<PAGE>
PAINEWEBBER SMALL CAP FUND
(A SERIES OF PAINEWEBBER SECURITIES TRUST)
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
December 15, 2000
Dear Shareholder:
The enclosed proxy statement and prospectus asks for your vote on a proposal
that will determine the future of PaineWebber Small Cap Fund.
We are seeking shareholder approval to merge Small Cap Fund into PACE
Small/Medium Company Value Equity Investments ("PACE Fund"). If the merger is
approved, you will receive shares of the corresponding class of shares of the
PACE Fund in exchange for your Small Cap Fund shares, and Small Cap Fund will
cease operations. The expenses of each class of shares of the PACE Fund
following the merger would be slightly lower than the current expenses of the
corresponding class of Small Cap Fund.
Mitchell Hutchins is the investment manager for both Funds and has retained
two unaffiliated firms, Ariel Capital Management, Inc. and ICM Asset Management,
Inc., to manage each Fund's assets. The two Funds have similar investment
objectives and policies. Each Fund seeks capital appreciation. The PACE Fund
pursues this objective by investing primarily in stocks of companies that are
believed to be undervalued or overlooked in the marketplace and that have total
market capitalizations of less than $4.0 billion at the time of purchase. Small
Cap Fund pursues this objective by investing primarily in common stocks of small
capitalization companies that are believed to have substantial potential for
capital growth and that have market capitalizations of up to $1.5 billion at the
time of purchase. Both Funds also may invest, to a lesser extent, in stocks of
larger capitalization companies.
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,
/s/ Brian M. Storms
Brian M. Storms
PRESIDENT
<PAGE>
PAINEWEBBER SMALL CAP FUND PROPOSED MERGER
QUESTIONS AND ANSWERS
On October 6, 2000, the Board of Trustees of PaineWebber Securities Trust
("Securities Trust"), unanimously approved the merger of its series, PaineWebber
Small Cap Fund ("Small Cap Fund"), into PACE Small/Medium Company Value Equity
Investments ("PACE Small/Medium Company Value Fund"), a series of PaineWebber
PACE Select Advisors Trust ("PACE Trust"). This merger, however, can occur only
if Small Cap 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 acquiring fund.
WHY IS THIS MERGER BEING PROPOSED?
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") and Securities
Trust's Board believe that Small Cap Fund's shareholders will benefit from the
merger with PACE Small/Medium Company Value Fund because the combined Fund would
have a larger asset base, which should provide greater opportunities for
diversifying investments and realizing economies of scale. In addition, the
Board and Mitchell Hutchins believe that operating two funds that offer
significantly overlapping investments and similar management would result in
higher expenses and less efficient operations than a single fund that combines
the assets of the two original funds.
Small Cap Fund and PACE Small/Medium Company Value Fund have similar
investment objectives and policies in that each Fund seeks capital appreciation
and invests primarily in stocks of companies with limited market
capitalizations. PACE Small/Medium Company Value Fund pursues this objective by
investing primarily in stocks of companies that are believed to be undervalued
or overlooked in the marketplace and that have total market capitalizations of
less than $4.0 billion at the time of purchase, and may invest, to a limited
extent, in stocks of companies with larger total market capitalizations and
other securities, including securities convertible into stocks. Small Cap Fund
pursues this objective by investing primarily in common stocks of small
capitalization companies that are believed to have substantial potential for
capital growth and that have market capitalizations of up to $1.5 billion at the
time of purchase, and may invest, to a lesser extent, in stocks of larger
companies and in bonds and money market instruments. (For a more detailed
comparison of the investment objectives and policies of the Funds, see
"Comparison of the Funds" on page 6 of the Combined Proxy Statement/Prospectus.)
Mitchell Hutchins allocates Small Cap Fund's assets between the same two
sub-advisers -- Ariel Capital Management, Inc. and ICM Asset Management,
Inc. -- that are sub-advisers to PACE Small/ Medium Company Value Fund. Each
sub-adviser uses the same basic investment strategy for both Funds. As a result,
the two Funds are now managed in a similar manner, except for the overlapping
but different market capitalization limits on the companies in which each Fund
primarily invests.
