities on a when-issued
basis or may purchase or sell securities for delayed delivery. Each Fund may
lend its securities to qualified broker-dealers or institutional investors in an
amount up to 33 1/3% of its total assets. PACE Government Securities Fixed
Income Fund may borrow from banks and through reverse repurchase agreements for
temporary or emergency purposes, but not in excess of 10% of its total assets.
U.S. Government Income Fund may borrow from banks and through reverse repurchase
agreements for temporary or emergency purposes, but not in excess of 33 1/3% of
its total assets, except that the Fund may borrow an additional 5% of its total
assets for temporary or emergency purposes. Neither Fund may purchase securities
while borrowings in excess of 5% of its total assets are outstanding. Each Fund
may invest in the securities of other investment companies and may sell short
"against the box."
PORTFOLIO TURNOVER. Each Fund may engage in frequent trading to achieve its
investment objective. Frequent trading may result in a portfolio turnover of
100% or more (high portfolio turnover). Frequent trading may increase the
portion of a Fund's capital gains that are realized for tax purposes in any
given year, which may increase the Fund's taxable distributions in that year.
Frequent trading also may increase the portion of a Fund's realized capital
gains that are considered "short-term" for tax purposes. Shareholders will pay
higher taxes on distributions that represent net short-term capital gains than
they would pay on distributions that represent net long-term capital gains.
Frequent trading also may result in higher fund expenses due to transaction
costs. Neither Fund restricts the frequency of trading to limit expenses or the
tax effect that its distributions may have on shareholders. The portfolio
turnover rates for
7
<PAGE>
U.S. Government Income Fund for the last two fiscal years ended November 30,
1999 and 1998, were 270% and 411%, respectively, while the portfolio turnover
rates for PACE Government Securities Fixed Income Fund for the last two fiscal
years ended July 31, 2000 and 1999, were 585% and 418%, respectively.
U.S Government Income Fund changed its investment management arrangements on
October 10, 2000 when PIMCO assumed responsibility for managing its investment
portfolio. PIMCO has realigned the Fund's portfolio to reflect its proprietary
investment strategies. As a result, during the period immediately following
October 10, 2000, the Fund experienced higher portfolio turnover than normal,
which may result in higher overall portfolio turnover for the current fiscal
year.
OPERATIONS OF PACE GOVERNMENT SECURITIES FIXED INCOME FUND FOLLOWING THE
REORGANIZATION
It is not expected that PACE Government Securities Fixed Income Fund will
revise any of its policies following the Reorganization to reflect those of U.S.
Government Income Fund. PIMCO has reviewed U.S. Government Income Fund's current
portfolio and determined that U.S. Government Income Fund's holdings generally
are compatible with PACE Government Securities Fixed Income Fund's portfolio. As
a result, Mitchell Hutchins believes that, if the Reorganization is approved, a
substantial portion of U.S. Government Income Fund's assets could be transferred
to and held by PACE Government Securities Fixed Income Fund.
It is expected that some of U.S. Government Income Fund's holdings may not
remain at the time of the Reorganization due to normal portfolio turnover. It is
not expected that any of U.S. Government Income Fund's holdings will be
incompatible with PACE Government Securities Fixed Income Fund's holdings.
However, if the shareholders of U.S. Government Income Fund approve the
Reorganization, some of the Fund's holdings may need to be liquidated
immediately prior to or following the Reorganization to adjust the duration of
the combined Fund. Any portfolio holdings of U.S. Government Income Fund that
must be sold for this reason would be liquidated in an orderly manner and the
proceeds held in temporary investments or reinvested in assets with durations
that are consistent with the duration of the combined Fund. As of
, 2000, only a very small percentage of U.S. Government Income
Fund's portfolio holdings would have had to be sold to adjust the portfolio
duration of the combined Fund. The portion of U.S. Government Income Fund's
assets that will be liquidated in connection with the Reorganization will depend
on the sub-adviser's continuing assessment of the appropriate portfolio duration
for PACE Government Securities Fixed Income Fund at the approximate time of the
Reorganization. The need for U.S. Government Income Fund to dispose of
investments in connection with the Reorganization may result in the Fund's
selling securities at a disadvantageous time and could result in the Fund's
realizing gain (or losses) that would not otherwise have been realized.
PERFORMANCE
The following bar chart and table provide information about the performance
of PACE Government Securities Fixed Income Fund Class P shares and thus give
some indication of the risks of an investment in the Fund. The Fund's Class P
shares were the only outstanding class of shares during the periods shown.
The bar chart shows how PACE Government Securities Fixed Income Fund's
performance has varied from year to year. The bar chart does not reflect the
maximum annual PACE-SM- Select Advisors Program fee of 1.50% (which does not
apply to shares received in the Reorganization) or the effect of sales charges
or the higher expenses of PACE Government Securities Fixed Income Fund's
Class A, Class B and Class C shares; if it did, the total returns shown would be
lower.
The first table that follows the bar chart shows the average annual returns
over several time periods for the Fund's Class P shares. Class P shares are not
subject to the sales charges applicable to the Fund's Class A, Class B and
Class C shares or the higher expenses of these shares. However, because all
classes of shares invest in the same portfolio of securities, their annual
returns would differ only to the extent of the different sales charges or
expenses. The table also does not reflect the maximum annual PACE-SM- Select
Advisors Program fee applicable only to Class P shares.
8
<PAGE>
The second table that follows the bar chart shows the average annual total
returns over several time periods for U.S. Government Income Fund's Class A,
Class B, Class C and Class Y shares. This table reflects sales charges and 12b-1
fees for Class A, Class B and Class C shares of the Fund. The Fund's Class Y
shares are not subject to any sales charges or 12b-1 fees and thus are most
comparable to the Class P shares of PACE Government Securities Fixed Income
Fund.
The tables also compare each Fund's returns to returns of a broad-based
market index that is unmanaged and, therefore, does not include any fees or
expenses. The two Funds have historically used different indices -- the Lehman
Brothers Government Bond Index for U.S. Government Income Fund and the Lehman
Brothers Mortgage-Backed Securities Index for PACE Government Securities Fixed
Income Fund. For comparative purposes, the returns of both indices are shown for
each Fund in the tables below.
Each Fund's past performance does not necessarily indicate how it will
perform in the future. This may be particularly true for U.S. Government Income
Fund because, during the periods shown, Mitchell Hutchins managed the Fund's
assets.
PACE GOVERNMENT SECURITIES FIXED INCOME FUND -- TOTAL RETURN ON CLASS P SHARES
(1996 IS THE FUND'S FIRST FULL CALENDAR YEAR OF OPERATIONS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CALENDAR YEAR PERCENTAGES
<S> <C>
1989
1990
1991
1992
1993
1994
1995
1996 4.26%
1997 9.04%
1998 6.42%
1999 1.01%
</TABLE>
Total return January 1 to September 30, 2000 -- 7.19%
Best quarter during years shown: 2nd quarter, 1997 -- 3.50%
Worst quarter during years shown: 1st quarter, 1996 -- (1.33)%
PACE GOVERNMENT SECURITIES FIXED INCOME FUND
AVERAGE ANNUAL TOTAL RETURNS
(as of December 31, 1999)
<TABLE>
<CAPTION>
LEHMAN BROTHERS LEHMAN BROTHERS
CLASS CLASS P MORTGAGE-BACKED GOVERNMENT
(INCEPTION DATE) (8/24/95) SECURITIES INDEX BOND INDEX
---------------- --------- ---------------- ---------------
<S> <C> <C> <C>
One Year........................... 1.01% 1.86% (2.23)%
Life of Class ..................... 5.87% 6.42% 5.80%
</TABLE>
9
<PAGE>
U.S. GOVERNMENT INCOME FUND
AVERAGE ANNUAL TOTAL RETURNS
(as of December 31, 1999)
<TABLE>
<CAPTION>
LEHMAN
BROTHERS LEHMAN BROTHERS
CLASS CLASS A CLASS B* CLASS C CLASS Y GOVERNMENT MORTGAGE-BACKED
(INCEPTION DATE) (8/31/84) (7/1/91) (7/2/92) (9/11/91) BOND INDEX SECURITIES INDEX
---------------- --------- -------- -------- --------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
One Year................. (6.77)% (8.27)% (4.11)% (2.65)% (2.23)% 1.86%
Five Years............... 5.40% 5.11% 5.73% 6.58% 7.44% 7.98%
Ten Years................ 5.20% N/A N/A N/A 7.48% 7.78%
Life of Class ........... 7.09% 4.43% 3.26% 4.85% ** **
</TABLE>
-------------------
* Assumes conversion of Class B shares to Class A shares after six years.
** Average annual total returns for the Lehman Brothers Government Bond Index
and the Lehman Brothers Mortgage-Backed Securities Index for the life of
each class were as follows: Class A -- 9.29% and 10.13%; Class B -- 7.35%
and 7.29%; Class C -- 6.53% and 6.47%; Class Y -- 7.06% and 6.99%,
respectively.
SALES CHARGES
No sales charges apply when U.S. Government Income Fund shareholders receive
shares of PACE Government Securities Fixed Income Fund in connection with the
Reorganization.
DIVIDENDS AND OTHER DISTRIBUTIONS
U.S. Government Income Fund normally declares dividends daily and pays them
monthly. PACE Government Securities Fixed Income Fund normally declares and pays
dividends monthly. Each Fund distributes substantially all of its gains, if any,
annually. Classes with higher expenses are expected to have lower dividends. For
example, Class B and Class C shares are expected to have the lowest dividends of
any class of a Fund's shares, while Class Y shares (and, for PACE Government
Securities Fixed Income Fund, Class P shares) would have the highest dividends.
As a shareholder of PACE Government Securities Fixed Income Fund, you will
receive dividends in additional shares of the Fund unless you elect to receive
them in cash. Your current dividend distribution election for U.S. Government
Income Fund will remain the same after the Reorganization. Contact your
Financial Advisor at PaineWebber if you prefer to receive dividends in cash.
On or before the Closing Date, U.S. Government Income Fund will distribute
substantially all of its undistributed net investment income, net capital gain
and net short-term capital gain, if any, in order to continue to maintain its
tax status as a regulated investment company. PACE Government Securities Fixed
Income Fund may also distribute substantially all of its undistributed net
investment income shortly before the Closing Date.
TAXES
The dividends that you receive from either Fund generally are subject to
federal income tax regardless of whether you receive them in additional Fund
shares or in cash. If you hold Fund shares through a tax-exempt account or plan,
such as an IRA or 401(k) plan, dividends on your shares generally will not be
subject to tax.
10
<PAGE>
When you sell Fund shares, you generally will be subject to federal income
tax on any gain you realize. If you exchange a Fund's shares for shares of
another PaineWebber mutual fund, the transaction will be treated as a sale of
the first fund's shares, and any gain will be subject to federal income tax.
Any distribution of capital gains may be taxed at a lower rate than ordinary
income, depending on whether the Fund held the assets that generated the gains
for more than 12 months. A Fund will tell you how you should treat its dividends
for tax purposes.
FLEXIBLE PRICING: BUYING, SELLING AND EXCHANGING SHARES OF
PACE GOVERNMENT SECURITIES FIXED INCOME FUND
FLEXIBLE PRICING
PACE Government Securities Fixed Income Fund offers four new classes of
shares -- Class A, Class B, Class C and Class Y -- established prior to the
Reorganization. The four new classes of shares of PACE Government Securities
Fixed Income Fund and the procedures for buying, selling and exchanging these
shares, as described below, are substantially identical to the corresponding
classes of shares and related procedures of U.S. Government Income Fund. Prior
to November [ ], 2000, PACE Government Securities Fixed Income Fund has offered
only Class P shares, which are available only to participants in the PaineWebber
PACE-SM- Select Advisors Program.
No sales charges apply when U.S. Government Income Fund shareholders receive
Class A, Class B, Class C or Class Y shares of PACE Government Securities Fixed
Income Fund as part of the Reorganization. PACE Government Securities Fixed
Income Fund is expected to offer its four new classes of shares to the general
public prior to the Reorganization. Class Y shares are only available to certain
types of investors. Class A, Class B and Class C shares purchased other than as
part of the Reorganization will be subject to the sales charges described below.
In addition, each class has different ongoing expenses.
PACE Government Securities Fixed Income Fund has adopted a plan under
Rule 12b-1 governing its Class A, Class B and Class C shares that allows it to
pay service fees for providing services to shareholders and (for Class B and
Class C shares) distribution fees for the sale of its shares. The terms of these
plans are substantially identical to the terms of the corresponding plans now in
place for U.S. Government Income Fund's Class A, Class B and Class C shares.
Because the 12b-1 distribution fees for Class B and Class C shares are paid out
of the Fund's assets on an ongoing basis, over time they will increase the cost
of your investment and may cost you more than if you paid a front-end sales
charge.
CLASS A SHARES
Class A shares have a front-end sales charge that is included in the
offering price of the Class A shares. This sales charge is not invested in the
Fund. Class A shares pay an annual 12b-1 service fee of 0.25% of average net
assets, but they pay no 12b-1 distribution fees. The ongoing expenses for
Class A shares are lower than for Class B and Class C shares.
The Class A sales charges for both Funds are described in the following
table.
11
<PAGE>
CLASS A SALES CHARGES
<TABLE>
<CAPTION>
REALLOWANCE TO SELECTED
SALES CHARGE AS A PERCENTAGE OF: DEALERS AS PERCENTAGE
AMOUNT OF INVESTMENT OFFERING PRICE NET AMOUNT INVESTED OF OFFERING PRICE*
-------------------- -------------- ------------------- -----------------------
<S> <C> <C> <C>
Less than $100,000................. 4.00% 4.17% 3.75%
$100,000 to $249,999............... 3.00 3.09 2.75
$250,000 to $499,999............... 2.25 2.30 2.00
$500,000 to $999,999............... 1.75 1.78 1.50
$1,000,000 and over (1)............ None None 1.00(2)
</TABLE>
-------------------
(1) A contingent deferred sales charge of 1% of the shares' offering price or
the net asset value at the time of sale by the shareholder, whichever is
less, is charged on sales of shares made within one year of the purchase
date. Class A shares purchased through the reinvestment of dividends are
not subject to this 1% charge. Withdrawals in the first year after purchase
of up to 12% of the value of the Fund account under the Fund's Systematic
Withdrawal Plan are not subject to this charge.
(2) Mitchell Hutchins pays 1% to the dealer.
* For an initial period ending on or about December 29, 2000, Mitchell
Hutchins will reallow the full amount of the sales charge to selected
dealers.
SALES CHARGE REDUCTIONS AND WAIVERS. You may qualify for a lower sales charge if
you already own Class A shares of a PaineWebber or PaineWebber PACE mutual fund.
You can combine the value of Class A shares that you own in other PaineWebber or
PaineWebber PACE funds and the purchase amount of the Class A shares of the
PaineWebber fund that you are buying.
You may also qualify for a lower sales charge if you combine your purchases
with those of:
- your spouse, parents or children under age 21;
- your Individual Retirement Accounts (IRAs);
- certain employee benefit plans, including 401(k) plans;
- a company that you control;
- a trust that you created;
- Uniform Transfers to Minors Act/Uniform Gifts to Minors Act accounts
created by you or by a group of investors for your children; or
- accounts with the same adviser.
You may qualify for a complete waiver of the sales charge if you:
- Are an employee of PaineWebber or its affiliates or the spouse, parent or
child under age 21 of a PaineWebber employee;
- Buy these shares through a PaineWebber Financial Advisor who was formerly
employed as an investment executive with a competing brokerage firm that
was registered as a broker-dealer with the SEC, and
-- you were the Financial Advisor's client at the competing brokerage
firm;
-- within 90 days of buying shares in a fund, you sell shares of one or
more mutual funds that were principally underwritten by the
competing brokerage firm or its affiliates, and you either paid a
sales charge to buy those shares, pay a contingent deferred sales
charge when selling them or held those shares until the contingent
deferred sales charge was waived; and
12
<PAGE>
-- you purchase an amount that does not exceed the total amount of
money you received from the sale of the other mutual fund;
- Acquire these shares through the reinvestment of dividends of a
PaineWebber unit investment trust;
- Are a 401(k) or 403(b) qualified employee benefit plan with 50 or more
eligible employees in the plan or at least $1 million in assets;
- Are a participant in the PaineWebber Members Only-SM- Program. For
investments made pursuant to this waiver, Mitchell Hutchins may make
payments out of its own resources to PaineWebber and to participating
membership organizations in a total amount not to exceed 1% of the amount
invested; or
- Acquire these shares through a PaineWebber InsightOne-SM- Program
brokerage account.
CLASS B SHARES
Class B shares have a contingent deferred sales charge. When you purchase
Class B shares, we invest 100% of your purchase in Fund shares. However, you may
have to pay the deferred sales charge when you sell your Fund shares, depending
on how long you own the shares.
Class B shares pay an annual 12b-1 distribution fee of 0.75% of average net
assets, as well as an annual 12b-1 service fee of 0.25% of average net assets.
If you hold your Class B shares for six years, they will automatically convert
to Class A shares, which have lower ongoing expenses.
If you sell Class B shares before the end of six years, you will pay a
deferred sales charge. We calculate the deferred sales charge by multiplying the
lesser of the net asset value of the Class B shares at the time of purchase or
the net asset value at the time of sale by the percentage shown below:
<TABLE>
<CAPTION>
PERCENTAGE BY WHICH
IF YOU SELL THE SHARES' NET ASSET
SHARES WITHIN: VALUE IS MULTIPLIED:
-------------- ---------------------
<S> <C>
1st year since purchase........................... 5%
2nd year since purchase........................... 4
3rd year since purchase........................... 3
4th year since purchase........................... 2
5th year since purchase........................... 2
6th year since purchase........................... 1
7th year since purchase........................... None
</TABLE>
We will not impose the deferred sales charge on Class B shares purchased
through the reinvestment of dividends or on withdrawals in any year of up to 12%
of the value of your Class B shares under the Systematic Withdrawal Plan.
For purposes of determining your deferred sales charge and when to convert
your Class B shares to Class A shares, the holding period for the Class B shares
of PACE Government Securities Fixed Income Fund that you receive in connection
with the Reorganization will include the period for which you held the
corresponding Class B shares of U.S. Government Income Fund and any other
PaineWebber fund whose shares you exchanged for Class B shares of U.S.
Government Income Fund.
To minimize your deferred sales charge, we will assume that you are selling:
- First, Class B shares representing reinvested dividends, and
13
<PAGE>
- Second, Class B shares that you have owned the longest.
SALES CHARGE WAIVERS. You may qualify for a waiver of the deferred sales
charge on a sale of shares if:
- You participate in the Systematic Withdrawal Plan;
- You are older than 59-1/2 and are selling shares to take a distribution
from certain types of retirement plans;
- You receive a tax-free return of an excess IRA contribution;
- You receive a tax-qualified retirement plan distribution following
retirement;
- The shares are sold within one year of your death and you owned the
shares either (1) as the sole shareholder or (2) with your spouse as a
joint tenant with the right of survivorship; or
- The shares are held in trust and the death of the trustee requires
liquidation of the trust.
CLASS C SHARES
Class C shares have a level load sales charge in the form of ongoing 12b-1
distribution fees. When you purchase Class C shares, we will invest 100% of your
purchase in Fund shares.
Class C shares pay an annual 12b-1 distribution fee of 0.50% of average net
assets, as well as an annual 12b-1 service fee of 0.25% of average net assets.
Class C shares do not convert to another class of shares. This means that you
will pay the 12b-1 fees for as long as you own your shares.
Class C shares also have a contingent deferred sales charge. You may have to
pay the deferred sales charge if you sell your shares within one year of the
date you purchased them. We calculate the deferred sales charge on sales of
Class C shares by multiplying 0.75% by the lesser of the net asset value of the
Class C shares at the time of purchase or the net asset value at the time of
sale. We will not impose the deferred sales charge on Class C shares purchased
through the reinvestment of dividends or on withdrawals in the first year after
purchase, of up to 12% of the value of your Class C shares under the Systematic
Withdrawal Plan.
For purposes of determining your deferred sales charge, the holding period
for the Class C shares of PACE Government Securities Fixed Income Fund that you
receive in connection with the Reorganization will include the period for which
you held the corresponding Class C shares of U.S. Government Income Fund and any
other PaineWebber fund whose shares you exchanged for Class C shares of U.S.
Government Income Fund.
You may be eligible to sell your shares without paying a contingent deferred
sales charge if you are a 401(k) or 403(b) qualified employee benefit plan with
50 or more eligible employees in the plan or at least $1 million in assets.
NOTE ON SALES CHARGE WAIVERS FOR CLASS A, CLASS B AND CLASS C SHARES:
If you think that you qualify for any of these sales charge waivers
described above, you will need to provide documentation to PaineWebber or the
Fund. For more information, you should contact your PaineWebber Financial
Advisor or correspondent firm or call 1-800-647-1568. If you want information on
the Fund's Systematic Withdrawal Plan, see the SAI or contact your PaineWebber
Financial Advisor or correspondent firm.
CLASS Y SHARES
Class Y shares have no sales charge. Only specific types of investors can
purchase Class Y shares. You may be eligible to purchase Class Y shares if you:
- Buy shares through PaineWebber's PACE-SM- Multi Advisor Program;
14
<PAGE>
- Buy $10 million or more of PaineWebber fund shares at any one time;
- Are a qualified retirement plan with 5,000 or more eligible employees or
$50 million in assets;
- Are a corporation, bank, trust company, insurance company, pension fund,
employee benefit plan, professional firm, trust, estate or educational,
religious or charitable organization with 5,000 or more employees or with
over $50 million in investable assets; or
- Are an investment company advised by PaineWebber or an affiliate of
PaineWebber.
The trustee of PaineWebber's 401(k) Plus Plan for its employees is also
eligible to purchase Class Y shares on behalf of that Plan.
Class Y shares do not pay ongoing distribution or service fees or sales
charges. The ongoing expenses for Class Y shares are lower than the ongoing
expenses of Class A, Class B or Class C shares.
BUYING SHARES
If you are a PaineWebber client, or a client of a PaineWebber correspondent
firm, you can purchase Fund shares through your Financial Advisor. Otherwise,
you can invest in the Fund through the Fund's transfer agent, PFPC Inc. You can
obtain an application by calling 1-800-647-1568. You must complete and sign the
application and mail it, along with a check, to:
PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.
If you wish to invest in other PaineWebber funds, you can do so by:
- Contacting your Financial Advisor (if you have an account at PaineWebber
or at a PaineWebber correspondent firm);
- Mailing an application with a check; or
- Opening an account by exchanging shares from another PaineWebber fund.
You do not have to complete an application when you make additional
investments in the same fund.
The Fund and Mitchell Hutchins reserve the right to reject a purchase order
or suspend the offering of shares.
MINIMUM INVESTMENTS
<TABLE>
<S> <C>
To open an account................................ $1,000
To add to an account.............................. $100
</TABLE>
The Fund may waive or reduce these amounts for:
- Employees of PaineWebber or its affiliates; or
- Participants in certain pension plans, retirement accounts, unaffiliated
investment programs or the Fund's automatic investment plans.
FREQUENT TRADING. The interests of the Fund's long-term shareholders and its
ability to manage its investments may be adversely affected when its shares are
repeatedly bought and sold in response to short-term market fluctuations--also
known as "market timing." When large dollar amounts are involved, the Fund may
have difficulty implementing long-term investment strategies, because it cannot
predict how much cash it will have to invest. Market timing also may force the
Fund to sell portfolio securities at disadvantageous times to raise the cash
needed to buy a market timer's fund shares. These factors may hurt the Fund's
performance and its shareholders. When Mitchell Hutchins believes frequent
trading
15
<PAGE>
would have a disruptive effect on the Fund's ability to manage its investments,
Mitchell Hutchins and the Fund may reject purchase orders and exchanges into the
Fund by any person, group or account that Mitchell Hutchins believes to be a
market timer. The Fund may notify the market timer that a purchase order or an
exchange has been rejected after the day the order is placed.
SELLING SHARES
You can sell your Fund shares at any time. If you own more than one class of
shares, you should specify which class you want to sell. If you do not, the Fund
will assume that you want to sell shares in the following order: Class A, then
Class C, then Class B and last, Class Y.
If you want to sell shares that you purchased recently, the Fund may delay
payment until it verifies that it has received good payment. If you purchased
shares by check, this can take up to 15 days.
If you have an account with PaineWebber or a PaineWebber correspondent firm,
you can sell shares by contacting your Financial Advisor.
If you do not have an account at PaineWebber or a correspondent firm, and
you bought your shares through the transfer agent, you can sell your shares by
writing to the Fund's transfer agent. Your letter must include:
- Your name and address;
- The Fund's name;
- The Fund account number;
- The dollar amount or number of shares you want to sell; and
- A guarantee of each registered owner's signature. A signature guarantee
may be obtained from a financial institution, broker, dealer or clearing
agency that is a participant in one of the medallion programs recognized
by the Securities Transfer Agents Association. These are: Securities
Transfer Agents Medallion Program (STAMP), Stock Exchanges Medallion
Program (SEMP) and the New York Stock Exchange Medallion Signature
Program (MSP). The Fund will not accept signature guarantees that are not
a part of these programs.
Mail the letter to:
PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.
If you sell Class A shares and then repurchase Class A shares of the Fund
within 365 days of the sale, you can reinstate your account without paying a
sales charge.
It costs the Fund money to maintain shareholder accounts. Therefore, the
Fund reserves the right to repurchase all shares in any account that has a net
asset value of less than $500. If the Fund elects to do this with your account,
it will notify you that you can increase the amount invested to $500 or more
within 60 days. The Fund will not repurchase shares in accounts that fall below
$500 solely because of a decrease in the Fund's net asset value.
EXCHANGING SHARES
You may exchange Class A, Class B or Class C shares of the Fund for shares
of the same class of the other PACE funds or of PaineWebber Money Market Fund.
(It is expected that shareholders will also be able to exchange Class A,
Class B or Class C shares of a PACE fund for shares of the same class of certain
other PaineWebber mutual funds beginning on or about March 1, 2001.) You may not
exchange Class Y shares.
16
<PAGE>
You will not pay either a front-end sales charge or a deferred sales charge
when you exchange shares. However, you may have to pay a deferred sales charge
if you later sell the shares you acquired in the exchange. The Fund will use the
date that you purchased the shares in the first fund to determine whether you
must pay a deferred sales charge when you sell the shares in the acquired fund.
You may not be able to exchange your shares if your exchange is not as large
as the minimum investment amount in that other fund.
You may exchange shares of one fund for shares of another fund only after
the first purchase has settled and the first fund has received your payment.
PAINEWEBBER AND CORRESPONDENT FIRM CLIENTS. If you bought your shares through
PaineWebber or a correspondent firm, you may exchange your shares by placing an
order with your Financial Advisor.
OTHER INVESTORS. If you are not a PaineWebber or correspondent firm client, you
may exchange your shares by writing to the Fund's transfer agent. You must
include:
- Your name and address;
- The name of the fund whose shares you are selling and the name of the
fund whose shares you want to buy;
- Your account number;
- How much you are exchanging (by dollar amount or by number of shares to
be sold); and
- A guarantee of your signature. (See "Buying Shares" for information on
obtaining a signature guarantee.)
Mail the letter to:
PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.
The Fund may modify or terminate the exchange privilege at any time.
PRICING AND VALUATION
The price at which you may buy, sell or exchange Fund shares is based on net
asset value per share. The Fund calculates net asset value on days that the New
York Stock Exchange, Inc. ("NYSE") is open. The Fund calculates net asset value
separately for each class as of the close of regular trading on the NYSE
(generally, 4:00 p.m., Eastern time). The NYSE normally is not open on most
national holidays and on Good Friday, and the Fund does not price its shares on
these days. If trading on the NYSE is halted for the day before 4:00 p.m.,
Eastern time, the Fund's net asset value per share will be calculated as of the
time trading was halted.
Your price for buying, selling or exchanging shares will be based on the net
asset value that is next calculated after the Fund accepts your order. If you
place your order through PaineWebber, your PaineWebber Financial Advisor is
responsible for making sure that your order is promptly sent to the Fund.
17
<PAGE>
You should keep in mind that a front-end sales charge may be applied to your
purchase if you buy Class A shares. A deferred sales charge may be applied when
you sell Class B or Class C shares.
The Fund calculates its net asset value based on the current market value
for its portfolio securities. The Fund normally obtains market values for their
securities from independent pricing services that use reported last sales
prices, current market quotations or valuations from computerized "matrix"
systems that derive values based on comparable securities. If a market value is
not available from an independent pricing source for a particular security, that
security is valued at a fair value determined by or under the direction of the
Fund's board. The Fund normally uses the amortized cost method to value bonds
that will mature in 60 days or less.
MANAGEMENT
INVESTMENT MANAGER AND INVESTMENT ADVISER
Mitchell Hutchins is the investment manager and administrator of both Funds.
Mitchell Hutchins is located at 51 West 52nd Street, New York, New York
10019-6114, and is a wholly owned asset management subsidiary of PaineWebber
Incorporated, which is a wholly owned indirect subsidiary of UBS AG, an
internationally diversified organization with headquarters in Zurich,
Switzerland and operations in many areas of the financial services industry. On
September 30, 2000, Mitchell Hutchins was adviser or sub-adviser of 31
investment companies with 75 separate portfolios and aggregate assets of
approximately $57.9 billion.
As investment manager for PACE Government Securities Fixed Income Fund,
Mitchell Hutchins recommends sub-advisers to the Board of PACE Trust to manage
the Fund's investments and monitors and reviews the performance of those
sub-advisers. PACE Trust has received an exemptive order from the SEC to permit
Mitchell Hutchins (subject to Board approval) to select and replace sub-advisers
and to amend the sub-advisory contracts between Mitchell Hutchins and the
sub-advisers without obtaining shareholder approval.
As investment manager for U.S. Government Income Fund, Mitchell Hutchins
recommends sub-advisers to the Board of Managed Investments Trust and monitors
and reviews the performance of those sub-advisers. Since October 10, 2000,
Mitchell Hutchins and the sub-adviser have provided investment management
services to the Fund under interim contracts approved by the Board of Managed
Investments Trust. Prior to October 10, 2000, Mitchell Hutchins managed U.S.
Government Income Fund's assets directly.
SUB-ADVISER
The same sub-adviser -- PIMCO -- manages the assets of each Fund. PIMCO is
located at 840 Newport Center Drive, Suite 300, Newport Beach, California 92660.
As of September 30, 2000, PIMCO had approximately $207 billion in assets under
management. PIMCO is one of the largest fixed income management firms in the
nation. Included among PIMCO's institutional clients are many "Fortune 500"
companies.
Scott Mather, an executive vice president of PIMCO, has been primarily
responsible for the day-to-day portfolio management of PACE Government
Securities Fixed Income Fund since November 1999. He also has been primarily
responsible for the day-to-day management of U.S. Government Income Fund since
October 10, 2000. Prior to joining PIMCO in 1998, he was associated with Goldman
Sachs Funds Management, LP, where he was a trader in the fixed income division
and specialized in structuring and trading a broad range of mortgage-backed
securities as well as managing proprietary derivatives positions. PIMCO has
served as sub-adviser to PACE Government Securities Fixed Income Fund since the
Fund commenced operations on August 24, 1995 and has served as sub-adviser to
U.S. Government Income Fund since October 10, 2000.
18
<PAGE>
ADVISORY FEES AND FUND EXPENSES
PACE Government Securities Fixed Income Fund pays fees to Mitchell Hutchins
for management and administration services at the combined annual contract rate
of 0.70% of average daily net assets. This combined fee includes an annual
contract rate of 0.50% for investment management services and 0.20% for
administrative services, both expressed as a percentage of the Fund's average
daily net assets. During the fiscal year ended July 31, 2000, PACE Government
Securities Fixed Income Fund paid Mitchell Hutchins at the lower effective rate
of 0.66% of the Fund's average daily net assets because Mitchell Hutchins waived
a portion of its fee. U.S. Government Income Fund paid fees to Mitchell Hutchins
for investment advisory and administration services for the Fund's most recent
fiscal year at the annual rate of 0.50% of the Fund's average daily net assets.
Although the management fee paid by PACE Government Securities Fixed Income
Fund is greater than the management fee paid by U.S. Government Income Fund,
Mitchell Hutchins anticipates that shareholders of each class of shares of U.S.
Government Income Fund who will become shareholders of the corresponding class
of shares of PACE Government Securities Fixed Income Fund will be subject to
total annual operating expenses that are no higher than the expenses they
currently pay as shareholders of U.S. Government Income Fund. The overall
operating expenses of the combined Fund are subject to a written management fee
waiver and expense reimbursement agreement between PACE Government Securities
Fixed Income Fund and Mitchell Hutchins, which will remain in effect through
December 1, 2002. Absent this agreement, it is expected that the overall
operating expenses of each class of shares of PACE Government Securities Fixed
Income Fund immediately following the Reorganization would be higher than the
current operating expenses of the corresponding class of shares of U.S.
Government Income Fund.
ADDITIONAL INFORMATION ABOUT THE REORGANIZATION
REASONS FOR THE REORGANIZATION
Managed Investments Trust's Board approved the proposed Reorganization of
U.S. Government Income Fund into PACE Government Securities Fixed Income Fund at
a meeting held on October 6, 2000. At that meeting and in a series of prior
meetings and presentations, Mitchell Hutchins explained to the Board that it had
undertaken an extensive review of whether the best interests of shareholders of
a number of PaineWebber funds, including U.S. Government Income Fund, would be
served by continuing to operate the funds under their current arrangements. For
U.S. Government Income Fund, Mitchell Hutchins' review included a possible
restructuring of the Fund's investment management arrangements and a possible
reorganization into another PaineWebber fund. Mitchell Hutchins noted that,
although U.S. Government Income Fund has performed well, it generally has
underperformed its benchmark index. Mitchell Hutchins also noted that PACE
Government Securities Fixed Income Fund has a similar investment objective and,
like U.S. Government Income Fund, invests primarily in U.S. government bonds.
(See "Comparison of the Funds" above for a more complete description of the
investment objectives, policies and risks of the Funds.)
Mitchell Hutchins stated its belief that the reorganization of U.S.
Government Income Fund into PACE Government Securities Fixed Income Fund would
likely benefit U.S. Government Income Fund's shareholders because the larger
asset base of the combined Fund could give the combined Fund greater
opportunities to diversify investments and realize greater economies of scale.
Mitchell Hutchins noted that the investment management and administration fee
currently paid by PACE Government Securities Fixed Income Fund is greater than
that currently paid by U.S. Government Income Fund. However, Mitchell Hutchins
informed the Board that it had entered into a written agreement with PACE
Government Securities Fixed Income Fund to waive its management fee and
reimburse that Fund after the Reorganization to the extent that its total annual
operating expenses for each class of shares through December 1, 2002 otherwise
would exceed the current overall operating expenses of the corresponding
19
<PAGE>
class of shares of U.S. Government Income Fund. Mitchell Hutchins explained
that, as a result, it anticipated that current shareholders of each class of
shares of U.S. Government Income Fund who will become shareholders of the
combined Fund if the Reorganization is approved will be subject to total annual
operating expenses that are no higher than the expenses they currently pay as
shareholders of U.S. Government Income Fund during the period of the
waiver/reimbursement. (See "Comparative Fee Table" above for a more complete
description of the fees and expenses of the Funds, both before and after the
Reorganization.)
Mitchell Hutchins then proposed immediate changes in the investment
management arrangements for U.S. Government Income Fund. Mitchell Hutchins
advised the Board of Managed Investments Trust that the proposed investment
management changes represented its judgment of the best management structure for
the Fund and believed that the changes would be more likely to help U.S.
Government Income Fund achieve its investment objective through better long-term
performance. Mitchell Hutchins noted its experience in selecting and monitoring
unaffiliated sub-advisers, particularly with respect to the various different
series of PACE Trust, all but one of which are managed by sub-advisers. Mitchell
Hutchins recommended to the Board of Managed Investments Trust that the same
sub-adviser that now manages the assets of PACE Government Securities Fixed
Income Fund -- PIMCO -- be retained on an interim basis to manage the assets of
U.S. Government Income Fund. After consideration of all the information
presented by Mitchell Hutchins, inquiries into the ability and resources of the
proposed sub-adviser to provide appropriate investment management services and
interviews with personnel of the proposed sub-adviser, Managed Investments
Trust's Board determined to implement the new investment management arrangements
effective October 10, 2000.
To implement the new investment management arrangements for U.S. Government
Income Fund, the Board of Managed Investments Trust, effective October 10, 2000,
terminated the existing investment advisory and administration contract between
the Fund and Mitchell Hutchins and approved a new interim contract with Mitchell
Hutchins and an interim sub-advisory contract between Mitchell Hutchins and
PIMCO. Under the Interim Management and Administration Contract ("Interim
Management Contract"), Mitchell Hutchins serves as investment manager for U.S.
Government Income Fund and provides portfolio management oversight as opposed to
direct management of the Fund's investments. Mitchell Hutchins provides
portfolio management oversight principally by performing initial reviews of
prospective sub-advisers and supervising and monitoring the performance of the
sub-advisers thereafter. The Interim Management Contract and interim
sub-advisory contract will terminate on the earlier of 150 days from their
effective date or the Closing Date of the Reorganization.
Mitchell Hutchins then reminded the Board that, once the new investment
management arrangements were in place, U.S. Government Income Fund and PACE
Government Securities Fixed Income Fund would be managed in a similar manner.
Mitchell Hutchins noted its belief that operating two funds that offer
essentially the same investments and similar management would result in higher
expenses and less efficient operations than operating a single fund that
combines the assets of the two original funds. Mitchell Hutchins also stated its
belief that it would not be desirable from a marketing or administrative
perspective to maintain and distribute shares for two similar funds. Mitchell
Hutchins noted, moreover, that PACE Government Securities Fixed Income Fund has
the additional flexibility to change its sub-adviser or add additional
sub-advisers when Mitchell Hutchins and the Board of PACE Trust decide without
the cost or delay of needing first to obtain approval by a vote of the
shareholders of PACE Government Securities Fixed Income Fund.
Finally, Mitchell Hutchins reviewed with the Board of Managed Investments
Trust the principal terms of the Plan. Mitchell Hutchins informed the Board that
the Reorganization would be tax-free to U.S. Government Income Fund and its
shareholders, that shareholders of the combined Fund after the Reorganization
could continue to exchange into other PaineWebber open-end funds without having
to pay an additional sales load should their investment priorities change, and
that no sales charges would be imposed on any PACE Government Securities Fixed
Income Fund shares issued in connection with the
20
<PAGE>
Reorganization. Furthermore, Mitchell Hutchins informed the Board of Managed
Investments Trust that, for purposes of calculating the contingent deferred
sales charge, the holding period for the Class B and Class C shares distributed
to Class B and Class C shareholders of U.S. Government Income Fund would include
the holding period for the shares of U.S. Government Income Fund and any other
PaineWebber fund shares of the same class that were exchanged for shares of U.S.
Government Income Fund.
As part of its considerations, the Board of Managed Investments Trust
examined a number of factors with respect to the Reorganization, including:
(1) the compatibility of the Funds' investment objectives, policies and
restrictions; (2) the Funds' respective investment performances; (3) the likely
impact of the Reorganization on the expense ratio of PACE Government Securities
Fixed Income Fund and that expense ratio relative to U.S. Government Income
Fund's current expense ratio; (4) that Mitchell Hutchins would bear the costs of
the Reorganization; (5) the compatibility of the Funds' portfolio holdings and
the effect on U.S. Government Income Fund and its shareholders of any
realignment of its portfolio in connection with the Reorganization; (6) the tax
consequences of the Reorganization; (7) the potential benefits of the
Reorganization to other persons, including Mitchell Hutchins and its affiliates;
(8) Mitchell Hutchins' assessment that the proposed Reorganization will be
beneficial to the shareholders of U.S. Government Income Fund and will not
dilute their interests; (9) the advisory arrangements in place for the Funds and
the level and quality of investment advisory services provided or to be provided
by Mitchell Hutchins and PIMCO; and (10) the terms of the proposed Plan.
On the basis of the information provided to it and its evaluation of that
information, the Board of Managed Investments Trust, including a majority of its
Independent Trustees, determined that the Reorganization would be in the best
interests of U.S. Government Income Fund and that the interests of existing U.S.
Government Income Fund shareholders would not be diluted as a result of the
Reorganization. THEREFORE, THE BOARD OF MANAGED INVESTMENTS TRUST UNANIMOUSLY
APPROVED THE REORGANIZATION AND RECOMMENDED THE APPROVAL OF THE PLAN BY THE
SHAREHOLDERS OF U.S. GOVERNMENT INCOME FUND AT THE MEETING.
TERMS OF THE REORGANIZATION
The terms and conditions under which the Reorganization may be consummated
are set forth in the Plan. Significant provisions of the Plan are summarized
below; however, this summary is qualified in its entirety by reference to the
Plan. A copy of the form of Agreement and Plan of Reorganization and Termination
is attached as Appendix A to this Proxy Statement/Prospectus.
The Plan contemplates (1) PACE Government Securities Fixed Income Fund's
acquiring on the Closing Date all the assets of U.S. Government Income Fund in
exchange solely for PACE Government Securities Fixed Income Fund shares and PACE
Government Securities Fixed Income Fund's assumption of all of U.S. Government
Income Fund's stated liabilities and (2) the distribution of those shares to
U.S. Government Income Fund shareholders. U.S. Government Income Fund's assets
include 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 its books and other property owned by it as of the
close of business on the Closing Date ("Effective Time") (collectively, the
"Assets"). PACE Government Securities Fixed Income Fund will assume from U.S.
Government Income Fund all its 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, and whether or not
specifically referred to in the Plan, but only to the extent disclosed or
provided for in U.S. Government Income Fund's most recent annual and semi-annual
financial statements, or incurred by U.S. Government Income Fund subsequent to
the date of those financial statements and disclosed in writing to and accepted
by PACE Trust (collectively, the "Liabilities"); provided, however, that U.S.
Government Income Fund will use its best efforts to discharge all of its known
Liabilities prior to the Effective Time. PACE Government Securities Fixed Income
Fund will deliver its shares to U.S. Government Income Fund, which then will be
distributed to U.S. Government Income Fund's shareholders.
21
<PAGE>
The value of the Assets to be acquired, and the amount of the Liabilities to
be assumed, by PACE Government Securities Fixed Income Fund and the NAV of a
PACE Government Securities Fixed Income Fund share will be determined as of the
close of regular trading on the NYSE on the Closing Date ("Valuation Time"),
using the applicable valuation procedures described in PACE Government
Securities Fixed Income Fund's then-current Prospectus and SAI. These procedures
are identical to those used by U.S. Government Income Fund and described in its
Prospectus and SAI. U.S. Government Income Fund's net asset value will be the
value of its Assets to be acquired by PACE Government Securities Fixed Income
Fund, less the amount of U.S. Government Income Fund's Liabilities, as of the
Valuation Time.
On, or as soon as practicable after, the Closing Date, U.S. Government
Income Fund will distribute to its shareholders of record as of the Effective
Time the PACE Government Securities Fixed Income Fund shares it receives, by
class, so that each U.S. Government Income Fund shareholder will receive the
number of full and fractional shares of the corresponding class of PACE
Government Securities Fixed Income Fund equal in aggregate NAV to the
shareholder's shares in U.S. Government Income Fund. That distribution will be
accomplished by opening accounts on the books of PACE Government Securities
Fixed Income Fund in the names of U.S. Government Income Fund's shareholders and
crediting those accounts with PACE Government Securities Fixed Income Fund
shares equal in aggregate NAV to the shareholders' shares in U.S. Government
Income Fund. Fractional shares of PACE Government Securities Fixed Income Fund
will be rounded to the third decimal place.
Immediately after the Reorganization, each former shareholder of U.S.
Government Income Fund will own shares of the class of PACE Government
Securities Fixed Income Fund equal in aggregate NAV to the aggregate NAV of that
shareholder's shares of the corresponding class of U.S. Government Income Fund
immediately prior to the Reorganization. The NAV per share of PACE Government
Securities Fixed Income Fund will not change as a result of the Reorganization.
Thus, the Reorganization will not result in a dilution of the interest of any
shareholder in either Fund. In addition, Mitchell Hutchins (not the Funds) will
bear the expenses of the Reorganization. U.S. Government Income Fund will be
terminated after the Reorganization.
The consummation of the Reorganization is subject to a number of conditions
set forth in the Plan, some of which may be waived by either Fund. In addition,
the Plan may be amended in any mutually agreeable manner, except that no
amendment may be made subsequent to the Meeting that would have a material
adverse effect on the interests of U.S. Government Income Fund shareholders. If
the Reorganization is not approved by shareholders at the Meeting, U.S.
Government Income Fund will continue to operate as a series of Managed
Investments Trust, and its Board will then consider other options and
alternatives for the future of the Fund, including the liquidation of the Fund,
resubmitting this proposal for shareholder approval or other appropriate action.
DESCRIPTION OF SECURITIES TO BE ISSUED
PACE Government Securities Fixed Income Fund is authorized to issue an
unlimited number of shares of beneficial interest, par value $0.001 per share.
The Fund's shares are divided into five classes, designated Class A, Class B,
Class C, Class Y and Class P shares. Class P shares are not involved in the
Reorganization. A share of each class of PACE Government Securities Fixed Income
Fund represents an identical interest in the Fund's investment portfolio and has
the same rights, privileges and preferences. Each share of the Fund is entitled
to participate equally in dividends and other distributions of the Fund, except
that dividends and distributions shall appropriately reflect expenses allocated
to a particular class. Shares of the Fund entitle their holders to one vote per
full share and fractional votes for fractional shares held. PACE Trust does not
hold annual meetings. Shares of the Fund generally are voted together, except
that only the shareholders of a particular class of the Fund may vote on matters
affecting only that class, such as the terms of a Rule 12b-1 plan as it relates
to the class. Shares of each series of PACE Trust will be voted separately,
except when an aggregate vote of all the series is required by law.
22
<PAGE>
TEMPORARY WAIVER OF INVESTMENT RESTRICTIONS
Certain fundamental investment restrictions of U.S. Government Income Fund,
which prohibit it from acquiring more than a stated percentage of ownership of
another company, might be construed as restricting its ability to carry out the
Reorganization. By approving the Plan, you agree to waive, only for the purpose
of the Reorganization, those fundamental investment restrictions that could
prohibit or otherwise impede the transaction.
FEDERAL INCOME TAX CONSIDERATIONS
The Reorganization is intended to be a tax-free reorganization within the
meaning of section 368(a)(1)(D) of the Code. Managed Investments Trust and PACE
Trust each will receive an opinion of Kirkpatrick & Lockhart LLP, counsel to
Managed Investments Trust and tax counsel to PACE Trust, substantially to the
following effect:
(1) PACE Government Securities Fixed Income Fund's acquisition of the
Assets in exchange solely for PACE Government Securities Fixed Income Fund
shares and PACE Government Securities Fixed Income Fund's assumption of the
Liabilities, followed by U.S. Government Income Fund's distribution of those
shares PRO RATA to its shareholders constructively in exchange for their
U.S. Government Income Fund shares, will qualify as a reorganization within
the meaning of section 368(a)(1)(D) of the Code, and each Fund will be "a
party to a reorganization" within the meaning of section 368(b) of the Code;
(2) U.S. Government Income Fund will recognize no gain or loss on its
transfer of the Assets to PACE Government Securities Fixed Income Fund in
exchange solely for PACE Government Securities Fixed Income Fund shares and
PACE Government Securities Fixed Income Fund's assumption of the Liabilities
or on the subsequent distribution of those shares to U.S. Government Income
Fund's shareholders in constructive exchange for their U.S. Government
Income Fund shares;
(3) PACE Government Securities Fixed Income Fund will recognize no gain
or loss on its receipt of the Assets in exchange solely for PACE Government
Securities Fixed Income Fund shares and its assumption of the Liabilities;
(4) PACE Government Securities Fixed Income Fund's basis for the Assets
will be the same as U.S. Government Income Fund's basis therefor immediately
before the Reorganization, and PACE Government Securities Fixed Income
Fund's holding period for the Assets will include U.S. Government Income
Fund's holding period therefor;
(5) A U.S. Government Income Fund shareholder will recognize no gain or
loss on the constructive exchange of all its U.S. Government Income Fund
shares solely for PACE Government Securities Fixed Income Fund shares
pursuant to the Reorganization; and
(6) A U.S. Government Income Fund shareholder's aggregate basis for the
PACE Government Securities Fixed Income Fund shares to be received by it in
the Reorganization will be the same as the aggregate basis for its U.S.
Government Income Fund shares to be constructively surrendered in exchange
for those PACE Government Securities Fixed Income Fund shares, and its
holding period for those PACE Government Securities Fixed Income Fund shares
will include its holding period for those U.S. Government Income Fund
shares, provided the shareholder holds them as capital assets on the Closing
Date.
The 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.
23
<PAGE>
Utilization by PACE Government Securities Fixed Income Fund after the
Reorganization of any pre-Reorganization capital losses realized by U.S.
Government Income Fund could be subject to limitation in future years under the
Code.
You should consult your tax adviser regarding the effect, if any, of the
Reorganization in light of your individual circumstances. Because the foregoing
discussion only relates to the federal income tax consequences of the
Reorganization, you also should consult your tax adviser as to state and local
tax consequences, if any, of the Reorganization.
REQUIRED VOTE
The proposal to approve the Plan requires the affirmative vote of the lesser
of (1) 67% or more of the shares of U.S. Government Income Fund present at the
Meeting, if more than 50% of the outstanding shares are represented at the
Meeting in person or by proxy, or (2) more than 50% of the outstanding shares
entitled to vote at the Meeting.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSAL.
-------------------
ORGANIZATION OF THE FUNDS
PACE Government Securities Fixed Income Fund commenced operations on August
24, 1995 as a diversified series of PACE Trust. PACE Trust was formed as a
Delaware business trust on September 9, 1994, and is registered under the 1940
Act as an open-end management investment company. The operations of PACE Trust,
as a Delaware business trust, are governed by its Trust Instrument, By-Laws and
Delaware law.
U.S. Government Income Fund commenced operations on August 31, 1984 and is a
diversified series of Managed Investments Trust. Managed Investments Trust was
organized as a Massachusetts business trust on November 21, 1986, and is
registered under the 1940 Act as an open-end management investment company. The
operations of Managed Investments Trust, as a Massachusetts business trust, are
governed by its Amended and Restated Declaration of Trust, Amended and Restated
By-Laws and Massachusetts law.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand
PACE Government Securities Fixed Income Fund's financial performance for the
periods shown. The table shows information for the Fund's Class P shares because
they were the only class of shares outstanding during the periods shown. Certain
information reflects financial results for a single Fund share. In the tables,
"total investment return" represents the rate that an investor would have earned
(or lost) on an investment in the Fund, assuming reinvestment of all dividends
and distributions. This information has been audited by Ernst & Young LLP,
independent auditors for PACE Government Securities Fixed Income Fund, whose
report, along with the Fund's financial statements, is included in the Fund's
Annual Report to Shareholders, dated July 31, 2000, which may be obtained
without charge by calling 1-800-647-1568.
24
<PAGE>
<TABLE>
<CAPTION>
PACE
GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS
-----------------------------------------------------------
FOR THE YEARS ENDED
JULY 31, FOR THE PERIOD
------------------------------------------ ENDED
2000 1999 1998 1997 JULY 31, 1996+
---- ---- ---- ---- --------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 12.10 $ 12.59 $ 12.61 $ 12.07 $ 12.00
-------- -------- -------- -------- -------
Net investment income.... 0.73 0.68 0.72 0.64 0.49
Net realized and
unrealized gains
(losses) from
investments, options
and futures............ 0.01 (0.43) 0.18 0.58 0.03
-------- -------- -------- -------- -------
Net increase from
investment
operations............. 0.74 0.25 0.90 1.22 0.52
-------- -------- -------- -------- -------
Dividends from net
investment income...... (0.75) (0.71) (0.72) (0.63) (0.44)
Distributions from net
realized gains from
investments............ -- (0.03) (0.20) (0.05) (0.01)
-------- -------- -------- -------- -------
Total dividends and
distributions.......... (0.75) (0.74) (0.92) (0.68) (0.45)
-------- -------- -------- -------- -------
Net asset value, end of
period................. $ 12.09 $ 12.10 $ 12.59 $ 12.61 $ 12.07
======== ======== ======== ======== =======
Total investment return
(1).................... 6.36% 2.02% 7.39% 10.42% 4.35%
======== ======== ======== ======== =======
Ratios/Supplemental Data:
Net assets, end of period
(000's)................ $198,918 $191,719 $162,119 $101,606 $58,752
Expenses to average net
assets, net of fee
waivers and expense
reimbursements......... 0.87%++ 0.87%++ 0.85% 1.57%++ 0.85%*
Expenses to average net
assets, before fee
waivers and expense
reimbursements......... 0.91%++ 0.93%++ 0.95% 1.70%++ 1.15%*
Net investment income to
average net assets, net
of fee waivers and
expense
reimbursements......... 6.12%++ 5.49%++ 5.90% 5.44%++ 5.09%*
Net investment income to
average net assets,
before fee waivers and
expense
reimbursements......... 6.08%++ 5.43%++ 5.80% 5.31%++ 4.79%*
Portfolio turnover....... 585% 418% 353% 712% 978%
</TABLE>
-------------------
+ For the period August 24, 1995 (commencement of operations) through
July 31, 1996.
* Annualized.
++ Includes 0.02%, 0.01% and 0.72% of interest expense related to reverse
repurchase agreements during the years ended July 31, 2000, July 31, 1999
and July 31, 1997, respectively.
(1) Total investment return is calculated assuming a $10,000 investment on the
first day of each period reported, reinvestment of all dividends and
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 any applicable sales charges or program fees; results would be
lower if they were included. Total investment return for period of less
than one year has not been annualized.
25
<PAGE>
CAPITALIZATION
The following table shows the capitalization of each of U.S. Government
Income Fund and PACE Government Securities Fixed Income Fund as of July 31,
2000, and the PRO FORMA capitalization as of the same date, assuming that
shareholders of both U.S. Government Income Fund and PaineWebber Low Duration
U.S. Government Income Fund approve the reorganizations with PACE Government
Securities Fixed Income Fund:
<TABLE>
<CAPTION>
U.S. GOVERNMENT PACE GOVERNMENT SECURITIES PRO FORMA CLASS A COMBINED
INCOME FUND: FIXED INCOME FUND: PACE GOVERNMENT SECURITIES
CLASS A CLASS A FIXED INCOME FUND
--------------- -------------------------- --------------------------
<S> <C> <C> <C>
Net Assets......................... $205,845,006 $ 0 $312,387,473
Shares Outstanding................. 24,304,537 0 25,847,535
Net Asset Value Per Share.......... $ 8.47 $ 0 $ 12.09
<CAPTION>
U.S. GOVERNMENT PACE GOVERNMENT SECURITIES PRO FORMA CLASS B COMBINED
INCOME FUND: FIXED INCOME FUND: PACE GOVERNMENT SECURITIES
CLASS B CLASS B FIXED INCOME FUND
--------------- -------------------------- --------------------------
<S> <C> <C> <C>
Net Assets......................... $ 7,515,198 $ 0 $ 11,610,434
Shares Outstanding................. 887,146 0 960,669
Net Asset Value Per Share.......... $ 8.47 $ 0 $ 12.09
<CAPTION>
U.S. GOVERNMENT PACE GOVERNMENT SECURITIES PRO FORMA CLASS C COMBINED
INCOME FUND: FIXED INCOME FUND: PACE GOVERNMENT SECURITIES
CLASS C CLASS C FIXED INCOME FUND
--------------- -------------------------- --------------------------
<S> <C> <C> <C>
Net Assets......................... $ 15,913,817 $ 0 $ 65,502,560
Shares Outstanding................. 1,880,778 0 5,419,807
Net Asset Value Per Share.......... $ 8.46 $ 0 $ 12.09
<CAPTION>
U.S. GOVERNMENT PACE GOVERNMENT SECURITIES PRO FORMA CLASS Y COMBINED
INCOME FUND: FIXED INCOME FUND: PACE GOVERNMENT SECURITIES
CLASS Y CLASS Y FIXED INCOME FUND
--------------- -------------------------- --------------------------
<S> <C> <C> <C>
Net Assets......................... $ 8,810,698 $ 0 $ 9,668,860
Shares Outstanding................. 1,041,269 0 800,020
Net Asset Value Per Share.......... $ 8.46 $ 0 $ 12.09
<CAPTION>
U.S. GOVERNMENT PACE GOVERNMENT SECURITIES PRO FORMA CLASS P COMBINED
INCOME FUND: FIXED INCOME FUND: PACE GOVERNMENT SECURITIES
CLASS P CLASS P FIXED INCOME FUND
--------------- -------------------------- --------------------------
<S> <C> <C> <C>
Net Assets......................... $ 0 $198,918,021 $198,918,021
Shares Outstanding................. 0 16,458,856 16,458,856
Net Asset Value Per Share.......... $ 0 $ 12.09 $ 12.09
</TABLE>
LEGAL MATTERS
Certain legal matters concerning the issuance of PACE Government Securities
Fixed Income Fund shares as part of the Reorganization will be passed upon by
Willkie Farr & Gallagher, 787 7th Avenue, New York, New York 10019-6099, counsel
to PACE Trust. Certain legal matters concerning the tax consequences of the
Reorganization will be passed upon by Kirkpatrick & Lockhart LLP, 1800
Massachusetts Avenue, NW, Second Floor, Washington, DC 20036-1800.
26
<PAGE>
INFORMATION FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
PACE Trust and Managed Investments Trust are each subject to the information
requirements of the Securities Exchange Act of 1934 and the 1940 Act and in
accordance therewith each files reports and other information with the SEC.
Reports, proxy statements, registration statements and other information may be
inspected without charge and copied at the Public Reference Room maintained by
the SEC at 450 Fifth Street, N.W., Washington, DC 20549, and at the following
regional offices of the SEC: 7 World Trade Center, Suite 1300, New York, NY
10048, and 500 West Madison Street, 14th floor, Chicago, IL 60661. Information
on the operation of the Public Reference Room may be obtained by calling the SEC
at 1-202-942-8090. The SEC maintains an Internet web site at http://www.sec.gov
that contains information regarding PACE Trust and Managed Investments Trust,
and other registrants that file electronically with the SEC. Copies of such
material may also be obtained, after paying a duplicating fee, from the Public
Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, Washington, DC, 20549, or by electronic
request at the following e-mail address: [email protected].
EXPERTS
The audited financial statements of U.S. Government Income Fund incorporated
by reference in the SAI have been audited by Ernst & Young LLP, independent
auditors, whose report thereon is included in U.S. Government Income Fund's
Annual Report to Shareholders for the fiscal year ended November 30, 1999. The
audited financial statements of PACE Government Securities Fixed Income Fund
incorporated by reference in the SAI for the fiscal year ended July 31, 2000,
have been audited by Ernst & Young LLP, independent auditors, whose report
thereon is included in PACE Government Securities Fixed Income Fund's Annual
Report to Shareholders for the fiscal year ended July 31, 2000. The financial
statements audited by Ernst & Young LLP have been incorporated by reference in
the SAI in reliance on its report given on its authority as experts in auditing
and accounting.
OTHER INFORMATION
SHAREHOLDER PROPOSALS. As a general matter, Managed Investments Trust does
not hold regular annual or other meetings of shareholders. Any shareholder who
wishes to submit proposals to be considered at a special meeting of U.S.
Government Income Fund's shareholders should send such proposals to U.S.
Government Income Fund at 51 West 52nd Street, New York, New York 10019-6114.
Proposals must be received a reasonable period of time prior to any meeting to
be included in the proxy materials. Moreover, inclusion of such proposals is
subject to limitations under the federal securities laws. Persons named as
proxies for any subsequent shareholders' meeting will vote in their discretion
with respect to proposals submitted on an untimely basis.
OTHER BUSINESS. Managed Investments Trust's management knows of no other
business to be presented to the Meeting other than the matters set forth in this
Proxy Statement/Prospectus, but should any other matter requiring a vote of U.S.
Government Income Fund's shareholders arise, the proxies will vote thereon
according to their best judgment in the interests of the Fund.
27
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
THIS AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION ("Agreement") is
made as of , 2000, by and among PaineWebber PACE Select Advisors Trust, a
Delaware business trust ("PACE Trust"), on behalf of PACE Government Securities
Fixed Income Investments, a segregated portfolio of assets ("series") thereof
("Acquiring Fund"), PaineWebber Managed Investments Trust, a Massachusetts
business trust ("Target Trust"), on behalf of PaineWebber U.S. Government Income
Fund, a series thereof ("Target"), and solely for purposes of paragraph 7.2
hereof, Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins").
(Acquiring Fund and Target are sometimes referred to herein individually as a
"Fund" and collectively as the "Funds," and PACE Trust and Target Trust are
sometimes referred to herein individually as an "Investment Company" and
collectively as the "Investment Companies.") All agreements, representations,
actions, and obligations described herein made or to be taken or undertaken by
Acquiring Fund or Target are made and shall be taken or undertaken by PACE Trust
or Target Trust, respectively.
The Investment Companies wish to effect a reorganization described in
section 368(a)(1) of the Internal Revenue Code of 1986, as amended ("Code"), and
intend this Agreement to be, and adopt it as, a "plan of reorganization" within
the meaning of the regulations under section 368 of the Code ("Regulations").
The reorganization will involve the transfer of Target's assets to Acquiring
Fund in exchange solely for voting shares of beneficial interest in Acquiring
Fund and the assumption by Acquiring Fund of Target's stated liabilities,
followed by the constructive distribution of those shares PRO RATA to the
holders of shares of beneficial interest in Target ("Target Shares") in exchange
therefor, all on the terms and conditions set forth herein. The foregoing
transactions are referred to herein collectively as the "Reorganization."
The Target Shares 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).
Acquiring Fund's shares are divided into five classes, four of which also are
designated Class A, Class B, Class C, and Class Y shares ("Class A Acquiring
Fund Shares," "Class B Acquiring Fund Shares," "Class C Acquiring Fund Shares,"
and "Class Y Acquiring Fund Shares," respectively, and collectively "Acquiring
Fund Shares"). Each class of Acquiring Fund Shares is substantially similar to
the identically designated class of Target Shares.
In consideration of the mutual promises contained herein, the parties agree
as follows:
1. PLAN OF REORGANIZATION AND TERMINATION
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
(rounded to the third decimal place) (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 net asset value ("NAV") of a Class A
Acquiring Fund Share (computed as set forth in paragraph 2.2),
(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 (as so computed), (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 (as so computed), 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 (as so computed), and
(b) to assume all of Target's stated liabilities described in paragraph
1.3 ("Liabilities").
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Such transactions shall take place at the Closing (as defined in
paragraph 3.1).
1.2. The Assets shall include all cash, cash equivalents, securities,
receivables (including interest and dividends receivable), claims and rights of
action, rights to register shares under applicable securities laws, books and
records, deferred and prepaid expenses shown as assets on Target's books, and
other property owned by Target at the Effective Time (as defined in paragraph
3.1).
1.3. The Liabilities shall include all of Target's liabilities, debts,
obligations, and duties of whatever kind of nature, whether absolute, accrued,
contingent, or otherwise, whether or not arising in the ordinary course of
business, and whether or not specifically referred to in this Agreement, but
only to the extent disclosed or provided for in Target Trust's financial
statements referred to in paragraph 4.1.18, or otherwise disclosed in writing to
and accepted by PACE Trust. Notwithstanding the foregoing, Target agrees to use
its best efforts to discharge all its Liabilities before 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 its current taxable year through the Effective Time.
1.5. At the Effective Time (or as soon thereafter as is reasonably
practicable), Target shall 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 (each a "Shareholder" and collectively "Shareholders"), in
constructive exchange for their Target Shares. Such distribution shall be
accomplished by PACE Trust's transfer agent's opening accounts on Acquiring
Fund's share transfer books in the Shareholders' names and transferring such
Acquiring Fund Shares thereto. Each Shareholder's account shall be credited with
the respective PRO RATA number of full and fractional (rounded to the third
decimal place) Acquiring Fund Shares due that Shareholder, by class (i.e., the
account for a Shareholder of Class A Target Shares shall be credited with the
respective PRO RATA number of Class A Acquiring Fund Shares due that
Shareholder; the account for a Shareholder of Class B Target Shares shall be
credited with the respective PRO RATA number of Class B Acquiring Fund Shares
due that Shareholder; the account for a Shareholder of Class C Target Shares
shall be credited with the respective PRO RATA number of Class C Acquiring Fund
Shares due that Shareholder; and the account for a Shareholder of Class Y Target
Shares shall be credited with the respective PRO RATA number of Class Y
Acquiring Fund Shares due that Shareholder). All outstanding Target Shares,
including any represented by certificates, shall simultaneously be canceled on
Target's share transfer books. Acquiring Fund shall not issue certificates
representing the Acquiring Fund Shares issued in connection with the
Reorganization.
1.6. As soon as reasonably practicable after distribution of the Acquiring
Fund Shares pursuant to paragraph 1.5, but in all events within six months after
the Effective Time, Target shall be terminated as a series of Target 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 on 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 ("NYSE") on the date of the Closing ("Valuation Time"), using the
valuation procedures set forth in Acquiring Fund's then-current prospectus
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and statement of additional information ("SAI"), less (b) the amount of the
Liabilities as of the Valuation Time.
2.2. For purposes of paragraph 1.1(a), the NAV 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 SAI.
2.3. All computations pursuant to paragraphs 2.1 and 2.2 shall be made by or
under the direction of Mitchell Hutchins.
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 or about
February , 2001, or at such other place and/or on such other date as to which
the Investment Companies 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 to which the Investment Companies 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 Target Value and the NAV of each class of Acquiring Fund Shares
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. Target Trust's fund accounting and pricing agent shall deliver at the
Closing a certificate of an authorized officer verifying that the information
(including adjusted basis and holding period, by lot) concerning the Assets,
including all portfolio securities, transferred by Target to Acquiring Fund, as
reflected on Acquiring Fund's books immediately after the Closing, does or will
conform to such information on Target's books immediately before the Closing.
Target Trust's custodian shall deliver at the Closing a certificate of an
authorized officer stating that the Assets held by the custodian will be
transferred to Acquiring Fund at, or arrangements for the transfer thereof to
Acquiring Fund will have been made on or before, the Effective Time.