Mitchell Hutchins and Securities Trust's Board believe that Small Cap Fund's
shareholders will not be materially adversely affected by the merger because
PACE Small/Medium Company Value Fund invests a significant part of its assets in
stocks of small capitalization companies. In addition, while there can be no
guarantee of the performance of the combined Fund, Mitchell Hutchins and the
Board also believe that the combined Fund's ability to invest in companies
within a somewhat wider range of market capitalizations is more likely to
produce better long-term performance results at reduced risk than may be true
for Small Cap Fund.
HOW MANY SHARES WILL I RECEIVE AT THE TIME OF THE MERGER?
If the merger is approved, you will receive full and fractional shares of
the corresponding class of PACE Small/Medium Company Value Fund having a total
value equal to the total value of your Small Cap Fund shares at the time of the
merger. Although the two Funds will have different net asset values per
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share, each class of shares of PACE Small/Medium Company Value Fund issued in
the merger will otherwise have characteristics that are substantially identical
to the corresponding class of shares of Small Cap Fund.
IF I CURRENTLY ELECT TO RECEIVE MY SMALL CAP 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 SMALL/MEDIUM COMPANY VALUE 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 Small/Medium Company Value Fund shares, and that your basis for the PACE
Small/Medium Company Value Fund shares you receive in the merger will be the
same as the basis for your Small Cap Fund shares.
Immediately prior to the merger, Small Cap 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 Small Cap Fund
shareholders. You should note, however, that both Funds must distribute by
December 31, 2000 their ordinary income for the calendar year ending
December 31, 2000 and net capital gain, if any, for the one-year period ended
October 31, 2000. This distribution must 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 Small Cap Fund, if the merger
takes place, you may receive two taxable distributions of ordinary income and
net capital gain, if any, within a short period of time. Because Small Cap
Fund's sub-advisers have continued their realignment of the Fund's portfolio to
reflect their proprietary investment strategies during the period following
October 31, 2000, the Fund has had higher portfolio turnover than normal and may
have greater realized net capital gain to include in this second taxable
distribution than would otherwise be the case.
HOW WILL THE MERGER AFFECT FUND EXPENSES?
The post-merger combined Fund is expected to have overall operating expenses
that are lower than the current operating expenses of Small Cap Fund due to
economies of scale and a lower management fee paid by PACE Small/Medium Company
Value Fund to Mitchell Hutchins. (For more details about fees and expenses of
each class of shares, see "Comparative Fee Table" on page 3 of the Combined
Proxy Statement/Prospectus.)
HOW HAVE PACE SMALL/MEDIUM COMPANY VALUE FUND AND SMALL CAP FUND PERFORMED?
The following tables show the average annual total returns over several time
periods for each class of shares of Small Cap Fund and the Class P shares of
PACE Small/Medium Company Value 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
both these Funds because the current sub-advisers did not manage the assets of
Small Cap Fund during the periods shown and, prior to October 4, 1999, a
different sub-adviser managed all the assets of PACE Small/Medium Company Value
Fund. (Ariel Capital Management assumed day-to-day management of a portion of
PACE Small/Medium Company Value Fund's assets on October 4, 1999, and ICM
assumed responsibility for managing a portion of the Fund's assets on
October 10, 2000.)
The table for Small Cap 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 Small/ Medium Company Value Fund
reflects the maximum annual PaineWebber PACE-SM- Select Advisors Program fee of
1.50% (which does not apply to shares received in the merger). A footnote to
this table shows the performance of PACE Small/Medium Company Value Fund's Class
P shares for the same periods without deduction of this fee. The tables also
compare each Fund's returns to returns of a broad-
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based market index. The comparative indices, which are different for the two
Funds, are unmanaged and, therefore, do not reflect the deduction of any sales
charges or expenses.