3.3. Target Trust shall deliver to PACE Trust at the Closing a list of the
names and addresses of the Shareholders and the number of outstanding Target
Shares (by class) owned by each Shareholder (rounded to the third decimal
place), all as of the Effective Time, certified by Target Trust's Secretary or
an Assistant Secretary thereof. PACE Trust's 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. PACE Trust shall issue and deliver a
confirmation to Target Trust evidencing the Acquiring Fund Shares to be credited
to Target at the Effective Time or provide evidence satisfactory to Target Trust
that such Acquiring Fund Shares have been credited to Target's account on
Acquiring Fund's books. At the Closing, each Investment Company shall deliver to
the other bills of sale, checks, assignments, stock certificates, receipts, or
other documents the other Investment Company or its counsel reasonably requests.
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 to PACE Trust, on behalf of Acquiring
Fund, as follows:
4.1.1. Target Trust is a trust operating under a written declaration of
trust, the beneficial interest in which is divided into transferable shares
("Business Trust"), that is duly organized and validly existing under the
laws of the Commonwealth of Massachusetts; and a copy of its Amended and
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Restated Declaration of Trust ("Declaration of Trust") is on file with the
Secretary of the Commonwealth of Massachusetts;
4.1.2. Target Trust is duly registered as an open-end management
investment company under the Investment Company Act of 1940, as amended
("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 Target
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 (except
securities that are subject to "securities loans" as referred to in section
851(b)(2) of the Code); and on delivery and payment for the Assets,
Acquiring Fund will acquire good and marketable title thereto;
4.1.5. Target's current prospectus and SAI conform in all material
respects to the applicable requirements of the Securities Act of 1933, as
amended ("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 the
Declaration of Trust or Target Trust's 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 otherwise disclosed in
writing to and accepted by PACE Trust;
4.1.7. Except as otherwise disclosed in writing to and accepted by PACE
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 or 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 PACE
Trust, no litigation, administrative proceeding, or investigation of or
before any court or governmental body is presently pending or (to Target
Trust's knowledge) threatened against Target Trust with respect to Target or
any of its properties or assets that, if adversely determined, would
materially and adversely affect Target's financial condition or the conduct
of its business; and Target Trust 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 have
been duly authorized as of the date hereof by all necessary action on the
part of Target 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, this Agreement constitutes a valid and legally
binding obligation of Target, enforceable in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium, and laws of general applicability relating to or affecting
creditors' rights and to general principles of equity;
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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, as
amended ("1934 Act"), or the 1940 Act for the execution or performance of
this Agreement by Target Trust, except for (a) the filing with the
Securities and Exchange Commission ("SEC") of a registration statement by
PACE 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"), and (b) 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 Meeting (as defined 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
rules and 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 PACE Trust for use therein;
4.1.13. The Liabilities were incurred by Target in the ordinary course
of its business; and there are no Liabilities other than liabilities
disclosed or provided for in Target Trust's financial statements referred to
in paragraph 4.1.18, or otherwise disclosed to and accepted by PACE Trust,
none of which has been materially adverse to the business, assets, or
results of Target's operations;
4.1.14. Target is a "fund" as defined in section 851(g)(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; the Assets will be invested at
all times through the Effective Time in a manner that ensures compliance
with the foregoing; and Target has no earnings and profits accumulated in
any taxable year in which the provisions of Subchapter M did not apply to
it;
4.1.15. Target is not under the jurisdiction of a court in a "title 11
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;
4.1.17. Target's federal income tax returns, and all applicable state
and local tax returns, for all taxable years through and including the
taxable year ended November 30, 1999, have been timely filed and all taxes
payable pursuant to such returns have been timely paid;
4.1.18. Target Trust's audited financial statements for the year ended
November 30, 1999, and unaudited financial statements for the six months
ended May 31, 2000, to be delivered to PACE Trust, fairly represent Target's
financial position as of each such date and the results of its operations
and changes in its net assets for the period then ended; and
4.1.19. Target's management (a) is unaware of any plan or intention of
Shareholders to redeem, sell, or otherwise dispose of (i) any portion of
their Target Shares before the Reorganization to any person "related"
(within the meaning of section 1.368-1(e)(3) of the Regulations) to either
Fund or (ii) any portion of the Acquiring Fund Shares to be received by them
in the Reorganization to any person related (within such meaning) to
Acquiring Fund, (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
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frequency of dispositions of shares of Target as a series of an open-end
investment company, (c) 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, and (d) does not anticipate that
there will be extraordinary redemptions of Acquiring Fund Shares immediately
following the Reorganization.
4.2. Acquiring Fund represents and warrants to Target Trust, on behalf of
Target, as follows:
4.2.1. PACE Trust is a business trust duly organized, validly existing,
and in good standing under the laws of the State of Delaware; and its
Certificate of Trust, including any amendments thereto ("Certificate of
Trust"), has been duly filed in the office of the Secretary of State
thereof;
4.2.2. PACE 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
PACE 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, including the receipt of
consideration in exchange therefor in excess of the par value thereof, will
be duly and validly issued and outstanding shares of Acquiring Fund, fully
paid and non-assessable;
4.2.6. Acquiring Fund's current prospectus and SAI 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, Delaware law or any provision of
PACE Trust's Certificate of Trust, Trust Instrument (including any
amendments thereto) ("Trust Instrument"), 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 otherwise disclosed in writing to and accepted by Target Trust;
4.2.8. Except as otherwise disclosed in writing to and accepted by
Target Trust, no litigation, administrative proceeding, or investigation of
or before any court or governmental body is presently pending or (to PACE
Trust's knowledge) threatened against PACE 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; and PACE Trust 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 have
been duly authorized as of the date hereof by all necessary action on the
part of PACE Trust's board of trustees (together with Target Trust's board
of trustees, the "Boards"), which has made the determinations required by
Rule 17a-8(a) under the 1940 Act; and this Agreement constitutes a valid and
legally binding obligation of Acquiring Fund, enforceable in accordance with
its terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium, and laws of general applicability relating to or
affecting creditors' rights and to general principles of equity;
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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 PACE Trust, except for
(a) the filing with the SEC of the Registration Statement and (b) 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 Meeting, 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 rules and 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 Target Trust for
use therein;
4.2.12. Acquiring Fund is a "fund" as defined in section 851(g)(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 or any person "related" (within the meaning
of section 1.368-1(e)(3) of the Regulations) thereto have any plan or
intention to redeem or otherwise reacquire any Acquiring Fund Shares issued
to the Shareholders pursuant to the Reorganization, except to the extent it
is required by the 1940 Act to redeem any of its shares presented for
redemption at NAV in the ordinary course of that business;
4.2.14. Following the Reorganization, Acquiring Fund (a) will continue
Target's "historic business" (within the meaning of section
1.368-1(d)(2) of the Regulations) and (b) will use a significant portion of
Target's "historic business assets" (within the meaning of
section 1.368-1(d)(3) of the Regulations) in a business; in addition,
Acquiring Fund (c) 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
(d) 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 business trust or a corporation or any "fund" thereof
(within the meaning of section 851(g)(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;
4.2.17. Acquiring Fund does not directly or indirectly own, nor at the
Effective Time will it directly or indirectly own, nor has it directly or
indirectly owned at any time during the past five years, any shares of
Target;
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4.2.18. Acquiring Fund's federal income tax returns, and all applicable
state and local tax returns, for all taxable years through and including the
taxable year ended July 31, 1999, have been timely filed and all taxes
payable pursuant to such returns have been timely paid; and
4.2.19. PACE Trust's audited financial statements for the year ended
July 31, 2000, to be delivered to Target Trust, fairly represent Acquiring
Fund's financial position as of that date and the results of its operations
and changes in its net assets for the year then ended.
4.3. Each Fund represents and warrants to the Trust of which the other Fund
is a series, on behalf of such other Fund, as follows:
4.3.1. The fair market value of the Acquiring Fund Shares received by
each Shareholder will be approximately equal to the fair market value of its
Target Shares constructively surrendered in exchange therefor;
4.3.2. The Shareholders will pay their own expenses, if any, incurred in
connection with the Reorganization;
4.3.3. The fair market value of the Assets on a going concern basis will
equal or exceed the Liabilities to be assumed by Acquiring Fund and those to
which the Assets are subject;
4.3.4. There is no intercompany indebtedness between the Funds that was
issued or acquired, or will be settled, at a discount;
4.3.5. 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 to make redemptions and distributions
immediately before the Reorganization (except (a) redemptions in the
ordinary course of its business required by section 22(e) of the 1940 Act
and (b) regular, normal dividend 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) after the date of this Agreement will be included as
assets held thereby immediately before the Reorganization;
4.3.6. None of the compensation received by any Shareholder who is an
employee of or service provider to Target will be separate consideration
for, or allocable to, any of the Target Shares held by such Shareholder;
none of the Acquiring Fund Shares received by any such Shareholder will be
separate consideration for, or allocable to, any employment agreement,
investment advisory agreement, or other service agreement; and the
consideration paid to any such Shareholder will be for services actually
rendered and will be commensurate with amounts paid to third parties
bargaining at arm's-length for similar services;
4.3.7. Immediately after the Reorganization, the Shareholders will own
shares constituting "control" (within the meaning of section 304(c) of the
Code) of Acquiring Fund; and
4.3.8. Neither Fund will be reimbursed for any expenses incurred by it
or on its behalf in connection with the Reorganization unless those expenses
are solely and directly related to the Reorganization (determined in
accordance with the guidelines set forth in Rev. Rul. 73-54, 1973-1 C.B.
187).
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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 changes in operations
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 if Target's shareholders
approve this Agreement (and the transactions contemplated hereby),
then between the date of such approval and the Closing, the Funds
shall coordinate their respective portfolios so that the transfer of
the Assets to Acquiring Fund will not cause it to fail to be in
compliance with any of its investment policies and restrictions
immediately after the Closing.
5.2. Target covenants to call a shareholders' meeting to consider and act on
this Agreement and to take all other action necessary to obtain approval of the
transactions contemplated hereby ("Meeting").
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 PACE Trust in obtaining
information PACE Trust reasonably requests concerning the beneficial ownership
of Target Shares.
5.5. Target covenants that its 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 PACE Trust at the Closing.
5.6. Each Fund covenants to cooperate in preparing the Proxy Statement in
compliance with applicable federal and state securities laws.
5.7. Each Fund covenants that it will, from time to time, as and when
requested by the other Fund, execute and deliver or cause to be executed and
delivered all assignments and other instruments, and will take or cause to be
taken further action, the other Fund may deem necessary or desirable in order to
vest in, and confirm to, (a) Acquiring Fund, title to and possession of all the
Assets, and (b) Target, title to and possession of the Acquiring Fund Shares to
be delivered hereunder, and otherwise to carry out the intent and purpose
hereof.
5.8. Acquiring Fund covenants to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act, and state
securities laws it deems appropriate 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 its 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
A-9
<PAGE>
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 each Board and shall have been approved by Target's
shareholders in accordance with the Declaration of Trust and Target Trust's
By-Laws and applicable law.
6.2. All necessary filings shall have been made with the SEC and state
securities authorities, and no order or directive shall have been received that
any other or further action is required to permit the parties to carry out the
transactions contemplated hereby. The Registration Statement shall have become
effective under the 1933 Act, no stop orders suspending the effectiveness
thereof shall have been issued, and the SEC shall not have issued an unfavorable
report with respect to the Reorganization under section 25(b) of the 1940 Act
nor instituted any proceedings seeking to enjoin consummation of the
transactions contemplated hereby under section 25(c) of the 1940 Act. All
consents, orders, and permits of federal, state, and local regulatory
authorities (including the SEC and state securities authorities) deemed
necessary by either Investment Company 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 either Fund's assets or properties, provided that either
Investment Company 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. Target Trust shall have received an opinion of Willkie Farr & Gallagher
("Willkie Farr") substantially to the effect that:
6.4.1. Acquiring Fund is a duly established series of PACE Trust, a
business trust duly organized, validly existing, and in good standing under
the laws of the State of Delaware, with power under its Certificate of Trust
and Trust Instrument to own all its properties and assets and, to the
knowledge of Willkie Farr, to carry on its business as presently conducted;
6.4.2. This Agreement (a) has been duly authorized, executed, and
delivered by PACE Trust on behalf of Acquiring Fund and (b) assuming due
authorization, execution, and delivery of this Agreement by Target Trust on
behalf of Target, is a valid and legally binding obligation of PACE Trust
with respect to Acquiring Fund, enforceable in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium, and laws of general applicability relating to or affecting
creditors' rights and to 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 and the receipt of consideration in exchange
therefor in excess of the par value thereof, will be duly authorized,
validly issued and outstanding, and fully paid and non-assessable;
6.4.4. The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate PACE Trust's Certificate of Trust, Trust Instrument, or By-Laws or
any provision of any agreement (known to Willkie Farr, without any
independent inquiry or investigation) to which PACE Trust (with respect to
Acquiring Fund) is a party or by which it is bound or (to the knowledge of
Willkie Farr, without any independent inquiry or investigation) result in
the acceleration of any obligation, or the imposition of any penalty, under
any agreement, judgment, or decree to which PACE Trust (with respect to
Acquiring Fund) is a party or by which it is bound, except as set forth in
such opinion or as otherwise disclosed in writing to and accepted by Target
Trust;
A-10
<PAGE>
6.4.5. To the knowledge of Willkie Farr (without any independent inquiry
or investigation), no consent, approval, authorization, or order of any
court or governmental authority is required for the consummation by PACE
Trust on behalf of Acquiring Fund of the transactions contemplated herein,
except those obtained under the 1933 Act, the 1934 Act, and the 1940 Act and
those that may be required under state securities laws;
6.4.6. PACE Trust is registered with the SEC as an investment company,
and to the knowledge of Willkie Farr no order has been issued or proceeding
instituted to suspend such registration; and
6.4.7. To the knowledge of Willkie Farr (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 PACE Trust (with respect to Acquiring Fund) or any of its
properties or assets attributable or allocable to Acquiring Fund and
(b) PACE 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 Target Trust.
In rendering such opinion, Willkie Farr may (1) rely (i) as to matters governed
by the laws of the State of Delaware, on an opinion of competent Delaware
counsel, and (ii) as to certain factual matters, on a certificate of PACE Trust,
(2) make assumptions regarding the authenticity, genuineness, and/or conformity
of documents and copies thereof without independent verification thereof,
(3) limit such opinion to applicable federal and state law, and (4) define the
word "knowledge" and related terms to mean the knowledge of attorneys then with
Willkie Farr who have devoted substantive attention to matters directly related
to this Agreement and the Reorganization.
6.5. PACE Trust shall have received an opinion of Kirkpatrick & Lockhart LLP
("K&L") substantially to the effect that:
6.5.1. Target is a duly established series of Target Trust, a Business
Trust duly organized and validly existing under the laws of the Commonwealth
of Massachusetts with power under the Declaration of Trust to own all its
properties and assets and, to the knowledge of K&L, to carry on its business
as presently conducted;
6.5.2. This Agreement (a) has been duly authorized, executed, and
delivered by Target Trust on behalf of Target and (b) assuming due
authorization, execution, and delivery of this Agreement by PACE Trust on
behalf of Acquiring Fund, is a valid and legally binding obligation of
Target Trust with respect to Target, enforceable in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium, and laws of general applicability relating to or
affecting creditors' rights and to 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 the Declaration of Trust or Target Trust's By-Laws or any provision
of any agreement (known to K&L, without any independent inquiry or
investigation) to which Target Trust (with respect to Target) is a party or
by which it is bound or (to the knowledge of K&L, without any independent
inquiry or investigation) result in the acceleration of any obligation, or
the imposition of any penalty, under any agreement, judgment, or decree to
which Target Trust (with respect to Target) is a party or by which it is
bound, except as set forth in such opinion or as otherwise disclosed in
writing to and accepted by PACE Trust;
6.5.4. To the knowledge of K&L (without any independent inquiry or
investigation), no consent, approval, authorization, or order of any court
or governmental authority is required for the consummation by Target Trust
on behalf of Target of the transactions contemplated herein, except those
obtained under the 1933 Act, the 1934 Act, and the 1940 Act and those that
may be required under state securities laws;
A-11
<PAGE>
6.5.5. Target Trust is registered with the SEC as an investment company,
and to the knowledge of K&L no order has been issued or proceeding
instituted to suspend such registration; and
6.5.6. To the knowledge of K&L (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 Target Trust (with respect to Target) or any of its
properties or assets attributable or allocable to Target and (b) Target
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 PACE Trust.
In rendering such opinion, K&L may (1) make assumptions regarding the
authenticity, genuineness, and/or conformity of documents and copies thereof
without independent verification thereof, (2) limit such opinion to applicable
federal and state law, and (3) define the word "knowledge" and related terms to
mean the knowledge of attorneys then with K&L 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 K&L,
addressed to and in form and substance satisfactory to it, as to the federal
income tax consequences mentioned below ("Tax Opinion"). In rendering the Tax
Opinion, K&L may rely as to factual matters, exclusively and without independent
verification, on the representations made in this Agreement, which K&L may treat
as representations made to it, or in separate letters addressed to K&L 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 and conditioned on consummation of the Reorganization in accordance with
this Agreement, for federal income tax purposes:
6.6.1. Acquiring Fund's acquisition of the Assets in exchange solely for
Acquiring Fund Shares and Acquiring Fund's assumption of the Liabilities,
followed by Target's distribution of those shares PRO RATA to the
Shareholders constructively in exchange for their Target Shares, will
qualify as a reorganization within the meaning of section 368(a)(1) 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. Target will recognize no gain or loss on the transfer of the
Assets to Acquiring Fund 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. Acquiring Fund will recognize no gain or loss 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 in the Assets will be the same as Target's
basis therein 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 aggregate basis in the Acquiring Fund Shares to
be received by it in the Reorganization will be the same as the aggregate
basis in 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 the
Shareholder held them as capital assets 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
A-12
<PAGE>
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, either Investment Company may waive any of
the foregoing conditions (except that set forth in paragraph 6.1) if, in the
judgment of its Board, such waiver will not have a material adverse effect on
its Fund's 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. Expenses of the Reorganization that relate to the Acquiring Fund and
Target will be borne by Mitchell Hutchins. Any such expenses which are so borne
by Mitchell Hutchins will be solely and directly related to the Reorganization.
8. ENTIRE AGREEMENT; NO 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 not
survive the Closing.
9. TERMINATION OF AGREEMENT
This Agreement may be terminated at any time at or before 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
before 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 , 2001; 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 any manner
mutually agreed on in writing by the parties; provided that following such
approval no such amendment shall have a material adverse effect on the
Shareholders' interests.
11. MISCELLANEOUS
11.1. This Agreement shall be governed by and construed in accordance with
the internal laws of the State of New York; 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. PACE Trust acknowledges that Target Trust is a Business Trust. This
Agreement is executed by Target Trust on behalf of Target and by its trustees
and/or officers in their capacities as such, and not individually. Target
Trust's obligations under this Agreement are not binding on or enforceable
against any of its trustees, officers, or shareholders but are only binding on
and enforceable against Target's assets and
A-13
<PAGE>
property; and a trustee of Target Trust shall not be personally liable hereunder
to PACE Trust or its trustees or shareholders for any act, omission, or
obligation of Target Trust or any other trustee thereof. PACE Trust agrees that,
in asserting any rights or claims under this Agreement on behalf of Acquiring
Fund, it shall look only to Target's assets and property in settlement of such
rights or claims and not to such trustees, officers, or shareholders.
11.4. A trustee of PACE Trust shall not be personally liable hereunder to
Target Trust or its trustees or shareholders for any act, omission, or
obligation of PACE Trust or any other trustee thereof. Target Trust agrees that,
in asserting any claim against PACE Trust or its trustees, it shall look only to
Acquiring Fund's assets for payment under such claim; and neither the
shareholders nor the trustees of PACE Trust, nor any of their agents, whether
past, present, or future, shall be personally liable therefor.
11.5. This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same agreement, and shall become effective
when one or more counterparts have been executed by each Investment Company and
delivered to the other party hereto. The headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
IN WITNESS WHEREOF, each party has caused this Agreement to be executed and
delivered by its duly authorized officers as of the day and year first written
above.
<TABLE>
<S> <C> <C>
PAINEWEBBER MANAGED INVESTMENTS TRUST,
acting on behalf of its series,
PaineWebber U.S. Government Income Fund
By:
......................................
PAINEWEBBER PACE SELECT ADVISORS TRUST,
acting on behalf of its series, PACE
Government Securities Fixed Income
Investments
By:
......................................
Solely with respect to paragraph 7.2
hereof:
MITCHELL HUTCHINS ASSET MANAGEMENT INC.
BY:
......................................
</TABLE>
A-14
<PAGE>
APPENDIX B
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of the Record Date, the following entities owned beneficially or of
record 5% or more of the Class [ ] shares of U.S. Government Income Fund or
PACE Government Securities Fixed Income Fund. Mitchell Hutchins did not know of
any other person who owned beneficially or of record 5% or more of any other
class of either Fund's outstanding equity securities as of the Record Date.
U.S. GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
PERCENT BENEFICIAL
PERCENT BENEFICIAL OWNERSHIP OF COMBINED
OWNERSHIP OF U.S. PACE GOVERNMENT SECURITIES
SHAREHOLDER'S NAME/ADDRESS GOVERNMENT INCOME FUND FIXED INCOME FUND
-------------------------- ---------------------- --------------------------
<S> <C> <C>
[ ] % %
c/o Mitchell Hutchins Asset Management
Inc.
51 West 52nd Street
New York, New York 10019-6114
</TABLE>
PACE GOVERNMENT SECURITIES FIXED INCOME FUND
<TABLE>
<CAPTION>
PERCENT BENEFICIAL PERCENT BENEFICIAL
OWNERSHIP OF PACE OWNERSHIP OF COMBINED
GOVERNMENT SECURITIES PACE GOVERNMENT SECURITIES
SHAREHOLDER'S NAME/ADDRESS FIXED INCOME FUND FIXED INCOME FUND
-------------------------- --------------------- --------------------------
<S> <C> <C>
[ ] % %
c/o Mitchell Hutchins Asset Management
Inc.
51 West 52nd Street
New York, New York 10019-6114
</TABLE>
B-1
<PAGE>
APPENDIX C
MANAGEMENT'S DISCUSSION OF PACE GOVERNMENT SECURITIES FIXED INCOME FUND'S
PERFORMANCE
THE DISCUSSION BELOW WAS TAKEN FROM PACE GOVERNMENT SECURITIES FIXED INCOME
FUND'S ANNUAL REPORT FOR ITS FISCAL YEAR ENDED JULY 31, 2000. THIS DISCUSSION
HAS NOT BEEN REVISED TO REFLECT SUBSEQUENT CHANGES WHICH ARE DISCUSSED ABOVE IN
THE PROXY STATEMENT/PROSPECTUS.
ADVISER: Pacific Investment Management Company LLC (PIMCO)
PORTFOLIO MANAGER: Scott Mather
OBJECTIVE: Current income
INVESTMENT PROCESS: The Portfolio invests primarily in mortgage-backed
securities along with U.S. government and agency securities of varying
maturities. The Portfolio's dollar-weighted average duration ranges between one
and seven years. (Duration is a measure of a bond portfolio's sensitivity to
interest-rate changes.) PIMCO establishes duration targets based on its
expectations for changes in interest rates, then positions the Portfolio to take
advantage of yield curve shifts. Securities are chosen for their value relative
to other equivalent securities.
AVERAGE ANNUAL TOTAL RETURNS, PERIODS ENDED 7/31/00
<TABLE>
<CAPTION>
6 MONTHS 1 YEAR 3 YEARS SINCE INCEPTION 8/24/95
-------- ------ ------- -----------------------
<S> <C> <C> <C> <C>
With PACE program fee*........ 4.37% 4.77% 3.66% 4.56%
Without PACE program fee...... 5.15% 6.36% 5.23% 6.14%
Lehman Brothers Mortgage
Backed Securities Index..... 5.24% 6.43% 5.54% 6.56%
Lipper Intermediate U.S.
Government Funds Median..... 4.58% 4.69% 4.49% 5.40%
</TABLE>
-------------------
* The maximum annual PACE program fee is 1.5% of the value of PACE assets.
Past performance does not predict future performance. The return and
principal value of an investment will fluctuate, so that an investor's shares,
when redeemed, may be worth more or less than their original cost. Performance
results assume reinvestment of all dividends and capital gains. Total returns
for periods of one year or less are cumulative.
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE PORTFOLIO AND THE
LEHMAN BROTHERS MORTGAGE BACKED SECURITIES INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PORTFOLIO WITHOUT FEE PORTFOLIO WITH FEE* LEHMAN BROTHERS MORTGAGE BACKED SECURITIES INDEX
<S> <C> <C> <C>
Aug-95 $10,008 $10,005 $10,000
Sep-95 $10,050 $10,034 $10,088
Oct-95 $10,219 $10,190 $10,178
Nov-95 $10,343 $10,301 $10,294
Dec-95 $10,493 $10,437 $10,422
Jan-96 $10,552 $10,483 $10,501
Feb-96 $10,402 $10,321 $10,413
Mar-96 $10,354 $10,260 $10,376
Apr-96 $10,297 $10,191 $10,347
May-96 $10,301 $10,182 $10,317
Jun-96 $10,427 $10,294 $10,459
Jul-96 $10,435 $10,289 $10,498
Aug-96 $10,460 $10,301 $10,498
Sep-96 $10,627 $10,452 $10,673
Oct-96 $10,837 $10,645 $10,883
Nov-96 $11,012 $10,804 $11,038
Dec-96 $10,940 $10,720 $10,981
Jan-97 $10,993 $10,758 $11,062
Feb-97 $11,019 $10,770 $11,099
Mar-97 $10,927 $10,667 $10,994
Apr-97 $11,090 $10,813 $11,169
May-97 $11,185 $10,891 $11,278
Jun-97 $11,310 $11,000 $11,410
Jul-97 $11,522 $11,192 $11,625
Aug-97 $11,495 $11,151 $11,597
Sep-97 $11,624 $11,262 $11,744
Oct-97 $11,771 $11,391 $11,875
Nov-97 $11,827 $11,430 $11,914
Dec-97 $11,929 $11,514 $12,022
Jan-98 $12,034 $11,601 $12,141
Feb-98 $12,049 $11,601 $12,167
Mar-98 $12,089 $11,626 $12,218
Apr-98 $12,156 $11,676 $12,288
May-98 $12,252 $11,752 $12,369
Jun-98 $12,326 $11,809 $12,428
Jul-98 $12,374 $11,840 $12,491
Aug-98 $12,515 $11,960 $12,605
Sep-98 $12,624 $12,049 $12,757
Oct-98 $12,586 $11,998 $12,740
Nov-98 $12,623 $12,018 $12,804
Dec-98 $12,694 $12,071 $12,858
Jan-99 $12,796 $12,152 $12,950
Feb-99 $12,718 $12,063 $12,898
Mar-99 $12,804 $12,129 $12,985
Apr-99 $12,848 $12,156 $13,045
May-99 $12,782 $12,078 $12,972
Jun-99 $12,707 $11,992 $12,926
Jul-99 $12,625 $11,900 $12,839
Aug-99 $12,609 $11,871 $12,839
Sep-99 $12,804 $12,039 $13,047
Oct-99 $12,849 $12,066 $13,122
Nov-99 $12,863 $12,064 $13,129
Dec-99 $12,823 $12,011 $13,097
Jan-00 $12,769 $11,946 $12,983
Feb-00 $12,953 $12,103 $13,134
Mar-00 $13,119 $12,243 $13,277
Apr-00 $13,128 $12,236 $13,286
May-00 $13,093 $12,188 $13,293
Jun-00 $13,348 $12,410 $13,577
Jul-00 $13,427 $12,468 $13,664
</TABLE>
The graph depicts the performance of PACE Government Securities Fixed
Income Investments versus the Lehman Brothers Mortgage Backed Securities Index.
It is important to note that PACE Government Securities Fixed Income Investments
is a professionally managed portfolio while the Index is not available for
investment and is unmanaged. The comparison is shown for illustrative purposes
only.
C-1
<PAGE>
ADVISER'S COMMENTS
Below-index duration, a measure of the Portfolio's sensitivity to interest
rate changes, was a positive for performance as intermediate- and short-term
rates rose during the period. An overweight in GNMA securities had a positive
impact on performance as GNMAs outperformed conventional mortgages because of
their "full faith and credit backing" from the Federal government. An
underweight in deep discount mortgages was a modest negative as these bonds
offered the best performing coupon for the period. Limited exposure to
yield-enhancing collateralized mortgage obligations (CMOs) added to returns, as
did the use of relatively high-yielding adjustable rate mortgages (ARMs).
PIMCO's secular outlook is bullish based on expectations of a slowing U.S.
economy, leading to anticipated maximum U.S. and global growth of three percent
over the next several years. While the tightening cycle by the Federal Reserve
Board (the "Fed") appears to be almost over, monetary policy will probably
remain restrictive until a slowdown is confirmed.
Prospects for mortgages remain favorable because of limited new supply and
reduced prepayment risk due to recent increases in mortgage rates. We intend to
target portfolio duration near the benchmark in anticipation of higher inflation
in the near term. To take advantage across the yield curve, however, the
Portfolio continues to hold a broader selection of maturities than the
benchmark. We also expect to reduce the overweight of GNMAs to a more neutral
position relative to conventional mortgages as relative value between these
sectors has become more balanced. We anticipate maintaining limited exposure to
well-structured CMOs to capture attractive yields. We also expect to continue
emphasizing ARMs as their relatively high yields should increase investor demand
and boost prices.
PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS -- PORTFOLIO STATISTICS
<TABLE>
<CAPTION>
CHARACTERISTICS* PORTFOLIO INDEX
---------------- --------- -----
<S> <C> <C>
Duration................................ 3.64 yrs 4.11 yrs
Maturity................................ 4.90 yrs 7.36 yrs
Average Coupon.......................... 6.65% 6.86%
Average Yield to Maturity............... 7.96% 7.58%
Average Quality......................... AAA AAA
Net Assets ($MM)........................ $ 198.9 $1,946.6
Number of Securities.................... 186 519
Bonds................................... 165% 100%
Liabilities in Excess of Other Assets... (65)% 0%
<CAPTION>
ASSET ALLOCATION* PORTFOLIO INDEX
----------------- --------- -----
Agency Mortgage Pass-Throughs. % 118.1 % 100.0
<S> <C> <C>
Collateralized Mortgages................ 31.7 --
U.S. Government......................... 2.5 --
Cash & Equivalents...................... 8.5 --
Corporate Obligations................... 1.5 --
Asset Backed............................ 2.8 --
Liabilities in Excess of Other Assets... (65.1) --
------- --------
Total................................... 100.0% 100.0%
</TABLE>
-------------------
* Weightings represent percentages of net assets as of July 31, 2000. The
Portfolio is actively managed and all holdings are subject to change.
C-2
<PAGE>
EVERY SHAREHOLDER'S VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR
PROXY TODAY
Please detach at perforation before mailing.
PROXY PAINEWEBBER U.S. GOVERNMENT INCOME FUND PROXY
(A SERIES OF PAINEWEBBER MANAGED INVESTMENTS TRUST)
SPECIAL MEETING OF SHAREHOLDERS - JANUARY 25, 2001
THIS PROXY IS BEING SOLICITED FOR THE BOARD OF TRUSTEES OF PAINEWEBBER MANAGED
INVESTMENTS TRUST ("TRUST") ON BEHALF OF PAINEWEBBER U.S. GOVERNMENT INCOME
FUND, A SERIES OF THE TRUST. The undersigned hereby appoints as proxies
[_____________] and [_______], and each of them (with the power of substitution)
to vote for the undersigned all shares of beneficial interest of the undersigned
in PaineWebber U.S. Government Income Fund, a series of the Trust, at the above
referenced 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 on the reverse side of this proxy card. UNLESS
INDICATED TO THE CONTRARY, THIS PROXY SHALL BE DEEMED TO GRANT AUTHORITY TO VOTE
"FOR" THE PROPOSAL RELATING TO PAINEWEBBER U.S. GOVERNMENT INCOME FUND.
VOTE VIA THE INTERNET: http://
VOTE VIA TELEPHONE:
CONTROL NUMBER: [999 9999 9999 999]
If shares are held by an individual, sign your
name exactly as it appears on this card. If
shares are held jointly, either party may
sign, but the name of the party signing should
conform exactly to the name shown on this
proxy card. If shares are held by a
corporation, partnership or similar account,
the name and the capacity of the individual
signing the proxy card should be indicated -
for example: "ABC Corp., John Doe, Treasurer."
----------------------------------------------
Signature
----------------------------------------------
Signature (if held jointly)
, 200
-------------------------------------- ---
Date
10740/PWU
PLEASE MARK YOUR VOTE ON THE REVERSE SIDE OF THIS CARD.
<PAGE>
EVERY SHAREHOLDER'S VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR
PROXY TODAY
Please detach at perforation before mailing.
THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR" THE PROPOSAL. PLEASE INDICATE YOUR
VOTE BY FILLING IN THE BOX COMPLETELY. EXAMPLE: / /
1. Approval of the Agreement and Plan of FOR AGAINST ABSTAIN
Reorganization and Termination that provides / / / / / /
for the reorganization of PaineWebber U.S.
Government Income Fund, a series of
PaineWebber Managed Investments Trust, into
PACE Government Securities Fixed Income
Investments, a series of PaineWebber PACE
Select Advisors Trust.
PLEASE DATE AND SIGN THE REVERSE SIDE OF THIS CARD.
10740/PWU
<PAGE>
PAINEWEBBER PACE SELECT ADVISORS TRUST
(ON BEHALF OF PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS)
PAINEWEBBER MANAGED INVESTMENTS TRUST
(ON BEHALF OF PAINEWEBBER U.S. GOVERNMENT INCOME FUND)
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information relates specifically to the
proposed Reorganization whereby PACE Government Securities Fixed Income
Investments ("PACE Government Securities Fixed Income Fund"), a series of
PaineWebber PACE Select Advisors Trust ("PACE Trust"), would acquire all of the
assets of PaineWebber U.S. Government Income Fund ("U.S. Government Income
Fund"), a series of PaineWebber Managed Investments Trust, in exchange solely
for shares of PACE Government Securities Fixed Income Fund and the assumption by
PACE Government Securities Fixed Income Fund of all of U.S. Government Income
Fund's stated liabilities. This Statement of Additional Information consists of
this cover page, the PRO FORMA financial statements of PACE Government
Securities Fixed Income Fund (giving effect to the Reorganization) for the year
ended July 31, 2000, and the following described documents, each of which is
incorporated by reference herein and accompanies this Statement of Additional
Information:
(1) The combined Statement of Additional Information of PACE Trust,
which includes information relating to PACE Government Securities Fixed Income
Fund, dated November __, 2000;
(2) The combined Annual Report to Shareholders of PACE Trust, which
includes information relating to PACE Government Securities Fixed Income Fund
for the fiscal year ended July 31, 2000 (Incorporated by reference from N-30D,
SEC File Number 811-08764, filed October 6, 2000, accession number
0000912057-00-043979);
(3) The Semi-Annual Report to Shareholders of U.S. Government Income
Fund, dated May 31, 2000 (Incorporated by reference from N-30D, SEC File Number
811-04040, filed August 7, 2000, accession number 0000912057-00-034897);
(4) The Annual Report to Shareholders of U.S. Government Income Fund for
the fiscal year ended November 30, 1999 (Incorporated by reference from N-30D,
SEC File Number 811-04040, filed February 10, 2000, accession number
0000912057-00-005117).
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Prospectus/Proxy Statement dated November __,
2000 relating to the
<PAGE>
proposed Reorganization. A copy of the Prospectus/Proxy Statement may be
obtained without charge by calling toll-free 1-800-647-1568. This Statement of
Additional Information is dated November __, 2000.
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
The first three tables set forth the unaudited pro forma condensed
Statement of Assets and Liabilities as of July 31, 2000, the unaudited pro
forma condensed Statement of Operations for the twelve month period ended
July 31, 2000 and the unaudited pro forma Portfolio of Investments as of July
31, 2000 for U.S. Government Income Fund and PACE Government Securities Fixed
Income Fund as adjusted giving effect to the Reorganization.
The next three tables set forth the unaudited pro forma condensed
Statement of Assets and Liabilities as of July 31, 2000, the unaudited pro
forma condensed Statement of Operations for the twelve month period ended
July 31, 2000 and the unaudited pro forma Portfolio of Investments as of July
31, 2000 for PaineWebber U.S. Government Income Fund, Low Duration U.S.
Government Income Fund and PACE Government Securities Fixed Income Fund as
adjusted to show the combined effect of the Reorganization and the proposed
reorganization of PaineWebber Low Duration U.S. Government Income Fund into
PACE Government Securities Fixed Income Fund, which is expected to occur at
approximately the same time as the Reorganization.
The pro forma Portfolio of Investments contains information about the
securities holdings of the Funds as of July 31, 2000, which has, and will
continue to, change over time due to the realignment of U.S. Government
Income Fund's portfolio to reflect the investment style and strategies of its
new sub-adviser and also due to normal portfolio turnover in response to
changes in market conditions. It is expected, however, that some of U.S.
Government Income Fund's holdings may not remain at the time of the
Reorganization due to normal portfolio turnover. It is not expected that any
of U.S. Government Income Fund's holdings will be incompatible with PACE
Government Securities Fixed Income Fund's holdings. However, if the
shareholders of U.S. Government Income Fund approve the Reorganization, some
of the Fund's holdings may need to be liquidated immediately prior to or
following the Reorganization to adjust the duration of the combined Fund. Any
portfolio holdings of U.S. Government Income Fund that must be sold for this
reason would be liquidated in an orderly manner and the proceeds held in
temporary investments or reinvested in assets with durations that are
consistent with the duration of the combined Fund. As of _____________, 2000,
only a very small percentage of U.S. Government Income Fund's portfolio
holdings would have had to be sold to adjust the portfolio duration of the
combined Fund. The portion of U.S. Government Income Fund's assets that will
be liquidated in connection with the Reorganization will depend on the
sub-adviser's continuing assessment of the appropriate portfolio duration for
PACE Government Securities Fixed Income Fund at the approximate time of the
Reorganization. The need for U.S. Government Income Fund to dispose of
investments in connection with the Reorganization may result in the Fund's
selling securities at a disadvantageous time and could result in the Fund's
realizing gain (or losses) that would not otherwise have been realized.
<PAGE>
PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS
PAINEWEBBER UNITED STATES GOVERNMENT INCOME FUND
PROFORMA STATEMENT OF ASSETS AND LIABILITIES
FOR THE YEAR ENDED JULY 31, 2000
<TABLE>
<CAPTION>
PACE GOVERNMENT
SECURITIES FIXED PW U.S. GOVERNMENT
INCOME INVESTMENTS INCOME FUND COMBINED
------------------ ------------------ ----------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at value (cost - $330,884,058, $327,386,261,
and $658,270,319, respectively) $ 328,327,261 $ 315,138,396 $ 643,465,657
Investment of cash collateral for securities loaned (cost - $0,
$24,520,750 and $24,520,750, respectively) - 24,520,750 24,520,750
Cash - 502 502
Receivable for investments sold 3,260 - 3,260
Receivable for shares of beneficial interests sold 110,435 161 110,596
Dividends and interest receivable 1,633,542 3,387,309 5,020,851
Deferred organizational expenses 1,025 - 1,025
Other assets 32,713 31,332 64,045
------------------ ------------------ ----------------
Total assets 330,108,236 343,078,450 673,186,686
------------------ ------------------ ----------------
LIABILITIES
Payable for cash collateral for securities loaned - 24,520,750 24,520,750
Payable for investments purchased 130,699,989 79,182,313 209,882,302
Payable for shares of beneficial interest repurchased 103,565 535,616 639,181
Outstanding options written, at value 77,700 - 77,700
Variation margin payable - 90,013 90,013
Payable to affiliates 114,807 122,437 237,244
Payable to custodian 82,526 - 82,526
Accrued expenses and other liabilities 111,628 542,602 654,230
------------------ ------------------ ----------------
Total liabilities 131,190,215 104,993,731 236,183,946
------------------ ------------------ ----------------
NET ASSETS
Common Stock/Beneficial interest shares of $0.001 par value
outstanding - 16,458,856, 28,113,731 and 36,158,439,
respectively 203,803,263 344,066,767 547,870,030
Accumulated undistributed (distributions in excess of) net
investment income (loss) 1,181,552 (169,608) 1,011,944
Accumulated net realized losses from investment transactions (3,516,672) (92,151,808) (95,668,480)
Net unrealized depreciation of investments (2,550,122) (13,660,632) (16,210,754)
------------------ ------------------ ----------------
Net assets applicable to shares outstanding $ 198,918,021 $ 238,084,719 437,002,740
================== ================== ================
CLASS P:
Net assets $ 198,918,021 $ - $ 198,918,021
------------------ ------------------ ----------------
Shares outstanding 16,458,856 - 16,458,856
------------------ ------------------ ----------------
Net asset value and offering price per share $ 12.09 $ - $ 12.09
================== ================== ================
CLASS A:
Net assets $ - $ 205,845,006 $ 205,845,006
------------------ ------------------ ----------------
Shares outstanding - 24,304,537 17,032,008
------------------ ------------------ ----------------
Net asset and redemption value per share $ - $ 8.47 $ 12.09
================== ================== ================
Maximum offering price per share (net asset value plus sales
charge of 4% of offering price) $ - $ 8.82 $ 12.59
================== ================== ================
CLASS B:
Net assets $ - $ 7,515,198 $ 7,515,198
------------------ ------------------ ----------------
Shares outstanding - 887,146 621,822
------------------ ------------------ ----------------
Net asset value and offering price per share $ - $ 8.47 $ 12.09
================== ================== ================
CLASS C:
Net assets $ - $ 15,913,817 $ 15,913,817
------------------ ------------------ ----------------
Shares outstanding - 1,880,778 1,316,740
------------------ ------------------ ----------------
Net asset value and offering price per share $ - $ 8.46 $ 12.09
================== ================== ================
CLASS Y:
Net assets $ - $ 8,810,698 $ 8,810,698
------------------ ------------------ ----------------
Shares outstanding - 1,041,269 729,014
------------------ ------------------ ----------------
Net asset value and offering price per share $ - $ 8.46 $ 12.09
================== ================== ================
</TABLE>
See accompanying notes to proforma financial statements
<PAGE>
PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS
PAINEWEBBER UNITED STATES GOVERNMENT INCOME FUND
PROFORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 2000
<TABLE>
<CAPTION>
PACE GOVERNMENT PW U.S.
SECURITIES FIXED GOVERNMENT
INCOME INVESTMENTS INCOME FUND ADJUSTMENTS COMBINED
------------------ -------------- -------------- -----------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest (net of foreign withholding taxes,
if any) $ 13,773,465 $ 18,447,280 $ - $ 32,220,745
------------------ -------------- -------------- -----------------
13,773,465 18,447,280 - 32,220,745
------------------ -------------- -------------- -----------------
EXPENSES:
Investment advisory and administration 1,380,076 1,315,199 526,080 (a) 3,221,355
Shareholder distribution and servicing fees - 807,378 - 807,378
Transfer agency fees and expenses 87,822 290,678 - 378,500
Reports and notices to shareholders 37,193 27,300 (21,840) (b) 42,653
Legal and audit 67,927 53,190 (53,190) (b) 67,927
Trustees' fees 26,250 13,500 (13,500) (b) 26,250
Federal and state registration fees 8,935 35,540 (28,432) (b) 16,043
Amortization of organizational expenses 18,980 - - 18,980
Custody and accounting 120,092 131,520 - 251,612
Interest expense 39,447 - - 39,447
Other expenses 12,333 55,198 - 67,531
------------------ -------------- -------------- -----------------
1,799,055 2,729,503 409,118 4,937,676
Less: fee waivers and reimbursements from
investment adviser (83,618) (19,401) (598,252) (c) (701,271)
------------------ -------------- -------------- -----------------
Net expenses 1,715,437 2,710,102 (189,134) 4,236,405
------------------ -------------- -------------- -----------------
Net investment income 12,058,028 15,737,178 189,134 27,984,340
------------------ -------------- -------------- -----------------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM
INVESTMENT ACTIVITIES:
Net realized gains (losses) from investment
transactions 15,206 (1,445,402) - (1,430,196)
Net change in unrealized appreciation
(depreciation) of investments 114,103 (14,764,732) - (14,650,629)
------------------ -------------- -------------- -----------------
Net realized and unrealized gains (losses)
from investment activities 129,309 (16,210,134) - (16,080,825)
------------------ -------------- -------------- -----------------
Net increase (decrease) in net assets
resulting from operations $ 12,187,337 $ (472,956) $ 189,134 $ 11,903,515
================== ============== ============== =================
</TABLE>
--------------------------
(a) Reflects increase in fees resulting from the higher fee schedule, before
waivers, of PACE Government Securities Fixed Income Investments.
(b) Reflects the anticipated savings of the merger.
(c) Reflects decrease in fees resulting from the lower fee schedule, net of
waivers, of PACE Government Securities Fixed Income Investments.
See accompanying notes to proforma financial statements
<PAGE>
PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS
PAINEWEBBER UNITED STATES GOVERNMENT INCOME FUND
PROFORMA PORTFOLIO OF INVESTMENTS
FOR THE YEAR ENDED JULY 31, 2000
<TABLE>
<CAPTION>
COMBINED
PRINCIPAL MATURITY
AMOUNT (000) DATES
------------ --------------------
<S> <C>
U.S. Government and Agency Obligations - 25.97%
19,000 Federal Home Loan Bank 08/09/00
18,915 FHLMC MTN 03/18/08
12,000 FNMA 04/29/09
30,230 United States Treasury Bonds(2) 08/15/13 to 08/15/21
15,400 United States Treasury Bonds(2) 11/15/14
4,839 U.S. Treasury Inflation Index Notes 07/15/02
Total U.S. Government and Agency Obligations (cost - $120,765,228)
Government National Mortgage Association Certificates - 25.66%
4,466 GNMA 07/20/25 to 09/20/26
3,694 GNMA 09/15/01
7,590 GNMA 05/15/02 to 11/20/27
2,606 GNMA 06/16/26
4,120 GNMA 11/20/21 to 12/20/27
4,795 GNMA 01/20/18 to 02/20/27
1,494 GNMA 05/15/39
1,298 GNMA 07/15/02 to 09/30/29
533 GNMA 12/15/07 to 08/15/09
4,282 GNMA 04/15/19
2,885 GNMA 06/20/16
3,601 GNMA 08/15/09
752 GNMA 06/15/11 to 02/15/16
3,995 GNMA ARM 05/20/30
22,000 GNMA I 08/23/30
10,000 GNMA I 08/23/30
6,000 GNMA II 08/25/30
998 GNMA II 04/20/30
332 GNMA II ARM 04/20/18 to 01/20/28
24,483 GNMA II ARM 10/20/29 to 08/24/30
1,500 GNMA II ARM 07/20/30
72 GNMA Project Loan 10/15/40
934 GNMA Project Loan 09/30/29
6 GNMA TBA TBA
Total Government National Mortgage Association Certificates (cost--$113,027,129)
Federal Home Loan Mortgage Corporation Certificates - 15.19%
9,919 FHLMC 06/01/29 to 04/01/30
220 FHLMC 08/01/01
6,442 FHLMC 08/01/25 to 03/01/30
1,895 FHLMC 09/01/04
984 FHLMC 05/01/21
789 FHLMC 10/01/17 to 11/01/24
876 FHLMC 03/01/13
283 FHLMC 04/01/04
5,801 FHLMC 04/01/25
537 FHLMC 06/01/04 to 12/01/05
2,748 FHLMC 01/01/16
1,858 FHLMC ARM 01/01/30
1,903 FHLMC ARM 01/01/28
1,873 FHLMC ARM 12/01/29
993 FHLMC ARM 10/01/29
1,773 FHLMC ARM 07/01/24
3,733 FHLMC ARM 04/01/29
2,124 FHLMC CMT ARM 10/01/23
23,000 FHLMC Gold TBA TBA
Total Federal Home Loan Mortgage Corporation Certificates (cost--$66,610,643)
Federal Housing Administration Certificates - 4.10%
18,662 FHA Project Notes 10/15/04 to 02/01/29
Total Federal Housing Administration Certificates (cost--$18,802,998)
Federal National Mortgage Association Certificates - 43.06%
31,800 FNMA 01/15/09
11,266 FNMA 08/01/25 to 03/01/30
9,183 FNMA 04/01/25
1,502 FNMA 03/01/04
5,347 FNMA 01/01/07 to 04/01/07
2,012 FNMA 06/01/04 to 12/01/05
40,200 FNMA 10/01/26 to 08/16/30
1,573 FNMA 07/01/25 to 10/01/29
4,596 FNMA 01/01/16
2,264 FNMA 11/01/02 to 09/01/27
1,337 FNMA 10/01/23
1,087 FNMA 10/01/19 to 02/01/26
1,836 FNMA ARM 02/01/30
1,389 FNMA ARM 02/01/29
1,862 FNMA ARM 12/01/27
3,188 FNMA ARM 03/01/07
4,961 FNMA ARM 07/01/09
1,642 FNMA ARM 03/01/25
38,500 FNMA TBA TBA
30,000 FNMA TBA TBA
Total Federal National Mortgage Association Certificates (cost--$191,164,238)
<CAPTION>
PACE GOVERNMENT PAINE WEBBER
INTEREST SECURITIES FIXED U.S. GOVERNMENT
RATES INCOME INVESTMENTS INCOME FUND COMBINED
--------------- ---------------------- ------------------- ----------------
<S> <C> <C> <C>
6.390% $ - $ 18,973,020 $ 18,973,020
6.220 - 17,665,721 17,665,721
6.500 - 11,215,584 11,215,584
8.125 to 12.000 - 39,574,427 39,574,427
11.750 - 21,218,320 21,218,320
3.625 4,821,287 - 4,821,287
---------------------- ------------------- ----------------
4,821,287 108,647,072 113,468,359
---------------------- ------------------- ----------------
6.750 4,490,751 - 4,490,751
6.800 3,686,108 - 3,686,108
7.000 7,557,891 - 7,557,891
7.040 2,585,051 - 2,585,051
7.125 4,134,598 - 4,134,598
7.375 4,817,913 - 4,817,913
7.470 1,474,303 - 1,474,303
7.500 1,299,879 - 1,299,879
8.000 542,741 - 542,741
8.250 - 4,347,290 4,347,290
8.500 2,921,257 - 2,921,257
9.000 - 3,713,725 3,713,725
11.000 - 815,655 815,655
6.000 3,918,267 - 3,918,267
6.500 21,793,750 - 21,793,750
7.000 9,706,200 - 9,706,200
8.500 6,093,750 - 6,093,750
9.000 1,021,226 - 1,021,226
6.375 333,584 - 333,584
7.000 24,428,510 - 24,428,510
7.500 1,503,225 - 1,503,225
7.000 62,660 - 62,660
7.500 895,874 - 895,874
11.000 - 7,044 7,044
---------------------- ------------------- ----------------
103,267,538 8,883,714 112,151,252
---------------------- ------------------- ----------------
6.500 - 9,383,143 9,383,143
6.500 218,001 - 218,001
7.000 - 6,230,729 6,230,729
7.000 1,878,253 - 1,878,253
7.450 978,511 - 978,511
7.500 783,984 - 783,984
8.000 881,132 - 881,132
8.500 283,982 - 283,982
9.000 - 6,025,760 6,025,760
10.500 - 567,359 567,359
11.000 - 2,943,044 2,943,044
5.930 1,867,450 - 1,867,450
6.350 1,883,990 - 1,883,990
6.468 1,891,699 - 1,891,699
6.907 991,777 - 991,777
7.742 1,808,409 - 1,808,409
7.907 3,834,577 - 3,834,577
7.244 - 2,178,578 2,178,578
6.500 - 21,742,176 21,742,176
---------------------- ------------------- ----------------
17,301,765 49,070,789 66,372,554
---------------------- ------------------- ----------------
6.850 to 8.500 17,920,086 - 17,920,086
---------------------- ------------------- ----------------
17,920,086 - 17,920,086
---------------------- ------------------- ----------------
5.250 - 28,008,359 28,008,359
6.000 - 10,358,783 10,358,783
6.500 - 8,877,052 8,877,052
7.000 1,489,630 - 1,489,630
7.250 5,371,925 - 5,371,925
7.500 - 1,983,465 1,983,465
7.500 39,626,000 - 39,626,000
8.000 1,586,188 - 1,586,188
8.500 - 4,689,317 4,689,317
8.500 2,306,023 - 2,306,023
9.000 - 1,371,230 1,371,230
9.000 1,121,721 - 1,121,721
6.276 1,859,262 - 1,859,262
6.424 1,405,656 - 1,405,656
6.629 1,852,853 - 1,852,853
6.820 3,201,042 - 3,201,042
7.249 4,947,190 - 4,947,190
7.810 1,680,984 - 1,680,984
6.500 - 36,358,437 36,358,437
8.000 30,084,360 - 30,084,360
---------------------- ------------------- ----------------
96,532,834 91,646,643 188,179,477
---------------------- ------------------- ----------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMBINED
PRINCIPAL MATURITY
AMOUNT (000) DATES
------------ --------------------
<S> <C>
Collateralized Mortgage Obligations - 19.40%
1,028 FDIC REMIC Trust, 1996-C1, Class 1A 05/25/26
136 FHLMC GNMA REMIC, Series 23, Class KZ 11/25/23
413 FHLMC REMIC, Series 0159, Class H 09/15/21
550 FHLMC REMIC, Series 0185, Class E 08/15/06
3,102 FHLMC REMIC, Series 1003, Class H 10/15/20
3,666 FHLMC REMIC, Series 1188, Class H 12/15/20
1,971 FHLMC REMIC, Series 1322, Class G 02/15/07
299 FHLMC REMIC, Series 1347, Class HC 12/15/21
2,280 FHLMC REMIC, Series 1361, Class D 11/15/05
1,106 FHLMC REMIC, Series 1502, Class PX 04/15/23
605 FHLMC REMIC, Series 1534, Class Z 06/15/23
1,630 FHLMC REMIC, Series 1542, Class Z 7/15/23
79 FHLMC REMIC, Series 1552, Class EA 01/15/17
179 FHLMC REMIC, Series 1573, Class PZ 09/15/23
255 FHLMC REMIC, Series 1640, Class F 10/15/07
150 FHLMC REMIC, Series 1658, Class GZ 01/15/24
114 FHLMC REMIC, Series 1661, Class PE 11/15/06
1,000 FHLMC REMIC, Series 1694, Class Z 03/15/24
110 FHLMC REMIC, Series 1775, Class Z 03/15/25
3,085 FHLMC REMIC, Series 1869, Class J 12/15/24
1,313 FHLMC REMIC, Series 1933, Class ZA 02/15/27
3,071 FNMA REMIC, Series 1987-2, Class Z 11/25/17
2,577 FNMA REMIC, Series 1998-7, Class Z 04/25/18
89 FNMA REMIC, Trust 1992 - 074, Class Z 05/25/22
165 FNMA REMIC, Trust 1992 - 129, Class L 07/25/22
1,251 FNMA REMIC, Trust 1993 - 037, Class PX 03/25/23
464 FNMA REMIC, Trust 1993 - 040, Class ZA 12/25/23
47 FNMA REMIC, Trust 1993 - 162, Class C 08/25/23
45 FNMA REMIC, Trust 1993 - 240, Class Z 12/25/13
1,187 FNMA REMIC, Trust 1993 - 250, Class DZ 12/25/23
71 FNMA REMIC, Trust 1993 - 250, Class Z 12/25/23
77 FNMA REMIC, Trust 1994- 027, Class CZ 02/25/24
876 FNMA REMIC, Trust 1999- 003, Class CZ 2/25/14
107 FNMA REMIC, Trust 1999- 043, Class AZ 08/25/29
1,105 FNMA REMIC, Trust G92 - 040, Class ZC 07/25/22
148 FNMA REMIC, Trust G94 - 006, Class PJ 05/17/24
919 GNMA REMIC, Trust Series 2000 - 009, Class FH 02/16/30
100 Bank of America Mortgage Securities Series 1999 - 5, Class A-22 05/25/29
450 Bank of America Mortgage Securities Series 1999 - 8, Class A-12 08/25/29
207 Bear Stearns Mortgage Securities Inc. Series 1993 - 8, Class A-5 08/25/24
2,379 Bear Stearns Mortgage Securities Inc. Series 1996 - 4, Class AI-1 09/25/27
1,750 Chase Mortgage Finance Corp. Series 1998, Class IA-8 08/25/28
1,145 CS First Boston Mortgage Securities Corp., Series 1997-2, Class A t 06/01/20
5,000 CS First Boston Mortgage Securities Corp., Series 1998-C2, Class A2 11/15/08
1,000 Countrywide Home Loan Inc. 06/15/04
1,500 CWMBS Inc. Series 1998 - 13, Class A3 12/25/28
1,500 CWMBS Inc. Series 1998 - 15, Class A8 10/25/28
3,586 DLJ Commercial Mortgage Corporation Series 1998-CF2, Class A1A 11/12/31
3,382 Farmer Mac. Series 2002 - Class AA1 04/25/01
530 Green Tree Financial Corp Series 1998, Class 2 11/01/16
686 Headlands Mortgage Security Inc. REMIC Series 1997 - 1, Class A, II 03/15/12
489 Headlands Mortgage Security Inc. REMIC Series 1997 - 2, Class A, II 05/25/12
383 Headlands Mortgage Security Inc. REMIC Series 1997 - 4, Class A, II 11/25/12
1,500 Headlands Mortgage Security Inc. REMIC Series 1998 - 1, Class A, III 11/25/28
6,346 LB Commercial Conduit Mortgage Trust, Series 1998-C4, Class A1A 08/15/06
703 Merrill Lynch Mortgage Investors, Inc. Series 1999, Class H1 03/20/17
3,086 Morgan Stanley Capital I, Series 1997-ALIC, Class A1B 11/15/02
4,289 Morgan Stanley Capital I, Series 1997-WF1, Class A1 144A 10/15/06
1,610 Morgan Stanley Capital Inc. Series 1998 - HF1, Class A1 01/15/07
4,935 Mortgage Capital Funding, Inc., Series 1998-MCI, Class A2 01/18/08
1,639 PNC Mortgage Securities Corp. Series 1998 - 5, Class 2A5 11/25/28
2,500 PNC Mortgage Securities Corp. Series 1999 - 5, Class 2A5 07/25/29
436 Prudential Home Mortgage REMIC 1993 - 29, Class A8 08/25/08
10 Residential Funding Mortgage Securities Inc. Series 1993 - S15, Class A9 04/25/08
1,500 Residential Funding Mortgage Securities Inc. Series 1998 - S12, Class A6 05/25/28
1,428 Residential Funding Mortgage Securities Inc. Series 1998 - S20, Class A19 09/25/28
990 Small Business Administration Series 1995 - 10, Class I 03/01/05
Total Collateralized Mortgage Obligations (cost--$88,556,838)
Asset Backed Securities - 1.26%
863 Beneficial Home Equity Loan Trust 04/28/26
2,000 Conseco Finance Home Loan Trust 06/15/24
688 Student Loan Marketing Association Series 1996 - 2, Class A1 10/25/04
2,000 Student Loan Trust 10/27/25
Total Asset Backed Securities (cost - $5,486,505)
Stripped Mortgage-Backed Securities - 2.85%
815 FHLMC REMIC Series 0013, Class B(1)+++ 06/25/23
772 FHLMC REMIC Series 1554, Class I(1)+++ 08/15/08
5,000 FHLMC REMIC Series 1627, Class PN(1)+++ 09/15/22
1,613 FHLMC REMIC Series 1993 - 138, Class CL(1)+++ 11/25/22
4,854 FHLMC REMIC Series 2059, Class PI(1)+++ 07/15/26
9,033 FHLMC REMIC Series 2080, Class VK(1)+++ 09/15/05
1,000 FHLMC REMIC Series 2110, Class PT(1)+++ 07/15/23
941 FHLMC REMIC Series 2136, Class GD(1)+++ 03/15/29
3,818 FHLMC REMIC, Series 2178, Class PI(1)+++ 08/15/29
6 FNMA REMIC Trust 1992 - 142, Class KB(1)+++ 08/25/07
7 FNMA REMIC Trust 1992 - 157, Class JA(1)+++ 09/25/07
616 FNMA REMIC Trust 1992 - 207, Class U(1)+++ 10/25/07
2,926 FNMA REMIC Trust 1993 - 116, Class H(1)+++ 07/25/22
186 FNMA REMIC Trust 1993 - 161, Class GC(1)+++ 02/25/23
<CAPTION>
PACE GOVERNMENT PAINE WEBBER
INTEREST SECURITIES FIXED U.S. GOVERNMENT
RATES INCOME INVESTMENTS INCOME FUND COMBINED
--------------- ---------------------- ------------------- ----------------
<S> <C> <C> <C>
6.750 - 1,022,827 1,022,827
6.500 114,123 - 114,123
4.500 379,392 - 379,392
9.000 559,620 - 559,620
7.438++ 2,117,058 - 2,117,058
7.500 3,670,156 - 3,670,156
7.500 1,979,886 - 1,979,886
4.250 276,467 - 276,467
6.000 2,268,188 - 2,268,188
7.000 969,396 - 969,396
5.000 426,837 - 426,837
7.000 1,446,932 - 1,446,932
5.850 79,186 - 79,186
7.000 162,186 - 162,186
7.088++ 254,690 - 254,690
7.000 135,893 - 135,893
6.000 113,810 - 113,810
6.500 868,568 - 868,568
8.500 112,996 - 112,996
8.000 3,109,343 - 3,109,343
8.000 1,314,272 - 1,314,272
11.000 - 3,284,870 3,284,870
9.250 - 2,674,831 2,674,831
8.000 89,019 - 89,019
6.000 144,528 - 144,528
7.000 1,122,227 - 1,122,227
6.500 401,819 - 401,819
3.000@ 46,319 - 46,319
6.250 40,516 - 40,516
7.000 992,139 - 992,139
7.000 65,975 - 65,975
6.500 66,515 - 66,515
6.000 716,987 - 716,987
7.000 92,220 - 92,220
7.000 1,077,759 - 1,077,759
8.000 150,586 - 150,586
7.126++ 922,361 - 922,361
6.500 90,863 - 90,863
6.750 416,812 - 416,812
6.350 206,163 - 206,163
8.125 2,401,504 - 2,401,504
6.750 1,536,743 - 1,536,743
7.500 - 1,134,562 1,134,562
6.300 - 4,624,118 4,624,118
6.850 975,880 - 975,880
6.500 1,337,805 - 1,337,805
6.750 1,300,505 - 1,300,505
5.880 - 3,381,526 3,381,526
7.721 3,380,077 - 3,380,077
6.240 519,956 - 519,956
7.750 689,249 - 689,249
7.750 490,697 - 490,697
7.250 380,330 - 380,330
6.500 1,368,570 - 1,368,570
5.870 - 6,042,498 6,042,498
6.210++ 698,216 - 698,216
6.440 - 3,044,907 3,044,907
6.830 - 4,236,486 4,236,486
6.190++ 1,557,497 - 1,557,497
6.663 - 4,703,302 4,703,302
6.750 1,526,259 - 1,526,259
6.750 2,322,625 - 2,322,625
6.750 423,257 - 423,257
7.721++ 92,763 - 92,763
6.750 1,359,461 - 1,359,461
6.750 267,777 - 267,777
7.750 994,061 - 994,061
---------------------- ------------------- ----------------
50,625,039 34,149,927 84,774,966
---------------------- ------------------- ----------------
6.945++ 862,514 - 862,514
9.520 2,003,480 - 2,003,480
6.581 686,863 - 686,863
6.740 1,939,960 - 1,939,960
---------------------- ------------------- ----------------
5,492,817 - 5,492,817
---------------------- ------------------- ----------------
7.000 466,384 - 466,384
6.500* 66,078 - 66,078
6.000 1,055,866 - 1,055,866
7.000 334,878 - 334,878
6.500 1,112,681 - 1,112,681
6.500 1,361,748 - 1,361,748
6.000 306,780 - 306,780
7.000 207,923 - 207,923
7.500 886,047 - 886,047
11.977 164,618 - 164,618
10.146 166,283 - 166,283
7.500 111,156 - 111,156
7.000 514,564 - 514,564
.010* 126,760 - 126,760
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMBINED
PRINCIPAL MATURITY
AMOUNT (000) DATES
------------ --------------------
<S> <C>
794 FNMA REMIC Trust 1994 - 007, Class PK(1)+++ 05/25/08
1,184 FNMA REMIC Trust 1994 - 030, Class IA(1)+++ 11/25/22
7,119 FNMA REMIC Trust 1998 - 013, Class PI(1)+++ 07/18/19
3,301 FNMA REMIC Trust 1998 - 024, Class OK(1) 11/18/21
1,388 FNMA REMIC Trust 1998 - 044, Class IG(1)+++ 07/18/16
6,705 GNMA REMIC Trust Series 1998 - 001, Class PG(1)+++ 07/20/24
4,424 Chase Mortgage Finance Corp. Series 1998 - S2, Class A4(1)+++ 07/25/28
16,000 Conseco Finance Securitizations(1)+++ 12/15/29
15,096 CWMBS Inc. Series 1998 - 14, Class A2(1)+++ 12/25/13
1,500 Firstplus Home Loan Owner Trust Series 1998 - 5, Class A1(1)+++ 10/10/00
1,410 Prudential Home Mortgage REMIC 1993 - 54, Class A19(1)** 01/25/24
Total Stripped Mortgage-Backed Securities (cost--$11,212,501)
Corporate Obligations - 0.69%
2,000 Lehman Brothers Holdings Inc. MTN 04/02/02
1,000 Morgan Stanley Dean Witter 01/28/02
Total Corporate Obligations (cost--$3,006,152)
Commercial Paper - 0.16%
700 Dominion Resources MTN 01/26/01
Short-Term U.S. Government Obligations - 0.02%
105 U.S. Treasury Notes 08/31/00
<CAPTION>
PACE GOVERNMENT PAINE WEBBER
INTEREST SECURITIES FIXED U.S. GOVERNMENT
RATES INCOME INVESTMENTS INCOME FUND COMBINED
--------------- ---------------------- ------------------- ----------------
<S> <C> <C> <C>
6.500* 40,883 - 40,883
6.500* 141,378 - 141,378
7.000 729,469 - 729,469
7.000 433,157 - 433,157
6.500 208,041 - 208,041
7.000 1,063,625 - 1,063,625
6.750 536,410 - 536,410
7.000 1,015,000 - 1,015,000
0.500* 207,564 - 207,564
6.000* 14,297 - 14,297
6.500 1,188,280 - 1,188,280
---------------------- ------------------- ----------------
12,459,870 - 12,459,870
---------------------- ------------------- ----------------
7.678 2,007,542 - 2,007,542
6.837@ 1,000,699 - 1,000,699
---------------------- ------------------- ----------------
3,008,241 - 3,008,241
---------------------- ------------------- ----------------
7.026 699,915 - 699,915
---------------------- ------------------- ----------------
5.125 104,869 - 104,869
---------------------- ------------------- ----------------
</TABLE>
<TABLE>
<CAPTION>
COMBINED PACE GOVERNMENT PAINE WEBBER
NUMBER SECURITIES FIXED U.S. GOVERNMENT
OF SHARES INCOME INVESTMENTS INCOME FUND COMBINED
----------- ---------------------- ------------------- ----------------
<S> <C> <C> <C>
Mutual Funds - 4.80%
14,703 MH Money Market Fund LLC - 14,702,955 14,702,955
84 Scudder Institutional Fund - 84,180 84,180
6,186 AIM Liquid Assets Portfolio - 6,186,116 6,186,116
---------------------- ------------------- ----------------
Total Mutual Funds (cost - $20,973,251) - 20,973,251 20,973,251
---------------------- ------------------- ----------------
</TABLE>
<TABLE>
<CAPTION>
COMBINED
PRINCIPAL MATURITY
AMOUNT (000) DATES
------------ --------------------
<S> <C>
Repurchase Agreements - 4.09%
$ 1,767 Repurchase Agreement dated 7/31/00 with SG Warburg collateralized by
$1,344,000 U.S. Treasury Bond, 8.750% due 08/15/20 (value--$1,802,640)
proceeds: $1,767,319 08/01/00
16,093 Repurchase Agreement dated 07/31/00 with State Street Bank & Trust Co.,
collateralized by $11,995,000 U.S. Treasury Bond, 8.750% due 08/15/20
(value--$16,418,156) proceeds: $16,095,347 08/01/00
Total Repurchase Agreements (cost - $17,860,000)
Total Investments (cost--$658,270,319) - 147.25%
Liabilities in excess of other assets - (47.25)%
Net Assets--100.00%
<CAPTION>
PACE GOVERNMENT PAINE WEBBER
INTEREST SECURITIES FIXED U.S. GOVERNMENT
RATES INCOME INVESTMENTS INCOME FUND COMBINED
--------------- ---------------------- ------------------- ----------------
<S> <C> <C> <C>
6.500% - 1,767,000 1,767,000
5.250 16,093,000 - 16,093,000
---------------------- ------------------- ----------------
16,093,000 1,767,000 17,860,000
---------------------- ------------------- ----------------
328,327,261 315,138,396 643,465,657
(129,409,240) (77,053,677) (206,462,917)
---------------------- ------------------- ----------------
$ 198,918,021 $ 238,084,719 $ 437,002,740
---------------------- ------------------- ----------------
</TABLE>
<TABLE>
<CAPTION>
COMBINED
NUMBER OF STRIKE
CONTRACTS PRICE
------------ --------------------
<S> <C>
Written Options(1)
300 Federal National Mortgage Association Calls $ 123.75
<CAPTION>
PACE GOVERNMENT PAINE WEBBER
EXPIRATION SECURITIES FIXED U.S. GOVERNMENT
DATES INCOME INVESTMENTS INCOME FUND COMBINED
--------------- ---------------------- ------------------- ----------------
<S> <C> <C> <C>
September 2000 $ 77,700 $ - $ 77,700
---------------------- ------------------- ----------------
</TABLE>
++ Floating rate securities. The interest rates shown are the current
rates as of July 31, 2000.
* Rate reflects annualized yield at date of purchase.
** Principal Only Security. This Security entitles the holder to receive
principal payments from an underlying pool of mortgages. High
prepayments return principal faster than expected and cause the
yield to increase. Low prepayments return principal more slowly than
expected and cause the yield to decrease.
+++ Interest Only Security. This security entitles the holder to receive
interest payments from an underlying pool of mortgages. The risk
associated with this security is related to the speed of the principal
paydowns. High prepayments would result in a smaller amount of
interest being received and cause the yield to decrease. Low
prepayments would result in a greater amount of interest being
received and cause the yield to increase.
+ Estimated yield to maturity at July 31, 2000.
@ Interest rate shown is discount rate at date of purchase.
(1) Illiquid securities representing 2.85% of net assets.
ARM Adjustable Rate Mortgage--The interest rates shown are the current
rates as of July 31, 2000.
CMT Constant Maturity Treasury.
MTN Medium Term Note.
REMIC Real Estate Mortgage Investment Conduit.
TBA (To Be Assigned) Securities are purchased on a forward commitment with
an approximate principal amount (generally +/- 1.0%) and no definite
maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are
assigned.
(2) Security, or portion thereof, was on loan at July 31, 2000.
See accompanying notes to proforma financial statements.
<PAGE>
PACE Government Securities Fixed Income Investments
PaineWebber U.S. Government Income Fund
Notes to Pro Forma Financial Statements
For the year ended July 31, 2000 (unaudited)
Basis of Presentation:
Subject to the approval of the Agreement and Plan of Reorganization and
Termination ("Plan") by the shareholders of PaineWebber U.S. Government
Income Fund ("U.S. Government Income"), PACE Government Securities Fixed
Income Investments ("Government Securities") would acquire the assets of U.S.
Government Income in exchange solely for the assumption by Government
Securities of U.S. Government Income's assets and liabilities and shares of
Government Securities that correspond to the outstanding shares of U.S.
Government Income. The number of shares to be received would be based on the
relative net asset value of Government Securities' shares on the effective
date of the Plan and U.S. Government Income will be terminated as soon as
practicable thereafter.
The pro forma financial statements reflect the financial position of
Government Securities and U.S. Government Income at July 31, 2000 and the
combined results of operations of Government Securities and U.S. Government
Income (each a "Fund" and, collectively, the "Funds") for the year ended July
31, 2000.
As a result of the Plan, the investment advisory and administration fee will
increase due to the higher fee schedule, net of waivers, of Government
Securities. However, after anticipated savings in other expenses of the Fund
(due to the elimination of duplicative expenses) coupled with the management
fee waiver/expense reimbursement, shareholders of U.S. Government Income will
not experience an increase in total expenses. U.S. Government Income
currently pays Rule 12b-1 distribution or service fees; Government Securities
currently does not. In addition, the pro forma statement of assets and
liabilities has not been adjusted as a result of the proposed transaction
because such adjustment would not be material. The cost of approximately
$197,000 associated with the Reorganization will be paid by Mitchell Hutchins
Asset Management Inc. ("Mitchell Hutchins"), a wholly owned asset management
subsidiary of PaineWebber Incorporated (a wholly owned indirect subsidiary of
UBS AG), so that each Fund bears no expenses of the Reorganization. These
costs are not included in the pro forma statement of operations.
The pro forma 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 August
1, 1999. The pro forma financial statements should be read in conjunction
with the historical financial statements of the constituent Funds included in
or incorporated by reference in the applicable statement of additional
information.
Significant Accounting Policies:
The Funds' financial statements are prepared in accordance with generally
accepted accounting principles that require the use of management accruals
and estimates. These unaudited financial statements reflect all adjustments,
which are, in the opinion of management, necessary to a fair
<PAGE>
statement of the results for the interim period presented. The following is a
summary of significant accounting policies followed by the Funds.
VALUATION OF INVESTMENTS-Each Fund calculates its net asset value based on
the current market value for its portfolio securities. Each Fund normally
obtains market values for its securities from independent pricing sources.
Independent pricing sources may use reported last sale prices, current market
quotations or valuations from computerized "matrix" systems that derive
values based on comparable securities. Securities traded in the
over-the-counter ("OTC") market and listed on The Nasdaq Stock Market, Inc.
("Nasdaq") normally are valued at the last sale price on Nasdaq prior to
valuation. Other OTC securities are valued at the last bid price available
prior to valuation. Securities which are listed on U.S. and foreign stock
exchanges normally are valued at the last sale price on the day the
securities are valued or, lacking any sales on such day, at the last
available bid price. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated as the primary
market by Mitchell Hutchins, or by the Fund's sub-adviser. If a market value
is not available from an independent pricing source for a particular
security, that security is valued at fair value as determined in good faith
or under the direction of the Fund's board of trustees (the "board"). The
amortized cost method of valuation, which approximates market value,
generally is used to value short-term debt instruments with sixty days or
less remaining to maturity, unless the board determines that this does not
represent fair value. Each Fund's investments are valued using the amortized
cost method of valuation.
2
<PAGE>
PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS
PAINEWEBBER UNITED STATES GOVERNMENT INCOME FUND
PAINEWEBBER LOW DURATION UNITED STATES GOVERNMENT INCOME FUND
PROFORMA STATEMENT OF ASSETS AND LIABILITIES
FOR THE YEAR ENDED JULY 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
PACE GOVERNMENT PW U.S.
SECURITIES FIXED GOVERNMENT
INCOME INVESTMENTS INCOME FUND
------------------------ ------------------
<S> <C> <C>
ASSETS
Investments in securities, at value (cost - $330,884,058, $327,386,261,
$209,625,314 and $867,895,633, respectively) $ 328,327,261 $ 315,138,396
Investment of cash collateral for securities loaned (cost - $0, $24,520,750,
$0 and $24,520,750, respectively) - 24,520,750
Cash - 502
Receivable for investments sold 3,260 -
Receivable for shares of beneficial interests sold 110,435 161
Dividends and interest receivable 1,633,542 3,387,309
Deferred organizational expenses 1,025 -
Other assets 32,713 31,332
------------------------ ------------------
Total assets 330,108,236 343,078,450
------------------------ ------------------
LIABILITIES
Payable for cash collateral for securities loaned - 24,520,750
Payable for investments purchased 130,699,989 79,182,313
Payable for shares of beneficial interest repurchased 103,565 535,616
Unrealized depreciation of forward foreign currency contracts - -
Outstanding options written, at value 77,700 -
Variation margin payable - 90,013
Payable to affiliates 114,807 122,437
Payable to custodian 82,526 -
Accrued expenses and other liabilities 111,628 542,602
------------------------ ------------------
Total liabilities 131,190,215 104,993,731
------------------------ ------------------
NET ASSETS
Common Stock/Beneficial interest shares of $0.001 par value outstanding - 16,458,856,
28,113,730, 70,382,925 and 49,486,887, respectively 203,803,263 344,066,767
Accumulated undistributed (distributions in excess of) net investment income (loss) 1,181,552 (169,608)
Accumulated net realized losses from investment transactions (3,516,672) (92,151,808)
Net unrealized depreciation of investments (2,550,122) (13,660,632)
------------------------ ------------------
Net assets applicable to shares outstanding $ 198,918,021 $ 238,084,719
======================== ==================
CLASS P:
Net assets $ 198,918,021 $ -
------------------------ ------------------
Shares outstanding 16,458,856 -
------------------------ ------------------
Net asset value and offering price per share $ 12.09 $ -
======================== ==================
CLASS A:
Net assets $ - $ 205,845,006
------------------------ ------------------
Shares outstanding - 24,304,537
------------------------ ------------------
Net asset and redemption value per share $ - $ 8.47
======================== ==================
Maximum offering price per share (net asset value plus sales charge of 0%, 4%, 3%,
and 4%, respectively, of offering price) $ - $ 8.82
======================== ==================
CLASS B:
Net assets $ - $ 7,515,198
------------------------ ------------------
Shares outstanding - 887,146
------------------------ ------------------
Net asset value and offering price per share $ - $ 8.47
======================== ==================
CLASS C:
Net assets $ - $ 15,913,817
------------------------ ------------------
Shares outstanding - 1,880,778
------------------------ ------------------
Net asset value and offering price per share $ - $ 8.46
======================== ==================
CLASS Y:
Net assets $ - $ 8,810,698
------------------------ ------------------
Shares outstanding - 1,041,269
------------------------ ------------------
Net asset value and offering price per share $ - $ 8.46
======================== ==================
<CAPTION>
PW LOW DURATION
U.S. GOVERNMENT
INCOME FUND COMBINED
---------------------- ------------------
<S> <C> <C>
ASSETS
Investments in securities, at value (cost - $330,884,058, $327,386,261,
$209,625,314 and $867,895,633, respectively) $ 208,997,696 $ 852,463,353
Investment of cash collateral for securities loaned (cost - $0, $24,520,750,
$0 and $24,520,750, respectively) - 24,520,750
Cash - 502
Receivable for investments sold 467,063 470,323
Receivable for shares of beneficial interests sold 381 110,977
Dividends and interest receivable 1,309,501 6,330,352
Deferred organizational expenses - 1,025
Other assets 19,591 83,636
---------------------- ------------------
Total assets 210,794,232 883,980,918
---------------------- ------------------
LIABILITIES
Payable for cash collateral for securities loaned - 24,520,750
Payable for investments purchased 48,800,072 258,682,374
Payable for shares of beneficial interest repurchased 434,226 1,073,407
Unrealized depreciation of forward foreign currency contracts 214 214
Outstanding options written, at value - 77,700
Variation margin payable - 90,013
Payable to affiliates 64,290 301,534
Payable to custodian - 82,526
Accrued expenses and other liabilities 410,824 1,065,054
---------------------- ------------------
Total liabilities 49,709,626 285,893,572
---------------------- ------------------
NET ASSETS
Common Stock/Beneficial interest shares of $0.001 par value outstanding - 16,458,856,
28,113,730, 70,382,925 and 49,486,887, respectively 282,773,545 830,643,575
Accumulated undistributed (distributions in excess of) net investment income (loss) (42,695) 969,249
Accumulated net realized losses from investment transactions (121,018,626) (216,687,106)
Net unrealized depreciation of investments (627,618) (16,838,372)
---------------------- ------------------
Net assets applicable to shares outstanding $ 161,084,606 $ 598,087,346
====================== ==================
CLASS P:
Net assets $ - $ 198,918,021
---------------------- ------------------
Shares outstanding - 16,458,856
---------------------- ------------------
Net asset value and offering price per share $ - $ 12.09
====================== ==================
CLASS A:
Net assets $ 106,542,467 $ 312,387,473
---------------------- ------------------
Shares outstanding 46,534,977 25,847,535
---------------------- ------------------
Net asset and redemption value per share $ 2.29 $ 12.09
====================== ==================
Maximum offering price per share (net asset value plus sales charge of 0%, 4%, 3%,
and 4%, respectively, of offering price) $ 2.36 $ 12.59
====================== ==================
CLASS B:
Net assets $ 4,095,236 $ 11,610,434
---------------------- ------------------
Shares outstanding 1,791,501 960,669
---------------------- ------------------
Net asset value and offering price per share $ 2.29 $ 12.09
====================== ==================
CLASS C:
Net assets $ 49,588,743 $ 65,502,560
---------------------- ------------------
Shares outstanding 21,682,285 5,419,807
---------------------- ------------------
Net asset value and offering price per share $ 2.29 $ 12.09
====================== ==================
CLASS Y:
Net assets $ 858,162 $ 9,668,860
---------------------- ------------------
Shares outstanding 374,162 800,020
---------------------- ------------------
Net asset value and offering price per share $ 2.29 $ 12.09
====================== ==================
</TABLE>
See accompanying notes to proforma financial statements
<PAGE>
PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS
PAINEWEBBER UNITED STATES GOVERNMENT INCOME FUND
PAINEWEBBER LOW DURATION UNITED STATES GOVERNMENT INCOME FUND
PROFORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
PACE GOVERNMENT PW U.S.
SECURITIES FIXED GOVERNMENT
INCOME INVESTMENTS INCOME FUND
-------------------------- ------------------
<S> <C> <C>
Investment income:
Interest (net of foreign withholding taxes, if any) $ 13,773,465 $ 18,447,280
-------------------------- ------------------
13,773,465 18,447,280
-------------------------- ------------------
EXPENSES:
Investment advisory and administration 1,380,076 1,315,199
Shareholder distribution and servicing fees - 807,378
Transfer agency fees and expenses 87,822 290,678
Reports and notices to shareholders 37,193 27,300
Legal and audit 67,927 53,190
Trustees' fees 26,250 13,500
Federal and state registration fees 8,935 35,540
Amortization of organizational expenses 18,980 -
Custody and accounting 120,092 131,520
Interest expense 39,447 -
Other expenses 12,333 55,198
-------------------------- ------------------
1,799,055 2,729,503
Less: fee waivers and reimbursements from investment adviser (83,618) (19,401)
-------------------------- ------------------
Net expenses 1,715,437 2,710,102
-------------------------- ------------------
Net investment income 12,058,028 15,737,178
-------------------------- ------------------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENT ACTIVITIES:
Net realized gains (losses) from investment transactions 15,206 (1,445,402)
Net change in unrealized appreciation (depreciation) of investments 114,103 (14,764,732)
-------------------------- ------------------
Net realized and unrealized gains (losses) from investment activities 129,309 (16,210,134)
-------------------------- ------------------
Net increase (decrease) in net assets resulting from operations $ 12,187,337 $ (472,956)
========================== ==================
<CAPTION>
PW LOW DURATION
U.S. GOVERNMENT
INCOME FUND ADJUSTMENTS COMBINED
-------------------- ------------ ----------------
<S> <C> <C> <C>
Investment income:
Interest (net of foreign withholding taxes, if any) $ 9,574,775 $ - $32,220,745
-------------------- ------------ ----------------
9,574,775 - 32,220,745
-------------------- ------------ ----------------
EXPENSES:
Investment advisory and administration 747,990 825,276 (a) 3,520,551
Shareholder distribution and servicing fees 700,716 - 807,378
Transfer agency fees and expenses 131,654 - 378,500
Reports and notices to shareholders 23,790 (40,872) (b) 23,621
Legal and audit 73,248 (126,438) (b) (5,321)
Trustees' fees 13,500 (27,000) (b) 12,750
Federal and state registration fees 37,812 (58,681) (b) (14,206)
Amortization of organizational expenses - - 18,980
Custody and accounting 74,799 - 251,612
Interest expense - - 39,447
Other expenses 27,839 - 67,531
-------------------- ------------ ----------------
1,831,348 572,285 5,100,843
Less: fee waivers and reimbursements from investment adviser - (792,729) (c) (895,748)
-------------------- ------------ ----------------
Net expenses 1,831,348 (220,444) 4,205,095
-------------------- ------------ ----------------
Net investment income 7,743,427 220,444 28,015,650
-------------------- ------------ ----------------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENT ACTIVITIES:
Net realized gains (losses) from investment transactions (2,386,961) - (1,430,196)
Net change in unrealized appreciation (depreciation) of investments 445,962 - (14,650,629)
-------------------- ------------ ----------------
Net realized and unrealized gains (losses) from investment activities (1,940,999) - (16,080,825)
-------------------- ------------ ----------------
Net increase (decrease) in net assets resulting from operations $ 5,802,428) $ 220,444 $11,934,825
==================== ============ ================
</TABLE>
--------------------------
(a) Reflects increase in fees resulting from the higher fee schedule, before
waivers, of PACE Government Securities Fixed Income Investments.
(b) Reflects the anticipated savings of the merger.
(c) Reflects decrease in fees resulting from the lower fee schedule, net of
waivers, of PACE Government Securities Fixed Income Investments.
See accompanying notes to proforma financial statements
<PAGE>
PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS
PAINEWEBBER UNITED STATES GOVERNMENT INCOME FUND
PAINEWEBBER LOW DURATION UNITED STATES GOVERNMENT INCOME FUND
PROFORMA PORTFOLIO OF INVESTMENTS
FOR THE YEAR ENDED JULY 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
COMBINED
PRINCIPAL MATURITY INTEREST
AMOUNT (000) DATES RATES
------------------ -------------------- ---------------
<S> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS - 21.17%
$ 19,000 Federal Home Loan Bank 08/09/00 6.390%
18,915 FHLMC MTN 03/18/08 6.220
12,000 FNMA 04/29/09 6.500
30,230 United States Treasury Bonds(2) 08/15/13 to 08/15/21 8.125 to 12.000
15,400 United States Treasury Bonds(2) 11/15/14 11.750
17,852 U.S. Treasury Inflation Index Notes 07/15/02 3.625%
155 U.S. Treasury Notes 08/31/00 5.125
Total U.S. Government and Agency Obligations
(cost - $133,799,631)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION CERTIFICATES - 37.77%
2,996 GNMA 05/20/30 6.000
11,708 GNMA 06/20/22 to 04/20/27 6.375
5,001 GNMA 07/15/30 6.500
6,479 GNMA 07/20/17 to 08/20/27 6.750
4,466 GNMA 07/20/25 to 09/20/26 6.750
3,694 GNMA 09/15/01 6.800
7,590 GNMA 05/15/02 to 11/20/27 7.000
2,606 GNMA 06/16/26 7.040+
1,105 GNMA 11/20/22 7.125
4,120 GNMA 11/20/21 to 12/20/27 7.125
4,795 GNMA 01/20/18 to 02/20/27 7.375
8,523 GNMA 03/20/23 to 02/20/28 7.375
1,494 GNMA 05/15/39 7.470
2,947 GNMA 06/20/30 7.500
1,298 GNMA 07/15/02 to 09/30/29 7.500
76 GNMA 02/15/23 8.000
533 GNMA 12/15/07 to 08/15/09 8.000
4,282 GNMA 04/15/19 8.250
2,885 GNMA 06/20/16 8.500
996 GNMA 06/20/30 9.000
3,601 GNMA 08/15/09 9.000
3,745 GNMA 01/15/16 to 09/15/20 10.500
752 GNMA 06/15/11 to 02/15/16 11.000
2,217 GNMA 03/15/10 to 05/15/19 11.500
3,995 GNMA ARM 05/20/30 6.000
22,000 GNMA I 08/23/30 6.500
10,000 GNMA I 08/23/30 7.000
5,000 GNMA II 04/20/30 6.500
1,799 GNMA II 07/20/27 to 04/20/30 6.750
21,911 GNMA II 05/20/30 to 07/20/30 7.000
480 GNMA II 01/20/28 7.375
1,500 GNMA II 07/20/30 7.500
6,000 GNMA II 08/25/30 8.500
2,998 GNMA II 04/20/30 to 07/20/30 9.000
998 GNMA II 04/20/30 9.000
4,763 GNMA II ARM 04/20/26 6.375
332 GNMA II ARM 04/20/18 to 01/20/28 6.375
24,483 GNMA II ARM 10/20/29 to 08/24/30 7.000
1,034 GNMA II ARM 01/20/18 7.375
1,500 GNMA II ARM 07/20/30 7.500
20,000 GNMA II TBA TBA 5.500
5,000 GNMA II TBA TBA 8.500
3,000 GNMA II TBA TBA 9.000
72 GNMA Project Loan 10/15/40 7.000
934 GNMA Project Loan 09/30/29 7.500
6 GNMA TBA TBA 11.000
Total Government National Mortgage Association Certificates
(cost - $227,159,313)
FEDERAL HOME LOAN MORTGAGE CORPORATION CERTIFICATES - 14.83%
9,919 FHLMC 06/01/29 to 04/01/30 6.500
220 FHLMC 08/01/01 6.500
6,442 FHLMC 08/01/25 to 03/01/30 7.000
1,895 FHLMC 09/01/04 7.000
1,855 FHLMC 07/01/24 7.270
984 FHLMC 05/01/21 7.450
789 FHLMC 10/01/17 to 11/01/24 7.500
52 FHLMC 01/01/23 8.000
876 FHLMC 03/01/13 8.000
1,569 FHLMC 05/01/16 8.500
283 FHLMC 04/01/04 8.500
179 FHLMC 07/01/09 to 02/01/10 9.000
5,801 FHLMC 04/01/25 9.000
499 FHLMC 11/01/16 9.750
537 FHLMC 06/01/04 to 12/01/05 10.500
525 FHLMC 10/01/20 to 11/01/20 10.500
1,659 FHLMC 05/01/11 to 12/01/20 11.000
2,748 FHLMC 01/01/16 11.000
1,074 FHLMC 06/01/04 to 07/01/19 11.500
6,511 FHLMC ARM 04/01/29 to 01/01/30 5.930
1,858 FHLMC ARM 01/01/30 5.930
<CAPTION>
COMBINED PACE GOVERNMENT PAINE WEBBER
PRINCIPAL SECURITIES FIXED U.S. GOVERNMENT
AMOUNT (000) INCOME INVESTMENTS INCOME FUND
------------------ ------------------------ ---------------------
<S> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS - 21.17%
$ 19,000 Federal Home Loan Bank $ - $ 18,973,020
18,915 FHLMC MTN - 17,665,721
12,000 FNMA - 11,215,584
30,230 United States Treasury Bonds(2) - 39,574,427
15,400 United States Treasury Bonds(2) - 21,218,320
17,852 U.S. Treasury Inflation Index Notes 4,821,287 -
155 U.S. Treasury Notes - -
------------------------ ---------------------
Total U.S. Government and Agency Obligations
(cost - $133,799,631) 4,821,287 108,647,072
------------------------ ---------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION CERTIFICATES - 37.77%
2,996 GNMA - -
11,708 GNMA - -
5,001 GNMA - -
6,479 GNMA - -
4,466 GNMA 4,490,751 -
3,694 GNMA 3,686,108 -
7,590 GNMA 7,557,891 -
2,606 GNMA 2,585,051 -
1,105 GNMA - -
4,120 GNMA 4,134,598 -
4,795 GNMA 4,817,913 -
8,523 GNMA - -
1,494 GNMA 1,474,303 -
2,947 GNMA - -
1,298 GNMA 1,299,879 -
76 GNMA - -
533 GNMA 542,741 -
4,282 GNMA - 4,347,290
2,885 GNMA 2,921,257 -
996 GNMA - -
3,601 GNMA - 3,713,725
3,745 GNMA - -
752 GNMA - 815,655
2,217 GNMA - -
3,995 GNMA ARM 3,918,267 -
22,000 GNMA I 21,793,750 -
10,000 GNMA I 9,706,200 -
5,000 GNMA II - -
1,799 GNMA II - -
21,911 GNMA II - -
480 GNMA II - -
1,500 GNMA II - -
6,000 GNMA II 6,093,750 -
2,998 GNMA II - -
998 GNMA II 1,021,226 -
4,763 GNMA II ARM - -
332 GNMA II ARM 333,584 -
24,483 GNMA II ARM 24,428,510 -
1,034 GNMA II ARM - -
1,500 GNMA II ARM 1,503,225 -
20,000 GNMA II TBA - -
5,000 GNMA II TBA - -
3,000 GNMA II TBA - -
72 GNMA Project Loan 62,660 -
934 GNMA Project Loan 895,874 -
6 GNMA TBA - 7,044
------------------------ ---------------------
Total Government National Mortgage Association Certificates
(cost - $227,159,313) 103,267,538 8,883,714
------------------------ ---------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION CERTIFICATES - 14.83%
9,919 FHLMC - 9,383,143
220 FHLMC 218,001 -
6,442 FHLMC - 6,230,729
1,895 FHLMC 1,878,253 -
1,855 FHLMC - -
984 FHLMC 978,511 -
789 FHLMC 783,984 -
52 FHLMC - -
876 FHLMC 881,132 -
1,569 FHLMC - -
283 FHLMC 283,982 -
179 FHLMC - -
5,801 FHLMC - 6,025,760
499 FHLMC - -
537 FHLMC - 567,359
525 FHLMC - -
1,659 FHLMC - -
2,748 FHLMC - 2,943,044
1,074 FHLMC - -
6,511 FHLMC ARM - -
1,858 FHLMC ARM 1,867,450 -
<CAPTION>
COMBINED PW LOW DURATION
PRINCIPAL U.S. GOVERNMENT
AMOUNT (000) INCOME FUND COMBINED
------------------ ---------------------- ----------------
<S> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS - 21.17%
$ 19,000 Federal Home Loan Bank $ - $ 18,973,020
18,915 FHLMC MTN - 17,665,721
12,000 FNMA - 11,215,584
30,230 United States Treasury Bonds(2) - 39,574,427
15,400 United States Treasury Bonds(2) - 21,218,320
17,852 U.S. Treasury Inflation Index Notes 12,963,906 17,785,193
155 U.S. Treasury Notes 154,806 154,806
---------------------- ----------------
Total U.S. Government and Agency Obligations
(cost - $133,799,631) 13,118,712 126,587,071
---------------------- ----------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION CERTIFICATES - 37.77%
2,996 GNMA 2,938,992 2,938,992
11,708 GNMA 11,743,262 11,743,262
5,001 GNMA 4,952,545 4,952,545
6,479 GNMA 6,508,342 6,508,342
4,466 GNMA - 4,490,751
3,694 GNMA - 3,686,108
7,590 GNMA - 7,557,891
2,606 GNMA - 2,585,051
1,105 GNMA 1,111,333 1,111,333
4,120 GNMA - 4,134,598
4,795 GNMA - 4,817,913
8,523 GNMA 8,565,823 8,565,823
1,494 GNMA - 1,474,303
2,947 GNMA 2,956,641 2,956,641
1,298 GNMA - 1,299,879
76 GNMA 76,905 76,905
533 GNMA - 542,741
4,282 GNMA - 4,347,290
2,885 GNMA - 2,921,257
996 GNMA 1,019,237 1,019,237
3,601 GNMA - 3,713,725
3,745 GNMA 4,023,275 4,023,275
752 GNMA - 815,655
2,217 GNMA 2,429,929 2,429,929
3,995 GNMA ARM - 3,918,267
22,000 GNMA I - 21,793,750
10,000 GNMA I - 9,706,200
5,000 GNMA II 4,956,667 4,956,667
1,799 GNMA II 1,779,977 1,779,977
21,911 GNMA II 21,831,073 21,831,073
480 GNMA II 481,218 481,218
1,500 GNMA II 1,503,225 1,503,225
6,000 GNMA II - 6,093,750
2,998 GNMA II 3,067,486 3,067,486
998 GNMA II - 1,021,226
4,763 GNMA II ARM 4,773,516 4,773,516
332 GNMA II ARM - 333,584
24,483 GNMA II ARM - 24,428,510
1,034 GNMA II ARM 1,040,990 1,040,990
1,500 GNMA II ARM - 1,503,225
20,000 GNMA II TBA 19,812,500 19,812,500
5,000 GNMA II TBA 5,078,125 5,078,125
3,000 GNMA II TBA 3,080,615 3,080,615
72 GNMA Project Loan - 62,660
934 GNMA Project Loan - 895,874
6 GNMA TBA - 7,044
---------------------- ----------------
Total Government National Mortgage Association Certificates
(cost - $227,159,313) 113,731,676 225,882,928
---------------------- ----------------
FEDERAL HOME LOAN MORTGAGE CORPORATION CERTIFICATES - 14.83%
9,919 FHLMC - 9,383,143
220 FHLMC - 218,001
6,442 FHLMC 6,230,729
1,895 FHLMC - 1,878,253
1,855 FHLMC 1,892,244 1,892,244
984 FHLMC - 978,511
789 FHLMC - 783,984
52 FHLMC 52,130 52,130
876 FHLMC - 881,132
1,569 FHLMC 1,599,247 1,599,247
283 FHLMC - 283,982
179 FHLMC 184,272 184,272
5,801 FHLMC - 6,025,760
499 FHLMC 522,840 522,840
537 FHLMC - 567,359
525 FHLMC 563,139 563,139
1,659 FHLMC 1,795,535 1,795,535
2,748 FHLMC - 2,943,044
1,074 FHLMC 1,174,337 1,174,337
6,511 FHLMC ARM 6,585,913 6,585,913
1,858 FHLMC ARM - 1,867,450
<PAGE>
<CAPTION>
COMBINED
PRINCIPAL MATURITY INTEREST
AMOUNT (000) DATES RATES
------------------ -------------------- ---------------
<S> <C> <C>
1,903 FHLMC ARM 01/01/28 6.350
2,809 FHLMC ARM 12/01/29 6.468
1,873 FHLMC ARM 12/01/29 6.468
4,549 FHLMC ARM 11/01/27 6.706
565 FHLMC ARM 10/01/29 6.907
993 FHLMC ARM 10/01/29 6.907
1,773 FHLMC ARM 07/01/24 7.742
3,733 FHLMC ARM 04/01/29 7.907
2,124 FHLMC CMT ARM 10/01/23 7.244
23,000 FHLMC Gold TBA TBA 6.500
Total Federal Home Loan Mortgage Corporation Certificates
(cost - $88,899,639)
FEDERAL HOUSING ADMINISTRATION CERTIFICATES - 4.84%
11,410 FHA 02/01/20 to 03/01/41 8.375 to 8.800
18,662 FHA Project Notes 10/15/04 to 02/01/29 6.850 to 8.500
Total Federal Housing Administration Certificates
(cost--$30,305,917)
FEDERAL NATIONAL MORTGAGE ASSOCIATION CERTIFICATES - 36.60%
31,800 FNMA 01/15/09 5.250
2,779 FNMA 02/01/29 6.000
11,266 FNMA 08/01/25 to 03/01/30 6.000
9,183 FNMA 04/01/25 6.500
1,502 FNMA 03/01/04 7.000
2,994 FNMA 04/01/07 7.250
5,347 FNMA 01/01/07 to 04/01/07 7.250
2,012 FNMA 06/01/04 to 12/01/05 7.500
40,200 FNMA 10/01/26 to 08/16/30 7.500
3,992 FNMA 03/01/07 7.547
1,573 FNMA 07/01/25 to 10/01/29 8.000
6,860 FNMA 11/01/02 to 09/01/27 8.500
4,596 FNMA 01/01/16 8.500
1,087 FNMA 10/01/19 to 02/01/26 9.000
1,337 FNMA 10/01/23 9.000
2,098 FNMA 04/01/10 to 12/01/15 9.250
267 FNMA 03/01/06 to 12/01/09 9.500
1,683 FNMA 08/01/19 10.000
446 FNMA 07/01/10 to 06/01/19 10.250
926 FNMA 02/01/12 to 04/01/22 10.500
4,589 FNMA ARM 02/01/30 6.064
1,836 FNMA ARM 02/01/30 6.276
1,910 FNMA ARM 02/01/26 6.406
1,389 FNMA ARM 02/01/29 6.424
1,791 FNMA ARM 09/01/15 6.531
1,862 FNMA ARM 12/01/27 6.629
3,188 FNMA ARM 03/01/07 6.820
2,284 FNMA ARM 09/01/26 7.027
4,961 FNMA ARM 07/01/09 7.249
1,642 FNMA ARM 03/01/25 7.634
1,642 FNMA ARM 03/01/25 7.810
1,033 FNMA ARM 02/01/05 9.000
1,616 FNMA ARM 07/01/13 to 05/01/20 11.000
38,500 FNMA TBA TBA 6.500
30,000 FNMA TBA TBA 8.000
Total Federal National Mortgage Association Certificates
(cost - $221,796,589)
COLLATERALIZED MORTGAGE OBLIGATIONS - 16.07%
1,028 FDIC REMIC Trust, 1996-C1, Class 1A 05/25/26 6.750
136 FHLMC GNMA REMIC, Series 23, Class KZ 11/25/23 6.500
413 FHLMC REMIC, Series 0159, Class H 09/15/21 4.500
550 FHLMC REMIC, Series 0185, Class E 08/15/06 9.000
3,102 FHLMC REMIC, Series 1003, Class H 10/15/20 7.438++
3,666 FHLMC REMIC, Series 1188, Class H 12/15/20 7.500
1,971 FHLMC REMIC, Series 1322, Class G 02/15/07 7.500
299 FHLMC REMIC, Series 1347, Class HC 12/15/21 4.250
2,280 FHLMC REMIC, Series 1361, Class D 11/15/05 6.000
1,106 FHLMC REMIC, Series 1502, Class PX 04/15/23 7.000
605 FHLMC REMIC, Series 1534, Class Z 06/15/23 5.000
1,630 FHLMC REMIC, Series 1542, Class Z 7/15/23 7.000
142 FHLMC REMIC, Series 1552, Class EA 01/15/17 5.850
179 FHLMC REMIC, Series 1573, Class PZ 09/15/23 7.000
255 FHLMC REMIC, Series 1640, Class F 10/15/07 7.088++
150 FHLMC REMIC, Series 1658, Class GZ 01/15/24 7.000
114 FHLMC REMIC, Series 1661, Class PE 11/15/06 6.000
1,000 FHLMC REMIC, Series 1694, Class Z 03/15/24 6.500
110 FHLMC REMIC, Series 1775, Class Z 03/15/25 8.500
3,085 FHLMC REMIC, Series 1869, Class J 12/15/24 8.000
1,313 FHLMC REMIC, Series 1933, Class ZA 02/15/27 8.000
3,071 FNMA REMIC, Series 1987-2, Class Z 11/25/17 11.000
2,577 FNMA REMIC, Series 1998-7, Class Z 04/25/18 9.250
89 FNMA REMIC, Trust 1992 - 074, Class Z 05/25/22 8.000
165 FNMA REMIC, Trust 1992 - 129, Class L 07/25/22 6.000
1,251 FNMA REMIC, Trust 1993 - 037, Class PX 03/25/23 7.000
464 FNMA REMIC, Trust 1993 - 040, Class ZA 12/25/23 6.500
47 FNMA REMIC, Trust 1993 - 162, Class C 08/25/23 3.000@
45 FNMA REMIC, Trust 1993 - 240, Class Z 12/25/13 6.250
1,187 FNMA REMIC, Trust 1993 - 250, Class DZ 12/25/23 7.000
71 FNMA REMIC, Trust 1993 - 250, Class Z 12/25/23 7.000
<CAPTION>
COMBINED PACE GOVERNMENT PAINE WEBBER
PRINCIPAL SECURITIES FIXED U.S. GOVERNMENT
AMOUNT (000) INCOME INVESTMENTS INCOME FUND
----------------- ------------------------ ---------------------
<S> <C> <C>
1,903 FHLMC ARM 1,883,990 -
2,809 FHLMC ARM - -
1,873 FHLMC ARM 1,891,699 -
4,549 FHLMC ARM - -
565 FHLMC ARM - -
993 FHLMC ARM 991,777 -
1,773 FHLMC ARM 1,808,409 -
3,733 FHLMC ARM 3,834,577 -
2,124 FHLMC CMT ARM - 2,178,578
23,000 FHLMC Gold TBA - 21,742,176
------------------------ ---------------------
Total Federal Home Loan Mortgage Corporation Certificates
(cost - $88,899,639) 17,301,765 49,070,789
------------------------ ---------------------
FEDERAL HOUSING ADMINISTRATION CERTIFICATES - 4.84%
11,410 FHA - -
18,662 FHA Project Notes 17,920,086 -
------------------------ ---------------------
Total Federal Housing Administration Certificates
(cost--$30,305,917) 17,920,086 -
------------------------ ---------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION CERTIFICATES - 36.60%
31,800 FNMA - 28,008,359
2,779 FNMA - -
11,266 FNMA - 10,358,783
9,183 FNMA - 8,877,052
1,502 FNMA 1,489,630
2,994 FNMA - -
5,347 FNMA 5,371,925 -
2,012 FNMA - 1,983,465
40,200 FNMA 39,626,000 -
3,992 FNMA - -
1,573 FNMA 1,586,188 -
6,860 FNMA 2,306,023 -
4,596 FNMA - 4,689,317
1,087 FNMA 1,121,721 -
1,337 FNMA - 1,371,230
2,098 FNMA - -
267 FNMA - -
1,683 FNMA - -
446 FNMA - -
926 FNMA - -
4,589 FNMA ARM - -
1,836 FNMA ARM 1,859,262 -
1,910 FNMA ARM - -
1,389 FNMA ARM 1,405,656 -
1,791 FNMA ARM - -
1,862 FNMA ARM 1,852,853 -
3,188 FNMA ARM 3,201,042 -
2,284 FNMA ARM - -
4,961 FNMA ARM 4,947,190 -
1,642 FNMA ARM - -
1,642 FNMA ARM 1,680,984 -
1,033 FNMA ARM - -
1,616 FNMA ARM - -
38,500 FNMA TBA - 36,358,437
30,000 FNMA TBA 30,084,360 -
------------------------ ---------------------
Total Federal National Mortgage Association Certificates
(cost - $221,796,589) 96,532,834 91,646,643
------------------------ ---------------------
COLLATERALIZED MORTGAGE OBLIGATIONS - 16.07%
1,028 FDIC REMIC Trust, 1996-C1, Class 1A - 1,022,827
136 FHLMC GNMA REMIC, Series 23, Class KZ 114,123 -
413 FHLMC REMIC, Series 0159, Class H 379,392 -
550 FHLMC REMIC, Series 0185, Class E 559,620 -
3,102 FHLMC REMIC, Series 1003, Class H 2,117,058 -
3,666 FHLMC REMIC, Series 1188, Class H 3,670,156 -
1,971 FHLMC REMIC, Series 1322, Class G 1,979,886 -
299 FHLMC REMIC, Series 1347, Class HC 276,467 -
2,280 FHLMC REMIC, Series 1361, Class D 2,268,188 -
1,106 FHLMC REMIC, Series 1502, Class PX 969,396 -
605 FHLMC REMIC, Series 1534, Class Z 426,837 -
1,630 FHLMC REMIC, Series 1542, Class Z 1,446,932 -
142 FHLMC REMIC, Series 1552, Class EA 79,186 -
179 FHLMC REMIC, Series 1573, Class PZ 162,186 -
255 FHLMC REMIC, Series 1640, Class F 254,690 -
150 FHLMC REMIC, Series 1658, Class GZ 135,893 -
114 FHLMC REMIC, Series 1661, Class PE 113,810 -
1,000 FHLMC REMIC, Series 1694, Class Z 868,568 -
110 FHLMC REMIC, Series 1775, Class Z 112,996 -
3,085 FHLMC REMIC, Series 1869, Class J 3,109,343 -
1,313 FHLMC REMIC, Series 1933, Class ZA 1,314,272 -
3,071 FNMA REMIC, Series 1987-2, Class Z - 3,284,870
2,577 FNMA REMIC, Series 1998-7, Class Z - 2,674,831
89 FNMA REMIC, Trust 1992 - 074, Class Z 89,019 -
165 FNMA REMIC, Trust 1992 - 129, Class L 144,528 -
1,251 FNMA REMIC, Trust 1993 - 037, Class PX 1,122,227 -
464 FNMA REMIC, Trust 1993 - 040, Class ZA 401,819 -
47 FNMA REMIC, Trust 1993 - 162, Class C 46,319 -
45 FNMA REMIC, Trust 1993 - 240, Class Z 40,516 -
1,187 FNMA REMIC, Trust 1993 - 250, Class DZ 992,139 -
71 FNMA REMIC, Trust 1993 - 250, Class Z 65,975 -
<CAPTION>
COMBINED PW LOW DURATION
PRINCIPAL U.S. GOVERNMENT
AMOUNT (000) INCOME FUND COMBINED
----------------- ---------------------- ----------------
<S> <C> <C>
1,903 FHLMC ARM - 1,883,990
2,809 FHLMC ARM 2,837,548 2,837,548
1,873 FHLMC ARM - 1,891,699
4,549 FHLMC ARM 4,576,529 4,576,529
565 FHLMC ARM 563,681 563,681
993 FHLMC ARM - 991,777
1,773 FHLMC ARM - 1,808,409
3,733 FHLMC ARM - 3,834,577
2,124 FHLMC CMT ARM - 2,178,578
23,000 FHLMC Gold TBA - 21,742,176
---------------------- ----------------
Total Federal Home Loan Mortgage Corporation Certificates
(cost - $88,899,639) 22,347,415 88,719,969
---------------------- ----------------
FEDERAL HOUSING ADMINISTRATION CERTIFICATES - 4.84%
11,410 FHA 11,038,169 11,038,169
18,662 FHA Project Notes - 17,920,086
---------------------- ----------------
Total Federal Housing Administration Certificates
(cost--$30,305,917) 11,038,169 28,958,255
---------------------- ----------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION CERTIFICATES - 36.60%
31,800 FNMA - 28,008,359
2,779 FNMA 2,811,312 2,811,312
11,266 FNMA - 10,358,783
9,183 FNMA - 8,877,052
1,502 FNMA - 1,489,630
2,994 FNMA 2,993,884 2,993,884
5,347 FNMA - 5,371,925
2,012 FNMA - 1,983,465
40,200 FNMA - 39,626,000
3,992 FNMA 4,007,942 4,007,942
1,573 FNMA - 1,586,188
6,860 FNMA - 2,306,023
4,596 FNMA - 4,689,317
1,087 FNMA - 1,121,721
1,337 FNMA - 1,371,230
2,098 FNMA 2,165,047 2,165,047
267 FNMA 276,685 276,685
1,683 FNMA 1,784,460 1,784,460
446 FNMA 469,710 469,710
926 FNMA 1,005,352 1,005,352
4,589 FNMA ARM 4,648,155 4,648,155
1,836 FNMA ARM - 1,859,262
1,910 FNMA ARM 1,959,593 1,959,593
1,389 FNMA ARM - 1,405,656
1,791 FNMA ARM 1,796,858 1,796,858
1,862 FNMA ARM - 1,852,853
3,188 FNMA ARM - 3,201,042
2,284 FNMA ARM 2,315,075 2,315,075
4,961 FNMA ARM - 4,947,190
1,642 FNMA ARM 1,680,984 1,680,984
1,642 FNMA ARM - 1,680,984
1,033 FNMA ARM 1,077,577 1,077,577
1,616 FNMA ARM 1,750,317 1,750,317
38,500 FNMA TBA - 36,358,437
30,000 FNMA TBA - 30,084,360
---------------------- ----------------
Total Federal National Mortgage Association Certificates
(cost - $221,796,589) 30,742,951 218,922,428
---------------------- ----------------
COLLATERALIZED MORTGAGE OBLIGATIONS - 16.07%
1,028 FDIC REMIC Trust, 1996-C1, Class 1A - 1,022,827
136 FHLMC GNMA REMIC, Series 23, Class KZ - 114,123
413 FHLMC REMIC, Series 0159, Class H - 379,392
550 FHLMC REMIC, Series 0185, Class E - 559,620
3,102 FHLMC REMIC, Series 1003, Class H - 2,117,058
3,666 FHLMC REMIC, Series 1188, Class H - 3,670,156
1,971 FHLMC REMIC, Series 1322, Class G - 1,979,886
299 FHLMC REMIC, Series 1347, Class HC - 276,467
2,280 FHLMC REMIC, Series 1361, Class D - 2,268,188
1,106 FHLMC REMIC, Series 1502, Class PX - 969,396
605 FHLMC REMIC, Series 1534, Class Z - 426,837
1,630 FHLMC REMIC, Series 1542, Class Z - 1,446,932
142 FHLMC REMIC, Series 1552, Class EA 62,529 141,715
179 FHLMC REMIC, Series 1573, Class PZ - 162,186
255 FHLMC REMIC, Series 1640, Class F - 254,690
150 FHLMC REMIC, Series 1658, Class GZ - 135,893
114 FHLMC REMIC, Series 1661, Class PE - 113,810
1,000 FHLMC REMIC, Series 1694, Class Z - 868,568
110 FHLMC REMIC, Series 1775, Class Z - 112,996
3,085 FHLMC REMIC, Series 1869, Class J - 3,109,343
1,313 FHLMC REMIC, Series 1933, Class ZA - 1,314,272
3,071 FNMA REMIC, Series 1987-2, Class Z - 3,284,870
2,577 FNMA REMIC, Series 1998-7, Class Z - 2,674,831
89 FNMA REMIC, Trust 1992 - 074, Class Z - 89,019
165 FNMA REMIC, Trust 1992 - 129, Class L - 144,528
1,251 FNMA REMIC, Trust 1993 - 037, Class PX - 1,122,227
464 FNMA REMIC, Trust 1993 - 040, Class ZA - 401,819
47 FNMA REMIC, Trust 1993 - 162, Class C - 46,319
45 FNMA REMIC, Trust 1993 - 240, Class Z - 40,516
1,187 FNMA REMIC, Trust 1993 - 250, Class DZ - 992,139
71 FNMA REMIC, Trust 1993 - 250, Class Z - 65,975
<PAGE>
<CAPTION>
COMBINED
PRINCIPAL MATURITY INTEREST
AMOUNT (000) DATES RATES
------------------ -------------------- ---------------
<S> <C> <C>
77 FNMA REMIC, Trust 1994- 027, Class CZ 02/25/24 6.500
876 FNMA REMIC, Trust 1999- 003, Class CZ 2/25/14 6.000
107 FNMA REMIC, Trust 1999- 043, Class AZ 08/25/29 7.000
1,105 FNMA REMIC, Trust G92 - 040, Class ZC 07/25/22 7.000
148 FNMA REMIC, Trust G94 - 006, Class PJ 05/17/24 8.000
919 GNMA REMIC, Trust Series 2000 - 009, Class FH 02/16/30 7.126++
1,963 3EWCourt Receivables Asset Trust Series 1997-1, Class A4 05/20/05 6.193
100 Bank of America Mortgage Securities Series 1999 - 5, Class A-22 05/25/29 6.500
450 Bank of America Mortgage Securities Series 1999 - 8, Class A-12 08/25/29 6.750
207 Bear Stearns Mortgage Securities Inc. Series 1993 - 8, Class A-5 08/25/24 6.350
2,379 Bear Stearns Mortgage Securities Inc. Series 1996 - 4, Class AI-1 09/25/27 8.125
1,750 Chase Mortgage Finance Corp. Series 1998, Class IA-8 08/25/28 6.750
386 Cityscape Home Equity Loan Trust Series 1997-B, Class A5 09/25/19 7.480
1,000 Countrywide Home Loan Inc. 06/15/04 6.850
1,145 CS First Boston Mortgage Securities Corp., Series 1997-2, Class A t 06/01/20 7.500
5,000 CS First Boston Mortgage Securities Corp., Series 1998-C2, Class A2 11/15/08 6.300
1,500 CWMBS Inc. Series 1998 - 13, Class A3 12/25/28 6.500
1,500 CWMBS Inc. Series 1998 - 15, Class A8 10/25/28 6.750
3,586 DLJ Commercial Mortgage Corporation Series 1998-CF2, Class A1A 11/12/31 5.880
3,382 Farmer Mac. Series 2002 - Class AA1 04/25/01 7.721
530 Green Tree Financial Corp Series 1998, Class 2 11/01/16 6.240
686 Headlands Mortgage Security Inc. REMIC Series 1997 - 1, Class A, II 03/15/12 7.750
489 Headlands Mortgage Security Inc. REMIC Series 1997 - 2, Class A, II 05/25/12 7.750
383 Headlands Mortgage Security Inc. REMIC Series 1997 - 4, Class A, II 11/25/12 7.250
1,500 Headlands Mortgage Security Inc. REMIC Series 1998 - 1, Class A, III 11/25/28 6.500
6,346 LB Commercial Conduit Mortgage Trust, Series 1998-C4, Class A1A 08/15/06 5.870
703 Merrill Lynch Mortgage Investors, Inc. Series 1999, Class H1 03/20/17 6.210++
539 Money Store Home Equity Trust Series 1997-D, Class AF3 11/15/21 6.345
3,086 Morgan Stanley Capital I, Series 1997-ALIC, Class A1B 11/15/02 6.440
4,289 Morgan Stanley Capital I, Series 1997-WF1, Class A1 144A 10/15/06 6.830
1,610 Morgan Stanley Capital Inc. Series 1998 - HF1, Class A1 01/15/07 6.190++
4,935 Mortgage Capital Funding, Inc., Series 1998-MCI, Class A2 01/18/08 6.663
1,639 PNC Mortgage Securities Corp. Series 1998 - 5, Class 2A5 11/25/28 6.750
2,500 PNC Mortgage Securities Corp. Series 1999 - 5, Class 2A5 07/25/29 6.750
436 Prudential Home Mortgage REMIC 1993 - 29, Class A8 08/25/08 6.750
2,488 Prudential Securities Trust Series 18, Class E 09/25/20 7.000
4,333 Residential Accredit Loans Inc. Series 2000-QS3C, Class A1 03/25/30 7.750
10 Residential Funding Mortgage Securities Inc. Series 1993 - S15, Class A9 04/25/08 7.721++
1,500 Residential Funding Mortgage Securities Inc. Series 1998 - S12, Class A6 05/25/28 6.750
1,428 Residential Funding Mortgage Securities Inc. Series 1998 - S20, Class A19 09/25/28 6.750
1,578 Ryland Mortgage Acceptance Corp. REMIC Series 76, Class B 08/01/18 9.000
990 Small Business Administration Series 1995 - 10, Class I 03/01/05 7.750
Total Collateralized Mortgage Obligations (cost - $100,751,562)
ASSET BACKED SECURITIES - 0.92%
863 Beneficial Home Equity Loan Trust 04/28/26 6.945++
2,000 Conseco Finance Home Loan Trust 06/15/24 9.520
688 Student Loan Marketing Association Series 1996 - 2, Class A1 10/25/04 6.581
2,000 Student Loan Trust 10/27/25 6.740
Total Asset Backed Securities (cost - $5,486,505)
STRIPPED MORTGAGE-BACKED SECURITIES - 2.08%
815 FHLMC REMIC Series 0013, Class B(1)+++ 06/25/23 7.000
772 FHLMC REMIC Series 1554, Class I(1)+++ 08/15/08 6.500*
5,000 FHLMC REMIC Series 1627, Class PN(1)+++ 09/15/22 6.000
1,613 FHLMC REMIC Series 1993 - 138, Class CL(1)+++ 11/25/22 7.000
4,854 FHLMC REMIC Series 2059, Class PI(1)+++ 07/15/26 6.500
9,033 FHLMC REMIC Series 2080, Class VK(1)+++ 09/15/05 6.500
1,000 FHLMC REMIC Series 2110, Class PT(1)+++ 07/15/23 6.000
941 FHLMC REMIC Series 2136, Class GD(1)+++ 03/15/29 7.000
3,818 FHLMC REMIC, Series 2178, Class PI(1)+++ 08/15/29 7.500
6 FNMA REMIC Trust 1992 - 142, Class KB(1)+++ 08/25/07 11.977
7 FNMA REMIC Trust 1992 - 157, Class JA(1)+++ 09/25/07 10.146
616 FNMA REMIC Trust 1992 - 207, Class U(1)+++ 10/25/07 7.500
2,926 FNMA REMIC Trust 1993 - 116, Class H(1)+++ 07/25/22 7.000
186 FNMA REMIC Trust 1993 - 161, Class GC(1)+++ 02/25/23 .010*
794 FNMA REMIC Trust 1994 - 007, Class PK(1)+++ 05/25/08 6.500*
1,184 FNMA REMIC Trust 1994 - 030, Class IA(1)+++ 11/25/22 6.500*
7,119 FNMA REMIC Trust 1998 - 013, Class PI(1)+++ 07/18/19 7.000
3,301 FNMA REMIC Trust 1998 - 024, Class OK(1) 11/18/21 7.000
1,388 FNMA REMIC Trust 1998 - 044, Class IG(1)+++ 07/18/16 6.500
6,705 GNMA REMIC Trust Series 1998 - 001, Class PG(1)+++ 07/20/24 7.000
4,424 Chase Mortgage Finance Corp. Series 1998 - S2, Class A4(1)+++ 07/25/28 6.750
16,000 Conseco Finance Securitizations(1)+++ 12/15/29 7.000
15,096 CWMBS Inc. Series 1998 - 14, Class A2(1)+++ 12/25/13 0.500*
1,500 Firstplus Home Loan Owner Trust Series 1998 - 5, Class A1(1)+++ 10/10/00 6.000*
1,410 Prudential Home Mortgage REMIC 1993 - 54, Class A19(1)** 01/25/24 6.500
Total Stripped Mortgage-Backed Securities (cost - $11,212,501)
CORPORATE OBLIGATIONS - 0.50%
2,000 Lehman Brothers Holdings Inc. MTN 04/02/02 7.678
1,000 Morgan Stanley Dean Witter 01/28/02 6.837@
Total Corporate Obligations (cost--$3,006,152)
COMMERCIAL PAPER - 0.12%
700 Dominion Resources MTN(1) (cost - $699,915) 01/26/01 7.026
<CAPTION>
COMBINED PACE GOVERNMENT PAINE WEBBER
PRINCIPAL SECURITIES FIXED U.S. GOVERNMENT
AMOUNT (000) INCOME INVESTMENTS INCOME FUND
------------------ ------------------ ---------------
<S> <C> <C>
77 FNMA REMIC, Trust 1994- 027, Class CZ 66,515 -
876 FNMA REMIC, Trust 1999- 003, Class CZ 716,987 -
107 FNMA REMIC, Trust 1999- 043, Class AZ 92,220 -
1,105 FNMA REMIC, Trust G92 - 040, Class ZC 1,077,759 -
148 FNMA REMIC, Trust G94 - 006, Class PJ 150,586 -
919 GNMA REMIC, Trust Series 2000 - 009, Class FH 922,361 -
1,963 3EWCourt Receivables Asset Trust Series 1997-1, Class A4 - -
100 Bank of America Mortgage Securities Series 1999 - 5, Class A-22 90,863 -
450 Bank of America Mortgage Securities Series 1999 - 8, Class A-12 416,812 -
207 Bear Stearns Mortgage Securities Inc. Series 1993 - 8, Class A-5 206,163 -
2,379 Bear Stearns Mortgage Securities Inc. Series 1996 - 4, Class AI-1 2,401,504 -
1,750 Chase Mortgage Finance Corp. Series 1998, Class IA-8 1,536,743 -
386 Cityscape Home Equity Loan Trust Series 1997-B, Class A5 - -
1,000 Countrywide Home Loan Inc. 975,880 -
1,145 CS First Boston Mortgage Securities Corp., Series 1997-2, Class A t - 1,134,562
5,000 CS First Boston Mortgage Securities Corp., Series 1998-C2, Class A2 - 4,624,118
1,500 CWMBS Inc. Series 1998 - 13, Class A3 1,337,805 -
1,500 CWMBS Inc. Series 1998 - 15, Class A8 1,300,505 -
3,586 DLJ Commercial Mortgage Corporation Series 1998-CF2, Class A1A - 3,381,526
3,382 Farmer Mac. Series 2002 - Class AA1 3,380,077 -
530 Green Tree Financial Corp Series 1998, Class 2 519,956 -
686 Headlands Mortgage Security Inc. REMIC Series 1997 - 1, Class A, II 689,249 -
489 Headlands Mortgage Security Inc. REMIC Series 1997 - 2, Class A, II 490,697 -
383 Headlands Mortgage Security Inc. REMIC Series 1997 - 4, Class A, II 380,330 -
1,500 Headlands Mortgage Security Inc. REMIC Series 1998 - 1, Class A, III 1,368,570 -
6,346 LB Commercial Conduit Mortgage Trust, Series 1998-C4, Class A1A - 6,042,498
703 Merrill Lynch Mortgage Investors, Inc. Series 1999, Class H1 698,216 -
539 Money Store Home Equity Trust Series 1997-D, Class AF3 - -
3,086 Morgan Stanley Capital I, Series 1997-ALIC, Class A1B - 3,044,907
4,289 Morgan Stanley Capital I, Series 1997-WF1, Class A1 144A - 4,236,486
1,610 Morgan Stanley Capital Inc. Series 1998 - HF1, Class A1 1,557,497 -
4,935 Mortgage Capital Funding, Inc., Series 1998-MCI, Class A2 - 4,703,302
1,639 PNC Mortgage Securities Corp. Series 1998 - 5, Class 2A5 1,526,259 -
2,500 PNC Mortgage Securities Corp. Series 1999 - 5, Class 2A5 2,322,625 -
436 Prudential Home Mortgage REMIC 1993 - 29, Class A8 423,257 -
2,488 Prudential Securities Trust Series 18, Class E - -
4,333 Residential Accredit Loans Inc. Series 2000-QS3C, Class A1 - -
10 Residential Funding Mortgage Securities Inc. Series 1993 - S15, Class A9 92,763 -
1,500 Residential Funding Mortgage Securities Inc. Series 1998 - S12, Class A6 1,359,461 -
1,428 Residential Funding Mortgage Securities Inc. Series 1998 - S20, Class A19 267,777 -
1,578 Ryland Mortgage Acceptance Corp. REMIC Series 76, Class B - -
990 Small Business Administration Series 1995 - 10, Class I 994,061 -
------------------ ---------------
Total Collateralized Mortgage Obligations (cost - $100,751,562) 50,625,039 34,149,927
------------------ ---------------
ASSET BACKED SECURITIES - 0.92%
863 Beneficial Home Equity Loan Trust 862,514 -
2,000 Conseco Finance Home Loan Trust 2,003,480 -
688 Student Loan Marketing Association Series 1996 - 2, Class A1 686,863 -
2,000 Student Loan Trust 1,939,960 -
------------------ ---------------
Total Asset Backed Securities (cost - $5,486,505) 5,492,817 -
------------------ ---------------
STRIPPED MORTGAGE-BACKED SECURITIES - 2.08%
815 FHLMC REMIC Series 0013, Class B(1)+++ 466,384 -
772 FHLMC REMIC Series 1554, Class I(1)+++ 66,078 -
5,000 FHLMC REMIC Series 1627, Class PN(1)+++ 1,055,866 -
1,613 FHLMC REMIC Series 1993 - 138, Class CL(1)+++ 334,878 -
4,854 FHLMC REMIC Series 2059, Class PI(1)+++ 1,112,681 -
9,033 FHLMC REMIC Series 2080, Class VK(1)+++ 1,361,748 -
1,000 FHLMC REMIC Series 2110, Class PT(1)+++ 306,780 -
941 FHLMC REMIC Series 2136, Class GD(1)+++ 207,923 -
3,818 FHLMC REMIC, Series 2178, Class PI(1)+++ 886,047 -
6 FNMA REMIC Trust 1992 - 142, Class KB(1)+++ 164,618 -
7 FNMA REMIC Trust 1992 - 157, Class JA(1)+++ 166,283 -
616 FNMA REMIC Trust 1992 - 207, Class U(1)+++ 111,156 -
2,926 FNMA REMIC Trust 1993 - 116, Class H(1)+++ 514,564 -
186 FNMA REMIC Trust 1993 - 161, Class GC(1)+++ 126,760 -
794 FNMA REMIC Trust 1994 - 007, Class PK(1)+++ 40,883 -
1,184 FNMA REMIC Trust 1994 - 030, Class IA(1)+++ 141,378 -
7,119 FNMA REMIC Trust 1998 - 013, Class PI(1)+++ 729,469 -
3,301 FNMA REMIC Trust 1998 - 024, Class OK(1) 433,157 -
1,388 FNMA REMIC Trust 1998 - 044, Class IG(1)+++ 208,041 -
6,705 GNMA REMIC Trust Series 1998 - 001, Class PG(1)+++ 1,063,625 -
4,424 Chase Mortgage Finance Corp. Series 1998 - S2, Class A4(1)+++ 536,410 -
16,000 Conseco Finance Securitizations(1)+++ 1,015,000 -
15,096 CWMBS Inc. Series 1998 - 14, Class A2(1)+++ 207,564 -
1,500 Firstplus Home Loan Owner Trust Series 1998 - 5, Class A1(1)+++ 14,297 -
1,410 Prudential Home Mortgage REMIC 1993 - 54, Class A19(1)** 1,188,280 -
------------------ ---------------
Total Stripped Mortgage-Backed Securities (cost - $11,212,501) 12,459,870 -
------------------ ---------------
CORPORATE OBLIGATIONS - 0.50%
2,000 Lehman Brothers Holdings Inc. MTN 2,007,542 -
1,000 Morgan Stanley Dean Witter 1,000,699 -
------------------ ---------------
Total Corporate Obligations (cost--$3,006,152) 3,008,241 -
------------------ ---------------
COMMERCIAL PAPER - 0.12%
700 Dominion Resources MTN(1) (cost - $699,915) 699,915 -
------------------ ---------------
<CAPTION>
COMBINED PW LOW DURATION
PRINCIPAL U.S. GOVERNMENT
AMOUNT (000) INCOME FUND COMBINED
------------------ ------------------ ----------------
<S> <C> <C>
77 FNMA REMIC, Trust 1994- 027, Class CZ - 66,515
876 FNMA REMIC, Trust 1999- 003, Class CZ - 716,987
107 FNMA REMIC, Trust 1999- 043, Class AZ - 92,220
1,105 FNMA REMIC, Trust G92 - 040, Class ZC - 1,077,759
148 FNMA REMIC, Trust G94 - 006, Class PJ - 150,586
919 GNMA REMIC, Trust Series 2000 - 009, Class FH - 922,361
1,963 3EWCourt Receivables Asset Trust Series 1997-1, Class A4 1,944,919 1,944,919
100 Bank of America Mortgage Securities Series 1999 - 5, Class A-22 - 90,863
450 Bank of America Mortgage Securities Series 1999 - 8, Class A-12 - 416,812
207 Bear Stearns Mortgage Securities Inc. Series 1993 - 8, Class A-5 - 206,163
2,379 Bear Stearns Mortgage Securities Inc. Series 1996 - 4, Class AI-1 - 2,401,504
1,750 Chase Mortgage Finance Corp. Series 1998, Class IA-8 - 1,536,743
386 Cityscape Home Equity Loan Trust Series 1997-B, Class A5 383,885 383,885
1,000 Countrywide Home Loan Inc. - 975,880
1,145 CS First Boston Mortgage Securities Corp., Series 1997-2, Class A t - 1,134,562
5,000 CS First Boston Mortgage Securities Corp., Series 1998-C2, Class A2 - 4,624,118
1,500 CWMBS Inc. Series 1998 - 13, Class A3 - 1,337,805
1,500 CWMBS Inc. Series 1998 - 15, Class A8 - 1,300,505
3,586 DLJ Commercial Mortgage Corporation Series 1998-CF2, Class A1A - 3,381,526
3,382 Farmer Mac. Series 2002 - Class AA1 - 3,380,077
530 Green Tree Financial Corp Series 1998, Class 2 - 519,956
686 Headlands Mortgage Security Inc. REMIC Series 1997 - 1, Class A, II - 689,249
489 Headlands Mortgage Security Inc. REMIC Series 1997 - 2, Class A, II - 490,697
383 Headlands Mortgage Security Inc. REMIC Series 1997 - 4, Class A, II - 380,330
1,500 Headlands Mortgage Security Inc. REMIC Series 1998 - 1, Class A, III - 1,368,570
6,346 LB Commercial Conduit Mortgage Trust, Series 1998-C4, Class A1A - 6,042,498
703 Merrill Lynch Mortgage Investors, Inc. Series 1999, Class H1 - 698,216
539 Money Store Home Equity Trust Series 1997-D, Class AF3 534,426 534,426
3,086 Morgan Stanley Capital I, Series 1997-ALIC, Class A1B - 3,044,907
4,289 Morgan Stanley Capital I, Series 1997-WF1, Class A1 144A - 4,236,486
1,610 Morgan Stanley Capital Inc. Series 1998 - HF1, Class A1 - 1,557,497
4,935 Mortgage Capital Funding, Inc., Series 1998-MCI, Class A2 - 4,703,302
1,639 PNC Mortgage Securities Corp. Series 1998 - 5, Class 2A5 - 1,526,259
2,500 PNC Mortgage Securities Corp. Series 1999 - 5, Class 2A5 - 2,322,625
436 Prudential Home Mortgage REMIC 1993 - 29, Class A8 - 423,257
2,488 Prudential Securities Trust Series 18, Class E 2,448,923 2,448,923
4,333 Residential Accredit Loans Inc. Series 2000-QS3C, Class A1 4,328,718 4,328,718
10 Residential Funding Mortgage Securities Inc. Series 1993 - S15, Class A9 - 92,763
1,500 Residential Funding Mortgage Securities Inc. Series 1998 - S12, Class A6 - 1,359,461
1,428 Residential Funding Mortgage Securities Inc. Series 1998 - S20, Class A19 - 267,777
1,578 Ryland Mortgage Acceptance Corp. REMIC Series 76, Class B 1,621,638 1,621,638
990 Small Business Administration Series 1995 - 10, Class I - 994,061
------------------ -----------------
Total Collateralized Mortgage Obligations (cost - $100,751,562) 11,325,038 96,100,004
------------------ -----------------
ASSET BACKED SECURITIES - 0.92%
863 Beneficial Home Equity Loan Trust - 862,514
2,000 Conseco Finance Home Loan Trust - 2,003,480
688 Student Loan Marketing Association Series 1996 - 2, Class A1 - 686,863
2,000 Student Loan Trust - 1,939,960
------------------ -----------------
Total Asset Backed Securities (cost - $5,486,505) - 5,492,817
------------------ -----------------
STRIPPED MORTGAGE-BACKED SECURITIES - 2.08%
815 FHLMC REMIC Series 0013, Class B(1)+++ - 466,384
772 FHLMC REMIC Series 1554, Class I(1)+++ - 66,078
5,000 FHLMC REMIC Series 1627, Class PN(1)+++ - 1,055,866
1,613 FHLMC REMIC Series 1993 - 138, Class CL(1)+++ - 334,878
4,854 FHLMC REMIC Series 2059, Class PI(1)+++ - 1,112,681
9,033 FHLMC REMIC Series 2080, Class VK(1)+++ - 1,361,748
1,000 FHLMC REMIC Series 2110, Class PT(1)+++ - 306,780
941 FHLMC REMIC Series 2136, Class GD(1)+++ - 207,923
3,818 FHLMC REMIC, Series 2178, Class PI(1)+++ - 886,047
6 FNMA REMIC Trust 1992 - 142, Class KB(1)+++ - 164,618
7 FNMA REMIC Trust 1992 - 157, Class JA(1)+++ - 166,283
616 FNMA REMIC Trust 1992 - 207, Class U(1)+++ - 111,156
2,926 FNMA REMIC Trust 1993 - 116, Class H(1)+++ - 514,564
186 FNMA REMIC Trust 1993 - 161, Class GC(1)+++ - 126,760
794 FNMA REMIC Trust 1994 - 007, Class PK(1)+++ - 40,883
1,184 FNMA REMIC Trust 1994 - 030, Class IA(1)+++ - 141,378
7,119 FNMA REMIC Trust 1998 - 013, Class PI(1)+++ - 729,469
3,301 FNMA REMIC Trust 1998 - 024, Class OK(1) - 433,157
1,388 FNMA REMIC Trust 1998 - 044, Class IG(1)+++ - 208,041
6,705 GNMA REMIC Trust Series 1998 - 001, Class PG(1)+++ - 1,063,625
4,424 Chase Mortgage Finance Corp. Series 1998 - S2, Class A4(1)+++ - 536,410
16,000 Conseco Finance Securitizations(1)+++ - 1,015,000
15,096 CWMBS Inc. Series 1998 - 14, Class A2(1)+++ - 207,564
1,500 Firstplus Home Loan Owner Trust Series 1998 - 5, Class A1(1)+++ - 14,297
1,410 Prudential Home Mortgage REMIC 1993 - 54, Class A19(1)** - 1,188,280
------------------ -----------------
Total Stripped Mortgage-Backed Securities (cost - $11,212,501) - 12,459,870
------------------ -----------------
CORPORATE OBLIGATIONS - 0.50%
2,000 Lehman Brothers Holdings Inc. MTN - 2,007,542
1,000 Morgan Stanley Dean Witter - 1,000,699
------------------ -----------------
Total Corporate Obligations (cost--$3,006,152) - 3,008,241
------------------ -----------------
COMMERCIAL PAPER - 0.12%
700 Dominion Resources MTN(1) (cost - $699,915) - 699,915
------------------ -----------------
<PAGE>
<CAPTION>
COMBINED
PRINCIPAL MATURITY INTEREST
AMOUNT (000) DATES RATES
------------------ -------------------- ---------------
<S> <C> <C>
SHORT-TERM U.S. GOVERNMENT OBLIGATIONS - 0.76%
4,500 Federal National Mortgage Association Discount Notes 10/26/00 6.42 to 6.45
105 U.S. Treasury Notes 08/31/00 5.125@
Total Short-Term U.S. Government Obligations (cost - $4,430,949)
<CAPTION>
COMBINED
NUMBER
OF SHARES
------------------
<S> <C> <C>
MUTUAL FUNDS - 3.51%
14,703 MH Money Market Fund LLC
84 Scudder Institutional Fund
6,186 AIM Liquid Assets Portfolio
Total Mutual Funds (cost - $20,973,251)
<CAPTION>
COMBINED
PRINCIPAL MATURITY INTEREST
AMOUNT (000) DATES RATES
------------------ -------------------- ---------------
<S> <C> <C>
REPURCHASE AGREEMENTS - 3.36%
$ 1,767 Repurchase Agreement dated 7/31/00 with SG Warburg collateralized by
$1,344,000 U.S. Treasury Bond, 8.750% due 08/15/20 (value--$1,802,640)
proceeds: $1,767,319 08/01/00 6.500%
2,263 Repurchase Agreement dated 07/31/00 with State Street Bank & Trust Co.,
collateralized by $2,315,000 U.S. Treasury Notes, 5.250% due 05/31/01
(value--$2,312,106) proceeds: $2,263,330 08/01/00 5.250
16,093 Repurchase Agreement dated 07/31/00 with State Street Bank & Trust Co.,
collateralized by $11,995,000 U.S. Treasury Bond, 8.750% due 08/15/20
(value--$16,418,156) proceeds: $16,095,347 08/01/00 5.250
Total Repurchase Agreements (cost - $20,123,000)
Total Investments (cost--$867,895,633) - 142.53%
Liabilities in excess of other assets - (42.53)%
Net Assets--100.00%
<CAPTION>
COMBINED PACE GOVERNMENT PAINE WEBBER
PRINCIPAL SECURITIES FIXED U.S. GOVERNMENT
AMOUNT (000) INCOME INVESTMENTS INCOME FUND
------------------ ------------------ --------------------
<S> <C> <C>
SHORT-TERM U.S. GOVERNMENT OBLIGATIONS - 0.76%
4,500 Federal National Mortgage Association Discount Notes - -
105 U.S. Treasury Notes 104,869 -
------------------ --------------------
Total Short-Term U.S. Government Obligations (cost - $4,430,949) 104,869 -
------------------ --------------------
<CAPTION>
COMBINED PACE GOVERNMENT PAINE WEBBER
NUMBER SECURITIES FIXED U.S. GOVERNMENT
OF SHARES INCOME INVESTMENTS INCOME FUND
------------------ ------------------ -------------------
<S> <C> <C>
MUTUAL FUNDS - 3.51%
14,703 MH Money Market Fund LLC - 14,702,955
84 Scudder Institutional Fund - 84,180
6,186 AIM Liquid Assets Portfolio - 6,186,116
------------------ -------------------
Total Mutual Funds (cost - $20,973,251) - 20,973,251
------------------ -------------------
<CAPTION>
COMBINED PACE GOVERNMENT PAINE WEBBER
PRINCIPAL SECURITIES FIXED U.S. GOVERNMENT
AMOUNT (000) INCOME INVESTMENTS INCOME FUND
------------------ ------------------ ------------------
<S> <C> <C>
REPURCHASE AGREEMENTS - 3.36%
$ 1,767 Repurchase Agreement dated 7/31/00 with SG Warburg collateralized by
$1,344,000 U.S. Treasury Bond, 8.750% due 08/15/20 (value--$1,802,640)
proceeds: $1,767,319 - 1,767,000
2,263 Repurchase Agreement dated 07/31/00 with State Street Bank & Trust Co.,
collateralized by $2,315,000 U.S. Treasury Notes, 5.250% due 05/31/01
(value--$2,312,106) proceeds: $2,263,330 - -
16,093 Repurchase Agreement dated 07/31/00 with State Street Bank & Trust Co.,
collateralized by $11,995,000 U.S. Treasury Bond, 8.750% due 08/15/20
(value--$16,418,156) proceeds: $16,095,347 16,093,000 -
------------------ ------------------
Total Repurchase Agreements (cost - $20,123,000) 16,093,000 1,767,000
------------------ ------------------
Total Investments (cost--$867,895,633) - 142.53% 328,327,261 315,138,396
Liabilities in excess of other assets - (42.53)% (129,409,240) (77,053,677)
------------------ ------------------
Net Assets--100.00% $ 198,918,021 $ 238,084,719
================= ==================
<CAPTION>
COMBINED PW LOW DURATION
PRINCIPAL U.S. GOVERNMENT
AMOUNT (000) INCOME FUND COMBINED
------------------ ------------------ ----------------
<S> <C> <C>
SHORT-TERM U.S. GOVERNMENT OBLIGATIONS - 0.76%
4,500 Federal National Mortgage Association Discount Notes 4,430,735 4,430,735
105 U.S. Treasury Notes - 104,869
---------------------- ----------------
Total Short-Term U.S. Government Obligations (cost - $4,430,949) 4,430,735 4,535,604
---------------------- ----------------
<CAPTION>
COMBINED PW LOW DURATION
NUMBER U.S. GOVERNMENT
OF SHARES INCOME FUND COMBINED
------------------ ---------------------- ----------------
<S> <C> <C>
MUTUAL FUNDS - 3.51%
14,703 MH Money Market Fund LLC - 14,702,955
84 Scudder Institutional Fund - 84,180
6,186 AIM Liquid Assets Portfolio - 6,186,116
---------------------- ----------------
Total Mutual Funds (cost - $20,973,251) - 20,973,251
---------------------- ----------------
<CAPTION>
COMBINED PW LOW DURATION
PRINCIPAL U.S. GOVERNMENT
AMOUNT (000) INCOME FUND COMBINED
------------------ ---------------------- ----------------
<S> <C> <C>
REPURCHASE AGREEMENTS - 3.36%
$ 1,767 Repurchase Agreement dated 7/31/00 with SG Warburg collateralized by
$1,344,000 U.S. Treasury Bond, 8.750% due 08/15/20 (value--$1,802,640)
proceeds: $1,767,319 1,767,000
2,263 Repurchase Agreement dated 07/31/00 with State Street Bank & Trust Co.,
collateralized by $2,315,000 U.S. Treasury Notes, 5.250% due 05/31/01
(value--$2,312,106) proceeds: $2,263,330 2,263,000 2,263,000
16,093 Repurchase Agreement dated 07/31/00 with State Street Bank & Trust Co.,
collateralized by $11,995,000 U.S. Treasury Bond, 8.750% due 08/15/20
(value--$16,418,156) proceeds: $16,095,347 - 16,093,000
---------------------- ----------------
Total Repurchase Agreements (cost - $20,123,000) 2,263,000 20,123,000
---------------------- ----------------
Total Investments (cost--$867,895,633) - 142.53% 208,997,696 852,463,353
Liabilities in excess of other assets - (42.53)% (47,913,090) (254,376,007)
---------------------- ----------------
Net Assets--100.00% $ 161,084,606 $ 598,087,346
====================== ================
</TABLE>
<TABLE>
<CAPTION>
COMBINED PACE GOVERNMENT PAINE WEBBER
NUMBER OF STRIKE EXPIRATION SECURITIES FIXED U.S. GOVERNMENT
CONTRACTS PRICE DATES INCOME INVESTMENTS INCOME FUND
------------------ -------- ---------------- ------------------- -----------------
<S> <C> <C> <C> <C>
WRITTEN OPTIONS(1)
300 Federal National Mortgage Association Calls $ 123.75 September 2000 $ 77,700 $ -
=================== =================
<CAPTION>
COMBINED PW LOW DURATION
NUMBER OF U.S. GOVERNMENT
CONTRACTS INCOME FUND COMBINED
------------------ ---------------------- -----------------
<S> <C> <C>
WRITTEN OPTIONS(1)
300 Federal National Mortgage Association Calls $ - $ 77,700
====================== =================
</TABLE>
---------------------------------
++ Floating rate securities. The interest rates shown are the current
rates as of July 31, 2000.