The different sales charges, expenses and program fees applicable to the
different classes of shares of the two Funds and the different periods for which
performance is shown after the 1999 calendar year make it difficult to compare
the Funds' performance. However, because the Class Y shares of Small Cap Fund
are not subject to any sales charges or 12b-1 fees, they are most comparable to
the Class P shares of PACE Small/Medium Company Value Fund. The performance of
Small Cap Fund's Class Y shares for the 1999 calendar year can thus be compared
to that of the Class P shares of PACE Small/Medium Company Value Fund before
deduction of the PACE-SM- Select Advisors Program fee, as shown in the footnote
to that Fund's table.
PACE SMALL/MEDIUM COMPANY VALUE FUND
AVERAGE ANNUAL TOTAL RETURNS*
(as of December 31, 1999)
<TABLE>
<CAPTION>
CLASS CLASS P RUSSELL 2500
(INCEPTION DATE) (8/24/95) VALUE INDEX
---------------- --------- ------------
<S> <C> <C>
One Year................................ (4.24)% 1.49%
Life of Class........................... 7.76% 13.13%
</TABLE>
-------------------
* The above performance reflects the deduction of the maximum annual PACE-SM-
Select Advisors Program fee of 1.50% (which does not apply to shares
received in the merger). If the program fee were not deducted, the average
annual total returns of the Fund's Class P shares would be (2.79)% for the
year ended December 31, 1999 and 9.39% for "Life of Class."
SMALL CAP FUND
AVERAGE ANNUAL TOTAL RETURNS
(as of December 31, 1999)
<TABLE>
<CAPTION>
CLASS CLASS A CLASS B* CLASS C CLASS Y S&P SMALLCAP
(INCEPTION DATE) (2/1/93) (2/1/93) (2/1/93) (7/26/96) 600 INDEX
---------------- -------- -------- -------- --------- ------------
<S> <C> <C> <C> <C> <C>
One Year................. (2.39)% (3.68)% 0.41% 2.57% 12.41%
Five Years............... 9.73% 9.76% 9.88% N/A 17.05%
Life of Class............ 7.91% 7.88% 7.78% 10.65% **
</TABLE>
-------------------
* Assumes conversion of Class B shares to Class A shares after six years.
** Average annual total returns for the S&P SmallCap 600 Index for the life of
each class were as follows: Class A -- 13.63%; Class B -- 13.63%;
Class C -- 13.63%; and Class Y -- 15.41%.
WHEN WILL THE PROPOSED MERGER OCCUR?
The Funds expect to merge in February 2001, assuming Small Cap Fund
shareholder approval at the special meeting to be held on January 25, 2001.
CAN I SELL OR EXCHANGE MY SMALL CAP FUND SHARES BEFORE THE MERGER?
If you do not wish to receive shares of PACE Small/Medium Company Value
Fund, you are free to sell or exchange your Small Cap 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 Small Cap 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.
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PAINEWEBBER SMALL CAP FUND
(A SERIES OF PAINEWEBBER SECURITIES TRUST)
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
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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 Small Cap Fund ("Small Cap Fund"), a series of PaineWebber
Securities Trust ("Securities Trust"), will be held on January 25, 2001, at 1285
Avenue of the Americas, 14th Floor, New York, New York, 10019-6028, at
2:00 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 Small Cap
Fund into PACE Small/Medium Company Value Equity Investments ("PACE
Small/Medium Company Value Fund"), a series of PaineWebber PACE Select
Advisors Trust ("PACE Trust"). Pursuant to the Plan, Small Cap Fund will
transfer all its assets to PACE Small/Medium Company Value Fund, which
will assume all the stated liabilities of Small Cap Fund, and PACE Trust
will issue to each Small Cap Fund shareholder the number of full and
fractional shares of the applicable class of PACE Small/ Medium Company
Value 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 Small Cap 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 Securities 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 Securities Trust or by
voting in person at the Meeting.
By Order of the Board of Trustees,
DIANNE E. O'DONNELL
SECRETARY
December 15, 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 https://vote.proxy-direct.com on
the World Wide Web and follow the on-screen instructions.
You may also call 1-800-597-7836 and vote by telephone.