* Rate reflects annualized yield at date of purchase.
** Principal Only Security. This Security entitles the holder to receive
principal payments from an underlying pool of mortgages. High
prepayments return principal faster than expected and cause the yield
to increase. Low prepayments return principal more slowly than
expected and cause the yield to decrease.
+++ Interest Only Security. This security entitles the holder to receive
interest payments from an underlying pool of mortgages. The risk
associated with this security is related to the speed of the principal
paydowns. High prepayments would result in a smaller amount of
interest being received and cause the yield to decrease. Low
prepayments would result in a greater amount of interest being
received and cause the yield to increase.
+ Estimated yield to maturity at July 31, 2000.
@ Interest rate shown is discount rate at date of purchase.
(1) Illiquid securities representing 2.10% of net assets.
ARM Adjustable Rate Mortgage--The interest rates shown are the current
rates as of July 31, 2000.
MTN Medium Term Note.
REMIC Real Estate Mortgage Investment Conduit.
TBA (To Be Assigned) Securities are purchased on a forward commitment with
an approximate principal amount (generally +/- 1.0%) and no definite
maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are
assigned.
(2) Security, or portion thereof, was on loan at July 31, 2000.
See accompanying notes to proforma financial statements
<PAGE>
PACE Government Securities Fixed Income Investments
PaineWebber U.S. Government Income Fund
PaineWebber Low Duration U.S. Government Income Fund
Notes to Pro Forma Financial Statements
For the year ended July 31, 2000 (unaudited)
Basis of Presentation:
Subject to the approval of the Agreement and Plan of Reorganization and
Termination ("Plan") by the shareholders of PaineWebber U.S. Government
Income Fund ("U.S. Government Income") and PaineWebber Low Duration U.S.
Government Income ("Low Duration"), PACE Government Securities Fixed Income
Investments ("Government Securities") would acquire the assets of U.S.
Government Income and Low Duration in exchange solely for the assumption by
Government Securities of U.S. Government Income's and Low Duration's assets
and liabilities and shares of Government Securities that correspond to the
outstanding shares of U.S. Government Income and Low Duration. The number of
shares to be received would be based on the relative net asset value of
Government Securities' shares on the effective date of the Plan and U.S.
Government Income and Low Duration will be terminated as soon as practicable
thereafter.
The pro forma financial statements reflect the financial position of
Government Securities, U.S. Government Income and Low Duration at July 31,
2000 and the combined results of operations of Government Securities, U.S.
Government Income and Low Duration (each a "Fund" and, collectively, the
"Funds") for the year ended July 31, 2000.
As a result of the Plan, the investment advisory and administration fee will
increase due to the higher fee schedule, net of waivers, of Government
Securities. However, after anticipated savings in other expenses of the Fund
(due to the elimination of duplicative expenses) coupled with the management
fee waiver/expense reimbursement, shareholders of each class of shares of
U.S. Government Income and shareholders of each class of shares of Low
Duration (except Class A) will not experience an increase in total expenses.
U.S. Government Income and Low Duration currently pay Rule 12b-1 distribution
or service fees; Government Securities currently does not. In addition, the
pro forma statement of assets and liabilities has not been adjusted as a
result of the proposed transaction because such adjustment would not be
material. The cost of approximately $368,000 associated with the
Reorganization will be paid by Mitchell Hutchins Asset Management Inc.
("Mitchell Hutchins"), a wholly owned asset management subsidiary of
PaineWebber Incorporated (a wholly owned indirect subsidiary of UBS AG), so
that each Fund bears no expenses of the Reorganization. These costs are not
included in the pro forma statement of operations.
The pro forma 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 August
1, 1999. The pro forma financial statements should be read in conjunction
with the historical financial statements of the constituent Funds included in
or incorporated by reference in the applicable statement of additional
information.
Significant Accounting Policies:
The Funds' financial statements are prepared in accordance with generally
accepted accounting principles that require the use of management accruals
and estimates. These unaudited financial
3
<PAGE>
statements reflect all adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim period
presented. The following is a summary of significant accounting policies
followed by the Funds.
VALUATION OF INVESTMENTS-Each Fund calculates its net asset value based on
the current market value for its portfolio securities. Each Fund normally
obtains market values for its securities from independent pricing sources.
Independent pricing sources may use reported last sale prices, current market
quotations or valuations from computerized "matrix" systems that derive
values based on comparable securities. Securities traded in the
over-the-counter ("OTC") market and listed on The Nasdaq Stock Market, Inc.
("Nasdaq") normally are valued at the last sale price on Nasdaq prior to
valuation. Other OTC securities are valued at the last bid price available
prior to valuation. Securities which are listed on U.S. and foreign stock
exchanges normally are valued at the last sale price on the day the
securities are valued or, lacking any sales on such day, at the last
available bid price. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated as the primary
market by Mitchell Hutchins, or by the Fund's sub-adviser. If a market value
is not available from an independent pricing source for a particular
security, that security is valued at fair value as determined in good faith
or under the direction of the Fund's board of trustees (the "board"). The
amortized cost method of valuation, which approximates market value,
generally is used to value short-term debt instruments with sixty days or
less remaining to maturity, unless the board determines that this does not
represent fair value. Each Fund's investments are valued using the amortized
cost method of valuation.
4
<PAGE>
PAINEWEBBER PACE SELECT ADVISORS TRUST
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
STATEMENT OF ADDITIONAL INFORMATION DATED NOVEMBER , 2000
The following funds are series of PaineWebber PACE Select Advisors
Trust ("Trust"), a professionally managed open-end investment company.
<TABLE>
<S> <C>
PACE Money Market Investments PACE Large Company Value Equity Investments
PACE Government Securities Fixed Income Investments PACE Large Company Growth Equity Investments
PACE Intermediate Fixed Income Investments PACE Small/Medium Company Value Equity Investments
PACE Strategic Fixed Income Investments PACE Small/Medium Company Growth Equity Investments
PACE Municipal Fixed Income Investments PACE International Equity Investments
PACE Global Fixed Income Investments PACE International Emerging Markets Equity Investments
</TABLE>
PACE Intermediate Fixed Income Investments and PACE Global Fixed
Income Investments are non-diversified series of the Trust. The other funds
are diversified series.
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a
wholly owned asset management subsidiary of PaineWebber Incorporated
("PaineWebber"), serves as the manager and administrator for each fund and
also as the investment adviser for PACE Money Market Investments. Mitchell
Hutchins selects and monitors unaffiliated investment advisers who provide
advisory services for the other funds. As distributor for the funds, Mitchell
Hutchins has appointed PaineWebber to serve as dealer for the sale of fund
shares.
Portions of the funds' Annual Report to Shareholders are
incorporated by reference into this Statement of Additional Information
("SAI"). The Annual Report accompanies this SAI. You may obtain additional
copies of the funds' Annual Report without charge by calling toll-free
1-800-647-1568.
This SAI is not a prospectus and should be read only in conjunction
with the funds' current Prospectus, dated November , 2000. A copy of the
Prospectus may be obtained by calling any PaineWebber Financial Advisor or by
calling toll-free 1-800-647-1568. The Prospectus contains more complete
information about the funds. You should read it carefully before investing.
This SAI is dated November , 2000.
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
----
<S> <C>
The Funds and Their Investment Policies............................................ 2
The Funds' Investments, Related Risks and Limitations.............................. 9
Strategies Using Derivative Instruments............................................ 33
Organization of Trust; Trustees and Officers; Principal Holders and
Management Ownership of Securities.............................................. 42
Investment Advisory, Administration and Distribution Arrangements.................. 46
Portfolio Transactions............................................................. 57
Reduced Sales Charges, Additional Exchange and Redemption Information
and Other Services.............................................................. 61
Conversion of Class B Shares....................................................... 67
Valuation of Shares................................................................ 67
Performance Information............................................................ 69
Taxes.............................................................................. 75
Other Information.................................................................. 80
Financial Statements............................................................... 81
Appendix........................................................................... A-1
</TABLE>
<PAGE>
THE FUNDS AND THEIR INVESTMENT POLICIES
No fund's investment objective may be changed without shareholder
approval. Except where noted, the other investment policies of each fund may
be changed by the board without shareholder approval. As with other mutual
funds, there is no assurance that a fund will achieve its investment
objective.
PACE MONEY MARKET INVESTMENTS has an investment objective of current
income consistent with preservation of capital and liquidity. The fund
invests in high quality money market instruments that have, or are deemed to
have, remaining maturities of 13 months or less. Money market instruments are
short-term debt obligations and similar securities. These instruments include
(1) U.S. and foreign government securities, (2) obligations of U.S. and
foreign banks, (3) commercial paper and other short-term obligations of U.S.
and foreign corporations, partnerships, trusts and similar entities, (4)
repurchase agreements and (5) investment company securities. Money market
instruments also include longer term bonds that have variable interest rates
or other special features that give them the financial characteristics of
short-term debt. The fund may purchase participation interests in any of the
securities in which it is permitted to invest. Participation interests are
pro rata interests in securities held by others. The fund maintains a
dollar-weighted average portfolio maturity of 90 days or less.
PACE Money Market Investments may invest in obligations (including
certificates of deposit, bankers' acceptances, time deposits and similar
obligations) of U.S. and foreign banks only if the institution has total
assets at the time of purchase in excess of $1.5 billion. The fund's
investments in non-negotiable time deposits of these institutions will be
considered illiquid if they have maturities greater than seven calendar days.
PACE Money Market Investments may purchase only those obligations
that Mitchell Hutchins determines, pursuant to procedures adopted by the
board, present minimal credit risks and are "First Tier Securities" as
defined in Rule 2a-7 under the Investment Company Act of 1940, as amended
("Investment Company Act"). First Tier Securities include U.S. government
securities and securities of other registered investment companies that are
money market funds. Other First Tier Securities are either (1) rated in the
highest short-term rating category by at least two nationally recognized
statistical rating organizations ("rating agencies"), (2) rated in the
highest short-term rating category by a single rating agency if only that
rating agency has assigned the obligation a short-term rating, (3) issued by
an issuer that has received such a short-term rating with respect to a
security that is comparable in priority and security, (4) subject to a
guarantee rated in the highest short-term rating category or issued by a
guarantor that has received the highest short-term rating for a comparable
debt obligation or (5) unrated, but determined by Mitchell Hutchins to be of
comparable quality. If a security in the fund's portfolio ceases to be a
First Tier Security (as defined above) or Mitchell Hutchins becomes aware
that a security has received a rating below the second highest rating by any
rating agency, Mitchell Hutchins and, in certain cases, the board, will
consider whether the fund should continue to hold the obligation. A First
Tier Security rated in the highest short-term category at the time of
purchase that subsequently receives a rating below the highest rating
category from a different rating agency may continue to be considered a First
Tier Security.
PACE Money Market Investments may purchase variable and floating
rate securities with remaining maturities in excess of 397 calendar days
issued by U.S. government agencies or instrumentalities or guaranteed by the
U.S. government. In addition, the fund may purchase variable and floating
rate securities of other issuers. The yields on these securities are adjusted
in relation to changes in specific rates, such as the prime rate, and
different securities may have different adjustment rates. Certain of these
obligations carry a demand feature that gives the fund the right to tender
them back to a specified party, usually the issuer or a remarketing agent,
prior to maturity. The fund's investment in these securities must comply with
conditions established by the Securities and Exchange Commission ("SEC")
under which they may be considered to have remaining maturities of 397
calendar days or less. The fund will purchase variable and floating rate
securities of non-U.S. government issuers that have remaining maturities of
more than 397 calendar days only if the securities are subject to a demand
feature exercisable within 397 calendar days or less. See "The Funds'
Investments, Related Risks and Limitations - Credit and Liquidity
Enhancements."
Generally, PACE Money Market Investments may exercise demand
features (1) upon a default under the terms of the underlying security, (2)
to maintain its portfolio in accordance with its investment objective and
policies or applicable legal or regulatory requirements or (3) as needed to
provide liquidity to the fund in order to meet redemption requests. The
ability of a bank or other financial institutional to fulfill its obligations
under a letter of credit, guarantee or other liquidity arrangement might be
affected by possible financial difficulties of its borrowers, adverse
interest rate or economic conditions, regulatory limitations or other
factors. The interest rate on floating rate or variable rate securities
<PAGE>
ordinarily is readjusted on the basis of the prime rate of the bank that
originated the financing or some other index or published rate, such as the
90-day U.S. Treasury bill rate, or is otherwise reset to reflect market rates
of interest. Generally, these interest rate adjustments cause the market
value of floating rate and variable rate securities to fluctuate less than
the market value of fixed rate securities.
Variable rate securities include variable amount master demand
notes, which are unsecured redeemable obligations that permit investment of
varying amounts at fluctuating interest rates under a direct agreement
between PACE Money Market Investments and an issuer. The principal amount of
these notes may be increased from time to time by the parties (subject to
specified maximums) or decreased by the fund or the issuer. These notes are
payable on demand (subject to any applicable advance notice provisions) and
may or may not be rated.
PACE Money Market Investments generally may invest no more than 5%
of its total assets in the securities of a single issuer (other than U.S.
government securities), except that the fund may invest up to 25% of its
total assets in First Tier Securities of a single issuer for a period of up
to three business days. The fund may purchase only U.S. dollar denominated
obligations of foreign issuers.
PACE Money Market Investments may invest up to 10% of its net assets
in illiquid securities. The fund may purchase securities on a when-issued or
delayed delivery basis. The fund may lend its portfolio securities to
qualified broker-dealers or institutional investors in an amount up to 33 1/3%
of its total assets. The fund may borrow from banks and through reverse
repurchase agreements for temporary or emergency purposes, but not in excess
of 10% of its total assets. The costs associated with borrowing may reduce
the fund's net income.
PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS has an
investment objective of current income. Pacific Investment Management Company
LLC ("PIMCO") serves as the fund's investment adviser. The fund invests in
U.S. government bonds and other bonds of varying maturities but normally
maintains a dollar-weighted average portfolio duration of between one and
seven years. Under normal circumstances, the fund invests at least 65% of its
total assets in U.S. government bonds, including those backed by mortgages,
and related repurchase agreements. The fund may invest up to 35% of its total
assets in corporate bonds, including mortgage- and asset-backed securities of
private issuers. These investments are limited to bonds that are rated at
least A by Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P"), or Moody's Investors Service, Inc. ("Moody's"), except that the fund
may not acquire a bond if, as a result, more than 25% of its total assets
would be invested in bonds rated below AAA or if more than 10% of its total
assets would be invested in bonds rated A. The fund may invest in bonds that
are assigned comparable ratings by another rating agency and unrated bonds
that its investment adviser determines are of comparable quality to rated
securities in which the fund may invest.
PACE Government Securities Fixed Income Investments may invest in
certain zero coupon securities that are U.S. Treasury notes and bonds that
have been stripped of their unmatured interest coupon receipts. The SEC staff
currently takes the position that "stripped" U.S. government securities that
are not issued through the U.S. Treasury are not U.S. government securities.
As long as the SEC staff takes this position, the fund will not consider
these stripped U.S. government securities to be U.S. government securities
for purposes of its 65% investment requirement. The fund may not invest more
than 5% of its net assets in any combination of interest-only, principal-only
and inverse floating rate securities, including those that are not mortgage-
or asset-backed securities.
PACE Government Securities Fixed Income Investments may invest up to
15% of its net assets in illiquid securities. The fund may purchase
securities on a when-issued or delayed delivery basis. The fund may lend its
portfolio securities to qualified broker-dealers or institutional investors
in an amount up to 33 1/3% of its total assets. The fund may engage in dollar
rolls and reverse repurchase agreements involving up to an aggregate of not
more than 5% of its total assets for investment purposes to enhance its
return. These transactions are considered borrowings. The fund may also
borrow from banks and through reverse repurchase agreements for temporary or
emergency purposes, but not in excess of 10% of its total assets. The costs
associated with borrowing may reduce the fund's net income. The fund may
invest in loan participations and assignments. These investments are
generally subject to the fund's overall limitation on investments in illiquid
securities. The fund may invest in the securities of other investment
companies and may sell short "against the box."
PACE INTERMEDIATE FIXED INCOME INVESTMENTS has an investment
objective of current income, consistent with reasonable stability of
principal. Metropolitan West Asset Management, LLC ("MWAM") serves as the
fund's
3
<PAGE>
investment adviser. The fund invests in bonds of varying maturities but
normally maintains a dollar-weighted average portfolio duration of between
two and four and one-half years. Under normal circumstances, the fund invests
at least 65% of its total assets in U.S. government and foreign government
bonds (including bonds issued by supranational and quasi-governmental
entities and mortgage-backed securities), corporate bonds (including
mortgage- and asset-backed securities of private issuers, Eurodollar
certificates of deposit, Eurodollar bonds and Yankee bonds) and preferred
stocks. The fund limits its investments to investment grade securities. The
fund may invest up to 10% of its total assets in securities denominated in
foreign currencies of developed countries. The fund's investments may include
certain zero coupon securities that are U.S. Treasury notes and bonds that
have been stripped of their unmatured interest coupon receipts. The fund may
not invest more than 5% of its net assets in any combination of
interest-only, principal-only and inverse floating rate securities, including
those that are not mortgage- or asset-backed securities.
PACE Intermediate Fixed Income Investments may invest up to 15% of
its net assets in illiquid securities. The fund may purchase securities on a
when-issued or delayed delivery basis. The fund may lend its portfolio
securities to qualified broker-dealers or institutional investors in an
amount up to 33 1/3% of its total assets. The fund may borrow from banks and
through reverse repurchase agreements for temporary or emergency purposes,
but not in excess of 10% of its total assets. The costs associated with
borrowing may reduce the fund's net income. The fund may invest in the
securities of other investment companies and may sell short "against the box."
PACE STRATEGIC FIXED INCOME INVESTMENTS has an investment objective
of total return consisting of income and capital appreciation. Pacific
Investment Management Company LLC ("PIMCO") serves as the fund's investment
adviser. The fund invests in bonds of varying maturities but normally
maintains a dollar-weighted average portfolio duration of between three and
eight years. Under normal circumstances, the fund invests at least 65% of its
total assets in U.S. government bonds, bonds (including convertible bonds) of
U.S. and foreign private issuers, foreign government bonds (including bonds
issued by supranational and quasi-governmental entities), foreign currency
exchange-related securities, loan participations and assignments and money
market instruments (including commercial paper and certificates of deposit).
These investments include mortgage- and asset-backed securities, although the
fund's investments in mortgage-backed securities of private issuers are
limited to 35% of its total assets. The fund may not invest more than 5% of
its net assets in any combination of interest-only, principal-only and
inverse floating rate securities, including those that are not mortgage- or
asset-backed securities.
PACE Strategic Fixed Income Investments invests primarily in
investment grade bonds but may invest up to 20% of its total assets in
securities, including convertible securities, that are not investment grade
but are rated at least B by S&P or Moody's, assigned a comparable rating by
another rating agency or, if unrated, determined by its investment adviser to
be of comparable quality. The fund may invest up to 20% of its total assets
in a combination of Yankee bonds, Eurodollar bonds and bonds denominated in
foreign currencies, except that not more than 10% of the fund's total assets
may be invested in bonds denominated in foreign currencies. The fund's
investments may include Brady Bonds. The fund's investments also may include
certain zero coupon securities that are U.S. Treasury notes and bonds that
have been stripped of their unmatured interest coupon receipts, other debt
securities sold with a discount and payment-in-kind securities.
PACE Strategic Fixed Income Investments may invest up to 15% of its
net assets in illiquid securities. The fund may purchase securities on a
when-issued or delayed delivery basis. The fund may lend its portfolio
securities to qualified broker-dealers or institutional investors in an
amount up to 33 1/3% of its total assets. The fund may engage in dollar rolls
and reverse repurchase agreements involving up to an aggregate of not more
than 5% of its total assets for investment purposes to enhance the fund's
return. These transactions are considered borrowings. The fund may also
borrow from banks and through reverse repurchase agreements for temporary or
emergency purposes, but not in excess of 10% of its total assets. The costs
associated with borrowing may reduce the fund's net income. The fund may
invest in loan participations and assignments. These investments are
generally subject to the fund's overall limitation on investments in illiquid
securities. The fund may invest in the securities of other investment
companies and may sell short "against the box."
PACE MUNICIPAL FIXED INCOME INVESTMENTS has an investment objective
of high current income exempt from federal income tax. Standish, Ayer & Wood,
Inc. serves as the fund's investment adviser. Under normal conditions, the
fund invests at least 80% of its total assets in municipal bonds, the
interest on which, in the opinion of counsel to the issuers, is exempt from
federal income tax. The fund invests in bonds of varying maturities but
4
<PAGE>
normally maintains a dollar-weighted average portfolio duration of between
three and seven years. The fund invests in municipal bonds rated at the time
of purchase at least A, MIG-2 or Prime-2 by Moody's or A, SP-2 or A-2 by S&P
or, if unrated, determined to be of comparable quality by its investment
adviser, except that the fund may invest up to 15% of its total assets in
municipal bonds that at the time of purchase are rated Baa by Moody's, BBB by
S&P or, if unrated, are determined to be of comparable quality by its
investment adviser. The fund also may invest without limit in private
activity bonds and other municipal bonds that pay interest that is an item of
tax preference for purposes of the federal alternative minimum tax ("AMT")
(sometimes referred to as a "tax preference item"), although the fund will
endeavor to manage its portfolio so that no more than 25% of its interest
income will be a tax preference item.
PACE Municipal Fixed Income Investments may not invest more than 25%
of its total assets in municipal obligations whose issuers are located in the
same state. The fund also may not invest more than 25% of its total assets in
municipal obligations that are secured by revenues from a particular
industry, except that it may invest up to 50% of its total assets in
municipal bonds that are secured by revenues from public housing authorities
and state and local housing finance authorities, including bonds backed by
the U.S. Treasury or other U.S. government-guaranteed securities. The fund
may invest without limit in private activity bonds, including private
activity bonds that are collateralized by letters of credit issued by banks
having stockholders' equity in excess of $100 million as of the date of their
most recently published statement of financial condition. The fund may not
invest more than 5% of its net assets in municipal leases.
PACE Municipal Fixed Income Investments may invest up to 15% of its
net assets in illiquid securities. The fund may purchase securities on a
when-issued or delayed delivery basis. The fund may lend its portfolio
securities to qualified broker-dealers or institutional investors in an
amount up to 33 1/3% of its total assets. The fund may borrow from banks and
through reverse repurchase agreements for temporary or emergency purposes,
but not in excess of 10% of its total assets. The costs associated with
borrowing may reduce the fund's net income. The fund may invest up to 20% of
its total assets in certain taxable securities to maintain liquidity. The
fund may invest in the securities of other investment companies.
PACE GLOBAL FIXED INCOME INVESTMENTS has an investment objective of
high total return. Rogge Global Partners plc and Fischer Francis Trees &
Watts, Inc. and its affiliates ("FFTW") serve as the fund's investment
advisers. Mitchell Hutchins allocates the fund's assets between the two
investment advisers. The fund invests primarily in high-grade bonds,
denominated in foreign currencies or U.S. dollars, of governmental and
private issuers in the United States and developed foreign countries. The
fund's investments may include mortgage-backed and asset-backed securities.
The fund invests in bonds of varying maturities but normally maintains a
dollar-weighted average portfolio duration of between four and eight years.
Under normal circumstances, the fund invests at least 65% of its total assets
in U.S. government bonds, foreign government bonds (including bonds issued by
supranational organizations and quasi-governmental entities) and bonds of
U.S. or foreign private issuers. The fund normally invests in a minimum of
four countries, one of which may be the United States. Debt securities are
considered high grade if they are rated A or better by S&P or Moody's or
another rating agency or, if unrated, determined by the fund's investment
adviser to be of comparable quality.
PACE Global Fixed Income Investments may invest up to 10% of its
total assets in bonds issued by companies and governments in emerging market
countries that are rated as low as Ba by Moody's or BB by S&P or, if unrated,
determined by the fund's investment adviser to be of comparable quality. The
fund considers "emerging market countries" to be those countries not included
in the Morgan Stanley Capital International World Index of major world
economies. The fund's investments may include Brady Bonds. The fund's
investments also may include certain zero coupon securities that are U.S.
Treasury notes and bonds that have been stripped of their unmatured interest
coupon receipts.
PACE Global Fixed Income Investments may invest up to 15% of its net
assets in illiquid securities. The fund may lend its portfolio securities to
qualified broker-dealers or institutional investors in an amount up to 33
1/3% of its total assets. The fund may borrow from banks and through reverse
repurchase agreements for temporary or emergency purposes, but not in excess
of 10% of its total assets. The costs associated with borrowing may reduce
the fund's net income. The fund may invest in structured foreign investments
and loan participations and assignments. These investments are generally
subject to the fund's overall limitation on investments in illiquid
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securities, and in no event may the fund's investments in loan participations
and assignments exceed 10% of its total assets. The fund may invest in the
securities of other investment companies and may sell short "against the box."
PACE LARGE COMPANY VALUE EQUITY INVESTMENTS has an investment
objective of capital appreciation and dividend income. Institutional Capital
Corporation ("ICAP"), Westwood Management Corporation and State Street Global
Advisors ("SSgA") serve as the fund's investment advisers. Mitchell Hutchins
allocates the fund's assets among the three investment advisers. The fund
invests primarily in equity securities of U.S. companies that are believed to
be undervalued. The fund's investments may include both large and medium
capitalization companies. However, under normal circumstances, the fund
invests at least 65% of its total assets in common stocks of companies with a
total market capitalization of $4.0 billion or greater at the time of
purchase. The term "market capitalization" means the market value of a
company's outstanding common stock. The fund seeks income primarily from
dividend paying stocks.
ICAP and Westwood use active stock selection strategies to invest
their share of the fund's assets. In managing its share of the fund's assets,
SSgA seeks to outperform the Russell 1000 Value Index (before fees and
expenses). SSgA uses several independent valuation measures to identify
investment opportunities within a large cap value universe and combines
factors to produce an overall rank. Comprehensive research determines the
optimal weighting of these perspectives to arrive at strategies that vary by
industry. SSgA ranks all companies within the investable universe initially
from top to bottom based on their relative attractiveness. SSgA constructs
the fund's portfolio by selecting the highest-ranked stocks from the universe
and managing deviations from the benchmark to maximize the risk/reward
trade-off. The resulting portfolio has characteristics similar to the Russell
1000 Value Index.
PACE Large Company Value Equity Investments may invest up to 10% of
its total assets in convertible bonds that are not investment grade, but
these securities must be rated at least BB by S&P, Ba by Moody's or, if
unrated, determined to be of comparable quality by its investment adviser.
Subject to its 65% investment requirement, the fund may invest in a broad
range of equity securities of U.S. issuers that are traded on major stock
exchanges or in the over-the-counter market. The fund may invest up to 10% of
its total assets in U.S. dollar-denominated foreign securities that are
traded on recognized U.S. exchanges or in the U.S. over-the-counter market.
The fund also may invest in U.S. government bonds and investment grade
corporate bonds.
PACE Large Company Value Equity Investments may invest up to 15% of
its net assets in illiquid securities. The fund may purchase securities on a
when-issued or delayed delivery basis. The fund may lend its portfolio
securities to qualified broker-dealers or institutional investors in an
amount up to 33 1/3% of its total assets. The fund may borrow from banks and
through reverse repurchase agreements for temporary or emergency purposes,
but not in excess of 10% of its total assets. The costs associated with
borrowing may reduce the fund's net income. The fund may invest in the
securities of other investment companies and may sell short "against the box."
PACE LARGE COMPANY GROWTH EQUITY INVESTMENTS has an investment
objective of capital appreciation. Alliance Capital Management L.P.
("Alliance Capital") and State Street Global Advisors ("SSgA") serve as the
fund's investment advisers. Mitchell Hutchins allocates the fund's assets
between the two investment advisers. The fund invests primarily in equity
securities that are believed to have substantial potential for capital
growth. Dividend income is an incidental consideration in the investment
advisers' selection of investments for the fund. Although the fund may invest
in a broad range of equity securities, including securities convertible into
common stocks, under normal circumstances it invests at least 65% of its
total assets in common stocks of companies with total market capitalization
of $4.0 billion or greater at the time of purchase. The term "market
capitalization" means the market value of a company's outstanding common
stock.
Alliance Capital uses an active stock selection strategy to invest
its share of the fund's assets. In managing its share of the fund's assets,
SSgA seeks to outperform the Russell 1000 Growth Index (before fees and
expenses). SSgA uses several independent valuation measures to identify
investment opportunities within a large cap growth universe and combines
factors to produce an overall rank. Comprehensive research determines the
optimal weighting of these perspectives to arrive at strategies that vary by
industry. SSgA ranks all companies within the investable universe are ranked
from top to bottom based on their relative attractiveness. SSgA constructs
the fund's portfolio by selecting the highest-ranked stocks from the universe
and manages deviations from the benchmark to
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maximize the risk/reward trade-off. The resulting portfolio has
characteristics similar to the Russell 1000 Growth Index.
Subject to its 65% investment requirement, PACE Large Company Growth
Equity Investments may invest in a broad range of equity securities of U.S.
issuers. The fund may invest up to 10% of its total assets in U.S.
dollar-denominated foreign securities that are traded on recognized U.S.
exchanges or in the U.S. over-the-counter market. The fund also may invest in
U.S. government bonds and investment grade corporate bonds.
PACE Large Company Growth Equity Investments may invest up to 15% of
its net assets in illiquid securities. The fund may purchase securities on a
when-issued or delayed delivery basis. The fund may lend its portfolio
securities to qualified broker-dealers or institutional investors in an
amount up to 33 1/3% of its total assets. The fund may borrow from banks and
through reverse repurchase agreements for temporary or emergency purposes,
but not in excess of 10% of its total assets. The costs associated with
borrowing may reduce the fund's net income. The fund may invest in the
securities of other investment companies and may sell short "against the box."
PACE SMALL/MEDIUM COMPANY VALUE EQUITY INVESTMENTS has an investment
objective of capital appreciation. Ariel Capital Management, Inc. and ICM
Asset Management, Inc. serve as the fund's investment advisers. Mitchell
Hutchins allocates the fund's assets between the two investment advisers. The
fund invests primarily in equity securities of companies that are believed to
be undervalued or overlooked in the marketplace. Although the fund may invest
in a broad range of equity securities, including securities convertible into
common stocks, under normal market conditions the fund invests at least 65%
of its total assets in common stocks of companies with total market
capitalization of less than $4.0 billion at the time of purchase. The term
"market capitalization" means the market value of a company's outstanding
common stock. The fund invests in equity securities that generally have
price-to-earnings ("P/E") ratios that are below the market average. The fund
invests in the equity securities of companies only if they have common stock
that is traded on a major stock exchange or in the over-the-counter market.
Subject to its 65% investment requirement, the fund may invest in U.S.
government bonds and investment grade corporate bonds.
PACE Small/Medium Company Value Equity Investments may invest up to
15% of its net assets in illiquid securities. The fund may purchase
securities on a when-issued or delayed delivery basis. The fund may lend its
portfolio securities to qualified broker-dealers or institutional investors
in an amount up to 33 1/3% of its total assets. The fund may borrow from
banks and through reverse repurchase agreements for temporary or emergency
purposes, but not in excess of 10% of its total assets. The costs associated
with borrowing may reduce the fund's net income. The fund may invest in the
securities of other investment companies and may sell short "against the box."
PACE SMALL/MEDIUM COMPANY GROWTH EQUITY INVESTMENTS has an
investment objective of capital appreciation. Delaware Management Company
serves as the fund's investment adviser. The fund invests primarily in the
stocks of companies that are characterized by above-average earnings growth
rates and total market capitalization of less than $4.0 billion at the time
of purchase. The term "market capitalization" means the market value of a
company's outstanding common stock. Dividend income is an incidental
consideration in the investment adviser's selection of investments for the
fund. Although the fund may invest in a broad range of equity securities,
including securities convertible into common stocks, under normal
circumstances it invests at least 65% of its total assets in common stocks of
issuers with total market capitalization of less than $4.0 billion that
exhibit the potential for high future earnings growth relative to the overall
market. Subject to its 65% investment requirement, the fund may invest in
U.S. government bonds and investment grade corporate bonds. The fund may
invest up to 5% of its total assets in U.S. dollar denominated foreign
securities that are traded on recognized U.S. exchanges or in the U.S.
over-the-counter market.
PACE Small/Medium Company Growth Equity Investments may invest up to
15% of its net assets in illiquid securities. The fund may purchase
securities on a when-issued or delayed delivery basis. The fund may lend its
portfolio securities to qualified broker-dealers or institutional investors
in an amount up to 33 1/3% of its total assets. The fund may borrow from
banks and through reverse repurchase agreements for temporary or emergency
purposes, but not in excess of 10% of its total assets. The costs associated
with borrowing may reduce the fund's net income. The fund may invest in the
securities of other investment companies and may sell short "against the box."
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PACE INTERNATIONAL EQUITY INVESTMENTS has an investment objective of
capital appreciation. Martin Currie Inc. serves as the fund's investment
adviser. The fund invests primarily in equity securities of companies
domiciled outside the United States, and a large part of its investments are
usually denominated in foreign currencies. Under normal circumstances, the
fund invests at least 65% of its total assets in common stocks, which may or
may not pay dividends, and securities convertible into common stocks, of
companies domiciled outside the United States. "Domiciled," for these
purposes, means companies (1) that are organized under the laws of a country
other than the United States, (2) for which the principal securities trading
market is in a country other than the United States or (3) that derive a
significant proportion (at least 50%) of their revenues or profits from goods
produced or sold, investments made or services performed in the respective
country or that have at least 50% of their assets situated in such a country.
PACE International Equity Investments normally invests in the
securities of issuers from three or more countries outside the United States,
and, under normal market conditions, its investments involve securities
principally traded in at least 10 different countries. The fund's investment
adviser gives particular consideration to investments that are principally
traded in Japanese, European, Pacific and Australian securities markets and
to securities of foreign companies that are traded on U.S. securities
markets. The fund may also invest in the securities of companies in emerging
markets, including Asia, Latin America and other regions where the markets
may not yet fully reflect the potential of the developing economies. The fund
considers "emerging market countries" to be those countries not included in
the Morgan Stanley Capital International World Index of major world
economies. The fund invests only in those markets where the investment
adviser considers there to be an acceptable framework of market regulation
and sufficient liquidity. The fund may also invest in non-investment grade
convertible securities. These non-investment grade convertible securities may
not be rated lower than B by S&P or Moody's or, if unrated, determined by the
fund's investment adviser to be of comparable quality. The fund's investments
in emerging market securities and non-investment grade convertible
securities, in the aggregate, may not exceed 10% of its total assets at the
time of purchase. Subject to its 65% investment requirement, the fund also
may invest in U.S. government bonds and investment grade bonds of U.S. and
foreign issuers.
PACE International Equity Investments may invest up to 15% of its
net assets in illiquid securities. The fund may lend its portfolio securities
to qualified broker-dealers or institutional investors in an amount up to 33
1/3% of its total assets. The fund may borrow from banks and through reverse
repurchase agreements for temporary or emergency purposes, but not in excess
of 10% of its total assets. The costs associated with borrowing may reduce
the fund's net income. The fund may invest in structured foreign investments.
The fund may invest in the securities of other investment companies,
including closed-end funds that invest in foreign markets, and may sell short
"against the box."
PACE INTERNATIONAL EMERGING MARKETS EQUITY INVESTMENTS has an
investment objective of capital appreciation. Schroder Investment Management
North America Inc. ("SIMNA") serves as the fund's investment adviser. The
fund invests at least 65% of its total assets in equity securities issued by
companies domiciled in emerging market countries. "Domiciled," for these
purposes, means companies (1) that are organized under the laws of an
emerging market country, (2) for which the principal securities trading
market is in an emerging market country or (3) that derive a significant
proportion (at least 50%) of their revenues or profits from goods produced or
sold, investments made or services performed in the respective country or
that have at least 50% of their assets situated in such a country. The fund
considers "emerging market countries" to be those countries not included in
the Morgan Stanley Capital International World Index of major world
economies. SIMNA may at times determine, based on its own analysis, that an
economy included in the MSCI World Index should nonetheless be considered an
emerging market country, in which case, that country would constitute an
emerging market country for purposes of the fund's investments. Based on
current political and economic factors, SIMNA considers Hong Kong SAR to be
such a country. The fund normally invests in the securities of issuers from
three or more emerging market countries.
PACE International Emerging Markets Equity Investments may invest up
to 35% of its total assets in bonds, including U.S. government bonds, foreign
government bonds and bonds of private U.S. and foreign issuers, including
convertible bonds. The fund's investments may include Brady Bonds. The fund's
investments in bonds of private issuers are rated at the time of purchase at
least A by S&P or Moody's or, if unrated, determined by the investment
adviser to be of comparable quality, except that up to 10% of the fund's
total assets may be invested in
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lower quality bonds, including convertible bonds. These lower quality bonds
must, at the time of purchase, be rated at least C by S&P or determined by
the investment adviser to be of comparable quality.
SIMNA believes that one of its key strengths is the worldwide
network of local research offices, many long established, in emerging market
countries, that is maintained by SIMNA and its affiliates. Each year, these
companies research and conduct on-site visits in emerging market countries.
During 1999, SIMNA and its affiliates made 1425 exclusive company visits. As
a result of these visits, SIMNA and its affiliates further develop extensive
management contacts with, and produce independent forecasts of earnings
estimates for, approximately 525 out of a total universe of 900 companies.
SIMNA's analysis involves researching companies across the full
capitalization spectrum.
PACE International Emerging Markets Equity Investments may invest up
to 15% of its net assets in illiquid securities. The fund may lend its
portfolio securities to qualified broker-dealers or institutional investors
in an amount up to 33 1/3% of its total assets. The fund may borrow from
banks and through reverse repurchase agreements for temporary or emergency
purposes, but not in excess of 10% of its total assets. The costs associated
with borrowing may reduce the fund's net income. The fund may invest in
structured foreign investments and loan participations and assignments. These
investments are generally subject to the fund's overall limitation on
investments in illiquid securities, and in no event may the fund's
investments in loan participations and assignments exceed 10% of its total
assets. The fund may invest in the securities of other investment companies,
including closed-end funds that invest in foreign markets, and may sell short
"against the box."
THE FUNDS' INVESTMENTS, RELATED RISKS AND LIMITATIONS
The following supplements the information contained in the
Prospectus and above concerning the funds' investments, related risks and
limitations. Except as otherwise indicated in the Prospectus or SAI, the
funds have established no policy limitations on their ability to use the
investments or techniques discussed in these documents.
EQUITY SECURITIES. Equity securities include common stocks, most
preferred stocks and securities that are convertible into them, including
common stock purchase warrants and rights, equity interests in trusts,
partnerships, joint ventures or similar enterprises and depositary receipts.
Common stocks, the most familiar type, represent an equity (ownership)
interest in a corporation.
Preferred stock has certain fixed income features, like a bond, but
actually it is an equity security that is senior to a company's common stock.
Convertible bonds may include debentures and notes that may be converted into
or exchanged for a prescribed amount of common stock of the same or a
different issuer within a particular period of time at a specified price or
formula. Some preferred stock also may be converted into or exchanged for
common stock. Depositary receipts typically are issued by banks or trust
companies and evidence ownership of underlying equity securities.
While past performance does not guarantee future results, equity
securities historically have provided the greatest long-term growth potential
in a company. However, their prices generally fluctuate more than other
securities and reflect changes in a company's financial condition and in
overall market and economic conditions. Common stocks generally represent the
riskiest investment in a company. It is possible that a fund may experience a
substantial or complete loss on an individual equity investment. While this
is possible with bonds, it is less likely.
BONDS. Bonds are fixed or variable rate debt obligations, including
bills, notes, debentures, money market instruments and similar instruments
and securities. Mortgage- and asset-backed securities are types of bonds, and
certain types of income-producing, non-convertible preferred stocks may be
treated as bonds for investment purposes. Bonds generally are used by
corporations, governments and other issuers to borrow money from investors.
The issuer pays the investor a fixed or variable rate of interest and
normally must repay the amount borrowed on or before maturity. Many preferred
stocks and some bonds are "perpetual" in that they have no maturity date.
Bonds are subject to interest rate risk and credit risk. Interest
rate risk is the risk that interest rates will rise and that, as a result,
bond prices will fall, lowering the value of a fund's investments in bonds.
In general, bonds
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having longer durations are more sensitive to interest rate changes than are
bonds with shorter durations. Credit risk is the risk that an issuer may be
unable or unwilling to pay interest and/or principal on the bond. Credit risk
can be affected by many factors, including adverse changes in the issuer's
own financial condition or in economic conditions.
CREDIT RATINGS; NON-INVESTMENT GRADE BONDS. Moody's, S&P and other
rating agencies are private services that provide ratings of the credit
quality of bonds, including municipal bonds, and certain other securities. A
description of the ratings assigned to corporate bonds by Moody's and S&P is
included in the Appendix to this SAI. The process by which Moody's and S&P
determine ratings for mortgage-backed securities includes consideration of
the likelihood of the receipt by security holders of all distributions, the
nature of the underlying assets, the credit quality of the guarantor, if any,
and the structural, legal and tax aspects associated with these securities.
Not even the highest such rating represents an assessment of the likelihood
that principal prepayments will be made by obligors on the underlying assets
or the degree to which such prepayments may differ from that originally
anticipated, nor do such ratings address the possibility that investors may
suffer a lower than anticipated yield or that investors in such securities
may fail to recoup fully their initial investment due to prepayments.
Credit ratings attempt to evaluate the safety of principal and
interest payments, but they do not evaluate the volatility of a bond's value
or its liquidity and do not guarantee the performance of the issuer. Rating
agencies may fail to make timely changes in credit ratings in response to
subsequent events, so that an issuer's current financial condition may be
better or worse than the rating indicates. There is a risk that rating
agencies may downgrade a bond's rating. Subsequent to a bond's purchase by a
fund, it may cease to be rated or its rating may be reduced below the minimum
rating required for purchase by the fund. The funds may use these ratings in
determining whether to purchase, sell or hold a security. It should be
emphasized, however, that ratings are general and are not absolute standards
of quality. Consequently, bonds with the same maturity, interest rate and
rating may have different market prices.
In addition to ratings assigned to individual bond issues, the
applicable investment adviser will analyze interest rate trends and
developments that may affect individual issuers, including factors such as
liquidity, profitability and asset quality. The yields on bonds are dependent
on a variety of factors, including general money market conditions, general
conditions in the bond market, the financial condition of the issuer, the
size of the offering, the maturity of the obligation and its rating. There is
a wide variation in the quality of bonds, both within a particular
classification and between classifications. An issuer's obligations under its
bonds are subject to the provisions of bankruptcy, insolvency and other laws
affecting the rights and remedies of bond holders or other creditors of an
issuer; litigation or other conditions may also adversely affect the power or
ability of issuers to meet their obligations for the payment of interest and
principal on their bonds.
Investment grade bonds are rated in one of the four highest rating
categories by Moody's or S&P, comparably rated by another rating agency or,
if unrated, determined by the applicable investment adviser to be of
comparable quality. Moody's considers bonds rated Baa (its lowest investment
grade rating) to have speculative characteristics. This means that changes in
economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than is the case
for higher rated debt securities. Bonds rated D by S&P are in payment default
or such rating is assigned upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
Bonds rated C by Moody's are in the lowest rated class and can be regarded as
having extremely poor prospects of attaining any real investment standing.
References to rated bonds in the Prospectus or this SAI include bonds that
are not rated by a rating agency but that the applicable investment adviser
determines to be of comparable quality.
Non-investment grade bonds (commonly known as "junk bonds" and
sometimes referred to as "high yield bonds") are rated Ba or lower by
Moody's, BB or lower by S&P, comparably rated by another rating agency or, if
unrated, determined by a fund's investment adviser to be of comparable
quality. A fund's investments in non-investment grade bonds entail greater
risk than its investments in higher rated bonds. Non-investment grade bonds,
which are sometimes referred to as "high yield bonds," are considered
predominantly speculative with respect to the issuer's ability to pay
interest and repay principal and may involve significant risk exposure to
adverse conditions. Non-investment grade bonds generally offer a higher
current yield than that available for investment grade issues; however, they
involve greater risks, in that they are especially sensitive to adverse
changes in general economic conditions and in the industries in which the
issuers are engaged, to changes in the financial condition of the issuers
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and to price fluctuations in response to changes in interest rates. During
periods of economic downturn or rising interest rates, highly leveraged
issuers may experience financial stress that could adversely affect their
ability to make payments of interest and principal and increase the
possibility of default. In addition, such issuers may not have more
traditional methods of financing available to them and may be unable to repay
debt at maturity by refinancing. The risk of loss due to default by such
issuers is significantly greater because such securities frequently are
unsecured by collateral and will not receive payment until more senior claims
are paid in full.
The market for non-investment grade bonds, especially those of
foreign issuers, has expanded rapidly in recent years, which has been a
period of generally expanding growth and lower inflation. These securities
will be susceptible to greater risk when economic growth slows or reverses
and when inflation increases or deflation occurs. This has been reflected in
recent volatility in emerging market securities. In the past, many lower
rated bonds experienced substantial price declines reflecting an expectation
that many issuers of such securities might experience financial difficulties.
As a result, the yields on lower rated bonds rose dramatically. However,
those higher yields did not reflect the value of the income stream that
holders of such securities expected. Rather, they reflected the risk that
holders of such securities could lose a substantial portion of their value
due to financial restructurings or defaults by the issuers. There can be no
assurance that those declines will not recur.
The market for non-investment grade bonds generally is thinner and
less active than that for higher quality securities, which may limit a fund's
ability to sell such securities at fair value in response to changes in the
economy or financial markets. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may also decrease the values
and liquidity of non-investment grade bonds, especially in a thinly traded
market.
Opinions relating to the validity of municipal bonds and to the
exemption of interest thereon from federal income tax and (when available)
from treatment as a tax preference item, are rendered by bond counsel to the
respective issuing authorities at the time of issuance. Neither PACE
Municipal Fixed Income Investments, its investment adviser or Mitchell
Hutchins reviews the proceedings relating to the issuance of municipal bonds
or the basis for such opinions. An issuer's obligations under its municipal
bonds are subject to the bankruptcy, insolvency and other laws affecting the
rights and remedies of creditors (such as the federal bankruptcy laws) and
federal, state and local laws that may be enacted that adversely affect the
tax-exempt status of interest on the municipal bonds held by the fund or the
exempt-interest dividends received by its shareholders, extend the time for
payment of principal or interest, or both, or impose other constraints upon
enforcement of such obligations. There is also the possibility that, as a
result of litigation or other conditions, the power or ability of issuers to
meet their obligations for the payment of principal of and interest on their
municipal bonds may be materially and adversely affected.
U.S. GOVERNMENT SECURITIES. U.S. government securities include
direct obligations of the U.S. Treasury (such as Treasury bills, notes or
bonds) and obligations issued or guaranteed as to principal and interest (but
not as to market value) by the U.S. government, its agencies or its
instrumentalities. U.S. government securities include mortgage-backed
securities issued or guaranteed by government agencies or
government-sponsored enterprises. Other U.S. government securities may be
backed by the full faith and credit of the U.S. government or supported
primarily or solely by the creditworthiness of the government-related issuer
or, in the case of mortgage-backed securities, by pools of assets.
U.S. government securities also include separately traded principal
and interest components of securities issued or guaranteed by the U.S.
Treasury, which are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually
numbered and separately issued by the U.S. Treasury.
Treasury inflation-protected securities ("TIPS") (also known as
"inflation-indexed securities") are Treasury bonds on which the principal
value is adjusted daily in accordance with changes in the Consumer Price
Index. Interest on TIPS is payable semi-annually on the adjusted principal
value. The principal value of TIPS would decline during periods of deflation,
but the principal amount payable at maturity would not be less than the
original par amount. If inflation is lower than expected while a fund holds
TIPS, the fund may earn less on the TIPS than it would on conventional
Treasury bonds. Any increase in the principal value of TIPS is taxable in the
year the increase occurs, even though holders do not receive cash
representing the increase at that time. See "Taxes -- Other Information,"
below.
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ASSET-BACKED SECURITIES. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed in more
detail below. However, the underlying assets are not first lien mortgage
loans or interests therein but include assets such as motor vehicle
installment sales contracts, other installment sales contracts, home equity
loans, leases of various types of real and personal property and receivables
from revolving credit (credit card) agreements. Such assets are securitized
through the use of trusts or special purpose corporations. Payments or
distributions of principal and interest may be guaranteed up to a certain
amount and for a certain time period by a letter of credit or pool insurance
policy issued by a financial institution unaffiliated with the issuer, or
other credit enhancements may be present. See "The Funds' Investments,
Related Risks and Limitations -- Credit and Liquidity Enhancements."
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent
direct or indirect interests in pools of underlying mortgage loans that are
secured by real property. U.S. government mortgage-backed securities are
issued or guaranteed as to the payment of principal and interest (but not as
to market value) by Ginnie Mae (also known as the Government National
Mortgage Association), Fannie Mae (also known as the Federal National
Mortgage Association), Freddie Mac (also known as the Federal Home Loan
Mortgage Corporation) or other government sponsored enterprises. Other
domestic mortgage-backed securities are sponsored or issued by private
entities, generally originators of and investors in mortgage loans, including
savings associations, mortgage bankers, commercial banks, investment bankers
and special purposes entities (collectively, "Private Mortgage Lenders").
Payments of principal and interest (but not the market value) of such private
mortgage-backed securities may be supported by pools of mortgage loans or
other mortgage-backed securities that are guaranteed, directly or indirectly,
by the U.S. government or one of its agencies or instrumentalities, or they
may be issued without any government guarantee of the underlying mortgage
assets but with some form of non-government credit enhancement. Foreign
mortgage-backed securities may be issued by mortgage banks and other private
or governmental entities outside the United States and are supported by
interests in foreign real estate.
Mortgage-backed securities may be composed of one or more classes
and may be structured either as pass-through securities or collateralized
debt obligations. Multiple-class mortgage-backed securities are referred to
herein as "CMOs." Some CMOs are directly supported by other CMOs, which in
turn are supported by mortgage pools. Investors typically receive payments
out of the interest and principal on the underlying mortgages. The portions
of these payments that investors receive, as well as the priority of their
rights to receive payments, are determined by the specific terms of the CMO
class. CMOs involve special risk and evaluating them requires special
knowledge.
A major difference between mortgage-backed securities and
traditional bonds is that interest and principal payments are made more
frequently (usually monthly) and that principal may be repaid at any time
because the underlying mortgage loans may be prepaid at any time. When
interest rates go down and homeowners refinance their mortgages,
mortgage-backed securities may be paid off more quickly than investors
expect. When interest rates rise, mortgage-backed securities may be paid off
more slowly than originally expected. Changes in the rate or "speed" of these
prepayments can cause the value of mortgage-backed securities to fluctuate
rapidly.
Mortgage-backed securities also may decrease in value as a result of
increases in interest rates and, because of prepayments, may benefit less
than other bonds from declining interest rates. Reinvestments of prepayments
may occur at lower interest rates than the original investment, thus
adversely affecting a fund's yield. Actual prepayment experience may cause
the yield of a mortgage-backed security to differ from what was assumed when
the fund purchased the security. Prepayments at a slower rate than expected
may lengthen the effective life of a mortgage-backed security. The value of
securities with longer effective lives generally fluctuates more widely in
response to changes in interest rates than the value of securities with
shorter effective lives.
CMO classes may be specially structured in a manner that provides
any of a wide variety of investment characteristics, such as yield, effective
maturity and interest rate sensitivity. As market conditions change, however,
and particularly during periods of rapid or unanticipated changes in market
interest rates, the attractiveness of the CMO classes and the ability of the
structure to provide the anticipated investment characteristics may be
significantly reduced. These changes can result in volatility in the market
value, and in some instances reduced liquidity, of the CMO class.
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Certain classes of CMOs and other mortgage-backed securities are
structured in a manner that makes them extremely sensitive to changes in
prepayment rates. Interest-only ("IO") and principal-only ("PO") classes are
examples of this. IOs are entitled to receive all or a portion of the
interest, but none (or only a nominal amount) of the principal payments, from
the underlying mortgage assets. If the mortgage assets underlying an IO
experience greater than anticipated principal prepayments, then the total
amount of interest payments allocable to the IO class, and therefore the
yield to investors, generally will be reduced. In some instances, an investor
in an IO may fail to recoup all of his or her initial investment, even if the
security is government issued or guaranteed or is rated AAA or the
equivalent. Conversely, PO classes are entitled to receive all or a portion
of the principal payments, but none of the interest, from the underlying
mortgage assets. PO classes are purchased at substantial discounts from par,
and the yield to investors will be reduced if principal payments are slower
than expected. Some IOs and POs, as well as other CMO classes, are structured
to have special protections against the effects of prepayments. These
structural protections, however, normally are effective only within certain
ranges of prepayment rates and thus will not protect investors in all
circumstances. Inverse floating rate CMO classes also may be extremely
volatile. These classes pay interest at a rate that decreases when a
specified index of market rates increases and vice versa.
The market for privately issued mortgage-backed securities is
smaller and less liquid than the market for U.S. government mortgage-backed
securities. Foreign mortgage-backed securities markets are substantially
smaller than U.S. markets but have been established in several countries,
including Germany, Denmark, Sweden, Canada and Australia, and may be
developed elsewhere. Foreign mortgage-backed securities generally are
structured differently than domestic mortgage-backed securities, but they
normally present substantially similar investment risks as well as the other
risks normally associated with foreign securities.
During 1994, the value and liquidity of many mortgage-backed
securities declined sharply due primarily to increases in interest rates.
There can be no assurance that such declines will not recur. The market value
of certain mortgage-backed securities, including IO and PO classes of
mortgage-backed securities, can be extremely volatile, and these securities
may become illiquid. A fund's investment adviser seeks to manage its
investments in mortgage-backed securities so that the volatility of its
portfolio, taken as a whole, is consistent with its investment objective.
Management of portfolio duration is an important part of this. However,
computing the duration of mortgage-backed securities is complex. See, "The
Funds' Investments, Related Risks and Limitations -- Duration." If a fund's
investment adviser does not compute the duration of mortgage-backed
securities correctly, the value of its portfolio may be either more or less
sensitive to changes in market interest rates than intended. In addition, if
market interest rates or other factors that affect the volatility of
securities held by a fund change in ways that its investment adviser does not
anticipate, the fund's ability to meet its investment objective may be
reduced.
More information concerning these mortgage-backed securities and the
related risks of investments therein is set forth below. New types of
mortgage-backed securities are developed and marketed from time to time and,
consistent with its investment limitations, a fund expects to invest in those
new types of mortgage-backed securities that its investment adviser believes
may assist it in achieving its investment objective. Similarly, a fund may
invest in mortgage-backed securities issued by new or existing governmental
or private issuers other than those identified herein.
GINNIE MAE CERTIFICATES -- Ginnie Mae guarantees certain mortgage
pass-through certificates ("Ginnie Mae certificates") that are issued by
Private Mortgage Lenders and that represent ownership interests in individual
pools of residential mortgage loans. These securities are designed to provide
monthly payments of interest and principal to the investor. Timely payment of
interest and principal is backed by the full faith and credit of the U.S.
government. Each mortgagor's monthly payments to his lending institution on
his residential mortgage are "passed through" to certificateholders such as
the funds. Mortgage pools consist of whole mortgage loans or participations
in loans. The terms and characteristics of the mortgage instruments are
generally uniform within a pool but may vary among pools. Lending
institutions that originate mortgages for the pools are subject to certain
standards, including credit and other underwriting criteria for individual
mortgages included in the pools.
FANNIE MAE CERTIFICATES -- Fannie Mae facilitates a national
secondary market in residential mortgage loans insured or guaranteed by U.S.
government agencies and in privately insured or uninsured residential
mortgage loans (sometimes referred to as "conventional mortgage loans" or
"conventional loans") through its mortgage purchase and mortgage-backed
securities sales activities. Fannie Mae issues guaranteed mortgage
pass-through certificates ("Fannie Mae certificates"), which represent pro
rata shares of all interest and principal payments made
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and owed on the underlying pools. Fannie Mae guarantees timely payment of
interest and principal on Fannie Mae certificates. The Fannie Mae guarantee
is not backed by the full faith and credit of the U.S. government.
FREDDIE MAC CERTIFICATES -- Freddie Mac also facilitates a national
secondary market for conventional residential and U.S. government-insured
mortgage loans through its mortgage purchase and mortgage-backed securities
sales activities. Freddie Mac issues two types of mortgage pass-through
securities: mortgage participation certificates ("PCs") and guaranteed
mortgage certificates ("GMCs"). Each PC represents a pro rata share of all
interest and principal payments made and owed on the underlying pool. Freddie
Mac generally guarantees timely monthly payment of interest on PCs and the
ultimate payment of principal, but it also has a PC program under which it
guarantees timely payment of both principal and interest. GMCs also represent
a pro rata interest in a pool of mortgages. These instruments, however, pay
interest semi-annually and return principal once a year in guaranteed minimum
payments. The Freddie Mac guarantee is not backed by the full faith and
credit of the U.S. government.
PRIVATE MORTGAGE-BACKED SECURITIES -- Mortgage-backed securities
issued by Private Mortgage Lenders are structured similarly to CMOs issued or
guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac. Such mortgage-backed
securities may be supported by pools of U.S. government or agency insured or
guaranteed mortgage loans or by other mortgage-backed securities issued by a
government agency or instrumentality, but they generally are supported by
pools of conventional (I.E., non-government guaranteed or insured) mortgage
loans. Since such mortgage-backed securities normally are not guaranteed by
an entity having the credit standing of Ginnie Mae, Fannie Mae and Freddie
Mac, they normally are structured with one or more types of credit
enhancement. See "The Funds' Investments, Related Risks and Limitations --
Mortgage-Backed Securities -- TYPES OF CREDIT ENHANCEMENT." These credit
enhancements do not protect investors from changes in market value.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS MORTGAGE
PASS-THROUGHS -- CMOs are debt obligations that are collateralized by
mortgage loans or mortgage pass-through securities (collectively, "Mortgage
Assets"). CMOs may be issued by Private Mortgage Lenders or by government
entities such as Fannie Mae or Freddie Mac. Multi-class mortgage pass-through
securities are interests in trusts that are comprised of Mortgage Assets and
that have multiple classes similar to those in CMOs. Unless the context
indicates otherwise, references herein to CMOs include multi-class mortgage
pass-through securities. Payments of principal of, and interest on, the
Mortgage Assets (and in the case of CMOs, any reinvestment income thereon)
provide the funds to pay the debt service on the CMOs or to make scheduled
distributions on the multi-class mortgage pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMO, also referred to as a "tranche," is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause
CMOs to be retired substantially earlier than their stated maturities or
final distribution dates. Interest is paid or accrued on all classes of a CMO
(other than any principal-only or "PO" class) on a monthly, quarterly or
semi-annual basis. The principal and interest on the Mortgage Assets may be
allocated among the several classes of a CMO in many ways. In one structure,
payments of principal, including any principal prepayments, on the Mortgage
Assets are applied to the classes of a CMO in the order of their respective
stated maturities or final distribution dates so that no payment of principal
will be made on any class of the CMO until all other classes having an
earlier stated maturity or final distribution date have been paid in full. In
some CMO structures, all or a portion of the interest attributable to one or
more of the CMO classes may be added to the principal amounts attributable to
such classes, rather than passed through to certificateholders on a current
basis, until other classes of the CMO are paid in full.
Parallel pay CMOs are structured to provide payments of principal on
each payment date to more than one class. These simultaneous payments are
taken into account in calculating the stated maturity date or final
distribution date of each class, which, as with other CMO structures, must be
retired by its stated maturity date or final distribution date but may be
retired earlier.
Some CMO classes are structured to pay interest at rates that are
adjusted in accordance with a formula, such as a multiple or fraction of the
change in a specified interest rate index, so as to pay at a rate that will
be attractive in certain interest rate environments but not in others. For
example, an inverse floating rate CMO class pays interest at a rate that
increases as a specified interest rate index decreases but decreases as that
index increases. For other CMO classes, the yield may move in the same
direction as market interest rates -- i.e., the yield may increase as rates
increase and decrease as rates decrease -- but may do so more rapidly or to a
greater degree. The
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market value of such securities generally is more volatile than that of a
fixed rate obligation. Such interest rate formulas may be combined with other
CMO characteristics. For example, a CMO class may be an inverse IO class, on
which the holders are entitled to receive no payments of principal and are
entitled to receive interest at a rate that will vary inversely with a
specified index or a multiple thereof.
TYPES OF CREDIT ENHANCEMENT -- To lessen the effect of failures by
obligors on Mortgage Assets to make payments, mortgage-backed securities may
contain elements of credit enhancement. Such credit enhancement falls into
two categories: (1) liquidity protection and (2) loss protection. Loss
protection relates to losses resulting after default by an obligor on the
underlying assets and collection of all amounts recoverable directly from the
obligor and through liquidation of the collateral. Liquidity protection
refers to the provision of advances, generally by the entity administering
the pool of assets (usually the bank, savings association or mortgage banker
that transferred the underlying loans to the issuer of the security), to
ensure that the receipt of payments on the underlying pool occurs in a timely
fashion. Loss protection ensures ultimate payment of the obligations on at
least a portion of the assets in the pool. Such protection may be provided
through guarantees, insurance policies or letters of credit obtained by the
issuer or sponsor, from third parties, through various means of structuring
the transaction or through a combination of such approaches. A fund will not
pay any additional fees for such credit enhancement, although the existence
of credit enhancement may increase the price of a security. Credit
enhancements do not provide protection against changes in the market value of
the security. Examples of credit enhancement arising out of the structure of
the transaction include "senior-subordinated securities" (multiple class
securities with one or more classes subordinate to other classes as to the
payment of principal thereof and interest thereon, with the result that
defaults on the underlying assets are borne first by the holders of the
subordinated class), creation of "spread accounts" or "reserve funds" (where
cash or investments, sometimes funded from a portion of the payments on the
underlying assets, are held in reserve against future losses) and
"over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed that required to make payment of the
securities and pay any servicing or other fees). The degree of credit
enhancement provided for each issue generally is based on historical
information regarding the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated could adversely
affect the return on an investment in such a security.
SPECIAL CHARACTERISTICS OF MORTGAGE- AND ASSET-BACKED SECURITIES --
The yield characteristics of mortgage- and asset-backed securities differ
from those of traditiona1 debt securities. Among the major differences are
that interest and principal payments are made more frequently, usually
monthly, and that principal may be prepaid at any time because the underlying
mortgage loans or other obligations generally may be prepaid at any time.
Prepayments on a pool of mortgage loans are influenced by a variety of
economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net
equity in the mortgaged properties and servicing decisions. Generally,
however, prepayments on fixed-rate mortgage loans will increase during a
period of falling interest rates and decrease during a period of rising
interest rates. Similar factors apply to prepayments on asset-backed
securities, but the receivables underlying asset-backed securities generally
are of a shorter maturity and thus are less likely to experience substantial
prepayments. Such securities, however, often provide that for a specified
time period the issuers will replace receivables in the pool that are repaid
with comparable obligations. If the issuer is unable to do so, repayment of
principal on the asset-backed securities may commence at an earlier date.
Mortgage- and asset-backed securities may decrease in value as a result of
increases in interest rates and may benefit less than other fixed-income
securities from declining interest rates because of the risk of prepayment.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to
the annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are
purchased or traded in the secondary market at a premium or discount. In
addition, there is normally some delay between the time the issuer receives
mortgage payments from the servicer and the time the issuer makes the
payments on the mortgage-backed securities, and this delay reduces the
effective yield to the holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and
the associated average life assumption. The average life of pass-through
pools varies with the maturities of the underlying mortgage loans. A pool's
term may be shortened by unscheduled
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or early payments of principal on the underlying mortgages. Because
prepayment rates of individual pools vary widely, it is not possible to
predict accurately the average life of a particular pool. In the past, a
common industry practice was to assume that prepayments on pools of fixed
rate 30-year mortgages would result in a 12-year average life for the pool.
At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of
average life determined for each pool. In periods of declining interest
rates, the rate of prepayment tends to increase, thereby shortening the
actual average life of a pool of mortgage-related securities. Conversely, in
periods of rising interest rates, the rate of prepayment tends to decrease,
thereby lengthening the actual average life of the pool. However, these
effects may not be present, or may differ in degree, if the mortgage loans in
the pools have adjustable interest rates or other special payment terms, such
as a prepayment charge. Actual prepayment experience may cause the yield of
mortgage-backed securities to differ from the assumed average life yield.
Reinvestment of prepayments may occur at lower interest rates than the
original investment, thus adversely affecting a fund's yield.
ADJUSTABLE RATE MORTGAGE AND FLOATING RATE MORTGAGE-BACKED
SECURITIES -- Adjustable rate mortgage ("ARM") securities are mortgage-backed
securities (sometimes referred to as "ARMs") that represent a right to
receive interest payments at a rate that is adjusted to reflect the interest
earned on a pool of mortgage loans bearing variable or adjustable rates of
interest. Floating rate mortgage-backed securities are classes of
mortgage-backed securities that have been structured to represent the right
to receive interest payments at rates that fluctuate in accordance with an
index but that generally are supported by pools comprised of fixed-rate
mortgage loans. Because the interest rates on ARM and floating rate
mortgage-backed securities are reset in response to changes in a specified
market index, the values of such securities tend to be less sensitive to
interest rate fluctuations than the values of fixed-rate securities. As a
result, during periods of rising interest rates, ARMs generally do not
decrease in value as much as fixed rate securities. Conversely, during
periods of declining rates, ARMs generally do not increase in value as much
as fixed rate securities. ARMs represent a right to receive interest payments
at a rate that is adjusted to reflect the interest earned on a pool of ARM
loans. These mortgage loans generally specify that the borrower's mortgage
interest rate may not be adjusted above a specified lifetime maximum rate or,
in some cases, below a minimum lifetime rate. In addition, certain ARM loans
specify limitations on the maximum amount by which the mortgage interest rate
may adjust for any single adjustment period. These mortgage loans also may
limit changes in the maximum amount by which the borrower's monthly payment
may adjust for any single adjustment period. If a monthly payment is not
sufficient to pay the interest accruing on the ARM, any such excess interest
is added to the mortgage loan ("negative amortization"), which is repaid
through future payments. If the monthly payment exceeds the sum of the
interest accrued at the applicable mortgage interest rate and the principal
payment that would have been necessary to amortize the outstanding principal
balance over the remaining term of the loan, the excess reduces the principal
balance of the ARM loan. Borrowers under these mortgage loans experiencing
negative amortization may take longer to build up their equity in the
underlying property and may be more likely to default.
ARM loans also may be subject to a greater rate of prepayments in a
declining interest rate environment. For example, during a period of
declining interest rates, prepayments on these mortgage loans could increase
because the availability of fixed mortgage loans at competitive interest
rates may encourage mortgagors to "lock-in" at a lower interest rate.
Conversely, during a period of rising interest rates, prepayments on ARM
loans might decrease. The rate of prepayments with respect to ARM loans has
fluctuated in recent years.
The rates of interest payable on certain ARM loans, and therefore on
certain ARM securities, are based on indices, such as the one-year constant
maturity Treasury rate, that reflect changes in market interest rates. Others
are based on indices, such as the 11th District Federal Home Loan Bank Cost
of Funds Index ("COFI"), that tend to lag behind changes in market interest
rates. The values of ARM securities supported by ARM loans that adjust based
on lagging indices tend to be somewhat more sensitive to interest rate
fluctuations than those reflecting current interest rate levels, although the
values of such ARM securities still tend to be less sensitive to interest
rate fluctuations than fixed-rate securities.
Floating rate mortgage-backed securities are classes of
mortgage-backed securities that have been structured to represent the right
to receive interest payments at rates that fluctuate in accordance with an
index but that generally are supported by pools comprised of fixed-rate
mortgage loans. As with ARM securities, interest rate adjustments on floating
rate mortgage-backed securities may be based on indices that lag behind
market interest rates. Interest rates on floating rate mortgage-backed
securities generally are adjusted monthly. Floating rate
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mortgage-backed securities are subject to lifetime interest rate caps, but
they generally are not subject to limitations on monthly or other periodic
changes in interest rates or monthly payments.
CREDIT AND LIQUIDITY ENHANCEMENTS. A fund may invest in securities
that have credit or liquidity enhancements or may purchase these types of
enhancements in the secondary market. Such enhancements may be structured as
demand features that permit the fund to sell the instrument at designated
times and prices. These credit and liquidity enhancements may be backed by
letters of credit or other instruments provided by banks or other financial
institutions whose credit standing affects the credit quality of the
underlying obligation. Changes in the credit quality of these financial
institutions could cause losses to a fund and affect its share price. The
credit and liquidity enhancements may have conditions that limit the ability
of a fund to use them when the fund wishes to do so.
INVESTING IN FOREIGN SECURITIES. Investing in foreign securities may
involve more risks than investing in U.S. securities. The value of foreign
securities is subject to economic and political developments in the countries
where the issuers operate and to changes in foreign currency values.
Investments in foreign securities involve risks relating to political, social
and economic developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign issuers and
markets are subject. These risks may include expropriation, confiscatory
taxation, withholding taxes on interest and/or dividends, limitations on the
use of or transfer of fund assets and political or social instability or
diplomatic developments. Moreover, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. In those European
countries that are using the Euro as a common currency unit, individual
national economies may be adversely affected by the inability of national
governments to use monetary policy to address their own economic or political
concerns.
Securities of foreign issuers may not be registered with the SEC,
and the issuers thereof may not be subject to its reporting requirements.
Accordingly, there may be less publicly available information concerning
foreign issuers of securities held by a fund than is available concerning
U.S. companies. Foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards or to other regulatory
requirements comparable to those applicable to U.S. companies.
Securities of many foreign companies may be less liquid and their
prices more volatile than securities of comparable U.S. companies. From time
to time foreign securities may be difficult to liquidate rapidly without
significantly depressing the price of such securities. Foreign markets have
different clearance and settlement procedures, and in certain markets there
have been times when settlements have failed to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when some of a fund's
assets are uninvested and no return is earned thereon. The inability of a
fund to make intended security purchases due to settlement problems could
cause the fund to miss attractive investment opportunities. Inability to
dispose of a portfolio security due to settlement problems could result
either in losses to the fund due to subsequent declines in the value of such
portfolio security or, if the fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Foreign
securities trading practices, including those involving securities settlement
where fund assets may be released prior to receipt of payment, may expose a
fund to increased risk in the event of a failed trade or the insolvency of a
foreign broker-dealer. Legal remedies for defaults and disputes may have to
be pursued in foreign courts, whose procedures differ substantially from
those of U.S. courts.
The costs of investing outside the United States frequently are
higher than those attributable to investing in the United States. This is
particularly true with respect to emerging capital markets. For example, the
cost of maintaining custody of foreign securities exceeds custodian costs for
domestic securities, and transaction and settlement costs of foreign
investing frequently are higher than those attributable to domestic
investing. Costs associated with the exchange of currencies also make foreign
investing more expensive than domestic investing.
A fund may invest in foreign securities by purchasing depositary
receipts, including American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs"), or
other securities convertible into securities of issuers based in foreign
countries. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs are
receipts typically
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issued by a U.S. bank or trust company evidencing ownership of the underlying
securities. They generally are in registered form, are denominated in U.S.
dollars and are designed for use in the U.S. securities markets. EDRs are
European receipts evidencing a similar arrangement, may be denominated in
other currencies and are designed for use in European securities markets.
GDRs are similar to EDRs and are designed for use in several international
financial markets. For purposes of each fund's investment policies,
depositary receipts generally are deemed to have the same classification as
the underlying securities they represent. Thus, a depositary receipt
representing ownership of common stock will be treated as common stock.
ADRs are publicly traded on exchanges or over-the-counter in the
United States and are issued through "sponsored" or "unsponsored"
arrangements. In a sponsored ADR arrangement, the foreign issuer assumes the
obligation to pay some or all of the depositary's transaction fees, whereas
under an unsponsored arrangement, the foreign issuer assumes no obligations
and the depositary's transaction fees are paid directly by the ADR holders.
In addition, less information is available in the United States about an
unsponsored ADR than about a sponsored ADR.
Eurodollar bonds and Yankee bonds are types of U.S. dollar
denominated foreign securities. Eurodollar bonds are U.S. dollar denominated
bonds that are held outside the United States, primarily in Europe. Yankee
bonds are U.S. dollar denominated bonds of foreign issuers that are sold
primarily in the United States.
The funds that invest outside the United States anticipate that
their brokerage transactions involving foreign securities of companies
headquartered in countries other than the United States will be conducted
primarily on the principal exchanges of such countries. Although each fund
will endeavor to achieve the best net results in effecting its portfolio
transactions, transactions on foreign exchanges are usually subject to fixed
commissions that are generally higher than negotiated commissions on U.S.
transactions. There is generally less government supervision and regulation
of exchanges and brokers in foreign countries than in the United States.
Investment income and gains on certain foreign securities in which
the funds may invest may be subject to foreign withholding or other taxes
that could reduce the return on these securities. Tax treaties between the
United States and certain foreign countries, however, may reduce or eliminate
the amount of foreign taxes to which the funds would be subject. In addition,
substantial limitations may exist in certain countries with respect to the
funds' ability to repatriate investment capital or the proceeds of sales of
securities.
FOREIGN CURRENCY RISKS. Currency risk is the risk that changes in
foreign exchange rates may reduce the U.S. dollar value of a fund's foreign
investments. If the value of a foreign currency rises against the value of
the U.S. dollar, the value of a fund's investments that are denominated in,
or linked to, that currency will increase. Conversely, if the value of a
foreign currency declines against the value of the U.S. dollar, the value of
those fund investments will decrease. These changes may have a significant
impact on the value of fund shares. In some instances, a fund may use
derivative strategies to hedge against changes in foreign currency value.
(See "Strategies Using Derivative Instruments," below.) However,
opportunities to hedge against currency risk may not exist in certain
markets, particularly with respect to emerging market currencies, and even
when appropriate hedging opportunities are available, a fund may choose not
to hedge against currency risk.
Generally, currency exchange rates are determined by supply and
demand in the foreign exchange markets and the relative merits of investments
in different countries. In the case of those European countries that use the
Euro as a common currency unit, the relative merits of investments in the
common market in which they participate, rather than the merits of
investments in the individual country, will be a determinant of currency
exchange rates. Currency exchange rates also can be affected by the
intervention of the U.S. and foreign governments or central banks, the
imposition of currency controls, speculation, devaluation or other political
or economic developments inside and outside the United States.
Each fund values its assets daily in U.S. dollars, and funds that
hold foreign currencies do not intend to convert them to U.S. dollars on a
daily basis. These funds may convert foreign currency to U.S. dollars from
time to time. From time to time a fund's foreign currencies may be held as
"foreign currency call accounts" at foreign branches of foreign or domestic
banks. These accounts bear interest at negotiated rates and are payable upon
relatively short demand periods. If a bank became insolvent, a fund could
suffer a loss of some or all of the amounts deposited. A fund may convert
foreign currency to U.S. dollars from time to time.
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The value of the assets of a fund as measured in U.S. dollars may be
affected favorably or unfavorably by fluctuations in currency rates and
exchange control regulations. Further, a fund may incur costs in connection
with conversions between various currencies. Currency exchange dealers
realize a profit based on the difference between the prices at which they are
buying and selling various currencies. Thus, a dealer normally will offer to
sell a foreign currency to a fund at one rate, while offering a lesser rate
of exchange should a fund desire immediately to resell that currency to the
dealer. A fund conducts its currency exchange transactions either on a spot
(I.E., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through entering into forward, futures or options
contracts to purchase or sell foreign currencies.
SPECIAL CHARACTERISTICS OF EMERGING MARKET SECURITIES AND SOVEREIGN DEBT
EMERGING MARKET INVESTMENTS. The special risks of investing in
foreign securities are heightened in emerging markets. For example, many
emerging market currencies have experienced significant devaluations relative
to the U.S. dollar in recent years. Emerging market countries typically have
economic and political systems that are less fully developed and can be
expected to be less stable than those of developed countries. Emerging market
countries may have policies that restrict investment by foreigners, and there
is a higher risk of government expropriation or nationalization of private
property. The possibility of low or nonexistent trading volume in the
securities of companies in emerging markets also may result in a lack of
liquidity and in price volatility. Issuers in emerging markets typically are
subject to a greater degree of change in earnings and business prospects than
are companies in more developed markets.
INVESTMENT AND REPATRIATION RESTRICTIONS -- Foreign investment in
the securities markets of several emerging market countries is restricted or
controlled to varying degrees. These restrictions may limit a fund's
investment in these countries and may increase its expenses. For example,
certain countries may require governmental approval prior to investments by
foreign persons in a particular company or industry sector or limit
investment by foreign persons to only a specific class of securities of a
company, which may have less advantageous terms (including price) than
securities of the company available for purchase by nationals. Certain
countries may restrict or prohibit investment opportunities in issuers or
industries deemed important to national interests. In addition, the
repatriation of both investment income and capital from some emerging market
countries is subject to restrictions, such as the need for certain government
consents. Even where there is no outright restriction on repatriation of
capital, the mechanics of repatriation may affect certain aspects of a fund's
operations. These restrictions may in the future make it undesirable to
invest in the countries to which they apply. In addition, if there is a
deterioration in a country's balance of payments or for other reasons, a
country may impose restrictions on foreign capital remittances abroad. A fund
could be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation, as well as by the application to it
of other restrictions on investments.
If, because of restrictions on repatriation or conversion, a fund
were unable to distribute substantially all of its net investment income and
capital gains within applicable time periods, the fund would be subject to
federal income and/or excise taxes that would not otherwise be incurred and
could cease to qualify for the favorable tax treatment afforded to regulated
investment companies under the Internal Revenue Code. If it did cease to
qualify for that treatment, it would become subject to federal income tax on
all of its income and net gains. See "Taxes -- Qualification as a Regulated
Investment Company," below.
DIFFERENCES BETWEEN THE U.S. AND EMERGING MARKET SECURITIES MARKETS.
Most of the securities markets of emerging market countries have
substantially less volume than the New York Stock Exchange, and equity
securities of most companies in emerging market countries are less liquid and
more volatile than equity securities of U.S. companies of comparable size.
Some of the stock exchanges in emerging market countries are in the earliest
stages of their development. As a result, security settlements may in some
instances be subject to delays and related administrative uncertainties. Many
companies traded on securities markets in emerging market countries are
smaller, newer and less seasoned than companies whose securities are traded
on securities markets in the United States. Investments in smaller companies
involve greater risk than is customarily associated with investing in larger
companies. Smaller companies may have limited product lines, markets or
financial or managerial resources and may be more susceptible to losses and
risks of bankruptcy. Additionally, market-making and arbitrage activities are
generally less extensive in such markets, which may contribute to increased
volatility and reduced liquidity of such markets. Accordingly, each of these
markets may be subject to greater influence by adverse events generally
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affecting the market, and by large investors trading significant blocks of
securities, than is usual in the United States. To the extent that an
emerging market country experiences rapid increases in its money supply and
investment in equity securities for speculative purposes, the equity
securities traded in that country may trade at price-earnings multiples
higher than those of comparable companies trading on securities markets in
the United States, which may not be sustainable.
GOVERNMENT SUPERVISION OF EMERGING MARKET SECURITIES MARKETS; LEGAL
SYSTEMS. There is also less government supervision and regulation of
securities exchanges, listed companies and brokers in emerging market
countries than exists in the United States. Therefore, less information may
be available to a fund than with respect to investments in the United States.
Further, in certain countries, less information may be available to a fund
than to local market participants. Brokers in other countries may not be as
well capitalized as those in the United States, so that they are more
susceptible to financial failure in times of market, political or economic
stress. In addition, existing laws and regulations are often inconsistently
applied. As legal systems in some of the emerging market countries develop,
foreign investors may be adversely affected by new laws and regulations,
changes to existing laws and regulations and preemption of local laws and
regulations by national laws. In circumstances where adequate laws exist, it
may not be possible to obtain swift and equitable enforcement of the law.
SOCIAL, POLITICAL AND ECONOMIC FACTORS -- Many emerging market
countries may be subject to a greater degree of social, political and
economic instability than is the case in the United States. Any change in the
leadership or policies of these countries may halt the expansion of or
reverse any liberalization of foreign investment policies now occurring. Such
instability may result from, among other things, the following: (1)
authoritarian governments or military involvement in political and economic
decision making, and changes in government through extra-constitutional
means; (2) popular unrest associated with demands for improved political,
economic and social conditions; (3) internal insurgencies; (4) hostile
relations with neighboring countries; and (5) ethnic, religious and racial
disaffection. Such social, political and economic instability could
significantly disrupt the financial markets in those countries and elsewhere
and could adversely affect the value of a fund's assets. In addition, there
may be the possibility of asset expropriations or future confiscatory levels
of taxation affecting a fund.
The economies of many emerging markets are heavily dependent upon
international trade and are accordingly affected by protective trade barriers
and the economic conditions of their trading partners, principally the United
States, Japan, China and the European Union. The enactment by the United
States or other principal trading partners of protectionist trade
legislation, reduction of foreign investment in the local economies and
general declines in the international securities markets could have a
significant adverse effect upon the securities markets of these countries. In
addition, the economies of some countries are vulnerable to weakness in world
prices for their commodity exports, including crude oil. A country whose
exports are concentrated in a few commodities could be vulnerable to a
decline in the international price of such commodities.
FINANCIAL INFORMATION AND LEGAL STANDARDS -- Issuers in emerging
market countries generally are subject to accounting, auditing and financial
standards and requirements that differ, in some cases significantly, from
those applicable to U.S. issuers. In particular, the assets and profits
appearing on the financial statements of an emerging market issuer may not
reflect its financial position or results of operations in the way they would
be reflected had the financial statements been prepared in accordance with
U.S. generally accepted accounting principles. In addition, for an issuer
that keeps accounting records in local currency, inflation accounting rules
may require, for both tax and accounting purposes, that certain assets and
liabilities be restated on the issuer's balance sheet in order to express
items in terms of currency of constant purchasing power. Inflation accounting
may indirectly generate losses or profits. Consequently, financial data may
be materially affected by restatements for inflation and may not accurately
reflect the real condition of those issuers and securities markets. Also,
securities brokers and dealers in other countries may not be as well
capitalized as those in the United States, so that they are more susceptible
to financial failure in times of market, political or economic stress.
In addition, existing laws and regulations are often inconsistently
applied. As legal systems in some of the emerging market countries develop,
foreign investors may be adversely affected by new laws and regulations,
changes to existing laws and regulations and preemption of local laws and
regulations by national laws. In circumstances where adequate laws exist, it
may not be possible to obtain swift and equitable enforcement of the law.
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FOREIGN SOVEREIGN DEBT. Sovereign debt includes bonds that are
issued by foreign governments or their agencies, instrumentalities or
political subdivisions or by foreign central banks. Sovereign debt also may
be issued by quasi-governmental entities that are owned by foreign
governments but are not backed by their full faith and credit or general
taxing powers. Investment in sovereign debt involves special risks. The
issuer of the debt or the governmental authorities that control the repayment
of the debt may be unable or unwilling to repay principal and/or interest
when due in accordance with the terms of such debt, and the funds may have
limited legal recourse in the event of a default.
Sovereign debt differs from debt obligations issued by private
entities in that, generally, remedies for defaults must be pursued in the
courts of the defaulting party. Legal recourse is therefore somewhat
diminished. Political conditions, especially a sovereign entity's willingness
to meet the terms of its debt obligations, are of considerable significance.
Also, there can be no assurance that the holders of commercial bank debt
issued by the same sovereign entity may not contest payments to the holders
of sovereign debt in the event of default under commercial bank loan
agreements.
A sovereign debtor's willingness or ability to repay principal and
interest due in a timely manner may be affected by, among other factors, its
cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size
of the debt service burden to the economy as a whole, the sovereign debtor's
policy toward principal international lenders and the political constraints
to which a sovereign debtor may be subject. A country whose exports are
concentrated in a few commodities could be vulnerable to a decline in the
international price of such commodities. Increased protectionism on the part
of a country's trading partners, or political changes in those countries,
could also adversely affect its exports. Such events could diminish a
country's trade account surplus, if any, or the credit standing of a
particular local government or agency. Another factor bearing on the ability
of a country to repay sovereign debt is the level of the country's
international reserves. Fluctuations in the level of these reserves can
affect the amount of foreign exchange readily available for external debt
payments and, thus, could have a bearing on the capacity of the country to
make payments on its sovereign debt.
The occurrence of political, social or diplomatic changes in one or
more of the countries issuing sovereign debt could adversely affect the
funds' investments. Political changes or a deterioration of a country's
domestic economy or balance of trade may affect the willingness of countries
to service their sovereign debt.
With respect to sovereign debt of emerging market issuers, investors
should be aware that certain emerging market countries are among the largest
debtors to commercial banks and foreign governments. Some emerging market
countries have from time to time declared moratoria on the payment of
principal and interest on external debt.
Some emerging market countries have experienced difficulty in
servicing their sovereign debt on a timely basis which led to defaults on
certain obligations and the restructuring of certain indebtedness.
Restructuring arrangements have included, among other things, reducing and
rescheduling interest and principal payments by negotiating new or amended
credit agreements or converting outstanding principal and unpaid interest to
Brady Bonds (discussed below), and obtaining new credit to finance interest
payments. Holders of sovereign debt, including the funds, may be requested to
participate in the rescheduling of such debt and to extend further loans to
sovereign debtors. The interests of holders of sovereign debt could be
adversely affected in the course of restructuring arrangements or by certain
other factors referred to below. Furthermore, some of the participants in the
secondary market for sovereign debt may also be directly involved in
negotiating the terms of these arrangements and may, therefore, have access
to information not available to other market participants. Obligations
arising from past restructuring agreements may affect the economic
performance and political and social stability of certain issuers of
sovereign debt. There is no bankruptcy proceeding by which sovereign debt on
which a sovereign has defaulted may be collected in whole or in part.
Foreign investment in certain sovereign debt is restricted or
controlled to varying degrees. These restrictions or controls may at times
limit or preclude foreign investment in such sovereign debt and increase the
costs and expenses of a fund. Certain countries in which a fund may invest
require governmental approval prior to investments by foreign persons, limit
the amount of investment by foreign persons in a particular issuer, limit the
investment by foreign persons only to a specific class of securities of an
issuer that may have less advantageous
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rights than the classes available for purchase by domiciliaries of the
countries or impose additional taxes on foreign investors. Certain issuers
may require governmental approval for the repatriation of investment income,
capital or the proceeds of sales of securities by foreign investors. In
addition, if a deterioration occurs in a country's balance of payments the
country could impose temporary restrictions on foreign capital remittances. A
fund could be adversely affected by delays in, or a refusal to grant, any
required governmental approval for repatriation of capital, as well as by the
application to the fund of any restrictions on investments. Investing in
local markets may require a fund to adopt special procedures, seek local
government approvals or take other actions, each of which may involve
additional costs to the fund.
BRADY BONDS -- Brady Bonds are sovereign bonds issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness. In
restructuring its external debt under the Brady Plan framework, a debtor
nation negotiates with its existing bank lenders as well as multilateral
institutions such as the International Monetary Fund ("IMF"). The Brady Plan
framework, as it has developed, contemplates the exchange of commercial bank
debt for newly issued Brady Bonds. Brady Bonds may also be issued in respect
of new money being advanced by existing lenders in connection with the debt
restructuring. The World Bank and the IMF support the restructuring by
providing funds pursuant to loan agreements or other arrangements which
enable the debtor nation to collateralize the new Brady Bonds or to
repurchase outstanding bank debt at a discount.
Brady Bonds have been issued only in recent years, and accordingly
do not have a long payment history. Agreements implemented under the Brady
Plan to date are designed to achieve debt and debt-service reduction through
specific options negotiated by a debtor nation with its creditors. As a
result, the financial packages offered by each country differ. The types of
options have included the exchange of outstanding commercial bank debt for
bonds issued at 100% of face value of such debt, which carry a below-market
stated rate of interest (generally known as par bonds), bonds issued at a
discount from the face value of such debt (generally known as discount
bonds), bonds bearing an interest rate which increases over time and bonds
issued in exchange for the advancement of new money by existing lenders.
Regardless of the stated face amount and stated interest rate of the various
types of Brady Bonds, a fund will purchase Brady Bonds in which the price and
yield to the investor reflect market conditions at the time of purchase.
Certain Brady Bonds have been collateralized as to principal due at
maturity by U.S. Treasury zero coupon bonds with maturities equal to the
final maturity of such Brady Bonds. Collateral purchases are financed by the
IMF, the World Bank and the debtor nations' reserves. In the event of a
default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero
coupon obligations held as collateral for the payment of principal will not
be distributed to investors, nor will such obligations be sold and the
proceeds distributed. The collateral will be held by the collateral agent
until the scheduled maturity of the defaulted Brady Bonds, which will
continue to be outstanding, at which time the face amount of the collateral
will equal the principal payments that would have then been due on the Brady
Bonds in the normal course. Interest payments on Brady Bonds may be wholly
uncollateralized or may be collateralized by cash or high grade securities in
amounts that typically represent between 12 and 18 months of interest
accruals on these instruments, with the balance of the interest accruals
being uncollateralized.
Brady Bonds are often viewed as having several valuation components:
(1) the collateralized repayment of principal, if any, at final maturity, (2)
the collateralized interest payments, if any, (3) the uncollateralized
interest payments and (4) any uncollateralized repayment of principal at
maturity (these uncollateralized amounts constitute the "residual risk"). In
light of the residual risk of Brady Bonds and, among other factors, the
history of defaults with respect to commercial bank loans by public and
private entities of countries issuing Brady Bonds, investments in Brady Bonds
are to be viewed as speculative. A fund may purchase Brady Bonds with no or
limited collateralization and will be relying for payment of interest and
(except in the case of principal collateralized Brady Bonds) repayment of
principal primarily on the willingness and ability of the foreign government
to make payment in accordance with the terms of the Brady Bonds.
STRUCTURED FOREIGN INVESTMENTS. This term generally refers to
interests in U.S. and foreign entities organized and operated solely for the
purpose of securitizing or restructuring the investment characteristics of
foreign securities. This type of securitization or restructuring usually
involves the deposit with or purchase by a U.S.
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or foreign entity, such as a corporation or trust, of specified instruments
(such as commercial bank loans or Brady Bonds) and the issuance by that
entity of one or more classes of securities backed by, or representing
interests in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued structured foreign
investments to create securities with different investment characteristics
such as varying maturities, payment priorities and interest rate provisions,
and the extent of the payments made with respect to structured foreign
investments is often dependent on the extent of the cash flow on the
underlying instruments.
Structured foreign investments frequently involve no credit
enhancement. Accordingly, their credit risk generally will be equivalent to
that of the underlying instruments. In addition, classes of structured
foreign investments may be subordinated to the right of payment of another
class. Subordinated structured foreign investments typically have higher
yields and present greater risks than unsubordinated structured foreign
investments. Structured foreign investments are typically sold in private
placement transactions, and there currently is no active trading market for
structured foreign investments.
CURRENCY-LINKED INVESTMENTS. The principal amount of securities that
are indexed to specific foreign currency exchange rates may be adjusted up or
down (but not below zero) at maturity to reflect changes in the exchange rate
between two currencies. A fund may experience loss of principal due to these
adjustments.
ZERO COUPON AND OTHER OID SECURITIES; PIK SECURITIES. Zero coupon
securities are securities on which no periodic interest payments are made but
instead are sold at a deep discount from their face value. The buyer of these
securities receives a rate of return by the gradual appreciation of the
security, which results from the fact that it will be paid at face value on a
specified maturity date. There are many types of zero coupon securities. Some
are issued in zero coupon form, including Treasury bills, notes and bonds
that have been stripped of (separated from) their unmatured interest coupons
(unmatured interest payments) and receipts or certificates representing
interests in such stripped debt obligations and coupons. Others are created
by brokerage firms that strip the coupons from interest-paying bonds and sell
the principal and the coupons separately.
Other securities that are sold with original issue discount ("OID")
(I.E., the difference between the issue price and the value at maturity) may
provide for some interest to be paid prior to maturity. In addition,
payment-in-kind ("PIK") securities pay interest in additional securities, not
in cash. OID and PIK securities usually trade at a discount from their face
value.
Zero coupon securities are generally more sensitive to changes in
interest rates than debt obligations of comparable maturities that make
current interest payments. This means that when interest rates fall, the
value of zero coupon securities rises more rapidly than securities paying
interest on a current basis. However, when interest rates rise, their value
falls more dramatically. Other OID securities and PIK securities also are
subject to greater fluctuations in market value in response to changing
interest rates than bonds of comparable maturities that make current
distributions of interest in cash.
Because federal tax law requires that accrued OID and "interest" on
PIK securities be included currently in a fund's income (see "Taxes," below),
a fund might be required to distribute as a dividend an amount that is
greater than the total amount of cash it actually receives. These
distributions would have to be made from the fund's cash assets or, if
necessary, from the proceeds of sales of portfolio securities. A fund would
not be able to purchase additional securities with cash used to make these
distributions, and its current income and the value of its shares would
ultimately be reduced as a result.
Certain zero coupon securities are U.S. Treasury notes and bonds
that have been stripped of their unmatured interest coupon receipts or
interests in such U.S. Treasury securities or coupons. The staff of the SEC
currently takes the position that "stripped" U.S. government securities that
are not issued through the U.S. Treasury are not U.S. government securities.
This technique is frequently used with U.S. Treasury bonds to create CATS
(Certificate of Accrual Treasury Securities), TIGRs (Treasury Income Growth
Receipts) and similar securities.
CONVERTIBLE SECURITIES. A convertible security is a bond, preferred
stock or other security that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest or dividends until the
convertible security matures or is redeemed, converted or exchanged. Convertible
securities
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have unique investment characteristics in that they generally (1) have higher
yields than common stocks, but lower yields than comparable non-convertible
securities, (2) are less subject to fluctuation in value than the underlying
stock because they have fixed income characteristics and (3) provide the
potential for capital appreciation if the market price of the underlying
common stock increases. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than the
issuer's common stock. However, the extent to which such risk is reduced
depends in large measure upon the degree to which the convertible security
sells above its value as a fixed income security.
A convertible security may be subject to redemption at the option of
the issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a fund is called for
redemption, the fund will be required to permit the issuer to redeem the
security, convert it into underlying common stock or sell it to a third party.
WARRANTS. Warrants are securities permitting, but not obligating,
holders to subscribe for other securities. Warrants do not carry with them
the right to dividends or voting rights with respect to the securities that
they entitle their holder to purchase, and they do not represent any rights
in the assets of the issuer. As a result, warrants may be considered more
speculative than certain other types of investments. In addition, the value
of a warrant does not necessarily change with the value of the underlying
securities, and a warrant ceases to have value if it is not exercised prior
to its expiration date.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Investments in secured or
unsecured fixed or floating rate loans ("Loans") arranged through private
negotiations between a borrowing corporation, government or other entity and
one or more financial institutions ("Lenders") may be in the form of
participations ("Participations") in Loans or assignments ("Assignments") of
all or a portion of Loans from third parties. Participations typically result
in the fund's having a contractual relationship only with the Lender, not
with the borrower. A fund has the right to receive payments of principal,
interest and any fees to which it is entitled only from the Lender selling
the Participation and only upon receipt by the Lender of the payments from
the borrower. In connection with purchasing Participations, a fund generally
has no direct right to enforce compliance by the borrower with the terms of
the loan agreement relating to the Loan, nor any rights of set-off against
the borrower, and a fund may not directly benefit from any collateral
supporting the Loan in which it has purchased the Participation. As a result,
a fund assumes the credit risk of both the borrower and the Lender that is
selling the Participation. In the event of the insolvency of the selling
Lender, the fund may be treated as a general creditor of that Lender and may
not benefit from any set-off between the Lender and the borrower. A fund will
acquire Participations only if its investment adviser determines that the
selling Lender is creditworthy.
When a fund purchases Assignments from Lenders, it acquires direct
rights against the borrower on the Loan. In an Assignment, the fund is
entitled to receive payments directly from the borrower and, therefore, does
not depend on the selling bank to pass these payments onto the fund. However,
because Assignments are arranged through private negotiations between
potential assignees and assignors, the rights and obligations acquired by the
fund as the purchaser of an Assignment may differ from, and be more limited
than, those held by the assigning Lender.
Assignments and Participations are generally not registered under
the Securities Act of 1933, as amended ("Securities Act"), and thus may be
subject to a fund's limitation on investment in illiquid securities. Because
there may be no liquid market for such securities, such securities may be
sold only to a limited number of institutional investors. The lack of a
liquid secondary market could have an adverse impact on the value of such
securities and on a fund's ability to dispose of particular Assignments or
Participations when necessary to meet the fund's liquidity needs or in
response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower.
TEMPORARY AND DEFENSIVE INVESTMENTS; MONEY MARKET INVESTMENTS. Each
fund may invest in money market investments for temporary or defensive
purposes, to reinvest cash collateral from its securities lending activities
or as part of its normal investment program. Such investments include, among
other things, (1) securities issued or guaranteed by the U.S. government or
one of its agencies or instrumentalities, (2) debt obligations of banks,
savings and loan institutions, insurance companies and mortgage bankers, (3)
commercial paper and notes, including those with variable and floating rates
of interest, (4) debt obligations of foreign branches of U.S. banks, U.S.
branches of foreign banks, and foreign branches of foreign banks, (5) debt
obligations issued or guaranteed by
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one or more foreign governments or any of their foreign political
subdivisions, agencies or instrumentalities, including obligations of
supranational entities, (6) bonds issued by foreign issuers, (7) repurchase
agreements and (8) securities of other investment companies that invest
exclusively in money market instruments and similar private investment
vehicles. Only those funds that may trade outside the United States may
invest in money market instruments that are denominated in foreign currencies.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. Each fund may invest in
securities of other investment companies, subject to limitations under the
Investment Company Act of 1940, as amended ("Investment Company Act"). Among
other things, these limitations currently restrict a fund's aggregate
investments in other investment companies to no more than 10% of its total
assets. A fund's investments in certain private investment vehicles are not
subject to this restriction. The shares of other investment companies are
subject to the management fees and other expenses of those companies, and the
purchase of shares of some investment companies requires the payment of sales
loads and (in the case of closed-end investment companies) sometimes
substantial premiums above the value of such companies' portfolio securities.
At the same time, a fund would continue to pay its own management fees and
expenses with respect to all its investments, including shares of other
investment companies. Each fund may invest in the shares of other investment
companies when, in the judgment of its investment adviser, the potential
benefits of the investment outweigh the payment of any management fees and
expenses and, where applicable, premium or sales load.
From time to time, investments in other investment companies may be
the most effective available means for a fund to invest a portion of its
assets. In some cases, investment in another investment company may be the
most practical way for a fund to invest in securities of issuers in certain
countries. These investments may include World Equity Benchmark Shares-SM-
(commonly known as "WEBS"), which are exchange-traded shares of series of an
investment company that are designed to replicate the composition and
performance of publicly traded issuers in particular foreign countries. A
fund's investment in another investment company is subject to the risks of
that investment company's underlying portfolio securities. Shares of
exchange-traded investment companies also can trade at substantial discounts
below the value of the companies' portfolio securities.
PACE Money Market Investments may invest in the securities of other
money market funds when Mitchell Hutchins believes that (1) the amounts to be
invested are too small or are available too late in the day to be effectively
invested in money market instruments, (2) shares of other money market funds
otherwise would provide a better return than direct investment in money
market instruments or (3) such investments would enhance the fund's
liquidity. The other funds may invest in the securities of money market funds
for similar reasons.
ILLIQUID SECURITIES. The term "illiquid securities" means securities
that cannot be disposed of within seven days in the ordinary course of
business at approximately the amount at which a fund has valued the
securities and includes, among other things, purchased over-the-counter
options, repurchase agreements maturing in more than seven days and
restricted securities other than those its investment adviser has determined
are liquid pursuant to guidelines established by the board. The assets used
as cover for over-the-counter options written by a fund will be considered
illiquid unless the over-the-counter options are sold to qualified dealers
who agree that the fund may repurchase any over-the-counter options they
write at a maximum price to be calculated by a formula set forth in the
option agreements. The cover for an over-the-counter option written subject
to this procedure would be considered illiquid only to the extent that the
maximum repurchase price under the formula exceeds the intrinsic value of the
option. Under current SEC guidelines, interest-only and principal-only
classes of mortgage-backed securities generally are considered illiquid.
However, interest-only and principal-only classes of fixed-rate
mortgage-backed securities issued by the U.S. government or one of its
agencies or instrumentalities will not be considered illiquid if the fund's
investment adviser has determined that they are liquid pursuant to guidelines
established by the board. A fund may not be able to readily liquidate its
investment in illiquid securities and may have to sell other investments if
necessary to raise cash to meet its obligations. The lack of a liquid
secondary market for illiquid securities may make it more difficult for a
fund to assign a value to those securities for purposes of valuing its
portfolio and calculating its net asset value.
Restricted securities are not registered under the Securities Act
and may be sold only in privately negotiated or other exempted transactions
or after a Securities Act registration statement has become effective. Where
registration is required, a fund may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the time
of the decision to sell and the time a fund may be permitted to sell
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a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, a fund might obtain a less
favorable price than prevailed when it decided to sell.
Not all restricted securities are illiquid. For funds that are
authorized to trade outside the United States, foreign securities are freely
tradeable in the country in which they are principally traded generally are
not considered illiquid, even if they are restricted in the United States. A
large institutional market has developed for many U.S. and foreign securities
that are not registered under the Securities Act. Institutional investors
generally will not seek to sell these instruments to the general public but
instead will often depend either on an efficient institutional market in
which such unregistered securities can be readily resold or on an issuer's
ability to honor a demand for repayment. Therefore, the fact that there are
contractual or legal restrictions on resale to the general public or certain
institutions is not dispositive of the liquidity of such investments.
Institutional markets for restricted securities also have developed
as a result of Rule 144A under the Securities Act, which establishes a "safe
harbor" from the registration requirements of the Securities Act for resales
of certain securities to qualified institutional buyers. Such markets include
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System
sponsored by the National Association of Securities Dealers, Inc. An
insufficient number of qualified institutional buyers interested in
purchasing Rule 144A-eligible restricted securities held by a fund, however,
could affect adversely the marketability of such portfolio securities, and
the fund might be unable to dispose of them promptly or at favorable prices.
The board has delegated the function of making day-to-day
determinations of liquidity to each fund's investment adviser pursuant to
guidelines approved by the board. An investment adviser takes into account a
number of factors in reaching liquidity decisions, including (1) the
frequency of trades for the security, (2) the number of dealers that make
quotes for the security, (3) the number of dealers that have undertaken to
make a market in the security, (4) the number of other potential purchasers,
(5) the nature of the security and how trading is effected (E.G., the time
needed to sell the security, how bids are solicited and the mechanics of
transfer) and (6) the existence of demand features or similar liquidity
enhancements. A fund's investment adviser monitors the liquidity of
restricted securities in its portfolio and reports periodically on such
decisions to the board.
In making determinations as to the liquidity of municipal lease
obligations purchased by PACE Municipal Fixed Income Investments, the
investment adviser distinguishes between direct investments in municipal
lease obligations (or participations therein) and investments in securities
that may be supported by municipal lease obligations or certificates of
participation therein. Since these municipal lease obligation-backed
securities are based on a well-established means of securitization, the
investment adviser does not believe that investing in such securities
presents the same liquidity issues as direct investments in municipal lease
obligations.
Mitchell Hutchins and (where applicable) the fund's investment
adviser monitor each fund's overall holdings of illiquid securities. If a
fund's holdings of illiquid securities exceed its limitation on investments
in illiquid securities for any reason (such as a particular security becoming
illiquid, changes in the relative market values of liquid and illiquid
portfolio securities or shareholder redemptions), Mitchell Hutchins and the
applicable investment adviser will consider what action would be in the best
interests of a fund and its shareholders. Such action may include engaging in
an orderly disposition of securities to reduce the fund's holdings of
illiquid securities. However, a fund is not required to dispose of illiquid
securities under these circumstances.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in
which a fund purchases securities or other obligations from a bank or
securities dealer (or its affiliate) and simultaneously commits to resell
them to the counterparty at an agreed-upon date or upon demand and at a price
reflecting a market rate of interest unrelated to the coupon rate or maturity
of the purchased obligations. A fund maintains custody of the underlying
obligations prior to their repurchase, either through its regular custodian
or through a special "tri-party" custodian or sub-custodian that maintains
separate accounts for both the fund and its counterparty. Thus, the
obligation of the counterparty to pay the repurchase price on the date agreed
to or upon demand is, in effect, secured by such obligations.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including a possible decline in the market value
of the underlying obligations. If their value becomes less than the repurchase
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price, plus any agreed-upon additional amount, the counterparty must provide
additional collateral so that at all times the collateral is at least equal
to the repurchase price plus any agreed-upon additional amount. The
difference between the total amount to be received upon repurchase of the
obligations and the price that was paid by a fund upon acquisition is accrued
as interest and included in its net investment income. Repurchase agreements
involving obligations other than U.S. government securities (such as
commercial paper and corporate bonds) may be subject to special risks and may
not have the benefit of certain protections in the event of the
counterparty's insolvency. If the seller or guarantor becomes insolvent, the
fund may suffer delays, costs and possible losses in connection with the
disposition of collateral. Each fund intends to enter into repurchase
agreements only in transactions with counterparties believed by Mitchell
Hutchins to present minimum credit risks.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements involve
the sale of securities held by a fund subject to its agreement to repurchase
the securities at an agreed-upon date or upon demand and at a price
reflecting a market rate of interest. Reverse repurchase agreements are
subject to each fund's limitation on borrowings and may be entered into only
with banks or securities dealers or their affiliates. While a reverse
repurchase agreement is outstanding, a fund will maintain, in a segregated
account with its custodian, cash or liquid securities, marked to market
daily, in an amount at least equal to its obligations under the reverse
repurchase agreement. See "The Funds' Investments, Related Risks and
Limitations -- Segregated Accounts."
Reverse repurchase agreements involve the risk that the buyer of the
securities sold by a fund might be unable to deliver them when that fund
seeks to repurchase. If the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, the buyer or trustee or
receiver may receive an extension of time to determine whether to enforce a
fund's obligation to repurchase the securities, and the fund's use of the
proceeds of the reverse repurchase agreement may effectively be restricted
pending such decision.
DOLLAR ROLLS. In a dollar roll, a fund sells mortgage-backed or
other securities for delivery on the next regular settlement date for those
securities and, simultaneously, contracts to purchase substantially similar
securities for delivery on a later settlement date. Dollar rolls also are
subject to a fund's limitation on borrowings.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each fund may purchase
securities on a "when-issued" basis or may purchase or sell securities for
delayed delivery, I.E., for issuance or delivery to the fund later than the
normal settlement date for such securities at a stated price and yield.
When-issued securities include TBA ("to be announced") securities. TBA
securities, which are usually mortgage-backed securities, are purchased on a
forward commitment basis with an approximate principal amount and no defined
maturity date. The actual principal amount and maturity date are determined
upon settlement when the specific mortgage pools are assigned. A fund
generally would not pay for such securities or start earning interest on them
until they are received. However, when a fund undertakes a when-issued or
delayed-delivery obligation, it immediately assumes the risks of ownership,
including the risks of price fluctuation. Failure of the issuer to deliver a
security purchased by a fund on a when-issued or delayed-delivery basis may
result in the fund's incurring or missing an opportunity to make an
alternative investment. Depending on market conditions, a fund's when-issued
and delayed-delivery purchase commitments could cause its net asset value per
share to be more volatile, because such securities may increase the amount by
which the fund's total assets, including the value of when-issued and
delayed-delivery securities held by that fund, exceeds its net assets.
A security purchased on a when-issued or delayed delivery basis is
recorded as an asset on the commitment date and is subject to changes in
market value, generally based upon changes in the level of interest rates.
Thus, fluctuation in the value of the security from the time of the
commitment date will affect a fund's net asset value. When a fund commits to
purchase securities on a when-issued or delayed delivery basis, its custodian
segregates assets to cover the amount of the commitment. See "The Funds'
Investments, Related Risks and Limitations -- Segregated Accounts." A fund's
when-issued and delayed delivery purchase commitments could cause its net
asset value per share to be more volatile. A fund may sell the right to
acquire the security prior to delivery if its investment adviser deems it
advantageous to do so, which may result in a gain or loss to the fund.
PACE MUNICIPAL FIXED INCOME INVESTMENTS -- TYPES OF MUNICIPAL BONDS.
The fund may invest in a variety of municipal bonds, as described below:
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MUNICIPAL BONDS -- Municipal bonds are obligations that are issued
by states, municipalities, public authorities or other issuers and that pay
interest that is exempt from federal income tax in the opinion of issuer's
counsel. The two principal classifications of municipal bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source
such as from the user of the facility being financed. Municipal bonds also
include "moral obligation" bonds, which are normally issued by special
purpose authorities. For these bonds, a government unit is regarded as
morally obligated to support payment of the debt service, which is usually
subject to annual budget appropriations. Various types of municipal bonds are
described in the following sections.
MUNICIPAL LEASE OBLIGATIONS -- Municipal bonds include municipal
lease obligations, such as leases, installment purchase contracts and
conditional sales contracts, and certificates of participation therein.
Municipal lease obligations are issued by state and local governments and
authorities to purchase land or various types of equipment or facilities and
may be subject to annual budget appropriations. The fund generally invests in
municipal lease obligations through certificates of participation.
Although municipal lease obligations do not constitute general
obligations of the municipality for which its taxing power is pledged, they
ordinarily are backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. The leases
underlying certain municipal lease obligations, however, provide that lease
payments are subject to partial or full abatement if, because of material
damage or destruction of the leased property, there is substantial
interference with the lessee's use or occupancy of such property. This
"abatement risk" may be reduced by the existence of insurance covering the
leased property, the maintenance by the lessee of reserve funds or the
provision of credit enhancements such as letters of credit.
Certain municipal lease obligations contain "non-appropriation"
clauses, which provide that the municipality has no obligation to make lease
or installment purchase payments in future years unless money is appropriated
for such purpose on a yearly basis. Some municipal lease obligations of this
type are insured as to timely payment of principal and interest, even in the
event of a failure by the municipality to appropriate sufficient funds to
make payments under the lease. However, in the case of an uninsured municipal
lease obligation, the fund's ability to recover under the lease in the event
of a non-appropriation or default will be limited solely to the repossession
of leased property without recourse to the general credit of the lessee, and
disposition of the property in the event of foreclosure might prove difficult.
INDUSTRIAL DEVELOPMENT BONDS ("IDBs") AND PRIVATE ACTIVITY BONDS
("PABs") -- IDBs and PABs are issued by or on behalf of public authorities to
finance various privately operated facilities, such as airport or pollution
control facilities. These obligations are considered municipal bonds if the
interest paid thereon is exempt from federal income tax in the opinion of the
bond issuer's counsel. IDBs and PABs are in most cases revenue bonds and thus
are not payable from the unrestricted revenues of the issuer. The credit
quality of IDBs and PABs is usually directly related to the credit standing
of the user of the facilities being financed. IDBs issued after August 15,
1986 generally are considered PABs, and to the extent the fund invests in
such PABs, shareholders generally will be required to include a portion of
their exempt-interest dividends from that fund in calculating their liability
for the AMT. See "Taxes" below. The fund may invest more than 25% of its net
assets in IDBs and PABs.
FLOATING RATE AND VARIABLE RATE OBLIGATIONS -- Floating rate and
variable rate obligations are municipal bonds that bear interest at rates
that are not fixed but that vary with changes in specified market rates or
indices. The interest rate on floating rate or variable rate securities
ordinarily is readjusted on the basis of the prime rate of the bank that
originated the financing or some other index or published rate, such as the
90-day U.S. Treasury bill rate, or is otherwise reset to reflect market rates
of interest. Generally, these interest rate adjustments cause the market
value of floating rate and variable rate municipal securities to fluctuate
less than the market value of fixed rate obligations. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation
or capital depreciation is less than for fixed rate obligations. Floating
rate or variable rate obligations typically permit the holder to demand
payment of principal from the issuer or remarketing agent at par value prior
to maturity and may permit the issuer to prepay principal, plus accrued
interest, at its discretion after a specified notice period. Frequently,
floating rate or variable rate obligations and/or the demand features thereon
are secured by letters of credit or other credit support arrangements
provided by banks or other financial institutions, the credit standing of
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which affects the credit quality of the obligations. Changes in the credit
quality of these institutions could cause losses to the fund and adversely
affect its share price.
A demand feature gives the fund the right to sell the securities to
a specified party, usually a remarketing agent, on a specified date. A demand
feature is often backed by a letter of credit from a bank or a guarantee or
other liquidity support arrangement from a bank or other financial
institution. As discussed under "Participation Interests," to the extent that
payment of an obligation is backed by a letter of credit, guarantee or other
liquidity support that may be drawn upon demand, such payment may be subject
to that institution's ability to satisfy that commitment.
PARTICIPATION INTERESTS -- Participation interests are interests in
municipal bonds, including IDBs, PABs and floating and variable rate
obligations, that are owned by banks. These interests carry a demand feature
permitting the holder to tender them back to the bank, which demand feature
generally is backed by an irrevocable letter of credit or guarantee of the
bank. The credit standing of such bank affects the credit quality of the
participation interests.
A participation interest gives the fund an undivided interest in a
municipal bond owned by a bank. The fund has the right to sell the
instruments back to the bank. Such right generally is backed by the bank's
irrevocable letter of credit or guarantee and permits the fund to draw on the
letter of credit on demand, after specified notice, for all or any part of
the principal amount of the fund's participation interest plus accrued
interest. Generally, the fund expects to exercise the demand under the
letters of credit or other guarantees (1) upon a default under the terms of
the underlying bond, (2) to maintain the fund's portfolio in accordance with
its investment objective and policies or (3) as needed to provide liquidity
to the fund in order to meet redemption requests. The ability of a bank to
fulfill its obligations under a letter of credit or guarantee might be
affected by possible financial difficulties of its borrowers, adverse
interest rate or economic conditions, regulatory limitations or other
factors. The fund's investment adviser will monitor the pricing, quality and
liquidity of the participation interests held by the fund, and the credit
standing of banks issuing letters of credit or guarantees supporting such
participation interests on the basis of published financial information
reports of rating services and bank analytical services.
TENDER OPTION BONDS -- Tender option bonds are long-term municipal
bonds sold by a bank subject to a "tender option" that gives the purchaser
the right to tender them to the bank at par plus accrued interest at
designated times (the "tender option"). The tender option may be exercisable
at intervals ranging from bi-weekly to semi-annually, and the interest rate
on the bonds is typically reset at the end of the applicable interval in an
attempt to cause the bonds to have a market value that approximates their par
value. The tender option generally would not be exercisable in the event of a
default on, or significant downgrading of, the underlying municipal bonds.
Therefore, the fund's ability to exercise the tender option will be affected
by the credit standing of both the bank involved and the issuer of the
underlying securities.
PUT BONDS -- A put bond is a municipal bond that gives the holder
the unconditional right to sell the bond back to the issuer or a remarketing
agent at a specified price and exercise date, which is typically well in
advance of the bond's maturity date. The obligation to purchase the bond on
the exercise date may be supported by a letter of credit or other credit
support arrangement from a bank, insurance company or other financial
institution, the credit standing of which affects the credit quality of the
obligation.
If the put is a "one time only" put, the fund ordinarily will either
sell the bond or put the bond, depending upon the more favorable price. If
the bond has a series of puts after the first put, the bond will be held as
long as, in the judgment of its investment adviser, it is in the best
interest of the fund to do so. There is no assurance that the issuer of a put
bond acquired by a fund will be able to repurchase the bond upon the exercise
date, if the fund chooses to exercise its right to put the bond back to the
issuer.
TAX-EXEMPT COMMERCIAL PAPER AND SHORT-TERM MUNICIPAL NOTES --
Municipal bonds include tax-exempt commercial paper and short-term municipal
notes, such as tax anticipation notes, bond anticipation notes, revenue
anticipation notes and other forms of short-term loans. Such notes are issued
with a short-term maturity in anticipation of the receipt of tax funds, the
proceeds of bond placements and other revenues.
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INVERSE FLOATERS -- The fund may invest in municipal bonds on which
the rate of interest varies inversely with interest rates on other municipal
bonds or an index. Such obligations include components of securities on which
interest is paid in two separate parts - an auction component, which pays
interest at a market rate that is set periodically through an auction process
or other method, and a residual component, or "inverse floater," which pays
interest at a rate equal to the difference between the rate that the issuer
would have paid on a fixed-rate obligation at the time of issuance and the
rate paid on the auction component. The market value of an inverse floater
will be more volatile than that of a fixed-rate obligation and, like most
debt obligations, will vary inversely with changes in interest rates.
Because the interest rate paid to holders of inverse floaters is
generally determined by subtracting the interest rate paid to holders of
auction components from a fixed amount, the interest rate paid to holders of
inverse floaters will decrease as market rates increase and increase as
market rates decrease. Moreover, the extent of the increases and decreases in
the market value of inverse floaters may be larger than comparable changes in
the market value of an equal principal amount of a fixed rate municipal bond
having similar credit quality, redemption provisions and maturity. In a
declining interest rate environment, inverse floaters can provide the fund
with a means of increasing or maintaining the level of tax-exempt interest
paid to shareholders.
MORTGAGE SUBSIDY BONDS -- The fund also may purchase mortgage
subsidy bonds that are normally issued by special purpose public authorities.
In some cases the repayment of such bonds depends upon annual legislative
appropriations; in other cases repayment is a legal obligation of the issuer,
and, if the issuer is unable to meet its obligations, repayment becomes a
moral commitment of a related government unit (subject, however, to such
appropriations). The types of municipal bonds identified above and in the
Prospectus may include obligations of issuers whose revenues are primarily
derived from mortgage loans on housing projects for moderate to low income
families.
STANDBY COMMITMENTS -- The fund may acquire standby commitments
pursuant to which a bank or other municipal bond dealer agrees to purchase
securities that are held in the fund's portfolio or that are being purchased
by the fund at a price equal to (1) the acquisition cost (excluding any
accrued interest paid on acquisition), less any amortized market premium or
plus any accrued market or original issue discount, plus (2) all interest
accrued on the securities since the last interest payment date or the date
the securities were purchased by the fund, whichever is later. Although the
fund does not currently intend to acquire standby commitments with respect to
municipal bonds held in its portfolio, the fund may acquire such commitments
under unusual market conditions to facilitate portfolio liquidity.
The fund would enter into standby commitments only with those banks
or other dealers that, in the opinion of its investment adviser, present
minimal credit risk. The fund's right to exercise standby commitments would
be unconditional and unqualified. A standby commitment would not be
transferable by the fund, although it could sell the underlying securities to
a third party at any time. The fund may pay for standby commitments either
separately in cash or by paying a higher price for the securities that are
acquired subject to such a commitment (thus reducing the yield to maturity
otherwise available for the same securities). The acquisition of a standby
commitment would not ordinarily affect the valuation or maturity of the
underlying municipal bonds. Standby commitments acquired by the fund would be
valued at zero in determining net asset value. Whether the fund paid directly
or indirectly for a standby commitment, its cost would be treated as
unrealized depreciation and would be amortized over the period the commitment
is held by the fund.
DURATION. Duration is a measure of the expected life of a bond on a
present value basis. Duration incorporates the bond's yield, coupon interest
payments, final maturity and call features into one measure and is one of the
fundamental tools used by the applicable investment adviser in portfolio
selection and yield curve positioning of a fund's investments in bonds.
Duration was developed as a more precise alternative to the concept "term to
maturity." Traditionally, a bond's "term to maturity" has been used as a
proxy for the sensitivity of the security's price to changes in interest
rates (which is the "interest rate risk" or "volatility" of the security).
However, "term to maturity" measures only the time until the scheduled final
payment on the bond, taking no account of the pattern of payments prior to
maturity.