If we do not receive your completed proxy cards after several weeks, our
proxy solicitor, Shareholder Communications Corporation, 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
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iv
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PAINEWEBBER SMALL CAP FUND
(A SERIES OF PAINEWEBBER SECURITIES TRUST)
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
1-800-647-1568
PACE SMALL/MEDIUM COMPANY VALUE EQUITY 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 15, 2000
-------------------
This Combined Proxy Statement and Prospectus ("Proxy Statement/Prospectus")
is being furnished in connection with a Special Meeting of Shareholders of
PaineWebber Small Cap Fund ("Small Cap Fund"), a series of PaineWebber
Securities Trust ("Securities 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 2:00 p.m., Eastern time (such meeting and any
adjournments thereof are referred to collectively as the "Meeting"). At the
Meeting, the shareholders of Small Cap Fund will be asked to consider and
approve the following proposal:
To approve or disapprove the Agreement and Plan of Reorganization and
Termination ("Plan"), which provides for the reorganization of Small Cap
Fund into PACE Small/Medium Company Value Equity Investments ("PACE
Small/Medium Company Value Fund"), a series of PaineWebber PACE Select
Advisors Trust ("PACE Trust"). Pursuant to the Plan, Small Cap Fund will
transfer all its assets to PACE Small/Medium Company Value Fund, which
will assume all the stated liabilities of Small Cap Fund, and PACE Trust
will issue to each Small Cap Fund shareholder the number of full and
fractional shares of the applicable class of PACE Small/ Medium Company
Value 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 Small Cap Fund.
A form of the Plan is attached as Appendix A to this Proxy
Statement/Prospectus. THE BOARD OF TRUSTEES OF SECURITIES TRUST HAS UNANIMOUSLY
APPROVED THE PLAN AS BEING IN THE BEST INTERESTS OF SMALL CAP FUND AND ITS
SHAREHOLDERS. (Small Cap Fund and PACE Small/Medium Company Value Fund sometimes
are referred to individually as a "Fund" and together as "Funds.")
Pursuant to the Plan, Small Cap Fund will transfer all its assets to PACE
Small/Medium Company Value Fund, which will assume all the stated liabilities of
Small Cap Fund, and PACE Trust will issue to each Small Cap Fund shareholder the
number of full and fractional shares of beneficial interest in the applicable
class of PACE Small/Medium Company Value 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 Small Cap Fund (the "Reorganization"). The value of each
Small Cap Fund shareholder's account with PACE Small/Medium Company Value Fund
immediately after the Reorganization will be the same as the value of such
shareholder's account with Small Cap Fund immediately prior to the
Reorganization. As a result of the Reorganization, shareholders of each class of
shares of Small Cap Fund will become shareholders of the corresponding class of
shares of PACE Small/Medium Company Value Fund. No sales charges will be
assessed on the shares of PACE Small/Medium Company Value Fund issued in
connection with the Reorganization.
<PAGE>
PACE Small/Medium Company Value Fund is a diversified series of PACE Trust,
which is an open-end management investment company currently comprised of twelve
series. PACE Small/Medium Company Value Fund's investment objective is capital
appreciation. The Fund seeks to achieve its investment objective by investing
primarily in stocks of companies that are believed to be undervalued or
overlooked in the marketplace and that have total market capitalizations of less
than $4.0 billion at the time of purchase. The Fund may invest, to a limited
extent, in stocks of companies with larger total market capitalizations and
other securities, including securities convertible into stocks. Mitchell
Hutchins allocates the Fund's assets between two sub-advisers.