Duration takes the length of the time intervals between the present
time and the time that the interest and principal payments are scheduled or,
in the case of a callable bond, expected to be made, and weights them by the
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present values of the cash to be received at each future point in time. For
any bond with interest payments occurring prior to the payment of principal,
duration is always less than maturity. For example, depending on its coupon
and the level of market yields, a Treasury note with a remaining maturity of
five years might have a duration of 4.5 years. For mortgage-backed and other
securities that are subject to prepayments, put or call features or
adjustable coupons, the difference between the remaining stated maturity and
the duration is likely to be much greater.
Duration allows an investment adviser to make certain predictions as
to the effect that changes in the level of interest rates will have on the
value of a fund's portfolio of bonds. For example, when the level of interest
rates increases by 1%, a debt security having a positive duration of three
years generally will decrease by approximately 3%. Thus, if an investment
adviser calculates the duration of a fund's portfolio of bonds as three
years, it normally would expect the portfolio to change in value by
approximately 3% for every 1% change in the level of interest rates. However,
various factors, such as changes in anticipated prepayment rates, qualitative
considerations and market supply and demand, can cause particular securities
to respond somewhat differently to changes in interest rates than indicated
in the above example. Moreover, in the case of mortgage-backed and other
complex securities, duration calculations are estimates and are not precise.
This is particularly true during periods of market volatility. Accordingly,
the net asset value of a fund's portfolio of bonds may vary in relation to
interest rates by a greater or lesser percentage than indicated by the above
example.
Futures, options and options on futures have durations that, in
general, are closely related to the duration of the securities that underlie
them. Holding long futures or call option positions will lengthen portfolio
duration by approximately the same amount as would holding an equivalent
amount of the underlying securities. Short futures or put options have
durations roughly equal to the negative duration of the securities that
underlie these positions, and have the effect of reducing portfolio duration
by approximately the same amount as would selling an equivalent amount of the
underlying securities.
There are some situations in which the standard duration calculation
does not properly reflect the interest rate exposure of a security. For
example, floating and variable rate securities often have final maturities of
ten or more years; however, their interest rate exposure corresponds to the
frequency of the coupon reset. Another example where the interest rate
exposure is not properly captured by the standard duration calculation is the
case of mortgage-backed securities. The stated final maturity of such
securities is generally 30 years, but current prepayment rates are critical
in determining the securities' interest rate exposure. In these and other
similar situations, an investment adviser will use more sophisticated
analytical techniques that incorporate the economic life of a security into
the determination of its duration and, therefore, its interest rate exposure.
LENDING OF PORTFOLIO SECURITIES. Each fund is authorized to lend its
portfolio securities to broker-dealers or institutional investors that
Mitchell Hutchins deems qualified. Lending securities enables a fund to earn
additional income but could result in a loss or delay in recovering these
securities. The borrower of a fund's portfolio securities must maintain
acceptable collateral with that fund's custodian in an amount, marked to
market daily, at least equal to the market value of the securities loaned,
plus accrued interest and dividends. Acceptable collateral is limited to
cash, U.S. government securities and irrevocable letters of credit that meet
certain guidelines established by Mitchell Hutchins. Each fund may reinvest
any cash collateral in money market investments or other short-term liquid
investments, including other investment companies. A fund also may reinvest
cash collateral in private investment vehicles similar to money market funds,
including one managed by Mitchell Hutchins. In determining whether to lend
securities to a particular broker-dealer or institutional investor, Mitchell
Hutchins will consider, and during the period of the loan will monitor, all
relevant facts and circumstances, including the creditworthiness of the
borrower. Each fund will retain authority to terminate any of its loans at
any time. Each fund may pay reasonable fees in connection with a loan and may
pay the borrower or placing broker a negotiated portion of the interest
earned on the reinvestment of cash held as collateral. A fund will receive
amounts equivalent to any dividends, interest or other distributions on the
securities loaned. Each fund will regain record ownership of loaned
securities to exercise beneficial rights, such as voting and subscription
rights, when regaining such rights is considered to be in the fund's interest.
Pursuant to procedures adopted by the board governing each fund's
securities lending program, PaineWebber has been retained to serve as lending
agent for each fund. The board also has authorized the payment of fees
(including fees calculated as a percentage of invested cash collateral) to
PaineWebber for these services. The
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board periodically reviews all portfolio securities loan transactions for
which PaineWebber acted as lending agent. PaineWebber also has been approved
as a borrower under each fund's securities lending program.
SHORT SALES "AGAINST THE BOX." Each fund (other than PACE Money
Market Investments and PACE Municipal Fixed Income Investments) may engage in
short sales of securities it owns or has the right to acquire at no added
cost through conversion or exchange of other securities it owns (short sales
"against the box"). To make delivery to the purchaser in a short sale, the
executing broker borrows the securities being sold short on behalf of a fund,
and that fund is obligated to replace the securities borrowed at a date in
the future. When a fund sells short, it establishes a margin account with the
broker effecting the short sale and deposits collateral with the broker. In
addition, the fund maintains, in a segregated account with its custodian, the
securities that could be used to cover the short sale. Each fund incurs
transaction costs, including interest expense, in connection with opening,
maintaining and closing short sales "against the box."
A fund might make a short sale "against the box" to hedge against
market risks when its investment adviser believes that the price of a
security may decline, thereby causing a decline in the value of a security
owned by the fund or a security convertible into or exchangeable for a
security owned by the fund. In such case, any loss in the fund's long
position after the short sale should be reduced by a corresponding gain in
the short position. Conversely, any gain in the long position after the short
sale should be reduced by a corresponding loss in the short position. The
extent to which gains or losses in the long position are reduced will depend
upon the amount of the securities sold short relative to the amount of the
securities a fund owns, either directly or indirectly, and in the case where
the fund owns convertible securities, changes in the investment values or
conversion premiums of such securities.
SEGREGATED ACCOUNTS. When a fund enters into certain transactions
that involve obligations to make future payments to third parties, including
the purchase of securities on a when-issued or delayed delivery basis, or
reverse repurchase agreements, it will maintain with an approved custodian in
a segregated account cash or liquid securities, marked to market daily, in an
amount at least equal to the fund's obligation or commitment under such
transactions. As described below under "Strategies Using Derivative
Instruments," segregated accounts may also be required in connection with
certain transactions involving options, futures or forward currency contracts
and swaps.
INVESTMENT LIMITATIONS OF THE FUNDS
FUNDAMENTAL LIMITATIONS. The following investment limitations cannot
be changed for a fund without the affirmative vote of the lesser of (a) more
than 50% of its outstanding shares or (b) 67% or more of the shares present
at a shareholders' meeting if more than 50% of its outstanding shares are
represented at the meeting in person or by proxy. If a percentage restriction
is adhered to at the time of an investment or transaction, a later increase
or decrease in percentage resulting from changing values of portfolio
securities or amount of total assets will not be considered a violation of
any of the following limitations. With regard to the borrowings limitation in
fundamental limitation number 4, the funds will comply with the applicable
restrictions of Section 18 of the Investment Company Act.
Under the investment restrictions adopted by the funds:
(1) A fund, other than PACE Intermediate Fixed Income
Investments and PACE Global Fixed Income Investments, may not purchase
securities (other than U.S. government securities) of any issuer if, as a
result of the purchase, more than 5% of the value of the fund's total assets
would be invested in such issuer, except that up to 25% of the value of the
fund's total assets may be invested without regard to this 5% limitation.
(2) A fund will not purchase more than 10% of the outstanding
voting securities of any one issuer, except that this limitation is not
applicable to the fund's investments in U.S. government securities and up to
25% of the fund's assets may be invested without regard to these limitations.
(3) A fund, other than PACE Municipal Fixed Income Investments,
will invest no more than 25% of the value of its total assets in securities
of issuers in any one industry, the term industry being deemed to include the
government of a particular country other than the United States. This
limitation is not applicable to a fund's investments in U.S. government
securities.
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(4) A fund will not issue senior securities (including borrowing
money from banks and other entities and through reverse repurchase agreements
and mortgage dollar rolls) in excess of 33 1/3% of its total assets
(including the amount of senior securities issued, but reduced by any
liabilities and indebtedness not constituting senior securities), except that
a fund may borrow up to an additional 5% of its total assets (not including
the amount borrowed) for extraordinary or emergency purposes.
(5) A fund will not pledge, hypothecate, mortgage, or otherwise
encumber its assets, except to secure permitted borrowings or in connection
with its use of forward contracts, futures contracts, options, swaps, caps,
collars and floors.
(6) A fund will not lend any funds or other assets, except
through purchasing debt obligations, lending portfolio securities and
entering into repurchase agreements consistent with the fund's investment
objective and policies.
(7) A fund will not purchase securities on margin, except that a
fund may obtain any short-term credits necessary for the clearance of
purchases and sales of securities. For purposes of this restriction, the
deposit or payment of initial or variation margin in connection with futures
contracts or options on futures contracts will not be deemed to be a purchase
of securities on margin.
(8) A fund will not make short sales of securities or maintain a
short position, unless at all times when a short position is open it owns an
equal amount of the securities or securities convertible into or exchangeable
for, without payment of any further consideration, securities of the same
issue as, and equal in amount to, the securities sold short ("short sales
against the box"), and unless not more than 10% of the fund's net assets
(taken at market value) is held as collateral for such sales at any one time.
(9) A fund will not purchase or sell real estate or real estate
limited partnership interests, except that it may purchase and sell mortgage
related securities and securities of companies that deal in real estate or
interests therein.
(10) A fund will not purchase or sell commodities or commodity
contracts (except currencies, forward currency contracts, futures contracts
and options and other similar contracts).
(11) A fund will not act as an underwriter of securities, except
that a fund may acquire restricted securities under circumstances in which,
if the securities were sold, the fund might be deemed to be an underwriter
for purposes of the Securities Act.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions
are non-fundamental and may be changed by the vote of the board without
shareholder approval. If a percentage restriction is adhered to at the time
of an investment or transaction, a later increase or decrease in percentage
resulting from a change in values of portfolio securities or amount of total
assets will not be considered a violation of any of the following limitations.
(1) A fund may not purchase securities of other investment
companies, except to the extent permitted by the Investment Company Act in
the open market at no more than customary brokerage commission rates. This
limitation does not apply to securities received or acquired as dividends,
through offers of exchange or as a result of reorganization, consolidation or
merger.
(2) A fund will not purchase portfolio securities while
borrowings in excess of 5% of its total assets are outstanding.
STRATEGIES USING DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. Each fund other than
PACE Money Market Investments is authorized to use a variety of financial
instruments ("Derivative Instruments"), including certain options, futures
contracts (sometimes referred to as "futures"), options on futures contracts
and swap transactions. For funds that are permitted to trade outside the
United States, the applicable investment adviser also may use forward
currency
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contracts, foreign currency options and futures and options on foreign
currency futures. A fund may enter into transactions involving one or more
types of Derivative Instruments under which the full value of its portfolio
is at risk. Under normal circumstances, however, each fund's use of these
instruments will place at risk a much smaller portion of its assets. The
particular Derivative Instruments used by the funds are described below.
A fund might not use any derivative instruments or strategies, and
there can be no assurance that using any strategy will succeed. If an
investment adviser is incorrect in its judgment on market values, interest
rates or other economic factors in using a derivative instrument or strategy,
a fund may have lower net income and a net loss on the investment.
OPTIONS ON SECURITIES AND FOREIGN CURRENCIES -- A call option is a
short-term contract pursuant to which the purchaser of the option, in return
for a premium, has the right to buy the security or currency underlying the
option at a specified price at any time during the term of the option or at
specified times or at the expiration of the option, depending on the type of
option involved. The writer of the call option, who receives the premium, has
the obligation, upon exercise of the option during the option term, to
deliver the underlying security or currency against payment of the exercise
price. A put option is a similar contract that gives its purchaser, in return
for a premium, the right to sell the underlying security or currency at a
specified price during the option term or at specified times or at the
expiration of the option, depending on the type of option involved. The
writer of the put option, who receives the premium, has the obligation, upon
exercise of the option during the option term, to buy the underlying security
or currency at the exercise price.
OPTIONS ON SECURITIES INDICES -- A securities index assigns relative
values to the securities included in the index and fluctuates with changes in
the market values of those securities. A securities index option operates in
the same way as a more traditional securities option, except that exercise of
a securities index option is effected with cash payment and does not involve
delivery of securities. Thus, upon exercise of a securities index option, the
purchaser will realize, and the writer will pay, an amount based on the
difference between the exercise price and the closing price of the securities
index.
SECURITIES INDEX FUTURES CONTRACTS -- A securities index futures
contract is a bilateral agreement pursuant to which one party agrees to
accept, and the other party agrees to make, delivery of an amount of cash
equal to a specified dollar amount times the difference between the
securities index value at the close of trading of the contract and the price
at which the futures contract is originally struck. No physical delivery of
the securities comprising the index is made. Generally, contracts are closed
out prior to the expiration date of the contract.
INTEREST RATE AND FOREIGN CURRENCY FUTURES CONTRACTS -- Interest
rate and foreign currency futures contracts are bilateral agreements pursuant
to which one party agrees to make, and the other party agrees to accept,
delivery of a specified type of debt security or currency at a specified
future time and at a specified price. Although such futures contracts by
their terms call for actual delivery or acceptance of bonds or currency, in
most cases the contracts are closed out before the settlement date without
the making or taking of delivery.
OPTIONS ON FUTURES CONTRACTS -- Options on futures contracts are
similar to options on securities or currency, except that an option on a
futures contract gives the purchaser the right, in return for the premium, to
assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put), rather than to purchase or
sell a security or currency, at a specified price at any time during the
option term. Upon exercise of the option, the delivery of the futures
position to the holder of the option will be accompanied by delivery of the
accumulated balance that represents the amount by which the market price of
the futures contract exceeds, in the case of a call, or is less than, in the
case of a put, the exercise price of the option on the future. The writer of
an option, upon exercise, will assume a short position in the case of a call
and a long position in the case of a put.
FORWARD CURRENCY CONTRACTS -- A forward currency contract involves
an obligation to purchase or sell a specific currency at a specified future
date, which may be any fixed number of days from the contract date agreed
upon by the parties, at a price set at the time the contract is entered into.
GENERAL DESCRIPTION OF STRATEGIES USING DERIVATIVE INSTRUMENTS. A
fund may use Derivative Instruments to attempt to hedge its portfolio and
also to attempt to enhance income or return or realize gains and to
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manage the duration of its bond portfolio. In addition, a fund may use
Derivative Instruments to adjust its exposure to different asset classes or
to maintain exposure to stocks or bonds while maintaining a cash balance for
fund management purposes (such as to provide liquidity to meet anticipated
shareholder sales of fund shares and for fund operating expenses).
Hedging strategies can be broadly categorized as "short hedges" and
"long hedges." A short hedge is a purchase or sale of a Derivative Instrument
intended partially or fully to offset potential declines in the value of one
or more investments held in a fund's portfolio. Thus, in a short hedge a fund
takes a position in a Derivative Instrument whose price is expected to move
in the opposite direction of the price of the investment being hedged. For
example, a fund might purchase a put option on a security to hedge against a
potential decline in the value of that security. If the price of the security
declined below the exercise price of the put, a fund could exercise the put
and thus limit its loss below the exercise price to the premium paid plus
transaction costs. In the alternative, because the value of the put option
can be expected to increase as the value of the underlying security declines,
a fund might be able to close out the put option and realize a gain to offset
the decline in the value of the security.
Conversely, a long hedge is a purchase or sale of a Derivative
Instrument intended partially or fully to offset potential increases in the
acquisition cost of one or more investments that a fund intends to acquire.
Thus, in a long hedge, a fund takes a position in a Derivative Instrument
whose price is expected to move in the same direction as the price of the
prospective investment being hedged. For example, a fund might purchase a
call option on a security it intends to purchase in order to hedge against an
increase in the cost of the security. If the price of the security increased
above the exercise price of the call, a fund could exercise the call and thus
limit its acquisition cost to the exercise price plus the premium paid and
transactions costs. Alternatively, a fund might be able to offset the price
increase by closing out an appreciated call option and realizing a gain.
A fund may purchase and write (sell) straddles on securities or
indices of securities. A long straddle is a combination of a call and a put
option purchased on the same security or on the same futures contract, where
the exercise price of the put is equal to the exercise price of the call. A
fund might enter into a long straddle when its investment adviser believes it
likely that the prices of the securities will be more volatile during the
term of the option than the option pricing implies. A short straddle is a
combination of a call and a put written on the same security where the
exercise price of the put is equal to the exercise price of the call. A fund
might enter into a short straddle when its investment adviser believes it
unlikely that the prices of the securities will be as volatile during the
term of the option as the option pricing implies.
Derivative Instruments on securities generally are used to hedge
against price movements in one or more particular securities positions that a
fund owns or intends to acquire. Derivative Instruments on stock indices, in
contrast, generally are used to hedge against price movements in broad equity
market sectors in which a fund has invested or expects to invest. Derivative
Instruments on bonds may be used to hedge either individual securities or
broad fixed income market sectors.
Income strategies using Derivative Instruments may include the
writing of covered options to obtain the related option premiums. Return or
gain strategies may include using Derivative Instruments to increase or
decrease a fund's exposure to different asset classes without buying or
selling the underlying instruments. A fund also may use derivatives to
simulate full investment by the fund while maintaining a cash balance for
fund management purposes (such as to provide liquidity to meet anticipated
shareholder sales of fund shares and for fund operating expenses).
The use of Derivative Instruments is subject to applicable
regulations of the SEC, the several options and futures exchanges upon which
they are traded and the Commodity Futures Trading Commission ("CFTC"). In
addition, a fund's ability to use Derivative Instruments may be limited by
tax considerations. See "Taxes."
In addition to the products, strategies and risks described below
and in the Prospectus, a fund's investment adviser may discover additional
opportunities in connection with Derivative Instruments and with hedging,
income, return and gain strategies. These new opportunities may become
available as regulatory authorities broaden the range of permitted
transactions and as new Derivative Instruments and techniques are developed.
The applicable investment adviser may use these opportunities for a fund to
the extent that they are consistent with the fund's investment objective and
permitted by its investment limitations and applicable regulatory
authorities. The funds'
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Prospectus or this SAI will be supplemented to the extent that new products
or techniques involve materially different risks than those described below
or in the Prospectus.
SPECIAL RISKS OF STRATEGIES USING DERIVATIVE INSTRUMENTS. The use of
Derivative Instruments involves special considerations and risks, as
described below. Risks pertaining to particular Derivative Instruments are
described in the sections that follow.
(1) Successful use of most Derivative Instruments depends upon
the ability of a fund's investment adviser to predict movements of the
overall securities, interest rate or currency exchange markets, which
requires different skills than predicting changes in the prices of individual
securities. While the applicable investment advisers are experienced in the
use of Derivative Instruments, there can be no assurance that any particular
strategy adopted will succeed.
(2) There might be imperfect correlation, or even no
correlation, between price movements of a Derivative Instrument and price
movements of the investments that are being hedged. For example, if the value
of a Derivative Instrument used in a short hedge increased by less than the
decline in value of the hedged investment, the hedge would not be fully
successful. Such a lack of correlation might occur due to factors affecting
the markets in which Derivative Instruments are traded, rather than the value
of the investments being hedged. The effectiveness of hedges using Derivative
Instruments on indices will depend on the degree of correlation between price
movements in the index and price movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss
by wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies can
also reduce opportunity for gain by offsetting the positive effect of
favorable price movements in the hedged investments. For example, if a fund
entered into a short hedge because the applicable investment adviser
projected a decline in the price of a security in that fund's portfolio, and
the price of that security increased instead, the gain from that increase
might be wholly or partially offset by a decline in the price of the
Derivative Instrument. Moreover, if the price of the Derivative Instrument
declined by more than the increase in the price of the security, the fund
could suffer a loss. In either such case, the fund would have been in a
better position had it not hedged at all.
(4) As described below, a fund might be required to maintain
assets as "cover," maintain segregated accounts or make margin payments when
it takes positions in Derivative Instruments involving obligations to third
parties (I.E., Derivative Instruments other than purchased options). If the
fund was unable to close out its positions in such Derivative Instruments, it
might be required to continue to maintain such assets or accounts or make
such payments until the positions expired or matured. These requirements
might impair a fund's ability to sell a portfolio security or make an
investment at a time when it would otherwise be favorable to do so, or
require that the fund sell a portfolio security at a disadvantageous time. A
fund's ability to close out a position in a Derivative Instrument prior to
expiration or maturity depends on the existence of a liquid secondary market
or, in the absence of such a market, the ability and willingness of a
counterparty to enter into a transaction closing out the position. Therefore,
there is no assurance that any hedging position can be closed out at a time
and price that is favorable to a fund.
COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS. Transactions
using Derivative Instruments, other than purchased options, expose the funds
to an obligation to another party. A fund will not enter into any such
transactions unless it owns either (1) an offsetting ("covered") position in
securities, currencies or other options or futures contracts or (2) cash or
liquid securities, with a value sufficient at all times to cover its
potential obligations to the extent not covered as provided in (1) above.
Each fund will comply with SEC guidelines regarding cover for such
transactions and will, if the guidelines so require, set aside cash or liquid
securities in a segregated account with its custodian in the prescribed
amount.
Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding Derivative Instrument is open, unless
they are replaced with similar assets. As a result, committing a large
portion of a fund's assets to cover positions or to segregated accounts could
impede portfolio management or the fund's ability to meet redemption requests
or other current obligations.
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OPTIONS. The funds may purchase put and call options, and write
(sell) covered put or call options on securities in which they invest and
related indices. Funds that may invest outside the United States also may
purchase put and call options and write covered options on foreign
currencies. The purchase of call options may serve as a long hedge, and the
purchase of put options may serve as a short hedge. In addition, a fund may
also use options to attempt to enhance return or realize gains by increasing
or reducing its exposure to an asset class without purchasing or selling the
underlying securities. Writing covered put or call options can enable a fund
to enhance income by reason of the premiums paid by the purchasers of such
options. Writing covered call options serves as a limited short hedge,
because declines in the value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if the
security appreciates to a price higher than the exercise price of the call
option, it can be expected that the option will be exercised and the affected
fund will be obligated to sell the security at less than its market value.
Writing covered put options serves as a limited long hedge because increases
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security depreciates
to a price lower than the exercise price of the put option, it can be
expected that the put option will be exercised and the fund will be obligated
to purchase the security at more than its market value. The securities or
other assets used as cover for over-the-counter options written by a fund
would be considered illiquid to the extent described under "The Funds'
Investment Policies, Related Risks and Restrictions -- Illiquid Securities."
The value of an option position will reflect, among other things,
the current market value of the underlying investment, the time remaining
until expiration, the relationship of the exercise price to the market price
of the underlying investment, the historical price volatility of the
underlying investment and general market conditions. Options normally have
expiration dates of up to nine months. Generally, over-the-counter options on
bonds are European-style options. This means that the option can only be
exercised immediately prior to its expiration. This is in contrast to
American-style options that may be exercised at any time. There are also
other types of options that may be exercised on certain specified dates
before expiration. Options that expire unexercised have no value.
A fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, a fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing
purchase transaction. Conversely, a fund may terminate a position in a put or
call option it had purchased by writing an identical put or call option; this
is known as a closing sale transaction. Closing transactions permit a fund to
realize profits or limit losses on an option position prior to its exercise
or expiration.
The funds may purchase and write both exchange-traded and
over-the-counter options. Currently, many options on equity securities are
exchange-traded. Exchange markets for options on bonds and foreign currencies
exist but are relatively new, and these instruments are primarily traded on
the over-the-counter market. Exchange-traded options in the United States are
issued by a clearing organization affiliated with the exchange on which the
option is listed that, in effect, guarantees completion of every
exchange-traded option transaction. In contrast, over-the-counter options are
contracts between a fund and its counterparty (usually a securities dealer or
a bank) with no clearing organization guarantee. Thus, when a fund purchases
or writes an over-the-counter option, it relies on the counterparty to make
or take delivery of the underlying investment upon exercise of the option.
Failure by the counterparty to do so would result in the loss of any premium
paid by the fund as well as the loss of any expected benefit of the
transaction.
The funds' ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. The
funds intend to purchase or write only those exchange-traded options for
which there appears to be a liquid secondary market. However, there can be no
assurance that such a market will exist at any particular time. Closing
transactions can be made for over-the-counter options only by negotiating
directly with the counterparty, or by a transaction in the secondary market
if any such market exists. Although the funds will enter into
over-the-counter options only with counterparties that are expected to be
capable of entering into closing transactions with the funds, there is no
assurance that a fund will in fact be able to close out an over-the-counter
option position at a favorable price prior to expiration. In the event of
insolvency of the counterparty, a fund might be unable to close out an
over-the-counter option position at any time prior to its expiration.
If a fund were unable to effect a closing transaction for an option
it had purchased, it would have to exercise the option to realize any profit.
The inability to enter into a closing purchase transaction for a covered put
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or call option written by the fund could cause material losses because the
fund would be unable to sell the investment used as cover for the written
option until the option expires or is exercised.
A fund may purchase and write put and call options on indices in
much the same manner as the more traditional options discussed above, except
the index options may serve as a hedge against overall fluctuations in a
securities market (or market sector) rather than anticipated increases or
decreases in the value of a particular security.
LIMITATIONS ON THE USE OF OPTIONS. The funds' use of options is
governed by the following guidelines, which can be changed by the board
without shareholder vote:
(1) A fund may purchase a put or call option, including any
straddle or spread, only if the value of its premium, when aggregated with
the premiums on all other options held by the fund, does not exceed 5% of its
total assets.
(2) The aggregate value of securities underlying put options
written by a fund, determined as of the date the put options are written,
will not exceed 50% of its net assets.
(3) The aggregate premiums paid on all options (including
options on securities, foreign currencies and stock or bond indices and
options on futures contracts) purchased by a fund that are held at any time
will not exceed 20% of the fund's net assets.
FUTURES. The funds may purchase and sell securities index futures
contracts, interest rate futures contracts, debt security index futures
contracts and (for those funds that invest outside the United States) foreign
currency futures contracts. A fund may also purchase put and call options,
and write covered put and call options, on futures in which it is allowed to
invest. The purchase of futures or call options thereon can serve as a long
hedge, and the sale of futures or the purchase of put options thereon can
serve as a short hedge. Writing covered call options on futures contracts can
serve as a limited short hedge, and writing covered put options on futures
contracts can serve as a limited long hedge, using a strategy similar to that
used for writing covered options on securities or indices. In addition, a
fund may purchase or sell futures contracts or purchase options thereon to
increase or reduce its exposure to an asset class without purchasing or
selling the underlying securities, either as a hedge or to enhance return or
realize gains.
Futures strategies also can be used to manage the average duration
of a fund's bond portfolio. If a fund's investment adviser wishes to shorten
the average duration of its portfolio, the fund may sell a futures contract
or a call option thereon, or purchase a put option on that futures contract.
If a fund's investment adviser wishes to lengthen the average duration of its
bond portfolio, the fund may buy a futures contract or a call option thereon,
or sell a put option thereon.
A fund may also write put options on futures contracts while at the
same time purchasing call options on the same futures contracts in order
synthetically to create a long futures contract position. Such options would
have the same strike prices and expiration dates. A fund will engage in this
strategy only when it is more advantageous to a fund than is purchasing the
futures contract.
No price is paid upon entering into a futures contract. Instead, at
the inception of a futures contract a fund is required to deposit in a
segregated account with its custodian, in the name of the futures broker
through whom the transaction was effected, "initial margin" consisting of
cash, obligations of the United States or obligations fully guaranteed as to
principal and interest by the United States, in an amount generally equal to
10% or less of the contract value. Margin must also be deposited when writing
a call option on a futures contract, in accordance with applicable exchange
rules. Unlike margin in securities transactions, initial margin on futures
contracts does not represent a borrowing, but rather is in the nature of a
performance bond or good-faith deposit that is returned to a fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, a
fund may be required by an exchange to increase the level of its initial
margin payment, and initial margin requirements might be increased generally
in the future by regulatory action.
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Subsequent "variation margin" payments are made to and from the
futures broker daily as the value of the futures position varies, a process
known as "marking to market." Variation margin does not involve borrowing,
but rather represents a daily settlement of each fund's obligations to or
from a futures broker. When a fund purchases an option on a futures contract,
the premium paid plus transaction costs is all that is at risk. In contrast,
when a fund purchases or sells a futures contract or writes a call option
thereon, it is subject to daily variation margin calls that could be
substantial in the event of adverse price movements. If a fund has
insufficient cash to meet daily variation margin requirements, it might need
to sell securities at a time when such sales are disadvantageous.
Holders and writers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions
on options, by selling or purchasing, respectively, an instrument identical
to the instrument held or written. Positions in futures and options on
futures may be closed only on an exchange or board of trade that provides a
secondary market. The funds intend to enter into futures transactions only on
exchanges or boards of trade where there appears to be a liquid secondary
market. However, there can be no assurance that such a market will exist for
a particular contract at a particular time.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a future or related option can vary
from the previous day's settlement price; once that limit is reached, no
trades may be made that day at a price beyond the limit. Daily price limits
do not limit potential losses because prices could move to the daily limit
for several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If a fund were unable to liquidate a futures or related options
position due to the absence of a liquid secondary market or the imposition of
price limits, it could incur substantial losses. A fund would continue to be
subject to market risk with respect to the position. In addition, except in
the case of purchased options, a fund would continue to be required to make
daily variation margin payments and might be required to maintain the
position being hedged by the future or option or to maintain cash or
securities in a segregated account.
Certain characteristics of the futures market might increase the
risk that movements in the prices of futures contracts or related options
might not correlate perfectly with movements in the prices of the investments
being hedged. For example, all participants in the futures and related
options markets are subject to daily variation margin calls and might be
compelled to liquidate futures or related options positions whose prices are
moving unfavorably to avoid being subject to further calls. These
liquidations could increase price volatility of the instruments and distort
the normal price relationship between the futures or options and the
investments being hedged. Also, because initial margin deposit requirements
in the futures market are less onerous than margin requirements in the
securities markets, there might be increased participation by speculators in
the futures markets. This participation also might cause temporary price
distortions. In addition, activities of large traders in both the futures and
securities markets involving arbitrage, "program trading" and other
investment strategies might result in temporary price distortions.
LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS. The funds'
use of futures and related options is governed by the following guidelines,
which can be changed by the board without shareholder vote:
(1) The aggregate initial margin and premiums on futures
contracts, options on futures contracts and options on foreign currencies
traded on a CFTC-regulated exchange that are not for bona fide hedging
purposes (as defined by the CFTC), excluding the amount by which options are
"in-the-money," may not exceed 5% of a fund's net assets.
(2) The aggregate premiums paid on all options (including
options on securities, foreign currencies and stock or bond indices and
options on futures contracts) purchased by a fund that are held at any time
will not exceed 20% of the fund's net assets.
(3) The aggregate margin deposits on all futures contracts and
options thereon held at any time by a fund will not exceed 5% of the fund's
total assets.
FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS. Each
fund that may invest outside the United States may use options and futures on
foreign currencies, as described above, and forward currency
39
<PAGE>
contracts, as described below, to hedge against movements in the values of
the foreign currencies in which the fund's securities are denominated. Such
currency hedges can protect against price movements in a security a fund owns
or intends to acquire that are attributable to changes in the value of the
currency in which it is denominated. Such hedges do not, however, protect
against price movements in the securities that are attributable to other
causes.
A fund might seek to hedge against changes in the value of a
particular currency when no Derivative Instruments on that currency are
available or such Derivative Instruments are considered expensive. In such
cases, the fund may hedge against price movements in that currency by
entering into transactions using Derivative Instruments on another currency
or a basket of currencies, the value of which its investment adviser believes
will have a positive correlation to the value of the currency being hedged.
In addition, a fund may use forward currency contracts to shift exposure to
foreign currency fluctuations from one country to another. For example, if a
fund owned securities denominated in a foreign currency and its investment
adviser believed that currency would decline relative to another currency, it
might enter into a forward contract to sell an appropriate amount of the
first foreign currency, with payment to be made in the second foreign
currency. Transactions that use two foreign currencies are sometimes referred
to as "cross hedging." Use of a different foreign currency magnifies the risk
that movements in the price of the Derivative Instrument will not correlate
or will correlate unfavorably with the foreign currency being hedged.
The value of Derivative Instruments on foreign currencies depends on
the value of the underlying currency relative to the U.S. dollar. Because
foreign currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such
Derivative Instruments, a fund could be disadvantaged by having to deal in
the odd-lot market (generally consisting of transactions of less than $1
million) for the underlying foreign currencies at prices that are less
favorable than for round lots.
There is no systematic reporting of last sale information for
foreign currencies or any regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Quotation information generally is representative of very large transactions
in the interbank market and thus might not reflect odd-lot transactions where
rates might be less favorable. The interbank market in foreign currencies is
a global, round-the-clock market. To the extent the U.S. options or futures
markets are closed while the markets for the underlying currencies remain
open, significant price and rate movements might take place in the underlying
markets that cannot be reflected in the markets for the Derivative
Instruments until they reopen.
Settlement of Derivative Instruments involving foreign currencies
might be required to take place within the country issuing the underlying
currency. Thus, a fund might be required to accept or make delivery of the
underlying foreign currency in accordance with any U.S. or foreign
regulations regarding the maintenance of foreign banking arrangements by U.S.
residents and might be required to pay any fees, taxes and charges associated
with such delivery assessed in the issuing country.
FORWARD CURRENCY CONTRACTS. Each fund that invests outside the
United States may enter into forward currency contracts to purchase or sell
foreign currencies for a fixed amount of U.S. dollars or another foreign
currency. Such transactions may serve as long hedges--for example, a fund may
purchase a forward currency contract to lock in the U.S. dollar price of a
security denominated in a foreign currency that the fund intends to acquire.
Forward currency contract transactions may also serve as short hedges--for
example, a fund may sell a forward currency contract to lock in the U.S.
dollar equivalent of the proceeds from the anticipated sale of a security
denominated in a foreign currency.
The cost to a fund of engaging in forward currency contracts varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
are usually entered into on a principal basis, no fees or commissions are
involved. When a fund enters into a forward currency contract, it relies on
the counterparty to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the counterparty to do so would result
in the loss of any expected benefit of the transaction.
As is the case with futures contracts, parties to forward currency
contracts can enter into offsetting closing transactions, similar to closing
transactions on futures, by entering into an instrument identical to the
instrument purchased or sold, but in the opposite direction. Secondary
markets generally do not exist for forward currency
40
<PAGE>
contracts, with the result that closing transactions generally can be made
for forward currency contracts only by negotiating directly with the
counterparty. Thus, there can be no assurance that a fund will in fact be
able to close out a forward currency contract at a favorable price prior to
maturity. In addition, in the event of insolvency of the counterparty, a fund
might be unable to close out a forward currency contract at any time prior to
maturity. In either event, the fund would continue to be subject to market
risk with respect to the position and would continue to be required to
maintain a position in the securities or currencies that are the subject of
the hedge or to maintain cash or securities in a segregated account.
The precise matching of forward currency contract amounts and the
value of the securities involved generally will not be possible because the
value of such securities, measured in the foreign currency, will change after
the foreign currency contract has been established. Thus, a fund might need
to purchase or sell foreign currencies in the spot (cash) market to the
extent such foreign currencies are not covered by forward contracts. The
projection of short-term currency market movements is extremely difficult,
and the successful execution of a short-term hedging strategy is highly
uncertain.
LIMITATIONS ON THE USE OF FORWARD CURRENCY CONTRACTS. A fund that
may invest outside the United States may enter into forward currency
contracts or maintain a net exposure to such contracts only if (1) the
consummation of the contracts would not obligate the fund to deliver an
amount of foreign currency in excess of the value of the position being
hedged by such contracts or (2) the fund segregates with its custodian cash
or liquid securities in an amount not less than the value of its total assets
committed to the consummation of the contract and not covered as provided in
(1) above, as marked to market daily.
SWAP TRANSACTIONS. A fund may enter into swap transactions, which
include swaps, caps, floors and collars relating to interest rates,
currencies, securities or other instruments. Interest rate swaps involve an
agreement between two parties to exchange payments that are based, for
example, on variable and fixed rates of interest and that are calculated on
the basis of a specified amount of principal (the "notional principal
amount") for a specified period of time. Interest rate cap and floor
transactions involve an agreement between two parties in which the first
party agrees to make payments to the counterparty when a designated market
interest rate goes above (in the case of a cap) or below (in the case of a
floor) a designated level on predetermined dates or during a specified time
period. Interest rate collar transactions involve an agreement between two
parties in which payments are made when a designated market interest rate
either goes above a designated ceiling level or goes below a designated floor
level on predetermined dates or during a specified time period. Currency
swaps, caps, floors and collars are similar to interest rate swaps, caps,
floors and collars, but they are based on currency exchange rates than
interest rates. Equity swaps or other swaps relating to securities or other
instruments are also similar, but they are based on changes in the value of
the underlying securities or instruments. For example, an equity swap might
involve an exchange of the value of a particular security or securities index
in a certain notional amount for the value of another security or index or
for the value of interest on that notional amount at a specified fixed or
variable rate.
A fund may enter into interest rate swap transactions to preserve a
return or spread on a particular investment or portion of its portfolio or to
protect against any increase in the price of securities it anticipates
purchasing at a later date. A fund may use interest rate swaps, caps, floors
and collars as a hedge on either an asset-based or liability-based basis,
depending on whether it is hedging its assets or its liabilities. Interest
rate swap transactions are subject to risks comparable to those described
above with respect to other hedging strategies.
A fund will usually enter into swaps on a net basis, I.E., the two
payment streams are netted out, with the fund receiving or paying, as the
case may be, only the net amount of the two payments. Because segregated
accounts will be established with respect to these transactions, Mitchell
Hutchins and the investment advisers believe these obligations do not
constitute senior securities and, accordingly, will not treat them as being
subject to a fund's borrowing restrictions. The net amount of the excess, if
any, of a fund's obligations over its entitlements with respect to each rate
swap will be accrued on a daily basis, and appropriate fund assets having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account as described above in "Investment Policies
and Restrictions--Segregated Accounts." A fund also will establish and
maintain such segregated accounts with respect to its total obligations under
any swaps that are not entered into on a net basis.
A fund will enter into swap transactions only with banks and
recognized securities dealers believed by its investment adviser to present
minimal credit risk in accordance with guidelines established by the board.
If there is a
41
<PAGE>
default by the other party to such a transaction, a fund will have to rely on
its contractual remedies (which may be limited by bankruptcy, insolvency or
similar laws) pursuant to the agreements related to the transaction.
ORGANIZATION OF TRUST; TRUSTEES AND OFFICERS;
PRINCIPAL HOLDERS AND MANAGEMENT OWNERSHIP OF SECURITIES
The Trust was formed on September 9, 1994 as a business trust under
the laws of the State of Delaware and has twelve operating series. The Trust
is governed by a board of trustees, which is authorized to establish
additional series and to issue an unlimited number of shares of beneficial
interest of each existing or future series, par value $0.001 per share. The
board oversees each fund's operations.
The trustees and executive officers of the Trust, their ages,
business addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------- ----------------------------------------
<S> <C> <C>
Margo N. Alexander*+; 53 Trustee and President Mrs. Alexander is Chairman (since March 1999), chief executive
officer and a director of Mitchell Hutchins (since January 1995)
and an executive vice president and director of PaineWebber
(since March 1984). Mrs. Alexander is president and a director
or trustee of 30 investment companies for which Mitchell
Hutchins, PaineWebber or one of their affiliates serves as
investment adviser.
David J. Beaubien; 66 Trustee Mr. Beaubien is chairman of Yankee Environmental Systems,
101 Industrial Road Inc., a manufacturer of meteorological measuring systems. Prior
Turner Falls, MA 03176 to January 1991, he was senior vice president of EG&G, Inc., a
company which makes and provides a variety of scientific and
technically oriented products and services. He is also a director
of IEC, Inc., a manufacturer of electronic assemblies, and Onix
Systems Inc., a manufacturer of process instrumentation. From
1985 to January 1995, Mr. Beaubien served as a director or
trustee on the boards of the Kidder, Peabody & Co.
Incorporated mutual funds. Mr. Beaubien is a trustee of one
investment company for which Mitchell Hutchins, PaineWebber
or one of their affiliates serves as investment adviser.
E. Garrett Bewkes, Jr.** +; 74 Trustee Mr. Bewkes is a director of Paine Webber Group Inc. ("PW
Group") (holding company of PaineWebber and Mitchell
Hutchins). Prior to 1996, he was a consultant to PW Group. He
serves as a consultant to PaineWebber (since May 1999). Prior
to 1988, he was chairman of the board, president and chief
executive officer of American Bakeries Company. Mr. Bewkes is
a director of Interstate Bakeries Corporation. Mr. Bewkes is a
director or trustee of 40 investment companies for which
Mitchell Hutchins, PaineWebber or one of their affiliates serves
as investment adviser.
42
<PAGE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------- ----------------------------------------
<S> <C> <C>
William W. Hewitt, Jr.; 72 Trustee Mr. Hewitt is retired. Since 1988, he has served as a director or
P.O. Box 2359 trustee on the boards of the Guardian Life Insurance Company
Princeton, NJ 08543-2359 mutual funds. From 1990 to January 1995, Mr. Hewitt served as
a director or trustee on the boards of the Kidder, Peabody & Co.
Incorporated mutual funds. From 1986-1988, he was an
executive vice president and director of mutual funds, insurance
and trust services of Shearson Lehman Brothers Inc. From 1976-
1986, he was president of Merrill Lynch Funds Distributor, Inc.
Mr. Hewitt is a trustee of one investment company for which
Mitchell Hutchins, PaineWebber or one of their affiliates serves
as investment adviser.
Morton L. Janklow; 70 Trustee Mr. Janklow is senior partner of Janklow & Nesbit Associates,
598 Madison Avenue an international literary agency representing leading authors in
New York, NY 10022 their relationships with publishers and motion picture, television
and multi-media companies, and of counsel to the law firm of
Janklow, Newborn & Ashley. Mr. Janklow is a director of
Revlon, Inc. (cosmetics). Mr. Janklow is a trustee of one
investment company for which Mitchell Hutchins, PaineWebber
or one of their affiliates serves as investment adviser.
Brian M. Storms*+; 46 Trustee Mr. Storms is president and chief operating officer of Mitchell
Hutchins (since March 1999). Mr. Storms was president of
Prudential Investments (1996-1999). Prior to joining Prudential
he was a managing director at Fidelity Investments. Mr. Storms
is a director or trustee of 30 investment companies for which
Mitchell Hutchins, PaineWebber or one of their affiliates serves
as investment adviser.
William D. White; 66 Trustee Mr. White is retired. From February 1989 through March 1994,
P.O. Box 199 he was president of the National League of Professional
Upper Black Eddy, PA 10017 Baseball Clubs. Prior to 1989, he was a television sportscaster
for WPIX-TV, New York. Mr. White served on the Board of
Directors of Centel from 1989 to 1993. Presently, Mr. White is on
the board of directors of Jefferson Banks Incorporated,
Philadelphia, PA. Mr. White is a trustee of one investment
company for which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.
M. Cabell Woodward, Jr.**; 70 Trustee Mr. Woodward is retired. From July 1985 until his retirement in
February 1993, Mr. Woodward was vice chairman and chief
financial officer of ITT Corporation. Mr. Woodward is a trustee
of one investment company for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as investment
adviser.
Thomas Disbrow***;34 Vice President and Mr. Disbrow is a first vice president and a senior manager of the
Assistant Treasurer mutual fund finance department of Mitchell Hutchins. Prior to
November 1999, he was a vice president of Zweig/Glaser
Advisers. Mr. Disbrow is a vice president and assistant
treasurer of 30 investment companies for which Mitchell
Hutchins, PaineWebber or one of their affiliates serves as
investment adviser.
43
<PAGE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------- ----------------------------------------
<S> <C> <C>
Amy R. Doberman**; 38 Vice President and Ms. Doberman is a senior vice president and general counsel of
Secretary Mitchell Hutchins. From December 1996 through July 2000, she
was general counsel of Aeltus Investment Management, Inc.
Prior to working at Aeltus, Ms. Doberman was a Division of
Investment Management Assistant Chief Counsel at the SEC.
Ms.Doberman is a vice president of 29 investment companies
and a vice president and secretary of one investment company
for which Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Joanne M. Kilkeary***; 32 Vice President and Ms. Kilkeary is a vice president and a manager of the mutual
Assistant Treasurer fund finance department of Mitchell Hutchins. Ms. Kilkeary is a
vice president and assistant treasurer of one investment
company for which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.
John J. Lee***; 32 Vice President and Mr. Lee is a vice president and a manager of the mutual fund
Assistant Treasurer finance department of Mitchell Hutchins. Prior to September
1997, he was an audit manager in the financial services practice
of Ernst & Young LLP. Mr. Lee is a vice president and assistant
treasurer of 30 investment companies for which Mitchell
Hutchins, PaineWebber or one of their affiliates serves as
investment adviser.
Kevin J. Mahoney***; 35 Vice President and Mr. Mahoney is a first vice president and a senior manager of
Assistant Treasurer the mutual fund finance department of Mitchell Hutchins. From
August 1996 through March 1999, he was the manager of the
mutual fund internal control group of Salomon Smith Barney.
Prior to August 1996, he was an associate and assistant
treasurer of BlackRock Financial Management L.P. Mr.
Mahoney is a vice president and assistant treasurer of 30
investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as investment
adviser.
Ann E. Moran***; 43 Vice President and Ms. Moran is a vice president and a manager of the mutual fund
Assistant Treasurer finance department of Mitchell Hutchins. Ms. Moran is a vice
president and assistant treasurer of 30 investment companies for
which Mitchell Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.
Dianne E. O'Donnell**; 48 Vice President and Ms. O'Donnell is a senior vice president and deputy general
Assistant Secretary counsel of Mitchell Hutchins. Ms. O'Donnell is a vice president
and secretary of 29 investment companies and a vice president
and assistant secretary of one investment company for which
Mitchell Hutchins, PaineWebber or one of their affiliates serves
as investment adviser.
Paul H. Schubert***; 37 Vice President and Mr. Schubert is a senior vice president and the director of the
Treasurer mutual fund finance department of Mitchell Hutchins. Mr.
Schubert is a vice president and treasurer of 30 investment
companies for which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.
44
<PAGE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------- ----------------------------------------
<S> <C> <C>
Barney A. Taglialatela***; 39 Vice President and Mr. Taglialatela is a vice president and a manager of the mutual
Assistant Treasurer fund finance department of Mitchell Hutchins. Mr. Taglialatela is
a vice president and assistant treasurer of 30 investment
companies for which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.
Keith A. Weller**; 39 Vice President and Mr. Weller is a first vice president and senior associate general
Assistant Secretary counsel of Mitchell Hutchins. Mr. Weller is a vice president
and assistant secretary of 30 investment companies for which
Mitchell Hutchins, PaineWebber or one of their affiliates serves
as investment adviser.
</TABLE>
-------------
* This person's business address is 51 West 52nd Street, New York, New York
10019-6114.
** This person's business address is 1285 Avenue of the Americas, New York,
New York 10019-6028.
*** This person's business address is Newport Center III, 499 Washington Blvd.,
14th Floor, Jersey City, New Jersey 07310-1998.
+ Messrs. Bewkes and Storms and Mrs. Alexander are "interested persons" of the
Trust as defined in the Investment Company Act by virtue of their positions
with PaineWebber, PW Group and/or Mitchell Hutchins.
The Trust pays each board member who is not an "interested person"
of the Trust $35,000 annually and $5,000 for attending a meeting of the board
or any committee thereof. Trustees are reimbursed for any expenses incurred
in attending meetings. Trustees of the Trust who are "interested persons" of
the Trust as defined in the Investment Company Act receive no compensation
from the Trust. Because Mitchell Hutchins, the investment advisers and
PaineWebber perform substantially all of the services necessary for the
operation of the Trust and the funds, the Trust requires no employees. No
officer, director or employee of Mitchell Hutchins, an investment adviser or
PaineWebber presently receives any compensation from the Trust for acting as
a trustee or officer.
The table below includes certain information relating to the
compensation of the current members of the Trust's board who held office with
the Trust during the periods indicated.
COMPENSATION TABLE+
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
AGGREGATE COMPENSATION FROM THE TRUST AND THE PAINEWEBBER
NAME OF PERSON, POSITION THE TRUST * FUND COMPLEX**
------------------------ ----------- --------------
<S> <C> <C>
David J. Beaubien,
Trustee.......................................... $ 68,750 $ 68,750
45
<PAGE>
<CAPTION>
TOTAL COMPENSATION FROM
AGGREGATE COMPENSATION FROM THE TRUST AND THE PAINEWEBBER
NAME OF PERSON, POSITION THE TRUST * FUND COMPLEX**
------------------------ ----------- --------------
<S> <C> <C>
William W. Hewitt,
Trustee.......................................... $ 78,750 $78,750
Morton L. Janklow,
Trustee.......................................... $ 68,750 $68,750
William D. White,
Trustee.......................................... $ 68,750 $68,750
M. Cabell Woodward, Jr.,
Trustee.......................................... $68,750 $68,750
</TABLE>
--------------------
+ Only independent board members are compensated by the PaineWebber funds and
identified above; trustees who are "interested persons", as defined in the
Investment Company Act, do not receive compensation from the PaineWebber
funds.
* Represents fees paid to each trustee during the fiscal year ended July 31,
2000. During the fiscal year ended July 31, 2000, Mitchell Hutchins waived a
portion of its management fee and subsidized certain operating expenses,
including the payment of trustees' fees, with respect to some funds in order
to lower the overall expenses of those funds to certain designated levels.
** No fund within the PaineWebber fund complex has a bonus, pension, profit
sharing or retirement plan.
PRINCIPAL HOLDERS AND MANAGEMENT OWNERSHIP OF SECURITIES. As of
November 1, 2000, trustees and officers owned in the aggregate less than 1% of
the outstanding shares of any class of each fund. As of October 31, 2000, the
following shareholders were shown in the Trust's records as owning more than 5%
of any class of a fund's shares:
<TABLE>
<CAPTION>
PERCENTAGE
OF CLASS P SHARES BENEFICIALLY OWNED
SHAREHOLDER NAME AND ADDRESS* AS OF OCTOBER 31, 2000
----------------------------- ----------------------
<S> <C>
PACE INTERMEDIATE FIXED INCOME INVESTMENTS
Chesapeake Hospital Authority Int. Bond Fund
Chesapeake General Hospital 6.76%
PACE STRATEGIC FIXED INCOME INVESTMENTS
CHA Foundation
Chesapeake General Hospital 5.39%
OBICI Foundation
Attn: William A. Carpenter 10.90%
</TABLE>
--------------------
* The shareholders listed may be contacted c/o Mitchell Hutchins Asset
Management Inc., 51 West 52nd Street, New York, NY 10019-6114.
INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY AND ADMINISTRATION ARRANGEMENTS. Mitchell
Hutchins acts as the investment manager and administrator to the Trust
pursuant to an Investment Management and Administration Agreement with the
Trust ("Management Agreement"). Pursuant to the Management Agreement,
Mitchell Hutchins, subject to the supervision of the Trust's board and in
conformity with the stated policies of the Trust, manages both the investment
operations of the Trust and the composition of the funds, including the
purchase, retention, disposition and lending
46
<PAGE>
of securities. Mitchell Hutchins is authorized to enter into advisory
agreements for investment advisory services ("Advisory Agreements") in
connection with the management of the funds. Mitchell Hutchins is responsible
for monitoring the investment advisory services furnished pursuant to the
Advisory Agreements. Mitchell Hutchins reviews the performance of all
investment advisers and makes recommendations to the board with respect to
the retention and renewal of Advisory Agreements. In connection therewith,
Mitchell Hutchins keeps certain books and records of the Trust. Mitchell
Hutchins also administers the Trust's business affairs and, in connection
therewith, furnishes the Trust with office facilities, together with those
ordinary clerical and bookkeeping services that are not furnished by the
Trust's custodian and its transfer and dividend disbursing agent. The
management services of Mitchell Hutchins under the Management Agreement are
not exclusive to the Trust, and Mitchell Hutchins is free to, and does,
render management services to others.
The following table shows the fees earned (or accrued) by Mitchell
Hutchins under the Management Agreement and the portions of those fees waived
by Mitchell Hutchins for the periods indicated.
<TABLE>
<CAPTION>
ADVISORY AND ADMINISTRATION FEES EARNED ADVISORY AND ADMINISTRATION FEES
(OR ACCRUED) WAIVED BY
BY MITCHELL HUTCHINS MITCHELL HUTCHINS
FOR FISCAL YEARS ENDED JULY 31, FOR FISCAL YEARS ENDED JULY 31,
------------------------------- -------------------------------
PORTFOLIO 2000 1999 1998 2000 1999 1998
--------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
PACE Money Market Investments ......... $ 210,048 $ 114,410 $ 76,176 $ 210,048 $ 114,410 $ 76,176
PACE Government Securities Fixed
Income Investments .................... 1,380,076 1,277,768 916,670 83,618 102,428 135,366
PACE Intermediate Fixed Income
Investments ........................... 828,218 740,117 504,134 13,758 1,460 5,372
PACE Strategic Fixed Income
Investments ........................... 1,596,218 1,302,736 697,639 84,075 70,795 91,847
PACE Municipal Fixed Income
Investments ........................... 329,466 337,795 259,431 23,718 24,086 35,977
PACE Global Fixed Income
Investments ........................... 821,382 805,390 599,606 240,342 220,842 209,982
PACE Large Company Value Equity
Investments ........................... 2,800,505 2,581,440 1,786,641 16,771 1,732 --
PACE Large Company Growth Equity
Investments ........................... 3,458,178 2,593,183 1,672,807 22,200 3,823 45,136
PACE Small/Medium Company Value
Equity Investments .................... 1,574,930 1,458,785 1,384,807 32,450 25,179 11,273
PACE Small/Medium Company Growth
Equity Investments .................... 2,495,426 1,704,803 1,328,874 17,105 15,569 43,813
PACE International Equity
Investments ........................... 2,227,716 1,615,444 1,163,135 7,642 834 --
PACE International Emerging Markets
Equity Investments .................... 991,438 751,091 623,343 222,127 195,575 161,872
</TABLE>
For PACE Money Market Investments, in addition to the advisory and
administration fee waiver in the foregoing table, Mitchell Hutchins
reimbursed the fund for $59,723 in other expenses.
In connection with its management of the business affairs of the
Trust, Mitchell Hutchins bears the following expenses:
47
<PAGE>
(1) the salaries and expenses of all of its and the Trust's
personnel except the fees and expenses of trustees who are not affiliated
persons of Mitchell Hutchins or the Trust's investment advisers;
(2) all expenses incurred, by Mitchell Hutchins or by the Trust
in connection with managing the ordinary course of the Trust's business,
other than those assumed by the Trust as described below; and
(3) the fees payable to each investment adviser (other than
Mitchell Hutchins) pursuant to the Advisory Agreements.
Under the terms of the Management Agreement, each fund bears all
expenses incurred in its operation that are not specifically assumed by
Mitchell Hutchins or the fund's investment adviser. General expenses of the
Trust not readily identifiable as belonging to a fund or to the Trust's other
series are allocated among series by or under the direction of the board in
such manner as the board deems to be fair and equitable. Expenses borne by
each fund include the following (or a fund's share of the following): (1) the
cost (including brokerage commissions) of securities purchased or sold by a
fund and any losses incurred in connection therewith, (2) fees payable to and
expenses incurred on behalf of a fund by Mitchell Hutchins, (3)
organizational expenses, (4) filing fees and expenses relating to the
registration and qualification of a fund's shares and the Trust under federal
and state securities laws and maintenance of such registration and
qualifications, (5) fees and salaries payable to trustees who are not
interested persons (as defined in the Investment Company Act) of the Trust,
Mitchell Hutchins or the investment advisers, (6) all expenses incurred in
connection with trustees' services, including travel expenses, (7) taxes
(including any income or franchise taxes) and governmental fees, (8) costs of
any liability, uncollectible items of deposit and other insurance or fidelity
bonds, (9) any costs, expenses or losses arising out of a liability of or
claim for damages or other relief asserted against the Trust or a fund for
violation of any law, (10) legal, accounting and auditing expenses, including
legal fees of special counsel for the independent trustees, (11) charges of
custodians, transfer agents and other agents, (12) costs of preparing share
certificates, (13) expenses of setting in type and printing prospectuses and
supplements thereto, statements of additional information and supplements
thereto, reports and proxy materials for existing shareholders, and costs of
mailing such materials to existing shareholders, (14) any extraordinary
expenses (including fees and disbursements of counsel) incurred by the Trust
or a fund, (15) fees, voluntary assessments and other expenses incurred in
connection with membership in investment company organizations, (16) costs of
mailing and tabulating proxies and costs of meetings of shareholders, the
board and any committees thereof, (17) the cost of investment company
literature and other publications provided to trustees and officers and (18)
costs of mailing, stationery and communications equipment.
Under the Management Agreement, Mitchell Hutchins will not be liable
for any error of judgment or mistake of law or for any loss suffered by a
fund in connection with the performance of the contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of Mitchell Hutchins in the performance of its duties or from reckless
disregard of its duties and obligations thereunder. The Management Agreement
terminates automatically upon its assignment and is terminable at any time
without penalty by the board or by vote of the holders of a majority of a
fund's outstanding voting securities, on 60 days' written notice to Mitchell
Hutchins or by Mitchell Hutchins on 60 days' written notice to the fund.
The following table shows the approximate net assets as of September
30, 2000, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser or sub-adviser. An
investment company may fall into more than one of the categories below:
<TABLE>
<CAPTION>
INVESTMENT CATEGORY NET ASSETS
------------------- ----------
($MIL)
------
<S> <C>
Domestic (excluding Money Market) $9,028.0
Global 4,731.0
Equity/Balanced 9,581.4
Fixed Income (excluding Money Market). 4,177.6
Taxable Fixed Income 2,771.5
Tax-Free Fixed Income 1,406.1
Money Market Funds 44,187.4
</TABLE>
48
<PAGE>
INVESTMENT ADVISORY ARRANGEMENTS. As noted in the Prospectus,
subject to the monitoring of the Manager and, ultimately, the board, each
investment adviser manages the securities held by the fund it serves in
accordance with the fund's stated investment objective and policies, makes
investment decisions for the fund and places orders to purchase and sell
securities on behalf of the fund.
Each Advisory Agreement provides that it will terminate in the event
of its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. Each Advisory Agreement may be
terminated by the Trust upon not more than 60 days' written notice. Each
Advisory Agreement may be terminated by Mitchell Hutchins or the investment
adviser upon not more than 120 days' written notice. Each Advisory Agreement
provides that it will continue in effect for a period of more than two years
from its execution only so long as such continuance is specifically approved
at least annually in accordance with the requirements of the Investment
Company Act.
Under the Advisory Agreements, the investment advisers will not be
liable for any error or judgment or mistake of law or for any loss suffered
by a fund in connection with the performance of the contract, except a loss
resulting from willful misfeasance, bad faith, or gross negligence on the
part of the investment advisers in the performance of their duties or from
reckless disregard of their duties and obligations thereunder. Each
investment adviser has agreed to its fees as described in the Prospectus and
which are generally lower than the fees it charges to institutional accounts
for which it serves as investment adviser and performs all administrative
functions associated with serving in that capacity in recognition of the
reduced administrative responsibilities it has undertaken with respect to the
fund. By virtue of the management, monitoring and administrative functions
performed by Mitchell Hutchins, and the fact that investment advisers are not
required to make decisions regarding the allocation of assets among the major
sectors of the securities markets, each investment adviser serves in a
subadvisory capacity to the fund. Subject to the monitoring by the Manager
and, ultimately, the board, each investment adviser's responsibilities are
limited to managing the securities held by the fund it serves in accordance
with the fund's stated investment objective and policies, making investment
decisions for the fund and placing orders to purchase and sell securities on
behalf of the fund.
PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS AND PACE STRATEGIC FIXED
INCOME INVESTMENTS
Under the Advisory Agreements for these funds with Pacific
Investment Management Company LLC ("PIMCO"), Mitchell Hutchins (not the fund)
pays PIMCO for its services a fee in the annual amount of 0.225% of the
average daily net assets of PACE Government Securities Fixed Income
Investments (0.25% prior to October 10, 2000) and 0.25% of the average daily
net assets of PACE Strategic Fixed Income Investments. For the fiscal years
ended July 31, 2000, July 31, 1999 and July 31, 1998, Mitchell Hutchins paid
or accrued investment advisory fees to PIMCO of $492,884, $456,345 and
$327,708, respectively for PACE Government Securities Fixed Income
Investments and $570,078, $465,263 and $249,156, respectively for PACE
Strategic Fixed Income Investments.
PIMCO, a Delaware limited liability company, is a subsidiary of
PIMCO Advisors L.P. ("PIMCO Advisors"). PIMCO Advisors was organized as a
limited partnership under Delaware law in 1987. PIMCO Advisors' sole general
partner is Pacific-Allianz Partners LLC. Pacific-Allianz Partners LLC is a
Delaware limited liability company with two members, Allianz GP Sub LLC, a
Delaware limited liability company and Pacific Asset Management LLC, a
Delaware limited liability company. Allianz GP Sub LLC is a wholly owned
subsidiary of Allianz of America, Inc., which is wholly owned by Allianz AG.
Pacific Asset Management LLC is a wholly owned subsidiary of Pacific Life
Insurance Company, which is a wholly owned subsidiary of Pacific Mutual
Holding Company.
On May 5, 2000 the general partners of PIMCO Advisors closed the
transactions contemplated by the Implementation and Merger Agreement dated as
of October 31, 1999 ("Implementation Agreement"), as amended March 3, 2000,
with Allianz of America, Inc., Pacific Asset Management LLC, PIMCO Partners,
LLC, PIMCO Holding LLC, PIMCO Partners, G.P., and other parties to the
Implementation Agreement. As a result of completing these transactions, PIMCO
Advisors is now majority-owned indirectly by Allianz AG, with subsidiaries of
Pacific Life Insurance Company retaining a significant minority interest.
Allianz AG is a German based insurer. Pacific Life Insurance Company is a
Newport Beach, California based insurer.
49
<PAGE>
In connection with the closing, Allianz of America entered into a
put/call arrangement for the possible disposition of Pacific Life's indirect
interest in PIMCO Advisors. The put option held by Pacific Life will allow it
to require Allianz of America, on the last business day of each calendar
quarter following the closing, to purchase at a formula-based price all of
the PIMCO Advisors' units owned directly or indirectly by Pacific Life. The
call option held by Allianz of America will allow it, beginning January 31,
2003 or upon a change in control of Pacific Life, to require Pacific Life to
sell or cause to be sold to Allianz of America, at the same formula-based
price, all of the PIMCO Advisors' units owned directly or indirectly by
Pacific Life. Allianz AG's address is Koniginstrasse 28, D-80802, Munich,
Germany.
Allianz AG, the parent of Allianz of America, is a publicly traded
German company which, together with its subsidiaries, comprises the world's
second largest insurance company as measured by premium income. Allianz AG is
a leading provider of financial services, particularly in Europe, and is
represented in 68 countries world-wide through subsidiaries, branch and
representative offices, and other affiliated entities. As of June 30, 2000,
the Allianz Group (including PIMCO) had assets under management of more than
$650 billion, and in its last fiscal year wrote approximately $50 billion in
gross insurance premiums.
Significant institutional shareholders of Allianz AG currently
include Dresdner Bank AG, Deutsche Bank AG, Munich Reinsurance and
HypoVereinsbank. BNP Paribas, Credit Lyonnais, Munich Reinsurance,
HypoVereinsbank, Dresdner Bank AG and Deutsche Bank AG, as well as certain
broker-dealers that might be controlled by or affiliated with these entities,
such as DB Alex. Brown LLC, Deutsche Bank Securities, Inc. and Dresdner
Klienwort Benson North America LLC (collectively, the "Affiliated Brokers"),
may be considered to be affiliated persons of PIMCO. Absent an SEC exemption
or other relief, PACE Government Fixed Income Investments and PACE Strategic
Fixed Income Investments generally are precluded from effecting principal
transactions with the Affiliated Brokers, and its ability to purchase
securities being underwritten by an Affiliated Broker or to utilize the
Affiliated Brokers for agency transactions is subject to restrictions. PIMCO
does not believe that the restrictions on transactions with the Affiliated
Brokers described above materially adversely affect its ability to provide
services to the funds, the funds' ability to take advantage of market
opportunities, or the funds' overall performance.
PACE INTERMEDIATE FIXED INCOME INVESTMENTS
Under the Advisory Agreement for this fund with Metropolitan West
Asset Management, LLC ("MWAM"), Mitchell Hutchins (not the fund) pays MWAM a
fee in the annual amount of 0.20% of the fund's average daily net assets up
to and including $200 million and 0.12% of the fund's average daily net
assets above $200 million. Prior to October 10, 2000, Pacific Income
Advisers, Inc. was the fund's investment adviser. For the fiscal years ended
July 31, 2000, July 31, 1999 and July 31, 1998, Mitchell Hutchins paid or
accrued investment advisory fees to the prior investment adviser of $276,073,
$246,706, and $168,045, respectively. MWAM is majority-owned by its key
executives, with an approximately 40% minority ownership stake held by
Metropolitan West Financial, Inc. ("MWF"), a registered investment adviser.
PACE MUNICIPAL FIXED INCOME INVESTMENTS
Under the Advisory Agreement for this fund with Standish, Ayer &
Wood, Inc. ("Standish"), Mitchell Hutchins (not the fund) pays Standish a fee
in the annual amount of 0.20% of the fund's average daily net assets up to
and including $60 million and 0.15% of the fund's average daily net assets in
excess of $60 million. Prior to June 1, 2000, Deutsche Asset Management, Inc.
was the fund's investment adviser. For the fiscal years ended July 31, 2000,
July 31, 1999 and July 31, 1998, Mitchell Hutchins paid or accrued investment
advisory fees to Standish and the prior investment adviser of $109,822,
$112,598 and $86,574, respectively.
Standish is a privately held investment management firm founded in
1933. Edward H. Ladd is the Chairman of the Board of Directors of Standish.
Richard S. Wood is President, Chief Executive Officer and a Managing Director
of Standish. George W. Noyes is the Vice Chairman and a Managing Director of
Standish. Austin C. Smith is the Treasurer of Standish. The following
constitute all of the Directors of Standish: Caleb F. Aldrich, David H.
Cameron, Maria D. Furman, Raymond J. Kubiak, George W. Noyes, Howard B.
Rubin, Thomas P. Sorbo, Ralph S. Tate and Richard S. Wood. All of the
outstanding stock of Standish is owned by SAW Trust, a Massachusetts business
trust. SAW Trust is owned entirely by its twenty-two trustees, all of whom
are officers of
50
<PAGE>
Standish. Nine of the twenty-two trustees are the Directors of Standish
listed above. The remaining thirteen trustee/shareholders are: Karen K.
Chandor, Lavinia B. Chase, W. Charles Cook, Joseph M. Corrado, Richard C.
Doll, Dolores S. Driscoll, James E. Hollis III, Edward H. Ladd, Laurence A.
Manchester, Catherine A. Powers, Austin C. Smith, David C. Stuehr and Michael
W. Thompson. All of the trustee/shareholders of SAW Trust are Standish
controlling persons.
PACE GLOBAL FIXED INCOME INVESTMENTS
Under the current Advisory Agreements for this fund with Rogge
Global Partners plc and Fischer Francis Trees & Watts, Inc. and its
affiliates, Mitchell Hutchins (not the fund) pays Rogge Global Partners a fee
in the annual amount of 0.25% of the portion of the fund's average annual net
assets that it manages and pays FFTW a fee in the annual amount of 0.25% of
the portion of the fund's average daily net assets that it manages up to and
including $400 million and 0.20% of the average daily net assets that it
manages in excess of $400 million. Prior to October 10, 2000, Rogge Global
Partners managed all the fund's assets and was paid by Mitchell Hutchins (not
the fund) an annual fee of 0.35% of the fund's average daily net assets. For
the fiscal years ended July 31, 2000, July 31, 1999 and July 31, 1998,
Mitchell Hutchins paid or accrued investment advisory fees to Rogge Global
Partners of $359,355, $352,679 and $262,596, respectively.
Rogge Global Partners is a wholly owned subsidiary of United Asset
Management Corporation ("UAM"), a New York Stock Exchange listed company. UAM
is principally engaged through affiliated firms in the United States and
abroad in providing institutional investment management services and
acquiring institutional management firms like Rogge Global Partners. During
the third quarter of 2000, eleven of Rogge Global Partners' senior employees
began the process of buying back 30.5% in the aggregate of the firm from UAM,
based on a valuation date of December 31, 1999. Those eleven employees,
including all six portfolio managers, will initially buy back 18% of Rogge's
shares from UAM. An additional 12.5% will be available through an option
scheme that ties in the key executives for 7 years (until 2007).
On June 16, 2000, Old Mutual and OM Acquisition Corp., a Delaware
corporation that was formed solely to effect the proposed acquisition of UAM,
entered into an Agreement and Plan of Merger ("Merger Agreement") with UAM.
Pursuant to the Merger Agreement, which was unanimously approved by the
boards of directors of Old Mutual and UAM, OM Acquisition Corp. commenced a
tender offer to acquire all of the issued and outstanding common stock of UAM.
To initiate the transaction, Old Mutual and OM Acquisition Corp.
filed a tender offer statement and UAM filed a solicitation/recommendation
statement with the SEC. The tender offer price was set at $25 per share in
cash and is subject to downward adjustment in certain circumstances,
including should UAM's revenues from assets under management decline below a
specified level prior to consummation of the offer. Consummation of the
tender offer also was subject to customary conditions, including acceptances
by holders of a majority of UAM's outstanding shares and receipt of
regulatory and client approvals. On September 26, 2000, Old Mutual announced
the closure of its tender offer for UAM.
Following completion of the tender offer, OM Acquisition Corp. will
be merged with and into UAM. Thereafter, OM Acquisition Corp. will cease to
exist, and UAM will continue as the surviving corporation and become a direct
and wholly owned subsidiary of Old Mutual.
Old Mutual is a 155-year old international financial services firm
that was founded in Cape Town, South Africa, and is now headquartered in
London, England. Old Mutual was founded in 1845 principally to provide life
insurance policies in South Africa. Today, Old Mutual provides a broad array
of financial services to clients in the United Kingdom, in South Africa and
other countries in southern Africa, and in other locations principally
outside of the United States. Old Mutual, which was founded as a mutual
organization, has been a publicly held stock company since the middle of 1999.
Fischer Francis Trees & Watts, Inc. ("FFTW") is a New York
corporation organized in 1972 and is directly owned by Charter Atlantic
Corporation, a holding company organized as a New York corporation. The
affiliates of FFTW are Fischer Francis Trees & Watts, a corporate partnership
organized under the laws of the United Kingdom (sometimes referred to as
"FFTW UK"), Fischer Francis Trees & Watts, pte Ltd (Singapore), a Singapore
51
<PAGE>
corporation (sometimes referred to as "FFTW (Singapore)") and Fischer Francis
Trees & Watts, Ltd Kabushiki Kaisha (Japan), a Japanese corporation
(sometimes referred to as "FFTW (Japan)"). FFTW (Singapore) and FFTW (Japan)
are wholly owned subsidiaries of FFTW. FFTW UK is 99% owned by FFTW and 1%
owned by Fischer Francis Trees & Watts Ltd. which in turn is owned by Charter
Atlantic Corporation. FFTW (Japan) will not assume duties as sub-adviser to
the fund until it has completed its registration as a registered investment
adviser with the SEC.
PACE LARGE COMPANY VALUE EQUITY INVESTMENTS
Under the current Advisory Agreements for this fund with
Institutional Capital Corporation ("ICAP"), Westwood Management Corporation
("Westwood") and State Street Global Advisors ("SSgA"), Mitchell Hutchins
(not the fund) pays each investment adviser a fee in the annual amount of
0.30% (0.15% for SSgA) of the fund's average daily net assets that it
manages. Prior to July 1, 2000, Brinson Partners, Inc. was the fund's sole
investment adviser. ICAP and Westwood assumed their fund responsibilities on
July 1, 2000 and SSgA assumed its fund responsibilities on October 10, 2000.
For the fiscal years ended July 31, 2000, July 31, 1999 and July 31, 1998,
Mitchell Hutchins paid or accrued aggregate investment advisory fees to ICAP,
Westwood and the fund's previous investment adviser of $1,024,189, $968,040,
and $670,717, respectively. Robert H. Lyon, who serves as president, chief
investment officer and a director of ICAP owns a 51% controlling interest in
ICAP. Westwood is a wholly owned subsidiary of Southwest Securities Group,
Inc., a Dallas-based securities firm. SSgA is the investment management
division of State Street Bank and Trust Company, which is a wholly owned
subsidiary of State Street Corporation, a publicly held bank holding company.
PACE LARGE COMPANY GROWTH EQUITY INVESTMENTS
Under the current Advisory Agreements for this fund with Alliance
Capital Management L.P. ("Alliance Capital") and State Street Global Advisors
("SSgA"), Mitchell Hutchins (not the fund) pays Alliance a fee in the annual
amount of 0.30% and SSgA a fee in the annual amount of 0.15% of the fund's
average daily net assets that it manages. Alliance Capital assumed its fund
responsibilities on November 10, 1997 and SSgA assumed its fund
responsibilities on October 10, 2000. Prior to November 10, 1997, Chancellor
LGT Asset Management, Inc. was the fund's sole investment adviser. For the
fiscal years ended July 31, 2000, July 31, 1999 and July 31, 1998, Mitchell
Hutchins paid or accrued investment advisory fees to Alliance Capital and the
prior investment adviser, of $1,296,816, $972,444 and $628,243, respectively.
SSgA is the investment management division of State Street Bank and
Trust Company, which is a wholly owned subsidiary of State Street
Corporation, a publicly held bank holding company.
In October 1999, Alliance Capital Management Holding L.P. ("Alliance
Holding"), reorganized by transferring its business and assets to Alliance
Capital Management L.P. ("Alliance Capital"), in exchange for all of the
Alliance Capital Units ("Reorganization"). Since the Reorganization, Alliance
Capital has conducted the diversified investment management services business
conducted by Alliance Holding prior to the Reorganization and Alliance
Holding's business has consisted of holding Alliance Capital Units and
engaging in related activities. The Alliance Holding Units trade publicly on
the New York Stock Exchange while the Alliance Capital Units do not trade
publicly and are subject to significant restrictions on transfer.
Alliance Capital Management L.P. ("ACMLP"), a Delaware limited
partnership, is registered as an investment adviser under the Investment
Advisers Act of 1940, as amended. Alliance Capital Management Corporation
("ACMC"), an indirect wholly-owned subsidiary of AXA Financial, Inc. ("AXF"),
is the general partner of ACMLP. As of October 2, 2000, AXF, together with
ACMC and certain of its other wholly-owned subsidiaries, beneficially owned
approximately 53% of the outstanding units of limited partnership interest in
ACMLP ("ACMLP Units"). Approximately 29% of the ACMLP Units were beneficially
owned by the public and approximately 18% were beneficially owned by
employees. AXA, which has operations in approximately 60 countries, holds a
60% interest in AXF.
52
<PAGE>
PACE SMALL/MEDIUM COMPANY VALUE EQUITY INVESTMENTS
Under the current Advisory Agreements for this fund with Ariel
Capital Management, Inc. ("Ariel") and ICM Asset Management, Inc. ("ICM"),
Mitchell Hutchins (not the fund) pays each of these investment advisers a fee
in the annual amount of 0.30% of the fund's average daily net assets that it
manages. Prior to October 10, 2000, Ariel and Brandywine Asset Management,
Inc. served as investment advisers for the fund's assets and, prior to
October 4, 1999, Brandywine was the fund's sole investment adviser. For the
fiscal years ended July 31, 2000, July 31, 1999 and July 31, 1998, Mitchell
Hutchins paid or accrued aggregate investment advisory fees to Ariel and
Brandywine of $590,599, $547,044 and $519,732, respectively. Ariel is an
independent subchapter S corporation with a majority of ownership held by its
employees. ICM also is an independent subchapter S corporation with a
majority of ownership held by its employees. James M. Simmons, founder and
chief investment officer of ICM, owns more than 25% of ICM's voting stock.
PACE SMALL/MEDIUM COMPANY GROWTH EQUITY INVESTMENTS
Under the current Advisory Agreement for this fund with Delaware
Management Company, Mitchell Hutchins (not the fund) pays Delaware Management
Company a fee in the annual amount of 0.40% of the fund's average daily net
assets. Prior to December 16, 1998, Westfield Capital Management Company,
Inc. was the fund's investment adviser. For the fiscal years ended July 31,
2000, July 31, 1999 and July 31, 1998, Mitchell Hutchins paid or accrued
aggregate investment advisory fees to Delaware Management Company and to the
prior investment adviser, of $1,247,713, $852,402, and $664,437,
respectively. Delaware Management Company is a series of Delaware Management
Business Trust, a Delaware business trust. It is a member of Delaware
Investments, a subsidiary of Lincoln National Corporation ("Lincoln
National"). Lincoln National, with headquarters in Fort Wayne, Indiana, is a
diversified organization with operations in many aspects of the financial
services industry, including insurance and investment management.
PACE INTERNATIONAL EQUITY INVESTMENTS
Under the current Advisory Agreement for this fund with Martin
Currie Inc., Mitchell Hutchins (not the fund) pays Martin Currie Inc. a fee
in the annual amount of 0.35% of the fund's average daily net assets up to
and including $150 million, 0.30% of the fund's average daily net assets
above $150 million up to and including $250 million, 0.25% of the fund's
average daily net assets above $250 million up to and including $350 million,
and 0.20% of the fund's average daily net assets above $350 million. Prior to
October 10, 2000, Mitchell Hutchins (not the fund) paid Martin Currie Inc. a
fee for its services under the Advisory Agreement at the annual rate of 0.40%
of the fund's average daily net assets. For the fiscal years ended July 31,
2000, July 31, 1999 and July 31, 1998, Mitchell Hutchins paid or accrued
investment advisory fees to Martin Currie Inc. of $990,097, $717,975 and
$517,629, respectively. Martin Currie Inc. is a wholly owned subsidiary of
Martin Currie Limited, a holding company.
PACE INTERNATIONAL EMERGING MARKETS EQUITY INVESTMENTS
Under the current Advisory Agreement for this fund with Schroder
Investment Management North America Inc. ("SIMNA"), Mitchell Hutchins (not
the fund) pays SIMNA a fee in the annual amount of 0.50% of the fund's
average daily net assets. SIMNA is a wholly owned subsidiary of Schroder U.S.
Holdings Inc., which engages through its subsidiary firms in the asset
management business. SIMNA was the surviving company in a merger with
Schroder Capital Management International Inc. (the fund's investment adviser
prior to July 1, 1999 and another wholly owned subsidiary of Schroder U.S.
Holdings Inc.). For the fiscal years ended July 31, 2000, July 31, 1999 and
July 31, 1998, Mitchell Hutchins paid or accrued investment advisory fees to
SIMNA and its predecessor of $450,653, $341,405 and $283,338, respectively.
Schroder U.S. Holdings Inc. is a wholly owned subsidiary of Schroders plc., a
publicly owned holding company organized under the laws of England. Schroders
plc and its affiliates currently engage in asset management businesses. In
May 2000, Schroders plc sold its worldwide investment banking business to
Salomon Smith Barney. Schroders plc retained its asset management business.
PROCESS FOR SELECTION OF INVESTMENT ADVISERS. In selecting
investment advisers for the PACE Portfolios, Mitchell Hutchins, together with
PaineWebber, looks for those firms who they believe are best positioned to
deliver
53
<PAGE>
strong, consistent performance in a particular investment style or market
capitalization range, while managing risk appropriately.
After a thorough initial review of potential advisers, the selection
process includes quantitative and qualitative analysis to narrow the list of
candidates. The rigorous review, using stringent qualifying standards,
incorporates statistical measures of performance, including:
- Investment returns over short- and long-term periods
- Risk-adjusted performance
- Performance relative to the market index that serves as the
benchmark for the investment style
The next phase includes office visits and extensive interviews. On
the qualitative side, the following areas are examined:
- Investment philosophy and discipline
- Adherence to investment style
- Experience and continuity of key personnel
- Client service capabilities
- Size and financial stability
In some instances, it is determined that more competitive and
consistent returns can be better achieved by hiring multiple investment
advisers for an individual portfolio, each specializing in a particular
market segment and management style.
The final phase is the ongoing monitoring of investment adviser
performance to ensure that the standards set by the initial phases remain
intact throughout the life of the portfolio. PACE portfolio investment
advisers can be considered for replacement if they are judged to no longer
meet the standards that led to their original selection. The result of this
comprehensive approach is access to an exclusive group of investment
advisers, many of whose services would not otherwise be available to
investors with less than $10 million to invest.
SECURITIES LENDING. For the fiscal year ended July 31, 2000,
PaineWebber, acting as the funds' lending agent, received compensation from
the funds as follows:
<TABLE>
<CAPTION>
FUND COMPENSATION
---- ------------
<S> <C>
PACE Money Market Investments .................................... $ 0
PACE Government Securities Fixed Income Investments .............. 158
PACE Intermediate Fixed Income Investments ....................... 54,662
PACE Strategic Fixed Income Investments .......................... 4,240
PACE Municipal Fixed Income ...................................... 0
PACE Global Fixed Income Investments ............................. 11,024
PACE Large Company Value Equity Investments ...................... 20,527
PACE Large Company Growth Equity Investments ..................... 26,547
PACE Small/Medium Company Value Equity Investments ............... 15,171
PACE Small/Medium Company Growth Equity Investments .............. 83,313
PACE International Equity Investments ............................ 34,989
PACE International Emerging Markets Equity Investments ........... 8,171
</TABLE>
PERSONAL TRADING POLICIES. The funds and Mitchell Hutchins
(investment manager and principal underwriter for the funds) each have
adopted a code of ethics under rule 17j-1 of the Investment Company Act,
which permits personnel covered by the rule to invest in securities that may
be purchased or held by a fund but prohibits fraudulent, deceptive or
manipulative conduct in connection with that personal investing. Each
investment adviser also has adopted a code of ethics under rule 17j-1.
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<PAGE>
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor
of each class of shares of each fund under a distribution contract with the
Trust ("Distribution Contract") that requires Mitchell Hutchins to use its
best efforts, consistent with its other businesses, to sell shares of the
funds. Shares of the funds are offered continuously. Under a dealer agreement
between Mitchell Hutchins and PaineWebber relating to each class of shares of
the funds ("PW Dealer Agreement"), PaineWebber and its correspondent firms
sell the funds' shares. Mitchell Hutchins is located at 51 West 52nd Street,
New York, New York 10019-6114 and PaineWebber is located at 1285 Avenue of
the Americas, New York, New York 10019-6028. PACE Money Market Investments
has only Class P shares established. The other funds have Class A, Class B,
Class C, Class Y and Class P shares established.
Under separate plans of distribution pertaining to the Class A,
Class B and Class C shares of each fund adopted by the Trust in the manner
prescribed under Rule 12b-1 under the Investment Company Act (each,
respectively, a "Class A Plan," "Class B Plan" and "Class C Plan," and
collectively, "Plans"), each fund pays Mitchell Hutchins a service fee,
accrued daily and payable monthly, at the annual rate of 0.25% of the average
daily net assets of each class of shares. Under the Class B Plan, each fund
pays Mitchell Hutchins a distribution fee, accrued daily and payable monthly,
at the annual rate of 0.75% of the average daily net assets of the Class B
shares. Under the Class C Plan, each fund pays Mitchell Hutchins a
distribution fee, accrued daily and payable monthly, at the annual rate of
0.75% (0.50% for fixed income funds) of the average daily net assets of the
Class C shares. There is no distribution plan with respect to the funds'
Class P or Class Y shares and the funds pay no service or distribution fees
with respect to these classes of shares.
Mitchell Hutchins uses the service fees under the Plans for Class A,
Class B and Class C shares primarily to pay PaineWebber for shareholder
servicing, currently at the annual rate of 0.25% of the aggregate investment
amounts maintained in each fund by PaineWebber clients. PaineWebber then
compensates its Financial Advisors for shareholder servicing that they
perform and offsets its own expenses in servicing and maintaining shareholder
accounts, including related overhead expenses.
Mitchell Hutchins uses the distribution fees under the Class B and
Class C Plans to:
- Offset the commissions it pays to PaineWebber for selling each
fund's Class B and Class C shares, respectively.
- Offset each fund's marketing costs attributable to such classes,
such as preparation, printing and distribution of sales literature,
advertising and prospectuses to prospective investors and related
overhead expenses, such as employee salaries and bonuses.
PaineWebber compensates Financial Advisors when Class B and Class C
shares are bought by investors, as well as on an ongoing basis. Mitchell
Hutchins receives no special compensation from any of the funds or investors
at the time Class B or C shares are bought.
Mitchell Hutchins receives the proceeds of the initial sales charge
paid when Class A shares are bought and of the contingent deferred sales
charge paid upon sales of shares. These proceeds may be used to cover
distribution expenses.
The Plans for Class A, Class B and Class C shares and the
Distribution Contract specify that each fund must pay service and
distribution fees to Mitchell Hutchins as compensation for its service- and
distribution-related activities, not as reimbursement for specific expenses
incurred. Therefore, even if Mitchell Hutchins' expenses for a fund exceed
the service or distribution fees it receives, the fund will not be obligated
to pay more than those fees. On the other hand, if Mitchell Hutchins'
expenses are less than such fees, it will retain its full fees and realize a
profit. Expenses in excess of service and distribution fees received or
accrued through the termination date of any Plan will be Mitchell Hutchins'
sole responsibility and not that of the funds. Annually, the board reviews
the Plans and Mitchell Hutchins' corresponding expenses for each class of
shares of a fund separately from the Plans and expenses of the other classes
of shares of that fund.
Among other things, each Plan provides that (1) Mitchell Hutchins
will submit to the board at least quarterly, and the board members will
review, reports regarding all amounts expended under the Plan and the
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<PAGE>
purposes for which such expenditures were made, (2) the Plan will continue in
effect only so long as it is approved at least annually, and any material
amendment thereto is approved, by the board, including those board members
who are not "interested persons" of the Trust and who have no direct or
indirect financial interest in the operation of the Plan or any agreement
related to the Plan, acting in person at a meeting called for that purpose,
(3) payments by a fund under the Plan shall not be materially increased
without the affirmative vote of the holders of a majority of the outstanding
shares of the relevant class of the fund and (4) while the Plan remains in
effect, the selection and nomination of board members who are not "interested
persons" of the Trust shall be committed to the discretion of the board
members who are not "interested persons" of the Trust.
In reporting amounts expended under the Plans to the board members,
Mitchell Hutchins allocates expenses attributable to the sale of each class
of a fund's shares to such class based on the ratio of sales of shares of
such class to the sales of all other classes of shares. The fees paid by one
class of a fund's shares will not be used to subsidize the sale of any other
class of fund shares.
In approving the overall Flexible Pricing-SM- system of distribution
for each fund, the board considered several factors, including that
implementation of Flexible Pricing would permit sales of fund shares outside
the PACE Program and would (1) enable investors to choose the purchasing
option best suited to their individual situation, thereby encouraging current
shareholders to make additional investments in the fund and attracting new
investors and assets to the fund to the benefit of the fund and its
shareholders, (2) facilitate distribution of the funds' shares and (3)
maintain the competitive position of the fund in relation to other funds that
have implemented or are seeking to implement similar distribution
arrangements.
In approving the Class A Plan, the board considered all the features
of the distribution system, including (1) the conditions under which initial
sales charges would be imposed and the amount of such charges, (2) Mitchell
Hutchins' belief that the initial sales charge combined with a service fee
would be attractive to PaineWebber Financial Advisors and correspondent
firms, resulting in greater growth of the fund than might otherwise be the
case, (3) the advantages to the shareholders of economies of scale resulting
from growth in the fund's assets and potential continued growth, (4) the
services provided to the fund and its shareholders by Mitchell Hutchins, (5)
the services provided by PaineWebber pursuant to the PW Dealer Agreement with
Mitchell Hutchins and (6) Mitchell Hutchins' shareholder service-related
expenses and costs.
In approving the Class B Plan, the board considered all the features
of the distribution system, including (1) the conditions under which
contingent deferred sales charges would be imposed and the amount of such
charges, (2) the advantage to investors in having no initial sales charges
deducted from fund purchase payments and instead having the entire amount of
their purchase payments immediately invested in fund shares, (3) Mitchell
Hutchins' belief that the ability of PaineWebber Financial Advisors and
correspondent firms to receive sales commissions when Class B shares are sold
and continuing service fees thereafter while their customers invest their
entire purchase payments immediately in Class B shares would prove attractive
to the Financial Advisors and correspondent firms, resulting in greater
growth of the fund than might otherwise be the case, (4) the advantages to
the shareholders of economies of scale resulting from growth in the fund's
assets and potential continued growth, (5) the services provided to the fund
and its shareholders by Mitchell Hutchins, (6) the services provided by
PaineWebber pursuant to the PW Dealer Agreement with Mitchell Hutchins and
(7) Mitchell Hutchins' shareholder service- and distribution-related expenses
and costs. The board members also recognized that Mitchell Hutchins'
willingness to compensate PaineWebber and its Financial Advisors, without the
concomitant receipt by Mitchell Hutchins of initial sales charges, was
conditioned upon its expectation of being compensated under the Class B Plan.
In approving the Class C Plan, the board considered all the features
of the distribution system, including (1) the advantage to investors of
having no initial sales charges deducted from fund purchase payments and
instead having the entire amount of such purchase payments immediately
invested in fund shares, (2) the advantage to investors in being free from
contingent deferred sales charges upon redemption for shares held more than
one year and paying for distribution on an ongoing basis, (3) Mitchell
Hutchins' belief that the ability of PaineWebber Financial Advisors and
correspondent firms to receive sales compensation for their sales of Class C
shares on an ongoing basis, along with continuing service fees, while their
customers invest their entire purchase payments immediately in Class C shares
and generally do not face contingent deferred sales charges, would prove
attractive to the Financial Advisors and correspondent firms, resulting in
greater growth to the fund than might otherwise be the case, (4) the
advantages to the shareholders of economies of scale resulting from growth in
the fund's assets and
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potential continued growth, (5) the services provided to the fund and its
shareholders by Mitchell Hutchins, (6) the services provided by PaineWebber
pursuant to the PW Dealer Agreement with Mitchell Hutchins and (7) Mitchell
Hutchins' shareholder service- and distribution-related expenses and costs.
The board members also recognized that Mitchell Hutchins' willingness to
compensate PaineWebber and its Financial Advisors after Class C shares have
been held more than one year without the concomitant receipt by Mitchell
Hutchins of initial sales charges or contingent deferred sales charges upon
redemption after one year following purchase was conditioned upon its
expectation of being compensated under the Class C Plan.
With respect to each Plan, the board considered all compensation
that Mitchell Hutchins would receive under the Plan and the Distribution
Contract, including service fees and, as applicable, initial sales charges,
distribution fees and contingent deferred sales charges. The board also
considered the benefits that would accrue to Mitchell Hutchins under each
Plan in that Mitchell Hutchins would receive service, distribution and
management and administration fees that are calculated based upon a
percentage of the average net assets of a fund, which fees would increase if
the Plan were successful and the fund attained and maintained significant
asset levels.
PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities for a fund other than PACE
Money Market Investments are made by the fund's investment adviser, subject
to the overall review of Mitchell Hutchins and the board of trustees.
Decisions to buy and sell securities for PACE Money Market Investments are
made by Mitchell Hutchins as that fund's investment adviser, subject to the
overall review of the board of trustees. Although investment decisions for a
fund are made independently from those of the other accounts managed by its
investment adviser, investments of the type that the fund may make also may
be made by those other accounts. When a fund and one or more other accounts
managed by its investment adviser are prepared to invest in, or desire to
dispose of, the same security, available investments or opportunities for
sales will be allocated in a manner believed by the investment adviser to be
equitable to each. In some cases, this procedure may adversely affect the
price paid or received by a fund or the size of the position obtained or
disposed of by a fund.
Transactions on U.S. stock exchanges and some foreign stock
exchanges involve the payment of negotiated brokerage commissions. On
exchanges on which commissions are negotiated, the cost of transactions may
vary among different brokers. On most foreign exchanges, commissions are
generally fixed. No stated commission is generally applicable to securities
traded in U.S. over-the-counter markets, but the prices of those securities
include undisclosed commissions or mark-ups. The cost of securities purchased
from underwriters include an underwriting commission or concession and the
prices at which securities are purchased from and sold to dealers include a
dealer's mark-up or mark-down. U.S. government securities generally are
purchased from underwriters or dealers, although certain newly issued U.S.
government securities may be purchased directly from the U.S. Treasury or
from the issuing agency or instrumentality.
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For the periods indicated, the funds paid the brokerage commissions
set forth below:
<TABLE>
<CAPTION>
TOTAL BROKERAGE COMMISSIONS
---------------------------
FISCAL YEAR ENDED JULY 31,
--------------------------
FUND 2000 1999 1998
---- ---- ---- ----
<S> <C> <C> <C>
PACE Money Market Investments ............................................. $ 0 $ 0 $ 0
PACE Government Securities Fixed Income Investments ....................... 0 0 0
PACE Intermediate Fixed Income Investments ................................ 0 0 0
PACE Strategic Fixed Income Investments ................................... 7,221 4,297 17,292
PACE Municipal Fixed Income Investments ................................... 0 0 0
PACE Global Fixed Income Investments ...................................... 0 0 0
PACE Large Company Value Equity Investments ............................... 839,338 336,042 191,304
PACE Large Company Growth Equity Investments .............................. 406,265 289,045 422,526
PACE Small/Medium Company Value Equity Investments ........................ 741,513 715,933 491,524
PACE Small/Medium Company Growth Equity Investments ....................... 147,922 296,609 303,695
PACE International Equity Investments ..................................... 724,608 722,215 441,600
PACE International Emerging Markets Equity Investments .................... 611,340 361,372 286,220
</TABLE>
The funds have no obligation to deal with any broker or group of
brokers in the execution of portfolio transactions. The funds contemplate
that, consistent with the policy of obtaining the best net results, brokerage
transactions may be conducted through Mitchell Hutchins or its affiliates,
including PaineWebber. The board has adopted procedures in conformity with
Rule 17e-1 under the Investment Company Act to ensure that all brokerage
commissions paid to PaineWebber are reasonable and fair. Specific provisions
in the Management Agreement and Advisory Agreements authorize Mitchell
Hutchins and any of its affiliates that is a member of a national securities
exchange to effect portfolio transactions for the funds on such exchange and
to retain compensation in connection with such transactions. Any such
transactions will be effected and related compensation paid only in
accordance with applicable SEC regulations. For the last three fiscal years,
none of the funds paid any brokerage commissions to PaineWebber, except
during the fiscal year ended July 31, 1999, PACE Large Company Growth Equity
Investments paid $215 in brokerage commissions to PaineWebber, which
represented less than 1% of the total commissions paid by that fund and less
than 1% of the aggregate dollar amount of the fund's transactions involving
commission payments.
Transactions in futures contracts are executed through futures
commission merchants ("FCMs") who receive brokerage commissions for their
services. The funds' procedures in selecting FCMs to execute transactions in
futures contracts, including procedures permitting the use of an affiliated
FCM, including PaineWebber and its affiliates, are similar to those in effect
with respect to brokerage transactions in securities.
In selecting brokers for a fund, its investment adviser will
consider the full range and quality of a broker's services. Consistent with
the interests of the funds and subject to the review of the board, Mitchell
Hutchins or the applicable investment adviser may cause a fund to purchase
and sell portfolio securities through brokers who provide Mitchell Hutchins
or the investment adviser with brokerage or research services. The funds may
pay those brokers a higher commission than may be charged by other brokers,
provided that Mitchell Hutchins or the investment adviser, as applicable,
determines in good faith that the commission is reasonable in terms either of
that particular transaction or of the overall responsibility of Mitchell
Hutchins or the investment adviser to that fund and its other clients.
Research services obtained from brokers may include written reports,
pricing and appraisal services, analysis of issues raised in proxy
statements, educational seminars, subscriptions, portfolio attribution and
monitoring services, and computer hardware, software and access charges which
are directly related to investment research. Research services may be
received in the form of written reports, online services, telephone contacts
and
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<PAGE>
personal meetings with securities analysts, economists, corporate and
industry spokespersons and government representatives.
For the fiscal year ended July 31, 2000, the funds directed
portfolio transactions to brokers chosen because they provide research and
analysis as indicated below, for which the funds paid the following in
brokerage commissions:
<TABLE>
<CAPTION>
AMOUNT OF PORTFOLIO BROKERAGE
FUND TRANSACTIONS COMMISSIONS PAID
---- ------------ ----------------
<S> <C> <C>
PACE Money Market Investments ............................... $ 0 $ 0
PACE Government Securities Fixed Income Investments ......... 0 0
PACE Intermediate Fixed Income Investments .................. 1,676,965 307
PACE Strategic Fixed Income Investments ..................... 7,800,000 851
PACE Municipal Fixed Income Investments ..................... 0 0
PACE Global Fixed Income Investments ........................ 0 0
PACE Large Company Value Equity Investments ................. 389,875,806 166,846
PACE Large Company Growth Equity Investments ................ 35,934,994 27,439
PACE Small/Medium Company Value Equity Investments .......... 63,281,970 166,846
PACE Small/Medium Company Growth Equity Investments ......... 4,828,196 7,044
PACE International Equity Investments ....................... 0 0
PACE International Emerging Markets Equity Investments ...... 0 0
</TABLE>
For purchases or sales with broker-dealer firms that act as
principal, Mitchell Hutchins or a fund's investment adviser seeks best
execution. Although Mitchell Hutchins or a fund's investment adviser may
receive certain research or execution services in connection with the
transactions, it will not purchase securities at a higher price or sell
securities at a lower price than would otherwise be paid if no weight was
attributed to the services provided by the executing dealer. Mitchell
Hutchins or a fund's investment adviser may engage in agency transactions in
over-the-counter equity and debt securities in return for research and
execution services. These transactions are entered into only pursuant to
procedures that are designed to ensure that the transaction (including
commissions) is at least as favorable as it would have been if effected
directly with a market-maker that did not provide research or execution
services.
Research services and information received from brokers or dealers
are supplemental to the research efforts of Mitchell Hutchins and a fund's
investment adviser and, when utilized, are subject to internal analysis
before being incorporated into their investment processes. Information and
research services furnished by brokers or dealers through which or with which
a fund effects securities transactions may be used by Mitchell Hutchins or
the fund's investment adviser in advising other funds or accounts and,
conversely, research services furnished to Mitchell Hutchins or a fund's
investment adviser by brokers or dealers in connection with other funds or
accounts that either of them advises may be used in advising a fund.
Investment decisions for a fund and for other investment accounts
managed by Mitchell Hutchins or the applicable investment adviser are made
independently of each other in light of differing considerations for the
various accounts. However, the same investment decision may occasionally be
made for a fund and one or more accounts. In those cases, simultaneous
transactions are inevitable. Purchases or sales are then averaged as to price
and allocated between that fund and the other account(s) as to amount in a
manner deemed equitable to the fund and the other account(s). While in some
cases this practice could have a detrimental effect upon the price or value
of the security as far as a fund is concerned, or upon its ability to
complete its entire order, in other cases it is believed that simultaneous
transactions and the ability to participate in volume transactions will
benefit the fund.
The funds will not purchase securities that are offered in
underwritings in which PaineWebber is a member of the underwriting or selling
group, except pursuant to procedures adopted by the board pursuant to Rule 10f-3
under the Investment Company Act. Among other things, these procedures
require that the spread or commission
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<PAGE>
paid in connection with such a purchase be reasonable and fair, the purchase
be at not more than the public offering price prior to the end of the first
business day after the date of the public offering and that PaineWebber or
any affiliate thereof not participate in or benefit from the sale to the fund.
As of July 31, 2000, the funds owned securities issued by their
regular broker-dealers (as defined in Rule 10b-1 under the Investment Company
Act) as follows:
PACE Money Market Investments: Commercial paper of Goldman Sachs Group, Inc.
($986,172); Short-term corporate obligations of Merrill Lynch & Co., Inc.
($1,999,892) and Morgan Stanley Dean Witter & Co. ($2,000,000).
PACE Government Securities Fixed Income Investments: Corporate obligations of
Lehman Brothers Holdings Inc. ($2,007,542) and Morgan Stanley Dean Witter &
Co. ($1,000,699); repurchase agreement with State Street Bank & Trust Co.
($16,093,000).
PACE Intermediate Fixed Income Investments: Repurchase agreement with State
Street Bank & Trust Co. ($2,844,000).
PACE Strategic Fixed Income Investments: Corporate obligations of Goldman
Sachs Group, Inc. ($3,251,661), Lehman Brothers Holdings Inc. ($2,308,673)
and Morgan Stanley Dean Witter & Co. ($4,497,143); repurchase agreement with
State Street Bank & Trust Co. ($2,822,000).
PACE Municipal Fixed Income Investments: None
PACE Global Fixed Income Investments: None
PACE Large Company Value Equity Investments: Common stock of Chase Manhattan
Corp. ($5,033,344); repurchase agreement with State Street Bank & Trust Co.
($804,000).
PACE Large Company Growth Equity Investments: Common stock of Chase Manhattan
Corp. ($9,122,625), Merrill Lynch & Co., Inc. ($2,068,000) and Morgan Stanley
Dean Witter & Co. ($13,486,750).
PACE Small/Medium Company Value Equity Investments: Repurchase agreement with
State Street Bank & Trust Co. ($11,103,000).
PACE Small/Medium Company Growth Equity Investments: Repurchase agreement
with State Street Bank & Trust Co. ($12,966,000).
PACE International Equity Investments: Repurchase agreement with State Street
Bank & Trust Co. ($7,214,000).
PACE International Emerging Markets Equity Investments: Repurchase agreement
with State Street Bank & Trust Co ($558,000).
PORTFOLIO TURNOVER. PACE Money Market Investments may attempt to
increase yields by trading to take advantage of short-term market variations,
which results in high portfolio turnover. Because purchases and sales of
money market instruments are usually effected as principal transactions, this
policy does not result in high brokerage commissions to the fund. The other
funds do not intend to seek profits through short-term trading. Nevertheless,
the funds will not consider portfolio turnover rate as a limiting factor in
making investment decisions.
A fund's turnover rate is calculated by dividing the lesser of
purchases or sales of its portfolio securities for the year by the monthly
average value of the portfolio securities. Securities or options with
remaining maturities of one year or less on the date of acquisition are
excluded from the calculation. Under certain market conditions, a fund
authorized to engage in transactions in options may experience increased
portfolio turnover as a result of its investment strategies. For instance,
the exercise of a substantial number of options written by a fund (due to
appreciation of the underlying security in the case of call options or
depreciation of the underlying security in the
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<PAGE>
case of put options) could result in a turnover rate in excess of 100%. A
portfolio turnover rate of 100% would occur if all of a fund's securities
that are included in the computation of turnover were replaced once during a
period of one year.
Certain other practices that may be employed by a fund also could
result in high portfolio turnover. For example, portfolio securities may be
sold in anticipation of a rise in interest rates (market decline) or
purchased in anticipation of a decline in interest rates (market rise) and
later sold. In addition, a security may be sold and another of comparable
quality purchased at approximately the same time to take advantage of what an
investment adviser believes to be a temporary disparity in the normal yield
relationship between the two securities. These yield disparities may occur
for reasons not directly related to the investment quality of particular
issues or the general movement of interest rates, such as changes in the
overall demand for, or supply of, various types of securities.
Portfolio turnover rates may vary greatly from year to year as well
as within a particular year and may be affected by cash requirements for
redemptions of a fund's shares as well as by requirements that enable the
fund to receive favorable tax treatment. PACE Large Company Value Equity
Investments experienced an increase in portfolio turnover during the fiscal
year ended July 31, 2000 due to the restructuring of the portfolio to reflect
the investment styles of the fund's new investment advisers.
The following table sets forth the portfolio turnover rates for each
fund for the periods indicated:
<TABLE>
<CAPTION>
PORTFOLIO TURNOVER RATES
------------------------
FISCAL YEAR FISCAL YEAR
ENDED ENDED
FUND JULY 31, 2000 JULY 31, 1999
---- --------------- ---------------
<S> <C> <C>
PACE Money Market Investments ........................ N/A N/A
PACE Government Securities Fixed Income Investments .. 585% 418%
PACE Intermediate Fixed Income Investments ........... 88% 89%
PACE Strategic Fixed Income Investments .............. 391% 202%
PACE Municipal Fixed Income Investments .............. 33% 11%
PACE Global Fixed Income Investments ................. 170% 226%
PACE Large Company Value Equity Investments .......... 195% 40%
PACE Large Company Growth Equity Investments ......... 59% 43%
PACE Small/Medium Company Value Equity Investments ... 83% 57%
PACE Small/Medium Company Growth Equity Investments .. 81% 102%
PACE International Equity Investments ................ 72% 89%
PACE International Emerging Markets Equity Investments 115% 66%
</TABLE>
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES
WAIVERS OF SALES CHARGES/CONTINGENT DEFERRED SALES CHARGES -- CLASS
A SHARES. The following additional sales charge waivers are available for Class
A shares if you:
- Purchase shares through a variable annuity offered only to
qualified plans. For investments made pursuant to this waiver,
Mitchell Hutchins may make payments out of its own resources to
PaineWebber and to the variable annuity's sponsor, adviser or
distributor in a total amount not to exceed l% of the amount
invested;
- Acquire shares through an investment program that is not sponsored
by PaineWebber or its affiliates and that charges participants a
fee for program services, provided that the program sponsor has
entered into a written agreement with PaineWebber permitting the
sale of shares at net asset value to that program. For investments
made pursuant to this waiver, Mitchell Hutchins may make a payment
to PaineWebber out of its own resources in an amount not to exceed
1% of the amount invested. For
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<PAGE>
subsequent investments or exchanges made to implement a
rebalancing feature of such an investment program, the minimum
subsequent investment requirement is also waived;
- Acquire shares in connection with a reorganization pursuant to
which a fund acquires substantially all of the assets and
liabilities of another fund in exchange solely for shares of the
acquiring fund; or
- Acquire shares in connection with the disposition of proceeds
from the sale of shares of Managed High Yield Plus Fund Inc. that
were acquired during that fund's initial public offering of shares
and that meet certain other conditions described in its
prospectus.
In addition, reduced sales charges on Class A shares are available
through the combined purchase plan or through rights of accumulation
described below. Class A share purchases of $1 million or more are not
subject to an initial sales charge; however, if a shareholder sells these
shares within one year after purchase, a contingent deferred sales charge of
1% of the offering price or the net asset value of the shares at the time of
sale by the shareholder, whichever is less, is imposed.
COMBINED PURCHASE PRIVILEGE -- CLASS A SHARES. Investors and
eligible groups of related fund investors may combine purchases of Class A
shares of the funds with concurrent purchases of Class A shares of any other
PaineWebber mutual fund and thus take advantage of the reduced sales charges
indicated in the tables of sales charges for Class A shares in the
Prospectus. The sales charge payable on the purchase of Class A shares of the
funds and Class A shares of such other funds will be at the rates applicable
to the total amount of the combined concurrent purchases.
An "eligible group of related fund investors" can consist of any
combination of the following:
(a) an individual, that individual's spouse, parents and
children;
(b) an individual and his or her individual retirement
account ("IRA");
(c) an individual (or eligible group of individuals) and any
company controlled by the individual(s) (a person, entity or group
that holds 25% or more of the outstanding voting securities of a
corporation will be deemed to control the corporation, and a
partnership will be deemed to be controlled by each of its
general partners);
(d) an individual (or eligible group of individuals) and one
or more employee benefit plans of a company controlled by the
individual(s);
(e) an individual (or eligible group of individuals) and a
trust created by the individual(s), the beneficiaries of which are
the individual and/or the individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform
Transfers to Minors Act account created by the individual or the
individual's spouse;
(g) an employer (or group of related employers) and one or
more qualified retirement plans of such employer or employers (an
employer controlling, controlled by or under common control with
another employer is deemed related to that other employer); or
(h) individual accounts related together under one registered
investment adviser having full discretion and control over the
accounts. The registered investment adviser must communicate at
least quarterly through a newsletter or investment update
establishing a relationship with all of the accounts.
RIGHTS OF ACCUMULATION -- CLASS A SHARES. Reduced sales charges are
available through a right of accumulation, under which investors and eligible
groups of related fund investors (as defined above) are permitted
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<PAGE>
to purchase Class A shares of the funds among related accounts at the
offering price applicable to the total of (1) the dollar amount then being
purchased plus (2) an amount equal to the then-current net asset value of the
purchaser's combined holdings of Class A fund shares and Class A shares of
any other PaineWebber mutual fund. The purchaser must provide sufficient
information to permit confirmation of his or her holdings, and the acceptance
of the purchase order is subject to such confirmation. The right of
accumulation may be amended or terminated at any time.
REINSTATEMENT PRIVILEGE -- CLASS A SHARES. Shareholders who have
redeemed Class A shares of a fund may reinstate their account without a sales
charge by notifying the transfer agent of such desire and forwarding a check
for the amount to be purchased within 365 days after the date of redemption.
The reinstatement will be made at the net asset value per share next computed
after the notice of reinstatement and check are received. The amount of a
purchase under this reinstatement privilege cannot exceed the amount of the
redemption proceeds. Gain on a redemption is taxable regardless of whether
the reinstatement privilege is exercised, although a loss arising out of a
redemption will not be deductible to the extent the reinstatement privilege
is exercised within 30 days after redemption, in which event an adjustment
will be made to the shareholder's tax basis for shares acquired pursuant to
the reinstatement privilege. Gain or loss on a redemption also will be
readjusted for federal income tax purposes by the amount of any sales charge
paid on Class A shares, under the circumstances and to the extent described
in "Taxes -- Special Rule for Class A Shareholders," below.
WAIVERS OF CONTINGENT DEFERRED SALES CHARGES -- CLASS B SHARES. The
maximum 5% contingent deferred sales charge applies to sales of shares during
the first year after purchase. The charge generally declines by 1% annually,
reaching zero after six years. Among other circumstances, the contingent
deferred sales charge on Class B shares is waived where a total or partial
redemption is made within one year following the death of the shareholder.
The contingent deferred sales charge waiver is available where the decedent
is either the sole shareholder or owns the shares with his or her spouse as a
joint tenant with right of survivorship. This waiver applies only to
redemption of shares held at the time of death.
PURCHASES OF CLASS A SHARES THROUGH THE PAINEWEBBER
INSIGHTONE-SM- PROGRAM. Investors who purchase shares through the PaineWebber
InsightOne-SM- Program are eligible to purchase Class A shares without a sales
load. The PaineWebber InsightOne-SM- Program offers a nondiscretionary
brokerage account to investors for an asset-based fee at an annual rate of up
to 1.50% of the assets in the account. Account holders may purchase or sell
certain investment products without paying commissions or other
markups/markdowns.
PURCHASES OF CLASS Y SHARES THROUGH THE PACE-SM- MULTI ADVISOR
PROGRAM. An investor who participates in the PACE-SM- Multi Advisor Program
is eligible to purchase Class Y shares. The PACE-SM- Multi Advisor Program is
an advisory program sponsored by PaineWebber that provides comprehensive
investment services, including investor profiling, a personalized asset
allocation strategy using an appropriate combination of funds, and a
quarterly investment performance review. Participation in the PACE-SM- Multi
Advisor Program is subject to payment of an advisory fee at the effective
maximum annual rate of 1.5% of assets. Employees of PaineWebber and its
affiliates are entitled to a waiver of this fee. Please contact your
PaineWebber Financial Advisor or PaineWebber's correspondent firms for more
information concerning mutual funds that are available through the PACE-SM-
Multi Advisor Program.
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of a PACE fund may be exchanged for shares of the
corresponding class of other PACE funds. Class P and Class Y shares are not
eligible for exchange. Shareholders will receive at least 60 days' notice of
any termination or material modification of the exchange offer, except no
notice need be given if, under extraordinary circumstances, either
redemptions are suspended under the circumstances described below or a fund
temporarily delays or ceases the sales of its shares because it is unable to
invest amounts effectively in accordance with the fund's investment
objective, policies and restrictions.
If conditions exist that make cash payments undesirable, each fund
reserves the right to honor any request for redemption by making payment in
whole or in part in securities chosen by the fund and valued in the same way
as they would be valued for purposes of computing the fund's net asset value.
Any such redemption in kind will be made with readily marketable securities,
to the extent available. If payment is made in securities, a shareholder may
incur brokerage expenses in converting these securities into cash. Each fund
has elected, however, to be governed
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by Rule 18f-1 under the Investment Company Act, under which it is obligated
to redeem shares solely in cash up to the lesser of $250,000 or 1% of its net
asset value during any 90-day period for one shareholder. This election is
irrevocable unless the SEC permits its withdrawal.
The funds may suspend redemption privileges or postpone the date of
payment during any period (1) when the New York Stock Exchange is closed or
trading on the New York Stock Exchange is restricted as determined by the
SEC, (2) when an emergency exists, as defined by the SEC, that makes it not
reasonably practicable for a fund to dispose of securities owned by it or
fairly to determine the value of its assets or (3) as the SEC may otherwise
permit. The redemption price may be more or less than the shareholder's cost,
depending on the market value of a fund's portfolio at the time.
SERVICE ORGANIZATIONS. A fund may authorize service organizations,
and their agents, to accept on its behalf purchase and redemption orders that
are in "good form" in accordance with the policies of those service
organizations. A fund will be deemed to have received these purchase and
redemption orders when a service organization or its agent accepts them. Like
all customer orders, these orders will be priced based on the fund's net
asset value next computed after receipt of the order by the service
organizations or their agents. Service organizations may include retirement
plan service providers who aggregate purchase and redemption instructions
received from numerous retirement plans or plan participants.
AUTOMATIC INVESTMENT PLAN. PaineWebber offers an automatic
investment plan with a minimum initial investment of $1,000 through which a
fund will deduct $50 or more on a monthly, quarterly, semi-annual or annual
basis from the investor's bank account to invest directly in the funds' Class
A, Class B or Class C shares. For Class P shares, an automatic investment
plan is available to certain shareholders who may authorized PaineWebber to
place a purchase order each month or quarter for fund shares in an amount not
less than $500 per month or quarter.
For Class P shareholders, the purchase price is paid automatically
from cash held in the shareholder's PaineWebber brokerage account through the
automatic redemption of the shareholder's shares of a PaineWebber money
market fund or through the liquidation of other securities held in the
investor's PaineWebber brokerage account. If the PACE Program assets are held
in a PaineWebber Resource Management Account-REGISTERED TRADEMARK-
("RMA-REGISTERED TRADEMARK-") account, the shareholder may arrange for
preauthorized automatic fund transfer on a regular basis, from the
shareholder's bank account to the shareholder's RMA account. Shareholders may
utilize this service in conjunction with the automatic investment plan to
facilitate regular PACE investments. This automatic fund transfer service,
however, is not available for retirement plan shareholders. For participants
in the PACE-REGISTERED TRADEMARK- Multi Advisor Program, amounts invested
through the automatic investment plan will be invested in accordance with the
participant's benchmark allocation. If sufficient funds are not available in
the participant's account on the trade date to purchase the full amount
specified by the participant, no purchase will be made.
In addition to providing a convenient and disciplined manner of
investing, participation in an automatic investment plan enables an investor
to use the technique of "dollar cost averaging." When a shareholder invests
the same amount each month, the shareholder will purchase more shares when a
fund's net asset value per share is low and fewer shares when the net asset
value per share is high. Using this technique, a shareholder's average
purchase price per share over any given period will usually be lower than if
the shareholder purchased a fixed number of shares on a monthly basis during
the period. Of course, investing through the automatic investment plan does
not assure a profit or protect against loss in declining markets.
Additionally, since an automatic investment plan involves continuous
investing regardless of price levels, an investor should consider his or her
financial ability to continue purchases through periods of low price levels.
An investor should also consider whether a single, large investment in Class
B or Class C shares would qualify for Class A sales load reductions.
For further information about an automatic investment plan, the RMA
account or the automatic funds transfer service, shareholders should contact
their PaineWebber Financial Advisor.
AUTOMATIC REDEMPTION PLAN -- CLASS P SHARES. Investors in Class P
shares may have PaineWebber redeem a portion of their shares in the PACE
Program (or the PACE-Registered Trademark- Multi-Advisor Program) monthly or
quarterly under the automatic redemption plan. Quarterly redemptions are made
in March, June, September and December. The amount to be redeemed must be at
least $500 per month or quarter. Purchases of additional shares of a fund
concurrent with redemption are ordinarily disadvantageous to shareholders
because of tax liabilities. For retirement
64
<PAGE>
plan shareholders, special limitations apply. For further information
regarding the automatic redemption plan, shareholders should contact their
PaineWebber Financial Advisors.
SYSTEMATIC WITHDRAWAL PLAN -- CLASS A, CLASS B AND CLASS C SHARES.
The systematic withdrawal plan allows investors to set up monthly, quarterly
(March, June, September and December), semi-annual (June and December) or
annual (December) withdrawals from their PaineWebber Mutual Fund accounts.
Minimum balances and withdrawals vary according to the class of shares:
- Class A and Class C shares. Minimum value of fund shares is $5,000;
minimum withdrawals of $100.
- Class B shares. Minimum value of fund shares is $10,000; minimum
monthly, quarterly, and semi-annual and annual withdrawals of $100,
$200, $300 and $400, respectively.
Withdrawals under the systematic withdrawal plan will not be subject
to a contingent deferred sales charge if the investor withdraws no more than
12% of the value of the fund account when the investor signed up for the Plan
(for Class B shares, annually; for Class A and Class C shares, during the
first year under the Plan). Shareholders who elect to receive dividends or
other distributions in cash may not participate in this plan.
An investor's participation in the systematic withdrawal plan will
terminate automatically if the "Initial Account Balance" (a term that means
the value of the fund account at the time the investor elects to participate
in the systematic withdrawal plan), less aggregate redemptions made other
than pursuant to the systematic withdrawal plan, is less than the minimum
values specified above. Purchases of additional shares of a fund concurrent
with withdrawals are ordinarily disadvantageous to shareholders because of
tax liabilities and, for Class A shares, initial sales charges. On or about
the 20th of a month for monthly, quarterly, semi-annual and annual plans,
PaineWebber will arrange for redemption by the funds of sufficient fund
shares to provide the withdrawal payments specified by participants in the
funds' systematic withdrawal plan. The payments generally are mailed
approximately five Business Days (defined under "Valuation of Shares") after
the redemption date. Withdrawal payments should not be considered dividends,
but redemption proceeds. If periodic withdrawals continually exceed
reinvested dividends and other distributions, a shareholder's investment may
be correspondingly reduced. A shareholder may change the amount of the
systematic withdrawal or terminate participation in the systematic withdrawal
plan at any time without charge or penalty by written instructions with
signatures guaranteed to PaineWebber or PFPC Inc. Instructions to participate
in the plan, change the withdrawal amount or terminate participation in the
plan will not be effective until five days after written instructions with
signatures guaranteed are received by PFPC. Shareholders may request the
forms needed to establish a systematic withdrawal plan from their PaineWebber
Financial Advisors, correspondent firms or PFPC at 1-800-647-1568.
TRANSFER OF ACCOUNTS. If investors holding Class A, Class B, Class C
or Class Y shares of a fund in a PaineWebber brokerage account transfer their
brokerage accounts to another firm, the fund shares will be moved to an
account with PFPC. However, if the other firm has entered into a selected
dealer agreement with Mitchell Hutchins relating to the fund, the shareholder
may be able to hold fund shares in an account with the other firm.
INDIVIDUAL RETIREMENT ACCOUNTS. A Self-Directed IRA is available
through PaineWebber through which investments may be made in Class P shares
of the funds, as well as in other investments available through PaineWebber.
The minimum initial investment in this IRA is $10,000. Investors considering
establishing an IRA should review applicable tax laws and should consult
their tax advisers.
PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN-SM- ;
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT-REGISTERED TRADEMARK- (RMA)-REGISTERED
TRADEMARK-
Class A, Class B, Class C and Class Y shares of PaineWebber mutual
funds, including the PACE funds (each a "PW Fund" and, collectively, the "PW
Funds"), are available for purchase through the RMA Resource Accumulation
Plan ("Plan") by customers of PaineWebber and its correspondent firms who
maintain Resource Management Accounts ("RMA accountholders"). The Plan allows
an RMA accountholder to continually invest in one or more of the PW Funds at
regular intervals, with payment for shares purchased automatically deducted
from
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<PAGE>
the client's RMA account. The client may elect to invest at monthly or
quarterly intervals and may elect either to invest a fixed dollar amount
(minimum $100 per period) or to purchase a fixed number of shares. A client
can elect to have Plan purchases executed on the first or fifteenth day of
the month. Settlement occurs three Business Days (defined under "Valuation of
Shares") after the trade date, and the purchase price of the shares is
withdrawn from the investor's RMA account on the settlement date from the
following sources and in the following order: uninvested cash balances,
balances in RMA money market funds, or margin borrowing power, if applicable
to the account.
To participate in the Plan, an investor must be an RMA
accountholder, must have made an initial purchase of the shares of each PW
Fund selected for investment under the Plan (meeting applicable minimum
investment requirements) and must complete and submit the RMA Resource
Accumulation Plan Client Agreement and Instruction Form available from
PaineWebber. The investor must have received a current prospectus for each PW
Fund selected prior to enrolling in the Plan. Information about mutual fund
positions and outstanding instructions under the Plan are noted on the RMA
accountholder's account statement. Instructions under the Plan may be changed
at any time, but may take up to two weeks to become effective.
The terms of the Plan, or an RMA accountholder's participation in
the Plan, may be modified or terminated at any time. It is anticipated that,
in the future, shares of other PW Funds and/or mutual funds other than the PW
Funds may be offered through the Plan.
PERIODIC INVESTING AND DOLLAR COST AVERAGING. Periodic investing in
the PW Funds or other mutual funds, whether through the Plan or otherwise,
helps investors establish and maintain a disciplined approach to accumulating
assets over time, de-emphasizing the importance of timing the market's highs
and lows. Periodic investing also permits an investor to take advantage of
"dollar cost averaging." By investing a fixed amount in mutual fund shares at
established intervals, an investor purchases more shares when the price is
lower and fewer shares when the price is higher, thereby increasing his or
her earning potential. Of course, dollar cost averaging does not guarantee a
profit or protect against a loss in a declining market, and an investor
should consider his or her financial ability to continue investing through
periods of both low and high share prices. However, over time, dollar cost
averaging generally results in a lower average original investment cost than
if an investor invested a larger dollar amount in a mutual fund at one time.
An investor should also consider whether a single, large investment in Class
B or Class C shares would qualify for Class A sales load reductions.
PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT. In order to enroll in the
Plan, an investor must have opened an RMA account with PaineWebber or one of
its correspondent firms. The RMA account is PaineWebber's comprehensive asset
management account and offers investors a number of features, including the
following:
- monthly Premier account statements that itemize all account
activity, including investment transactions, checking activity and
Platinum MasterCard-Registered Trademark- transactions during the
period, and provide unrealized and realized gain and loss estimates
for most securities held in the account;
- comprehensive year-end summary statements that provide information
on account activity for use in tax planning and tax return
preparation;
- automatic "sweep" of uninvested cash into the RMA accountholder's
choice of one of the six RMA money market funds-RMA Money Market
Portfolio, RMA U.S. Government Portfolio, RMA Tax-Free Fund, RMA
California Municipal Money Fund, RMA New Jersey Municipal Money
Fund and RMA New York Municipal Money Fund. AN INVESTMENT IN A
MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
ALTHOUGH A MONEY MARKET FUND SEEKS TO PRESERVE THE VALUE OF YOUR
INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY
INVESTING IN A MONEY MARKET FUND.
- check writing, with no per-check usage charge, no minimum amount
on checks and no maximum number of checks that can be written. RMA
accountholders can code their checks to classify expenditures. All
canceled checks are returned each month;
- Platinum MasterCard-Registered Trademark- , with or without a line
of credit, which provides RMA accountholders with direct access to
their accounts and can be used with automatic teller machines
worldwide.
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<PAGE>
Purchases on the Platinum MasterCard-Registered Trademark- are
debited to the RMA account once monthly, permitting accountholders
to remain invested for a longer period of time;
- unlimited electronic funds transfers and a bill payment service
for an additional fee;
- 24-hour access to account information through toll-free numbers,
and more detailed personal assistance during business hours from
the RMA Service Center;
- expanded account protection for the net equity securities balance
in the event of the liquidation of PaineWebber. This protection
does not apply to shares of funds that are held at PFPC and not
through PaineWebber; and
- automatic direct deposit of checks into your RMA account and
automatic withdrawals from the account.
The annual account fee for an RMA account is $85, which includes the
Platinum MasterCard-Registered Trademark- , with an additional fee of $40 if
the investor selects an optional line of credit with the Platinum
MasterCard-Registered Trademark- .
CONVERSION OF CLASS B SHARES
Class B shares of a fund will automatically convert to Class A
shares of that fund, based on the relative net asset values per share of the
two classes, as of the close of business on the first Business Day (as
defined under "Valuation of Shares") of the month in which the sixth
anniversary of the initial issuance of such Class B shares occurs. For the
purpose of calculating the holding period required for conversion of Class B
shares, the date of initial issuance shall mean (1) the date on which such
Class B shares were issued or (2) for Class B shares obtained through an
exchange, or a series of exchanges, the date on which the original Class B
shares were issued. For purposes of conversion to Class A shares, Class B
shares purchased through the reinvestment of dividends and other
distributions paid in respect of Class B shares will be held in a separate
sub-account. Each time any Class B shares in the shareholder's regular
account (other than those in the sub-account) convert to Class A shares, a
pro rata portion of the Class B shares in the sub-account will also convert
to Class A shares. The portion will be determined by the ratio that the
shareholder's Class B shares converting to Class A shares bears to the
shareholder's total Class B shares not acquired through dividends and other
distributions.
The conversion feature is subject to the continuing availability of
an opinion of counsel to the effect that the dividends and other
distributions paid on Class A and Class B shares will not result in
"preferential dividends" under the Internal Revenue Code and that the
conversion of shares does not constitute a taxable event. If the conversion
feature ceased to be available, the Class B shares would not be converted and
would continue to be subject to the higher ongoing expenses beyond six years
from the date of purchase. Mitchell Hutchins has no reason to believe that
this condition will not continue to be met.
VALUATION OF SHARES
Each fund normally determines its net asset value per share as of
the close of regular trading (usually 4:00 p.m., Eastern time) on the New
York Stock Exchange on each Monday through Friday when the New York Stock
Exchange is open. Prices will be calculated earlier when the New York Stock
Exchange closes early because trading has been halted for the day. Currently
the New York Stock Exchange is closed on the observance of the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Securities that are listed on U.S. and foreign stock exchanges
normally are valued at the last sale price on the day the securities are
valued or, lacking any sales on that day, at the last available bid price. In
cases where securities are traded on more than one exchange, the securities
are generally valued on the exchange considered by a fund's investment
adviser as the primary market. Securities traded in the over-the-counter
market and listed on the Nasdaq Stock Market ("Nasdaq") normally are valued
at the last available sale price on Nasdaq prior to valuation; other
over-the-counter securities are valued at the last bid price available prior
to valuation, other than short-term investments that mature in 60 days or
less.
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<PAGE>
Where market quotations are readily available, bonds held by the
funds (other than PACE Money Market Investments) are valued based upon market
quotations, provided those quotations adequately reflect, in the judgment of
a fund's investment adviser, the fair value of the securities. Where those
market quotations are not readily available, bonds are 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 is used to value debt
obligations with 60 days or less remaining until maturity, unless the board
determines that this does not represent fair value. All other securities and
assets are valued at fair value as determined in good faith by or under the
direction of the board.
It should be recognized that judgment often plays a greater role in
valuing thinly traded securities and lower rated bonds than is the case with
respect to securities for which a broader range of dealer quotations and
last-sale information is available.
All investments quoted in foreign currency will be valued daily in
U.S. dollars on the basis of the foreign currency exchange rate prevailing at
the time such valuation is determined by a fund's custodian. Foreign currency
exchange rates are generally determined prior to the close of regular trading
on the NYSE. Occasionally events affecting the value of foreign investments
and such exchange rates occur between the time at which they are determined
and the close of trading on the New York Stock Exchange, which events would
not be reflected in the computation of a fund's net asset value on that day.
If events materially affecting the value of such investments or currency
exchange rates occur during such time period, the investments will be valued
at their fair value as determined in good faith by or under the direction of
the board. The foreign currency exchange transactions of the funds conducted
on a spot (that is, cash) basis are valued at the spot rate for purchasing or
selling currency prevailing on the foreign exchange market. Under normal
market conditions this rate differs from the prevailing exchange rate by less
than one-tenth of one percent due to the costs of converting from one
currency to another.
PACE MONEY MARKET INVESTMENTS. PACE Money Market Investments values
its portfolio securities in accordance with the amortized cost method of
valuation under Rule 2a-7 under the Investment Company Act. To use amortized
cost to value its portfolio securities, the fund must adhere to certain
conditions under that Rule relating to its investments. Amortized cost is an
approximation of market value, whereby the difference between acquisition
cost and value at maturity is amortized on a straight-line basis over the
remaining life of the instrument. The effect of changes in the market value
of a security as a result of fluctuating interest rates is not taken into
account and thus the amortized cost method of valuation may result in the
value of a security being higher or lower than its actual market value. In
the event that a large number of redemptions takes place at a time when
interest rates have increased, the fund might have to sell portfolio
securities prior to maturity and at a price that might not be as desirable as
the value at maturity.
The board has established procedures for the purpose of maintaining
a constant net asset value of $1.00 per share for PACE Money Market
Investments, which include a review of the extent of any deviation of net
asset value per share, based on available market quotations, from the $1.00
amortized cost per share. Should that deviation exceed 1/2 of 1%, the
trustees will promptly consider whether any action should be initiated to
eliminate or reduce material dilution or other unfair results to
shareholders. Such action may include redeeming shares in kind, selling
portfolio securities prior to maturity, reducing or withholding dividends and
utilizing a net asset value per share as determined by using available market
quotations. PACE Money Market Investments will maintain a dollar weighted
average portfolio maturity of 90 days or less and will not purchase any
instrument with a remaining maturity greater than 397 calendar days (as
calculated under Rule 2a-7) and except that securities subject to repurchase
agreements may have maturities in excess of 397 calendar days. PACE Money
Market Investments will limit portfolio investments, including repurchase
agreements, to those U.S. dollar denominated instruments that are of high
quality and that the trustees determine present minimal credit risks as
advised by Mitchell Hutchins and will comply with certain reporting and
recordkeeping procedures. There is no assurance that constant net asset value
per share will be maintained. In the event amortized cost ceases to represent
fair value, the board will take appropriate action.
In determining the approximate market value of portfolio
instruments, the Trust may employ outside organizations, which may use a
matrix or formula method that takes into consideration market indices,
matrices, yield curves and other specific adjustments. This may result in the
securities being valued at a price different from
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<PAGE>
the price that would have been determined had the matrix or formula method
not been used. All cash, receivables and current payables are carried at
their face value. Other assets, if any, are valued at fair value as
determined in good faith by or under the direction of the board.
PERFORMANCE INFORMATION
Each fund's performance data quoted in advertising and other
promotional materials ("Performance Advertisements") represent past
performance and are not intended to indicate future performance. The
investment return and principal value of an investment will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
TOTAL RETURN CALCULATIONS. Average annual total return quotes
("Standardized Return") used in a fund's Performance Advertisements are
calculated according to the following formula:
n
P(1 + T) = ERV
where: P = a hypothetical initial payment of $1,000 to purchase
shares of a fund
T = average annual total return of shares of that fund
N = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment at the beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the
last day of the most recent quarter prior to submission of the Performance
Advertisements for publication. Total return, or "T" in the formula above, is
computed by finding the average annual change in the value of an initial
$1,000 investment over the period. In calculating the ending redeemable value
for Class A shares, the maximum sales charge of 4.5% (4.0% for fixed income
funds) is deducted from the initial $1,000 payment and, for Class B and Class
C shares, the applicable contingent deferred sales charge imposed on a
redemption of Class B or Class C shares held for the period is deducted. All
dividends and other distributions are assumed to have been reinvested at net
asset value.
Each fund also may refer in Performance Advertisements to total
return performance data that are not calculated according to the formula set
forth above ("Non-Standardized Return"). A fund calculates Non-Standardized
Return for specified periods of time by assuming an investment of $1,000 in
fund shares and assuming the reinvestment of all dividends and other
distributions. The rate of return is determined by subtracting the initial
value of the investment from the ending value and by dividing the remainder
by the initial value. Neither initial nor contingent deferred sales charges
are taken into account in calculating Non-Standardized Return; the inclusion
of those charges would reduce the return.
The following tables show performance information for Class P shares
of the funds outstanding during the periods indicated. All returns for
periods of more than one year are expressed as an average total return. The
standardized return for Class P shares reflects the maximum annual program
fee of 1.50% for participants in the PACE Select Advisors program.
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<PAGE>
PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS
<TABLE>
<CAPTION>
CLASS CLASS P
----- -------
(INCEPTION DATE) (08/24/95)
--------------- ----------
<S> <C>
Year ended July 31, 2000:
Standardized Return 4.77%
Non-Standardized Return......... 6.36%
Inception to July 31, 2000:
Standardized Return 4.56%
Non-Standardized Return......... 6.14%
</TABLE>
PACE INTERMEDIATE FIXED INCOME INVESTMENTS
<TABLE>
<CAPTION>
CLASS CLASS P
----- -------
(INCEPTION DATE) (08/24/95)
--------------- ----------
<S> <C>
Year ended July 31, 2000:
Standardized Return 3.18%
Non-Standardized Return......... 4.74%
Inception to July 31, 2000:
Standardized Return 3.62%
Non-Standardized Return......... 5.18%
</TABLE>
PACE STRATEGIC FIXED INCOME INVESTMENTS
<TABLE>
<CAPTION>
CLASS CLASS P
----- -------
(INCEPTION DATE) (08/24/95)
--------------- ----------
<S> <C>
Year ended July 31, 2000:
Standardized Return 3.52%
Non-Standardized Return......... 5.08%
Inception to July 31, 2000:
Standardized Return 5.11%
Non-Standardized Return......... 6.70%
</TABLE>
PACE MUNICIPAL FIXED INCOME INVESTMENTS
<TABLE>
<CAPTION>
CLASS CLASS P
----- -------
(INCEPTION DATE) (08/24/95)
--------------- ----------
<S> <C>
Year ended July 31, 2000:
Standardized Return 0.85%
Non-Standardized Return......... 2.37%
Inception to July 31, 2000:
Standardized Return 3.33%
Non-Standardized Return......... 4.89%
</TABLE>
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<PAGE>
PACE GLOBAL FIXED INCOME INVESTMENTS
<TABLE>
<CAPTION>
CLASS CLASS P
----- -------
(INCEPTION DATE) (08/24/95)
--------------- ----------
<S> <C>
Year ended July 31, 2000:
Standardized Return (6.39)%
Non-Standardized Return......... (4.97)%
Inception to July 31, 2000:
Standardized Return 1.73%
Non-Standardized Return......... 3.27%
</TABLE>
PACE LARGE COMPANY VALUE EQUITY INVESTMENTS
<TABLE>
<CAPTION>
CLASS CLASS P
----- -------
(INCEPTION DATE) (08/24/95)
--------------- ----------
<S> <C>
Year ended July 31, 2000:
Standardized Return (16.01)%
Non-Standardized Return......... (14.74)%
Inception to July 31, 2000:
Standardized Return 11.67%
Non-Standardized Return......... 13.36%
</TABLE>
PACE LARGE COMPANY GROWTH EQUITY INVESTMENTS
<TABLE>
<CAPTION>
CLASS CLASS P
----- -------
(INCEPTION DATE) (08/24/95)
--------------- ----------
<S> <C>
Year ended July 31, 2000:
Standardized Return 16.00%
Non-Standardized Return......... 17.76%
Inception to July 31, 2000:
Standardized Return 21.96%
Non-Standardized Return......... 23.80%
</TABLE>
PACE SMALL/MEDIUM COMPANY VALUE EQUITY INVESTMENTS
<TABLE>
<CAPTION>
CLASS CLASS P
----- -------
(INCEPTION DATE) (08/24/95)
--------------- ----------
<S> <C>
Year ended July 31, 2000:
Standardized Return (11.92)%
Non-Standardized Return......... (10.59)%
Inception to July 31, 2000:
Standardized Return 6.37%
Non-Standardized Return......... 7.98%
</TABLE>
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<PAGE>
PACE SMALL/MEDIUM COMPANY GROWTH EQUITY INVESTMENTS
<TABLE>
<CAPTION>
CLASS CLASS P
----- -------
(INCEPTION DATE) (08/24/95)
--------------- ----------
<S> <C>
Year ended July 31, 2000:
Standardized Return 59.89%
Non-Standardized Return......... 62.30%
Inception to July 31, 2000:
Standardized Return 22.95%
Non-Standardized Return......... 24.81%
</TABLE>
PACE INTERNATIONAL EQUITY INVESTMENTS
<TABLE>
<CAPTION>
CLASS CLASS P
----- -------
(INCEPTION DATE) (08/24/95)
--------------- ----------
<S> <C>
Year ended July 31, 2000:
Standardized Return 13.20%
Non-Standardized Return......... 14.91%
Inception to July 31, 2000: Return
Standardized Return 10.87%
Non-Standardized Return......... 12.55%
</TABLE>
PACE INTERNATIONAL EMERGING MARKETS EQUITY INVESTMENTS
<TABLE>
<CAPTION>
CLASS CLASS P
----- -------
(INCEPTION DATE) (08/24/95)
--------------- ----------
<S> <C>
Year ended July 31, 2000:
Standardized Return (1.51)%
Non-Standardized Return......... (0.02)%
Inception to July 31, 2000:
Standardized Return (1.08)%
Non-Standardized Return......... 0.42%
</TABLE>
YIELD. Yields used in a fund's Performance Advertisements, except
for those given for PACE Money Market Investments, are calculated by dividing
the fund's interest and dividend income attributable to the fund's shares for
a 30-day period ("Period"), net of expenses attributable to such fund, by the
average number of shares of such fund entitled to receive dividends during
the Period and expressing the result as an annualized percentage (assuming
semi-annual compounding) of the net asset value per share at the end of the
Period. Yield quotations are calculated according to the following formula:
6
YIELD = 2 [( a-b/cd +1 ) - 1 ]
where:a = interest earned during the Period attributable to a fund
b = expenses accrued for the Period attributable to a fund (net of
reimbursements)
C = the average daily number of shares of a fund outstanding during
the Period that were entitled to receive dividends
D = the net asset value per share on the last day of the Period
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<PAGE>
Except as noted below, in determining interest and dividend income
earned during the Period (a variable in the above formula), a fund calculates
interest earned on each debt obligation held by it during the Period by (1)
computing the obligation's yield to maturity, based on the market value of
the obligation (including actual accrued interest) on the last business day
of the Period or, if the obligation was purchased during the Period, the
purchase price plus accrued interest and (2) dividing the yield to maturity
by 360, and multiplying the resulting quotient by the market value of the
obligation (including actual accrued interest) to determine the interest
income on the obligation for each day of the period that the obligation is in
the fund. Once interest earned is calculated in this fashion for each debt
obligation held by the fund, interest earned during the Period is then
determined by totaling the interest earned on all debt obligations. For
purposes of these calculations, the maturity of an obligation with one or
more call provisions is assumed to be the next date on which the obligation
reasonably can be expected to be called or, if none, the maturity date. With
respect to Class A shares, in calculating the maximum offering price per
share at the end of the Period (variable "d" in the above formula), the
fund's current maximum 4.5% (4.0% for fixed income funds) initial sales
charge on Class A shares is included.
The following table shows the yield for Class P shares of certain
funds for the 30-day period ended July 31, 2000:
<TABLE>
<CAPTION>
FUND YIELD
---- -----
<S> <C>
PACE Government Securities Fixed Income Investments ............... 6.51%
PACE Intermediate Fixed Income Investments ........................ 5.91%
PACE Strategic Fixed Income Investments ........................... 5.97%
PACE Municipal Fixed Income Investment............................. 4.53%
PACE Global Fixed Income Investments .............................. 3.94%
</TABLE>
PACE Money Market Investments computes its 7-day current yield and
its 7-day effective yield quotations using standardized methods required by
the SEC. Each fund from time to time advertises (1) its current yield based
on a recently ended seven-day period, computed by determining the net change,
exclusive of capital changes, in the value of a hypothetical pre-existing
account having a balance of one share at the beginning of the period,
subtracting a hypothetical charge reflecting deductions from that shareholder
account, dividing the difference by the value of the account at the beginning
of the base period to obtain the base period return and then multiplying the
base period return by (365/7), with the resulting yield figure carried to at
least the nearest hundredth of one percent; and (2) its effective yield based
on the same seven-day period by compounding the base period return by adding
1, raising the sum to a power equal to (365/7), and subtracting 1 from the
result, according to the following formula:
365/7
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1) ] - 1
PACE Municipal Fixed Income Investments from time to time also
advertises its tax-equivalent yield and tax-equivalent effective yield, also
based on a recently ended seven-day period. These quotations are calculated
by dividing that portion of the fund's yield (or effective yield, as the case
may be) that is tax-exempt by 1 minus a stated income tax rate and adding the
product to that portion, if any, of the fund's yield that is not tax-exempt,
according to the following formula:
TAX EQUIVALENT YIELD = (E/(1-p))+t
E = tax-exempt yield of a class of shares
p = stated income tax rate
t = taxable yield of a Class of shares
Yield may fluctuate daily and does not provide a basis for
determining future yields. Because the yield of each fund fluctuates, it
cannot be compared with yields on savings accounts or other investment
alternatives that provide an agreed to or guaranteed fixed yield for a stated
period of time. However, yield information may be useful to an investor
considering temporary investments in money market instruments. In comparing
the yield of one money market fund to another, consideration should be given
to each fund's investment policies, including the types
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of investments made, the average maturity of the portfolio securities and
whether there are any special account charges that may reduce the yield. The
funds may also advertise non-standardized yields calculated in a manner
similar to that described above, but for different time periods (E.G.,
one-day yield, 30-day yield).
PACE Money Market Investments' yield and effective yield for the
seven-day period ended July 31, 2000 were 6.16% and 6.35%, respectively.
OTHER INFORMATION. In Performance Advertisement, each fund may
compare its Standardized Return and/or Non-Standardized Return with data
published by Lipper Analytical Services, Inc. ("Lipper"), CDA Investment
Technologies, Inc. ("CDA"), Wiesenberger Investment Companies Services
("Wiesenberger"), Investment Company Data, Inc. ("ICD"), or Morningstar
Mutual Funds ("Morningstar") or with the performance of appropriate
recognized stock and other indices, including the Standard & Poor's 500
Composite Stock Price Index, the Dow Jones Industrial Average, the Wilshire
5000 Index, other Wilshire Associates equities indices, Frank Russell Company
equity indices, the Morgan Stanley Capital International Perspective Indices,
the Salomon Smith Barney World Government bond indices, the Lehman Brothers
Bond indices, Municipal Bond Buyers Indices, 90 day Treasury Bills, 30-year
and 10-year U.S. Treasury Bonds and changes in the Consumer Price Index as
published by the U.S. Department of Commerce. The fund also may refer in such
materials to mutual fund performance rankings and other data, such as
comparative asset, expense and fee levels, published by Lipper, CDA,
Wiesenberger, ICD or Morningstar. Performance Advertisements also may refer
to discussions of a fund and comparative mutual fund data and ratings
reported in independent periodicals, including THE WALL STREET JOURNAL, MONEY
MAGAZINE, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW
YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST AND THE KIPLINGER
LETTERS. Comparisons in Performance Advertisements may be in graphic form.
Ratings may include criteria relating to portfolio characteristics
in addition to performance information. In connection with a ranking, a fund
may also provide additional information with respect to the ranking, such as
the particular category to which it relates, the number of funds in the
category, the criteria on which the ranking is based, and the effect of sales
charges, fee waivers and/or expense reimbursements.
Each fund may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on a fund investment are reinvested
by being paid in additional fund shares, any future income or capital
appreciation of the fund would increase the value, not only of the original
fund investment, but also of the additional fund shares received through
reinvestment. As a result, the value of the fund investment would increase
more quickly than if dividends or other distributions had been paid in cash.
The funds may also compare their performance with the performance of
bank certificates of deposit (CDs) as measured by the CDA Certificate of
Deposit Index, the Bank Rate Monitor National Index and the averages of
yields of CDs of major banks published by Banxquote-REGISTERED TRADEMARK- Money
Markets. In aaarcomparing the funds' performance to CD performance,
investors should keep in mind that bank CDs are insured in whole or in part
by an agency of the U.S. government and offer fixed principal and fixed or
variable rates of interest, and that bank CD yields may vary depending on the
financial institution offering the CD and prevailing interest rates. Shares
of the funds are not insured or guaranteed by the U.S. government and returns
and net asset values will fluctuate. The debt securities held by the funds
generally have longer maturities than most CDs and may reflect interest rate
fluctuations for longer term debt securities. An investment in any fund
involves greater risks than an investment in a CD, and an investment in any
fund other than PACE Money Market Investments involves greater risks than an
investment in a money market fund.
Each fund may also compare its performance to general trends in the
stock and bond markets, as illustrated by the following graph prepared by
Ibbotson Associates, Chicago.
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[CHART]
IBBOTSON CHART PLOT POINTS
Chart showing performance of S&P 500, long-term U.S. government bonds,
Treasury Bills and inflation from 1925 through 1999
<TABLE>
<CAPTION>
YEAR COMMON STOCKS LONG-TERM GOV'T BONDS INFLATION/CPI TREASURY BILLS
---- ------------- --------------------- ------------- --------------
<S> <C> <C> <C> <C>
1925 $10,000 $10,000 $10,000 $10,000
1926 $11,162 $10,777 $9,851 $10,327
1927 $15,347 $11,739 $9,646 $10,649
1928 $22,040 $11,751 $9,553 $11,028
1929 $20,185 $12,153 $9,572 $11,552
1930 $15,159 $12,719 $8,994 $11,830
1931 $8,590 $12,044 $8,138 $11,957
1932 $7,886 $14,073 $7,300 $12,072
1933 $12,144 $14,062 $7,337 $12,108
1934 $11,969 $15,472 $7,486 $12,128
1935 $17,674 $16,243 $7,710 $12,148
1936 $23,669 $17,464 $7,803 $12,170
1937 $15,379 $17,504 $8,045 $12,207
1938 $20,165 $18,473 $7,821 $12,205
1939 $20,082 $19,570 $7,784 $12,208
1940 $18,117 $20,761 $7,859 $12,208
1941 $16,017 $20,955 $8,622 $12,216
1942 $19,275 $21,629 $9,423 $12,248
1943 $24,267 $22,080 $9,721 $12,291
1944 $29,060 $22,702 $9,926 $12,332
1945 $39,649 $25,139 $10,149 $12,372
1946 $36,449 $25,113 $11,993 $12,416
1947 $38,529 $24,454 $13,073 $12,478
1948 $40,649 $25,285 $13,426 $12,580
1949 $48,287 $26,916 $13,184 $12,718
1950 $63,601 $26,932 $13,948 $12,870
1951 $78,875 $25,873 $14,767 $13,063
1952 $93,363 $26,173 $14,898 $13,279
1953 $92,439 $27,125 $14,991 $13,521
1954 $141,084 $29,075 $14,916 $13,638
1955 $185,614 $28,699 $14,972 $13,852
1956 $197,783 $27,096 $15,400 $14,193
1957 $176,457 $29,117 $15,866 $14,639
1958 $252,975 $27,342 $16,145 $14,864
1959 $283,219 $26,725 $16,387 $15,303
1960 $284,549 $30,407 $16,629 $15,711
1961 $361,060 $30,703 $16,741 $16,045
1962 $329,545 $32,818 $16,946 $16,483
1963 $404,685 $33,216 $17,225 $16,997
1964 $471,388 $34,381 $17,430 $17,598
1965 $530,081 $34,625 $17,765 $18,289
1966 $476,737 $35,889 $18,361 $19,159
1967 $591,038 $32,594 $18,920 $19,966
1968 $656,415 $32,509 $19,814 $21,005
1969 $600,590 $30,860 $21,024 $22,388
1970 $624,653 $34,596 $22,179 $23,849
1971 $714,058 $39,173 $22,924 $24,895
1972 $849,559 $41,400 $23,706 $25,851
1973 $725,003 $40,942 $25,792 $27,643
1974 $533,110 $42,725 $28,939 $29,855
1975 $731,443 $46,653 $30,969 $31,588
1976 $905,842 $54,470 $32,458 $33,193
1977 $840,766 $54,095 $34,656 $34,893
1978 $895,922 $53,458 $37,784 $37,398
1979 $1,061,126 $52,799 $42,812 $41,279
1980 $1,405,137 $50,715 $48,120 $45,917
1981 $1,336,161 $51,657 $52,421 $52,671
1982 $1,622,226 $72,507 $54,451 $58,224
1983 $1,987,451 $72,979 $56,518 $63,347
1984 $2,111,991 $84,274 $58,753 $69,586
1985 $2,791,166 $110,371 $60,968 $74,960
1986 $3,306,709 $137,446 $61,657 $79,580
1987 $3,479,675 $133,716 $64,376 $83,929
1988 $4,064,583 $146,650 $67,221 $89,257
1989 $5,344,555 $173,215 $70,345 $96,728
1990 $5,174,990 $183,924 $74,640 $104,286
1991 $6,755,922 $219,420 $76,927 $110,121
1992 $7,274,115 $237,092 $79,159 $113,982
1993 $8,000,785 $280,339 $81,334 $117,284
1994 $8,105,379 $258,556 $83,510 $121,862
1995 $11,139,184 $340,435 $85,630 $128,680
1996 $13,709,459 $337,265 $88,475 $135,381
1997 $18,272,762 $390,735 $89,897 $142,496
1998 $23,495,420 $441,777 $91,513 $149,416
1999 $28,456,286 $402,177 $93,998 $156,414
</TABLE>
----------------------
Source: Stocks, Bonds, Bills and Inflation 1999 Yearbook-TM- Ibbotson Assoc.,
Chi. (annual updates work by Roger G. Ibbotson & Rex A. Sinquefield).
The chart is shown for illustrative purposes only and does not represent any
fund's performance. These returns consist of income and capital appreciation
(or depreciation) and should not be considered an indication or guarantee of
future investment results. Year-to-year fluctuations in certain markets have
been significant and negative returns have been experienced in certain
markets from time to time. Stocks are measured by the S&P 500 Index, an
unmanaged weighted index comprising 500 widely held common stocks and varying
in composition. Unlike investors in bonds and U.S. Treasury bills, common
stock investors do not receive fixed income payments and are not entitled to
repayment of principal. These differences contribute to investment risk.
Returns shown for long-term government bonds are based on U.S. Treasury bonds
with 20-year maturities. Inflation is measured by the Consumer Price Index.
The indexes are unmanaged and are not available for investment.
TAXES
BACKUP WITHHOLDING. Each fund is required to withhold 31% of all
taxable dividends, capital gain distributions and redemption proceeds payable
to individuals and certain other non-corporate shareholders who do not
provide the fund or PaineWebber with a correct taxpayer identification
number. Withholding at that rate also is required from taxable dividends and
capital gain distributions payable to those shareholders who otherwise are
subject to backup withholding.
SALE OR EXCHANGE OF FUND SHARES. A shareholder's sale (redemption)
of fund shares may result in a taxable gain or loss, depending on whether the
shareholder receives more or less than his or her adjusted basis for the
shares. In addition, if a fund's shares are bought within 30 days before or
after selling other shares of the fund at a loss, all or a portion of that
loss will not be deductible and will increase the basis of the newly
purchased shares.
CLASS A SHAREHOLDERS. A special tax rule applies when a shareholder
sells or exchanges Class A shares within 90 days of purchase and subsequently
acquires Class A shares of the same or another PaineWebber mutual fund
without paying a sales charge due to the 365-day reinstatement privilege or
the exchange privilege. In these
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cases, any gain on the sale or exchange of the original Class A shares would
be increased, or any loss would be decreased, by the amount of the sales
charge paid when those shares were bought, and that amount would increase the
basis of the PaineWebber mutual fund shares subsequently acquired.
CONVERSION OF CLASS B SHARES. A shareholder will recognize no gain
or loss as a result of a conversion from Class B shares to Class A shares.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. Each fund intends
to continue to qualify for treatment as a regulated investment company
("RIC") under the Internal Revenue Code. To so qualify, a fund must
distribute to its shareholders for each taxable year at least 90% of its
investment company income (consisting generally of net investment income, net
short-term capital gain and, for some funds, net gain from certain foreign
currency transactions). (PACE Municipal Fixed Income Investments must
distribute to its shareholders for each taxable year at least 90% of the sum
of its investment company taxable income (consisting generally of taxable net
investment income and net short-term capital gain) and its net interest
income excludable from gross income under section 103(a) of the Internal
Revenue Code.) In addition to this "Distribution Requirement," a fund must
meet several additional requirements. For each fund, these requirements
include the following: (1) the fund must derive at least 90% of its gross
income each taxable year from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of securities
or foreign currencies, or other income (including gains from options, futures
or forward currency contracts) derived with respect to its business of
investing in securities or those currencies ("Income Requirement"); (2) at
the close of each quarter of the fund's taxable year, at least 50% of the
value of its total assets must be represented by cash and cash items, U.S.
government securities, securities of other RICs and other securities that are
limited, in respect of any one issuer, to an amount that does not exceed 5%
of the value of the fund's total assets and that does not represent more than
10% of the issuer's outstanding voting securities; and (3) at the close of
each quarter of the fund's taxable year, not more than 25% of the value of
its total assets may be invested in securities (other than U.S. government
securities or the securities of other RICs) of any one issuer. If a fund
failed to qualify for treatment as a RIC for any taxable year, (1) it would
be taxed as an ordinary corporation on its taxable income for that year
without being able to deduct the distributions it makes to its shareholders
and (2) the shareholders would treat all those distributions, including
distributions that otherwise would be "exempt-interest dividends" as
described below under "Taxes -- Information about PACE Municipal Fixed Income
Investments" and distributions of net capital gain (the excess of net
long-term capital gain over net short-term capital loss), as taxable
dividends (that is, ordinary income) to the extent of the fund's earnings and
profits. In addition, the fund could be required to recognize unrealized
gains, pay substantial taxes and interest and make substantial distributions
before requalifying for RIC treatment.
OTHER INFORMATION. Dividends and other distributions the fund
declares in October, November or December of any year that are payable to
shareholders of record on a date in any of those months will be deemed to
have been paid by the fund and received by the shareholders on December 31 of
that year if the fund pays the distributions during the following January.
A portion of the dividends (whether paid in cash or in additional
fund shares) from the investment company taxable income of funds that invest
in equity securities of corporations may be eligible for the
dividends-received deduction allowed to corporations. The eligible portion
for a fund may not exceed the aggregate dividends received by the fund from
U.S. corporations. However, dividends received by a corporate shareholder and
deducted by it pursuant to the dividends-received deduction are subject
indirectly to the federal alternative minimum tax.
If fund shares are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital
loss to the extent of any capital gain distributions received thereon.
Investors also should be aware that if shares are purchased shortly before
the record date for a taxable dividend or capital gain distribution, the
shareholder will pay full price for the shares and receive some portion of
the price back as a taxable distribution.
Each fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for the calendar year and capital
gain net income for the one-year period ending on October 31 of that year,
plus certain other amounts.
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Dividends and interest received, and gains realized, by a fund on
foreign securities may be subject to income, withholding or other taxes
imposed by foreign countries and U.S. possessions (collectively "foreign
taxes") that would reduce the return on its securities. Tax conventions
between certain countries and the United States, however, may reduce or
eliminate foreign taxes, and many foreign countries do not impose taxes on
capital gains in respect of investments by foreign investors. If more than
50% of the value of a fund's total assets at the close of its taxable year
consists of securities of foreign corporations, it will be eligible to, and
may, file an election with the Internal Revenue Service that will enable its
shareholders, in effect, to receive the benefit of the foreign tax credit
with respect to any foreign taxes paid by it. Pursuant to the election, the
fund would treat those taxes as dividends paid to its shareholders and each
shareholder (1) would be required to include in gross income, and treat as
paid by him or her, his or her proportionate share of those taxes, (2) would
be required to treat his or her share of those taxes and of any dividend paid
by the fund that represents income from foreign or U.S. possessions sources
as his or her own income from those sources and (3) could either deduct the
foreign taxes deemed paid by him or her in computing his or her taxable
income or, alternatively, use the foregoing information in calculating the
foreign tax credit against his or her federal income tax. A fund will report
to its shareholders shortly after each taxable year their respective shares
of foreign taxes paid to, and the income from sources within, foreign
countries and U.S. possessions if it makes this election. Individuals who
have no more than $300 ($600 for married persons filing jointly) of
creditable foreign taxes included on Forms 1099 and all of whose foreign
source income is "qualified passive income" may elect each year to be exempt
from the extremely complicated foreign tax credit limitation, in which event
they would be able to claim a foreign tax credit without having to file the
detailed Form 1116 that otherwise is required.
Each fund may invest in the stock of "passive foreign investment
companies" ("PFICs") if that stock is a permissible investment. A PFIC is any
foreign corporation (with certain exceptions) that, in general, meets either
of the following tests: (1) at least 75% of its gross income is passive or
(2) an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, a fund will be
subject to federal income tax on a portion of any "excess distribution"
received on the stock of a PFIC or of any gain from disposition of that stock
(collectively "PFIC income"), plus interest thereon, even if the fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent it
distributes that income to its shareholders.
If a fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund" ("QEF"), then in lieu of the foregoing tax and
interest obligation, the fund will be required to include in income each year
its pro rata share of the QEF's annual ordinary earnings and net capital gain
(which it may have to distribute to satisfy the Distribution Requirement and
avoid imposition of the Excise Tax) even if the QEF does not distribute those
earnings and gain to the fund. In most instances it will be very difficult,
if not impossible, to make this election because of certain of its
requirements.
Each fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of a PFIC's stock
over a fund's adjusted basis therein as of the end of that year. Pursuant to
the election, a fund also would be allowed to deduct (as an ordinary, not
capital, loss) the excess, if any, of its adjusted basis in PFIC stock over
the fair market value thereof as of the taxable year-end, but only to the
extent of any net mark-to-market gains with respect to that stock included by
the fund for prior taxable years under the election (and under regulations
proposed in 1992 that provided a similar election with respect to the stock
of certain PFICs). A fund's adjusted basis in each PFIC's stock with respect
to which it has made this election will be adjusted to reflect the amounts of
income included and deductions taken thereunder.
The use of hedging strategies, such as writing (selling) and
purchasing options and futures contracts and entering into forward currency
contracts, involves complex rules that will determine for income tax purposes
the amount, character and timing of recognition of the gains and losses a
fund realizes in connection therewith. Gains from the disposition of foreign
currencies (except certain gains that may be excluded by future regulations),
and gains from options, futures and forward currency contracts derived by a
fund with respect to its business of investing in securities or foreign
currencies, will be treated as qualifying income under the Income Requirement.
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Certain futures and foreign currency contracts in which a fund may
invest may be subject to section 1256 of the Code ("section 1256 contracts").
Any section 1256 contracts a fund holds at the end of each taxable year
generally must be "marked-to-market" (that is, treated as having been sold at
that time for their fair market value) for federal income tax purposes, with
the result that unrealized gains or losses will be treated as though they
were realized. Sixty percent of any net gain or loss recognized on these
deemed sales, and 60% of any net realized gain or loss from any actual sales
of section 1256 contracts, will be treated as long-term capital gain or loss,
and the balance will be treated as short-term capital gain or loss. These
rules may operate to increase the amount that a fund must distribute to
satisfy the Distribution Requirement (I.E., with respect to the portion
treated as short-term capital gain), which will be taxable to the
shareholders as ordinary income, and to increase the net capital gain a fund
recognizes, without in either case increasing the cash available to the fund.
A fund may elect not to have the foregoing rules apply to any "mixed
straddle" (that is, a straddle, clearly identified by the fund in accordance
with the regulations, at least one (but not all) of the positions of which
are section 1256 contracts), although doing so may have the effect of
increasing the relative proportion of net short-term capital gain (taxable as
ordinary income) and thus increasing the amount of dividends that must be
distributed.
Gains or losses (1) from the disposition of foreign currencies,
including forward currency contracts, (2) on the disposition of each
foreign-currency-denominated debt security that are attributable to
fluctuations in the value of the foreign currency between the dates of
acquisition and disposition of the security and (3) that are attributable to
exchange rate fluctuations between the time a fund accrues interest,
dividends or other receivables, or expenses or other liabilities, denominated
in a foreign currency and the time the fund actually collects the receivables
or pays the liabilities, generally will be treated as ordinary income or
loss. These gains, referred to under the Code as "section 988" gains or
losses, will increase or decrease the amount of a fund's investment company
taxable income available to be distributed to its shareholders as ordinary
income, rather than increasing or decreasing the amount of its net capital
gain. If section 988 losses exceed other investment company taxable income
during a taxable year, a fund would not be able to distribute any dividends,
and any distributions made during that year before the losses were realized
would be recharacterized as a return of capital to shareholders, rather than
as a dividend, thereby reducing each shareholder's basis in his or her fund
shares.
Offsetting positions in any actively traded security, option,
futures or forward contract entered into or held by a fund may constitute a
"straddle" for federal income tax purposes. Straddles are subject to certain
rules that may affect the amount, character and timing of a fund's gains and
losses with respect to positions of the straddle by requiring, among other
things, that (1) loss realized on disposition of one position of a straddle
be deferred to the extent of any unrealized gain in an offsetting position
until the latter position is disposed of, (2) the fund's holding period in
certain straddle positions not begin until the straddle is terminated
(possibly resulting in gain being treated as short-term rather than long-term
capital gain) and (3) losses recognized with respect to certain straddle
positions, that otherwise would constitute short-term capital losses, be
treated as long-term capital losses. Applicable regulations also provide
certain "wash sale" rules, which apply to transactions where a position is
sold at a loss and a new offsetting position is acquired within a prescribed
period, and "short sale" rules applicable to straddles. Different elections
are available to the funds, which may mitigate the effects of the straddle
rules, particularly with respect to "mixed straddles" (I.E., a straddle of
which at least one, but not all, positions are section 1256 contracts).
When a covered call option written (sold) by a fund expires, it will
realize a short-term capital gain equal to the amount of the premium it
received for writing the option. When a fund terminates its obligations under
such an option by entering into a closing transaction, it will realize a
short-term capital gain (or loss), depending on whether the cost of the
closing transaction is less (or more) than the premium it received when it
wrote the option. When a covered call option written by a fund is exercised,
the fund will be treated as having sold the underlying security, producing
long-term or short-term capital gain or loss, depending on the holding period
of the underlying security and whether the sum of the option price received
on the exercise plus the premium received when it wrote the option is more or
less than the basis of the underlying security.
If a fund has an "appreciated financial position"-- generally, an
interest (including an interest through an option, futures or forward
currency contract or short sale) with respect to any stock, debt instrument
(other than "straight debt") or partnership interest the fair market value of
which exceeds its adjusted basis--and enters into a "constructive sale" of
the position, the fund will be treated as having made an actual sale thereof,
with the result that gain will be recognized at that time. A constructive
sale generally consists of a short sale, an offsetting notional principal
contract or a futures or forward currency contract entered into by a fund or
a related person with respect to
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the same or substantially identical property. In addition, if the appreciated
financial position is itself a short sale or such a contract, acquisition of
the underlying property or substantially identical property will be deemed a
constructive sale. The foregoing will not apply, however, to a fund's
transaction during any taxable year that otherwise would be treated as a
constructive sale if the transaction is closed within 30 days after the end
of that year and the fund holds the appreciated financial position unhedged
for 60 days after that closing (I.E., at no time during that 60-day period is
the fund's risk of loss regarding that position reduced by reason of certain
specified transactions with respect to substantially identical or related
property, such as having an option to sell, being contractually obligated to
sell, making a short sale or granting an option to buy substantially
identical stock or securities).
A fund that acquires zero coupon or other securities issued with
original issue discount ("OID") and/or Treasury inflation-protected
securities ("TIPS"), on which principal is adjusted based on changes in the
Consumer Price Index, must include in its gross income the OID that accrues
on those securities, and the amount of any principal increases on TIPS,
during the taxable year, even if the fund receives no corresponding payment
on them during the year. Similarly, a fund that invests in payment-in-kind
("PIK") securities must include in its gross income securities it receives as
"interest" on those securities. Each fund has elected similar treatment with
respect to securities purchased at a discount from their face value ("market
discount"). Because a fund annually must distribute substantially all of its
investment company taxable income, including any accrued OID, market discount
and other non-cash income, to satisfy the Distribution Requirement and avoid
imposition of the Excise Tax, it may be required in a particular year to
distribute as a dividend an amount that is greater than the total amount of
cash it actually receives. Those distributions would have to be made from the
fund's cash assets or from the proceeds of sales of portfolio securities, if
necessary. The fund might realize capital gains or losses from those sales,
which would increase or decrease its investment company taxable income and/or
net capital gain.
INFORMATION ABOUT PACE MUNICIPAL FIXED INCOME INVESTMENTS. Dividends
paid by PACE Municipal Fixed Income Investments will qualify as
"exempt-interest dividends," and thus will be excludable from gross income
for federal income tax purposes by its shareholders, if the fund satisfies
the requirement that, at the close of each quarter of its taxable year, at
least 50% of the value of its total assets consists of securities the
interest on which is excludable from gross income under section 103(a); the
fund intends to continue to satisfy this requirement. The aggregate dividends
designated as exempt-interest dividends for any year by the fund may not
exceed its net tax-exempt income for the year. Shareholders' treatment of
dividends from the fund under state and local income tax laws may differ from
the treatment thereof under the Internal Revenue Code. Investors should
consult their tax advisers concerning this matter.
Entities or persons who are "substantial users" (or persons related
to "substantial users") of facilities financed by IDBs or PABs should consult
their tax advisers before purchasing fund shares because, for users of
certain of these facilities, the interest on those bonds is not exempt from
federal income tax. For these purposes, "substantial user" is defined to
include a "non-exempt person" who regularly uses in a trade or business a
part of a facility financed from the proceeds of IDBs or PABs.
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income
(including income from tax-exempt sources such as the fund) plus 50% of their
benefits exceeds certain base amounts. Exempt-interest dividends from the
fund still would be tax-exempt to the extent described above; they would only
be included in the calculation of whether a recipient's income exceeded the
established amounts.
If fund shares are sold at a loss after being held for six months or
less, the loss will be disallowed to the extent of any exempt-interest
dividends received on those shares, and any loss not disallowed will be
treated as long-term, instead of short-term, capital loss to the extent of
any capital gain distributions received thereon. Investors also should be
aware that if shares are purchased shortly before the record date for a
capital gain distribution, the shareholder will pay full price for the shares
and receive some portion of the price back as a taxable distribution.
If the fund invests in instruments that generate taxable interest
income, under the circumstances described in the Prospectus and in the
discussion of municipal market discount bonds below, the portion of any fund
dividend attributable to the interest earned thereon will be taxable to the
fund's shareholders as ordinary income to the extent of its earnings and
profits, and only the remaining portion will qualify as an exempt-interest
dividend. The
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respective portions will be determined by the "actual earned" method, under
which the portion of any dividend that qualifies as an exempt-interest
dividend may vary, depending on the relative proportions of tax-exempt and
taxable interest earned during the dividend period. Moreover, if the fund
realizes capital gain as a result of market transactions, any distributions
of the gain will be taxable to its shareholders.
The fund may invest in municipal bonds that are purchased, generally
not on their original issue, with market discount (that is, at a price less
than the principal amount of the bond or, in the case of a bond that was
issued with original issue discount, a price less than the amount of the
issue price plus accrued original issue discount) ("municipal market discount
bonds"). If a bond's market discount is less that the product of (1) 0.25% of
the redemption price at maturity times (2) the number of complete years to
maturity after the fund acquired the bond, then no market discount is
considered to exist. Gain on the disposition of a municipal market discount
bond purchased by the fund after April 30, 1993 (other than a bond with a
fixed maturity date within one year from its issuance), generally is treated
as ordinary (taxable) income, rather than capital gain, to the extent of the
bond's accrued market discount at the time of disposition. Market discount on
such a bond generally is accrued ratably, on a daily basis, over the period
from the acquisition date to the date of maturity. In lieu of treating the
disposition gain as above, the fund may elect to include market discount in
its gross income currently, for each taxable year to which it is attributable.
OTHER INFORMATION
DELAWARE BUSINESS TRUST. The Trust is an entity of the type commonly
known as a Delaware business trust. Although Delaware law statutorily limits
the potential liabilities of a Delaware business trust's shareholders to the
same extent as it limits the potential liabilities of a Delaware corporation,
shareholders of a fund could, under certain conflicts of laws jurisprudence
in various states, be held personally liable for the obligations of the Trust
or a fund. However, the trust instrument of the Trust disclaims shareholder
liability for acts or obligations of the Trust or its series (the funds) and
requires that notice of such disclaimer be given in each written obligation
made or issued by the trustees or by any officers or officer by or on behalf
of the Trust, a series, the trustees or any of them in connection with the
Trust. The trust instrument provides for indemnification from a fund's
property for all losses and expenses of any fund shareholder held personally
liable for the obligations of the fund. Thus, 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 believes is remote and not material.
Upon payment of any liability incurred by a shareholder solely by reason of
being or having been a shareholder of a fund, the shareholder paying such
liability will be entitled to reimbursement from the general assets of the
fund. The trustees intend to conduct the operations of the funds in such a
way as to avoid, as far as possible, ultimate liability of the shareholders
for liabilities of the funds.
In the event any of the initial shares of a fund are redeemed during
the five-year amortization period, the redemption proceeds will be reduced by
a pro rata portion of any unamortized deferred organizational expenses in the
same proportion as the number of initial shares being redeemed bears to the
number of initial shares outstanding at the time of redemption.
CLASSES OF SHARES. A share of each class of a fund represents an
identical interest in that fund's investment portfolio and has the same
rights, privileges and preferences. However, each class may differ with
respect to sales charges, if any, distribution and/or service fees, if any,
other expenses allocable exclusively to each class, voting rights on matters
exclusively affecting that class, and its exchange privilege, if any. The
different sales charges and other expenses applicable to the different
classes of shares of the funds will affect the performance of those classes.
Each share of a fund is entitled to participate equally in dividends, other
distributions and the proceeds of any liquidation of that fund. However, due
to the differing expenses of the classes, dividends and liquidation proceeds
on Class A, B, C, P and Y shares will differ.
VOTING RIGHTS. Shareholders of each fund are entitled to one vote
for each full share held and fractional votes for fractional shares held.
Voting rights are not cumulative and, as a result, the holders of more than
50% of all the shares of the funds as a group may elect all of the trustees
of the Trust. The shares of each series of the Trust will be voted
separately, except when an aggregate vote of all the series of the Trust is
required by law.
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The Trust does not hold annual meetings. Shareholders of record of
no less than two-thirds of the outstanding shares of the Trust may remove a
trustee through a declaration in writing or by vote cast in person or by
proxy at a meeting called for that purpose. A meeting will be called to vote
on the removal of a trustee at the written request of holders of 10% of the
outstanding shares of the Trust.
CLASS-SPECIFIC EXPENSES. Each fund may determine to allocate certain
of its expenses (in addition to service and distribution fees) to the
specific classes of its shares to which those expenses are attributable. For
example, Class B and Class C shares bear higher transfer agency fees per
shareholder account than those borne by Class A, Class P or Class Y shares.
The higher fee is imposed due to the higher costs incurred by the transfer
agent in tracking shares subject to a contingent deferred sales charge
because, upon redemption, the duration of the shareholder's investment must
be determined in order to determine the applicable charge. Although the
transfer agency fee will differ on a per account basis as stated above, the
specific extent to which the transfer agency fees will differ between the
classes as a percentage of net assets is not certain, because the fee as a
percentage of net assets will be affected by the number of shareholder
accounts in each class and the relative amounts of net assets in each class.
PRIOR NAMES. Prior to December 1, 1997, the Trust's name was
"Managed Accounts Services Portfolio Trust."
CUSTODIAN AND RECORDKEEPING AGENT; TRANSFER AND DIVIDEND AGENT.
State Street Bank and Trust Company, located at 1776 Heritage Drive, North
Quincy, Massachusetts 02171, serves as custodian and recordkeeping agent for
each fund and employs foreign sub-custodians approved by the board in
accordance with applicable requirements under the Investment Company Act to
provide custody of the funds' foreign assets. PFPC, a subsidiary of PNC Bank,
N.A., serves as each fund's transfer and dividend disbursing agent. It is
located at 400 Bellevue Parkway, Wilmington, DE 19809.
COUNSEL. The law firm Willkie Farr & Gallagher, 787 Seventh Avenue,
New York, New York 10019 serves as counsel to the Trust. Willkie Farr &
Gallagher also acts as counsel to PaineWebber and Mitchell Hutchins in
connection with other matters.
AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York
10019, serves as independent auditors for the Trust.
FINANCIAL STATEMENTS
The Trust's Annual Report to Shareholders for its fiscal year ended
July 31, 2000 is a separate document supplied with this SAI, and the
financial statements, accompanying notes and report of independent auditors
appearing therein are incorporated by this reference into the SAI.
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APPENDIX
RATINGS INFORMATION
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Aaa. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues;
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long term risk appear somewhat larger than in
Aaa securities; A. Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
sometime in the future; Baa. Bonds which are rated Baa are considered as
medium-grade obligations, I.E., they are neither highly protected nor poorly
secured. Interest payment and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well; Ba. Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class; B. Bonds
which are rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small; Caa. Bonds which
are rated Caa are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest; Ca.
Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings; C. Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through Caa. The modifier 1 indicates
that the obligation ranks in the higher end of its generic rating category,
the modifier 2 indicates a mid-range ranking, and the modifier 3 indicates a
ranking in the lower end of that generic rating category.
DESCRIPTION OF S&P CORPORATE DEBT RATINGS
AAA. An obligation rated AAA has the highest rating assigned by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong; AA. An obligation rated AA differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its
financial commitment on the obligation is very strong; A. An obligation rated
A is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in higher rated
categories. However, the obligor's capacity to meet its financial commitment
on the obligation is still strong; BBB. An obligation rated BBB exhibits
adequate protection parameters. However, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation; BB, B, CCC, CC,
C. Obligations rated BB, B, CCC, CC and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and
C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions; BB. An obligation rated BB is less
vulnerable to nonpayment than other speculative issues. However, it faces
major ongoing uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to the obligor's inadequate capacity to
meet its financial commitment on the obligation; B. An obligation rated B is
more vulnerable to nonpayment than obligations rated BB, but the obligor
currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment
on the obligation; CCC. An obligation rated CCC is
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currently vulnerable to nonpayment and is dependent upon favorable business,
financial and economic conditions for the obligor to meet its financial
commitment on the obligation. In the event of adverse business, financial, or
economic conditions, the obligor is not likely to have the capacity to meet
its financial commitment on the obligation; CC. An obligation rated CC is
currently highly vulnerable to nonpayment; C. The C rating may be used to
cover a situation where a bankruptcy petition has been filed or similar
action has been taken, but payments on this obligation are being continued;
D. An obligation rated D is in payment default. The D rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
CI. The rating CI is reserved for income bonds on which no interest
is being paid.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
r. This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility
of expected returns which are not addressed in the credit rating. Examples
include: obligations linked or indexed to equities, currencies, or
commodities; obligations exposed to severe prepayment risk--such as
interest-only or principal-only mortgage securities; and obligations with
unusually risky interest terms, such as inverse floaters.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
PRIME-1. Issuers assigned this highest rating have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by the following characteristics:
Leading market positions in well established industries; high rates of return
on funds employed; conservative capitalization structures with moderate
reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; well
established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2. Issuers assigned this rating have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3. Issuers assigned this rating have an acceptable
capacity for repayment of senior short-term obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
NOT PRIME. Issuers assigned this rating do not fall within any
of the Prime rating categories.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS
A-1. A short-term obligation rated A-1 is rated in the highest
category by S&P. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity
to meet its financial commitment on these obligations is extremely strong.
A-2. A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory. A-3. A
short-term obligation rated A-3 exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation. B. A short-term obligation rated B is regarded
as having significant speculative characteristics. The obligor currently has
the capacity to meet its financial commitment on the obligation; however, it
faces major ongoing uncertainties which could lead to the obligor's
inadequate capacity to meet its financial commitments on
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the obligation. C. A short-term obligation rated C is currently vulnerable to
nonpayment and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the
obligation. D. A short-term obligation rated D is in payment default. The D
rating category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS
Aaa. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues;
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long term risk appear somewhat larger than in
Aaa securities; A. Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
sometime in the future; Baa. Bonds which are rated Baa are considered as
medium-grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payment and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well; Ba. Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class; B. Bonds
which are rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small; Caa. Bonds which
are rated Caa are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest; Ca.
Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings; C. Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through Caa. The modifier 1 indicates
that the obligation ranks in the higher end of its generic rating category,
the modifier 2 indicates a mid-range ranking, and the modifier 3 indicates a
ranking in the lower end of that generic rating category.
DESCRIPTION OF S&P MUNICIPAL DEBT RATINGS
AAA. An obligation rated AAA has the highest rating assigned by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong; AA. An obligation rated AA differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its
financial commitment on the obligation is very strong; A. An obligation rated
A is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in higher rated
categories. However, the obligor's capacity to meet its financial commitment
on the obligation is still strong; BBB. An obligation rated BBB exhibits
adequate protection parameters. However, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation; BB, B, CCC, CC,
C, D. Obligations rated BB, B, CCC, CC and C are regarded as having
significant speculative characteristics. BB indicates the least degree of
speculation and C the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions; BB. An obligation
rated BB is less vulnerable to nonpayment than other speculative issues.
However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation; B. An
obligation rated B is
A-3
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more vulnerable to nonpayment than obligations rated BB, but the obligor
currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment
on the obligation; CCC. An obligation rated CCC is currently vulnerable to
nonpayment and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the
obligation. In the event of adverse business, financial, or economic
conditions, the obligor is not likely to have the capacity to meet its
financial commitment on the obligation; CC. An obligation rated CC is
currently highly vulnerable to nonpayment; C. The C rating may be used to
cover a situation where a bankruptcy petition has been filed or similar
action has been taken, but payments on this obligation are being continued;
D. An obligation rated D is in payment default. The D rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
CI. The rating CI is reserved for income bonds on which no interest
is being paid.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
DESCRIPTION OF MOODY'S RATINGS OF SHORT-TERM OBLIGATIONS
There are three categories for short-term obligations that define an
investment grade situation. These are designated Moody's Investment Grade as
MIG 1 (best quality) through MIG-3. Short-term obligations of speculative
quality are designated SG.
In the case of variable rate demand obligations (VRDOs), a two-component
rating is assigned. The first element represents an evaluation of the degree
of risk associated with scheduled principal and interest payments, and the
other represents an evaluation of the degree of risk associated with the
demand feature. The short-term rating assigned to the demand feature of a
VRDO is designated as VMIG. When either the long- or short-term aspect of a
VRDO is not rated, that piece is designated NR, e.g. Aaa/NR or NR/VMIG 1.
MIG ratings terminate at the retirement of the obligation, while a VMIG
rating expiration will be a function of each issue's specific structural or
credit features.
MIG-1/VMIG-1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing. MIG-2/VMIG-2.
This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group. MIG-3/VMIG-3. This
designation denotes favorable quality. Liquidity and cash flow protection may
be narrow and market access for refinancing is likely to be less well
established. SG. This designation denotes speculative quality. Debt
Instruments in this category lack margins of protection.
DESCRIPTION OF S&P'S RATINGS OF STATE AND MUNICIPAL NOTES AND OTHER
SHORT-TERM LOANS:
A S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-term
debt rating. The following criteria will be used in making the assessment.
--Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
--Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
SP-1. Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation. SP-2.
Satisfactory capacity to pay principal and interest with some vulnerability
to
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adverse financial and economic changes over the term of the notes. SP-3.
Speculative capacity to pay principal and interest.
DESCRIPTION OF SHORT-TERM DEBT COMMERCIAL PAPER RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
PRIME-1. Issuers (or supporting institutions) assigned this
highest rating have a superior ability for repayment of senior short-term
debt obligations. Prime-1 repayment ability will often be evidenced by the
following characteristics: Leading market positions in well established
industries; high rates of return on funds employed; conservative
capitalization structures with moderate reliance on debt and ample asset
protection; broad margins in earnings coverage of fixed financial charges and
high internal cash generation; well established access to a range of
financial markets and assured sources of alternate liquidity.
PRIME-2. Issuers (or supporting institutions) assigned this
rating have a strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the characteristics
cited above, but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
PRIME-3. Issuers (or supporting institutions) assigned this
rating have an acceptable capacity for repayment of senior short-term
obligations. The effect of industry characteristics and market composition
may be more pronounced. Variability in earnings and profitability may result
in changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
NOT PRIME. Issuers assigned this rating do not fall within any
of the Prime rating categories.
Commercial paper rated by S&P have the following characteristics:
A-1. A short-term obligation rated A-1 is rated in the highest
category by S&P. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity
to meet its financial commitment on these obligations is extremely strong.
A-2. A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory. A-3. A
short-term obligation rated A-3 exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation. B. A short-term obligation rated B is regarded
as having significant speculative characteristics. The obligor currently has
the capacity to meet its financial commitment on the obligation; however, it
faces major ongoing uncertainties which could lead to the obligor's
inadequate capacity to meet its financial commitments on the obligation. C. A
short-term obligation rated C is currently vulnerable to nonpayment and is
dependent upon favorable business, financial and economic conditions for the
obligor to meet its financial commitment on the obligation. D. A short-term
obligation rated D is in payment default. The D rating category is used when
payments on an obligation are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grace period. The D rating also will be used upon the filing
of a bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
A-5
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YOU SHOULD RELY ONLY ON THE INFORMATION
CONTAINED OR REFERRED TO IN THE
PROSPECTUS AND THIS STATEMENT OF
ADDITIONAL INFORMATION. THE FUNDS AND
THEIR DISTRIBUTOR HAVE NOT AUTHORIZED
ANYONE TO PROVIDE YOU WITH INFORMATION
THAT IS DIFFERENT. THE PROSPECTUS AND
THIS STATEMENT OF ADDITIONAL INFORMATION
ARE NOT AN OFFER TO SELL SHARES OF THE
FUNDS IN ANY JURISDICTION WHERE THE
FUNDS OR THEIR DISTRIBUTOR MAY NOT
LAWFULLY SELL THOSE SHARES.
____________
PaineWebber PACE
Select Advisors Trust
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Statement of Additional Information
November , 2000
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-C- 2000 PaineWebber Incorporated. All rights reserved.
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PART C. OTHER INFORMATION
Item 15. INDEMNIFICATION
Article IX, Section 2 of the Amended and Restated Trust Instrument of
PaineWebber PACE Select Advisors Trust ("Trust Instrument") provides that the
Registrant will indemnify its trustees, officers, employees, investment managers
and administrators and investment advisers 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, officer, employee, investment manager and
administrator or investment adviser; provided that (i) no such person shall be
indemnified where there has been an adjudication or other determination, as
described in Article IX, 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 or her action was
in the best interest of the Registrant, or (ii) no such person shall be
indemnified where there has been a settlement, unless there has been a
determination that such person did not engage in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his or her office; such determination shall be made (A) by the court or other
body approving the Settlement, (B) by the vote of at least a majority of those
trustees who are neither Interested Persons of the trust nor are parties to the
proceeding based upon a review of readily available facts (as opposed to a full
trial-type inquiry), or (C) by written opinion of independent legal counsel
based upon a review of readily available facts (as opposed to a full trial-type
inquiry).
"Interested Person" has the meaning provided in the Investment Company
Act of 1940, as amended from time to time. Article IX, Section 2(d) of the Trust
Instrument also provides that the Registrant may maintain insurance policies
covering such rights of indemnification.
Article IX, Section 1 of the Trust Instrument provides that the
trustees and officers of the Registrant (i) shall not be personally liable to
any person contracting with, or having a claim against, the Trust, and (ii)
shall not be liable for neglect or wrongdoing by them or any officer, agent,
employee or investment adviser of the Registrant, provided they have exercised
reasonable care and have acted under the reasonable belief that their actions
are in the best interest of the Registrant.
Article X, Section 2 of the Trust Instrument provides that, subject to
the provisions of Article IX, the trustees shall not be liable for (i) errors of
judgment or mistakes of fact or law or (ii) any act or omission made in
accordance with advice of counsel or other experts, or (iii) failure to follow
such advice, with respect to the meaning and operation of the Trust Instrument.
Registrant undertakes to carry out all indemnification provisions of
its Trust Instrument and By-laws in accordance with Investment Company Act
Release No. 11330 (September 4, 1980) and successor releases.
Section 9 of the Investment Management and Administration Agreement
("Management Agreement") 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 Management Agreement
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 Management
Agreement. Section 10 of the Management Agreement provides that the Trustees and
shareholders shall not be liable for any obligations of the Registrant or any
series under the Management Agreement and that Mitchell Hutchins shall look only
to the assets and property of the Registrant in
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settlement of such right or claim and not to the assets and property of the
Trustees or shareholders.
Section 6 of the Sub-Advisory Agreement provides that the Sub-Adviser
shall not be liable for any error of judgment or mistake of law or for any loss
suffered by the portfolio, the Registrant or its shareholders or by Mitchell
Hutchins in connection with the matters to which the Sub-Advisory Agreement
relates, except for a loss resulting from the willful misfeasance, bad faith, or
gross negligence on its part in the performance of its duties or from its
reckless disregard of its obligations and duties under the Management Agreement.
Section 9 of the Distribution Contract provides that the Registrant
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 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 Registrant 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 the Distribution
Contract also provides that Mitchell Hutchins agrees to indemnify, defend and
hold the Registrant, 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 Contract.
Section 9 of the Dealer Agreement contains provisions similar to
Section 9 of the Distribution Contract, with respect to PaineWebber Incorporated
("PaineWebber").
Section 15 of the Distribution Contract contains provisions similar to
Section 10 of the Management Agreement.
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 Trust, pursuant to the foregoing provisions or otherwise, the
Trust 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 Trust of expenses
incurred or paid by a trustee, officer or controlling person of the Trust in
connection with the successful defense of any action, suit or proceeding or
payment pursuant to any insurance policy) is asserted against the Trust by such
trustee, officer or controlling person in connection with the securities being
registered, the Trust 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) Certificate of Business Trust effective September 9,
1994 (1)
(b) Amended and Restated Trust Instrument (2)
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(2) Amended and Restated By-Laws (2)
(3) Copies of any voting trust agreement - none
(4) A copy of the Agreement and Plan of Reorganization and
Termination is included in the Combined Proxy
Statement/Prospectus as Appendix A thereto and incorporated by
reference.
(5) Instruments defining the rights of holders of Registrant's
shares of beneficial interest (3)
(6) (a) Investment Management and Administration Agreement (4)
(b) Sub-Advisory Agreement with Pacific Investment Management
Company LLC with respect to PACE Government Securities
Fixed Income Investments dated as of October 10, 2000 (2)
(c) Sub-Advisory Agreement with Metropolitan West Asset
Management LLC with respect to PACE Intermediate Fixed
Income Investments dated as of October 10, 2000 (2)
(d) Sub-Advisory Agreement with Pacific Investment Management
Company LLC with respect to PACE Strategic Fixed Income
Investments dated as of May 5, 2000 (2)
(e) Sub-Advisory Agreement with Standish, Ayer & Wood, Inc.
with respect to PACE Municipal Fixed Income Investments
dated as of October 10, 2000 (2)
(f) Sub-Advisory Agreement with Rogge Global Partners plc
with respect to PACE Global Fixed Income Investments
dated as of October 10, 2000 (2)
(g) Sub-Advisory Agreement with Fischer Francis Trees &
Watts, Inc. with respect to PACE Global Fixed Income
Investments dated as of October 10, 2000 (2)
(h) Sub-Advisory Agreement with State Street Global Advisors
with respect to PACE Large Company Value Equity
Investments dated as of October 10, 2000 (2)
(i) Sub-Advisory Agreement with Institutional Capital
Corporation with respect to PACE Large Company Value
Equity Investments dated as of July 1, 2000 (2)
(j) Sub-Advisory Agreement with Westwood Management
Corporation with respect to PACE Large Company Value
Equity Investments dated as of July 1, 2000 (2)
(k) Sub-Advisory Agreement with Alliance Capital Management
L.P. with respect to PACE Large Company Growth Equity
Investments dated as of October 10, 2000 (2)
(l) Sub-Advisory Agreement with State Street Global Advisors
with respect to PACE Large Company Growth Equity
Investments dated as of October 10, 2000 (2)
(m) Sub-Advisory Agreement with Ariel Capital Management,
Inc. with respect to PACE Small/Medium Company Value
Equity Investments dated as of October 4, 1999 (1)
(n) Sub-Advisory Agreement with ICM Asset Management, Inc.
with respect to PACE Small/Medium Company Value Equity
Investments dated as of October 10, 2000 (2)
(o) Sub-Advisory Agreement with Delaware Management Company
with respect to PACE Small/Medium Company Growth Equity
Investments dated as of December 16, 1996 (5)
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(p) Sub-Advisory Agreement with Martin Currie Inc. with
respect to PACE International Equity Investments dated
as of October 10, 2000 (6)
(q) Sub-Advisory Agreement with Schroder Investment
Management North America Inc. with respect to PACE
International Emerging Markets Equity Investments dated
as of June 15, 1995 (4)
(7) (a) Distribution Contract (2)
(b) Dealer Agreement (2)
(8) Bonus, profit sharing or pension plans - none
(9) Custodian Agreement (1)
(10) Plan pursuant to Rule 12b-1
(a) Plan of Distribution pursuant to Rule 12b-1 with respect
to Class A shares (2)
(b) Plan of Distribution pursuant to Rule 12b-1 with respect
to Class B shares (2)
(c) Plan of Distribution pursuant to Rule 12b-1 with respect
to Class C shares (2)
(d) Plan pursuant to Rule 18f-3 (7)
(11) Opinion and consent of Counsel on legality of shares (filed
herewith)
(12) Opinion and consent of Counsel on tax matters (to be filed)
(13) Transfer Agency Agreement (8)
(14) Auditors' consent (filed herewith)
(15) Financial Statements omitted from prospectus - none
(16) (a) Powers of Attorney for Ms. Alexander and Messrs.
Beaubien, Bewkes, Hewitt, Janklow, White and
Woodward (9)
(b) Power of Attorney for Mr. Storms (filed herewith)
(17) Additional Exhibits - none
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(1) Incorporated by reference from Post-Effective Amendment No. 8 to
registration statement, SEC File No. 33-87254, filed December 1, 1999.
(2) Incorporated by reference from Registrant's N-14 registration
statement, SEC File No. 333-49052, filed November 1, 2000.
(3) Incorporated by reference from Articles IV, VI, IX and X of
Registrant's Trust Instrument and from Articles V and IX of
Registrant's By-Laws.
(4) Incorporated by reference from Post-Effective Amendment No. 1 to
registration statement, SEC File No. 33-87254, filed February 23, 1996.
(5) Incorporated by reference from Post-Effective Amendment No. 4 to
registration statement, SEC File No. 33-87254, filed November 13, 1997.
(6) Incorporated by reference from Post-Effective Amendment No. 10 to
registration statement, SEC File No. 33-87254, filed November 9, 2000.
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(7) Incorporated by reference from Registrant's N-14 registration
statement, SEC File No. 333-49850, filed November 13, 2000.
(8) Incorporated by reference from Post-Effective Amendment No. 2 to
registration statement, SEC File No. 33-87254, filed October 16, 1996.
(9) Incorporated by reference from Post-Effective Amendment No. 9 to
registration statement, SEC File No. 33-87254, filed September 29,
2000.
Item 17. UNDERTAKINGS
(1) The undersigned Registrant agrees that prior to any public
re-offering of the securities registered through the use of a 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-offerings 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 1933 Act, 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.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York, on the 15th day of November, 2000.
PAINEWEBBER PACE SELECT ADVISORS TRUST
By: /S/ DIANNE E. O'DONNELL
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Dianne E. O'Donnell
Vice President and Assistant Secretary
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
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/S/ BRIAN M. STORMS President and Trustee November 15, 2000
--------------------------- (Chief Executive Officer)
Brian M. Storms **
/S/ DAVID J. BEAUBIEN Trustee and Chairman November 15, 2000
--------------------------- of the Board of Trustees
David J. Beaubien *
/S/ MARGO N. ALEXANDER Trustee November 15, 2000
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Margo N. Alexander *
/S/ E. GARRETT BEWKES, JR. Trustee November 15, 2000
---------------------------
E. Garrett Bewkes, Jr. *
/S/ WILLIAM W. HEWITT, JR. Trustee November 15, 2000
---------------------------
William W. Hewitt, Jr. *
/S/ MORTON L. JANKLOW Trustee November 15, 2000
---------------------------
Morton L. Janklow *
/S/ WILLIAM D. WHITE Trustee November 15, 2000
---------------------------
William D. White *
/S/ M. CABELL WOODWARD, JR. Trustee November 15, 2000
---------------------------
M. Cabell Woodward, Jr. *
/S/ PAUL H. SCHUBERT Vice President and Treasurer November 15, 2000
--------------------------- (Chief Financial and
Paul H. Schubert Accounting Officer)
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SIGNATURES (CONTINUED)
* Signature affixed by Elinor W. Gammon pursuant to power of attorney dated
September 12, 2000 and incorporated by reference from Exhibit 16 to
Post-Effective Amendment No. 9 to the Registration Statement on Form N-1A
of PaineWebber PACE Select Advisors Trust, SEC File 33-87254, filed
September 29, 2000.
** Signature affixed by Elinor W. Gammon pursuant to power of attorney dated
November 13, 2000 and filed herewith.
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PAINEWEBBER PACE SELECT ADVISORS TRUST
EXHIBIT INDEX
EXHIBIT
NUMBER
(1) (a) Certificate of Business Trust effective September 9, 1994 (1)
(b) Amended and Restated Trust Instrument (2)
(2) Amended and Restated By-Laws (2)
(3) Copies of any voting trust agreement - none
(4) A copy of the Agreement and Plan of Reorganization and Termination
is included in the Combined Proxy Statement/Prospectus as Appendix A
thereto and incorporated by reference.
(5) Instruments defining the rights of holders of Registrant's shares of
beneficial interest (3)
(6) (a) Investment Management and Administration Agreement (4)
(b) Sub-Advisory Agreement with Pacific Investment Management
Company LLC with respect to PACE Government Securities Fixed
Income Investments dated as of October 10, 2000 (2)
(c) Sub-Advisory Agreement with Metropolitan West Asset
Management LLC with respect to PACE Intermediate Fixed Income
Investments dated as of October 10, 2000 (2)
(d) Sub-Advisory Agreement with Pacific Investment Management
Company LLC with respect to PACE Strategic Fixed Income
Investments dated as of May 5, 2000 (2)
(e) Sub-Advisory Agreement with Standish, Ayer & Wood, Inc. with
respect to PACE Municipal Fixed Income Investments dated as
of October 10, 2000 (2)
(f) Sub-Advisory Agreement with Rogge Global Partners plc with
respect to PACE Global Fixed Income Investments dated as of
October 10, 2000 (2)
(g) Sub-Advisory Agreement with Fischer Francis Trees & Watts,
Inc. with respect to PACE Global Fixed Income Investments
dated as of October 10, 2000 (2)
(h) Sub-Advisory Agreement with State Street Global Advisors with
respect to PACE Large Company Value Equity Investments dated
as of October 10, 2000 (2)
(i) Sub-Advisory Agreement with Institutional Capital Corporation
with respect to PACE Large Company Value Equity Investments
dated as of July 1, 2000 (2)
(j) Sub-Advisory Agreement with Westwood Management Corporation
with respect to PACE Large Company Value Equity Investments
dated as of July 1, 2000 (2)
(k) Sub-Advisory Agreement with Alliance Capital Management L.P.
with respect to PACE Large Company Growth Equity Investments
dated as of October 10, 2000 (2)
(l) Sub-Advisory Agreement with State Street Global Advisors with
respect to PACE Large Company Growth Equity Investments dated
as of October 10, 2000 (2)
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(m) Sub-Advisory Agreement with Ariel Capital Management, Inc.
with respect to PACE Small/Medium Company Value Equity
Investments dated as of October 4, 1999 (1)
(n) Sub-Advisory Agreement with ICM Asset Management, Inc. with
respect to PACE Small/Medium Company Value Equity Investments
dated as of October 10, 2000 (2)
(o) Sub-Advisory Agreement with Delaware Management Company with
respect to PACE Small/Medium Company Growth Equity
Investments dated as of December 16, 1996 (5)
(p) Sub-Advisory Agreement with Martin Currie Inc. with respect
to PACE International Equity Investments dated as of
October 10, 2000 (6)
(q) Sub-Advisory Agreement with Schroder Investment Management
North America Inc. with respect to PACE International
Emerging Markets Equity Investments dated as of June 15,
1995 (4)
(7) (a) Distribution Contract (2)
(b) Dealer Agreement (2)
(8) Bonus, profit sharing or pension plans - none
(9) Custodian Agreement (1)
(10) Plan pursuant to Rule 12b-1
(a) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class A shares (2)
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class B shares (2)
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class C shares (2)
(d) Plan pursuant to Rule 18f-3 (7)
(11) Opinion and consent of Counsel on legality of shares (filed
herewith)
(12) Opinion and consent of Counsel on tax matters (to be filed)
(13) Transfer Agency Agreement (8)
(14) Auditors' consent (filed herewith)
(15) Financial Statements omitted from prospectus - none
(16) (a) Powers of Attorney for Ms. Alexander and Messrs. Beaubien,
Bewkes, Hewitt, Janklow, White and Woodward (9)
(b) Power of Attorney for Mr. Storms (filed herewith)
(17) Additional Exhibits - none
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(1) Incorporated by reference from Post-Effective Amendment No. 8 to
registration statement, SEC File No. 33-87254, filed December 1, 1999.
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(2) Incorporated by reference from Registrant's N-14 registration statement,
SEC File No. 333-49052, filed November 1, 2000.
(3) Incorporated by reference from Articles IV, VI, IX and X of Registrant's
Trust Instrument and from Articles V and IX of Registrant's By-Laws.
(4) Incorporated by reference from Post-Effective Amendment No. 1 to
registration statement, SEC File No. 33-87254, filed February 23, 1996.
(5) Incorporated by reference from Post-Effective Amendment No. 4 to
registration statement, SEC File No. 33-87254, filed November 13, 1997.
(6) Incorporated by reference from Post-Effective Amendment No. 10 to
registration statement, SEC File No. 33-87254, filed November 9, 2000.
(7) Incorporated by reference from Registrant's N-14 registration statement,
SEC File No. 333-49850, filed November 13, 2000.
(8) Incorporated by reference from Post-Effective Amendment No. 2 to
registration statement, SEC File No. 33-87254, filed October 16, 1996.
(9) Incorporated by reference from Post-Effective Amendment No. 9 to
registration statement, SEC File No. 33-87254, filed September 29, 2000.