This Proxy Statement/Prospectus sets forth the information that a Small Cap
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 15, 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 Small/Medium Company Value 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 Small Cap
Fund is included in its current Prospectus and SAI, each dated December 1, 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 Small Cap Fund's Annual Report to Shareholders for the
fiscal year ended July 31, 2000, are available without charge by writing either
Small Cap Fund or PACE Small/Medium Company Value 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 Securities
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
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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 Investment Risks of the
Funds......................................... 6
COMPARISON OF THE FUNDS........................... 6
Investment Objectives........................... 6
Investment Policies............................. 6
Operations of PACE Small/Medium Company Value
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 SMALL/ MEDIUM COMPANY VALUE
FUND............................................ 11
Flexible Pricing................................ 11
Buying Shares................................... 14
Selling Shares.................................. 15
Exchanging Shares............................... 16
Pricing and Valuation........................... 17
MANAGEMENT........................................ 17
Investment Manager and Investment Adviser....... 17
Sub-Advisers.................................... 18
Advisory Fees and Fund Expenses................. 18
ADDITIONAL INFORMATION ABOUT THE REORGANIZATION... 18
Reasons for the Reorganization.................. 18
Terms of the Reorganization..................... 21
Description of Securities to be Issued.......... 22
Temporary Waiver of Investment Restrictions..... 22
Federal Income Tax Considerations............... 22
Required Vote................................... 23
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
Small/Medium Company Value Fund's Performance... C-1
</TABLE>
iii
<PAGE>
INTRODUCTION
This Proxy Statement/Prospectus is being furnished to shareholders of Small
Cap Fund, a series of Securities 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 Small Cap 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 Small Cap 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 Securities 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. Securities Trust intends to first mail this Proxy
Statement/Prospectus and the accompanying proxy card on or about December 15,
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, Small
Cap Fund had 5,087,513 shares issued and outstanding, consisting of 3,096,452
Class A shares, 890,250 Class B shares, 984,768 Class C shares, and 116,043
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 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.
Securities Trust has engaged the services of Shareholder Communications
Corporation ("SCC") to assist it in the solicitation of proxies for the Meeting.
Securities Trust expects to solicit proxies by mail, telephone and via the
internet. Securities 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. SCC will be paid approximately $12,400 for
proxy solicitation services. Securities 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, Securities Trust's Board believes that
the proposed Reorganization will benefit Small Cap Fund's shareholders.
THE PROPOSED REORGANIZATION
The Boards of PACE Trust and Securities 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 Small/Medium Company Value Fund of all of Small Cap Fund's assets in
exchange for PACE Small/Medium Company Value Fund shares and the assumption by
PACE Small/Medium Company Value Fund of all of Small Cap Fund's stated
liabilities. Small Cap Fund will then distribute the PACE Small/Medium Company
Value Fund shares to Small Cap Fund's shareholders, by class, so that each Small
Cap Fund shareholder will receive the number of full and fractional shares of
the corresponding class of PACE Small/Medium Company Value Fund equal in
aggregate NAV to the aggregate NAV of the shares of Small Cap 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 9, 2001, or on
such later date as the conditions to consummation of the Reorganization are
satisfied ("Closing Date"). Small Cap Fund will be terminated as soon as is
practicable after the Closing Date. See "Additional Information About the
Reorganization," below.
Securities 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) 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 Small Cap
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 Small Cap 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 Securities Trust
has determined that the Reorganization is in the best interests of Small Cap
Fund and that the interests of existing Small Cap Fund shareholders will not be
diluted as a result of the Reorganization. ACCORDINGLY, SECURITIES TRUST'S BOARD
UNANIMOUSLY RECOMMENDS APPROVAL OF THE REORGANIZATION.
2
<PAGE>
COMPARATIVE FEE TABLE
The table below describes the fees and expenses that you would pay if you
buy and hold Small Cap Fund shares or PACE Small/Medium Company Value Fund
shares before the Reorganization and PACE Small/Medium Company Value 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 Small/Medium Company Value Fund and for Small Cap Fund. The PRO FORMA
information reflects the anticipated effects of the Reorganization.
<TABLE>
<CAPTION>
COMBINED PACE SMALL/MEDIUM
PACE SMALL/MEDIUM COMPANY COMPANY VALUE FUND
SMALL CAP FUND VALUE FUND PRO FORMA
----------------------------------- ----------------------------------- -----------------------------------
CLASS A CLASS B CLASS C CLASS Y 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> <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)..... 4.5% None None None 4.5% None None None 4.5% None None None
Maximum Deferred Sales
Charge (load) (AS A
PERCENTAGE OF
ORIGINAL PURCHASE
PRICE OR REDEMPTION
PROCEEDS, WHICHEVER
IS LESS)............ None 5% 1% None None 5% 1% None None 5% 1% None
Exchange Fee.......... None None None None None None None None None None None None
ANNUAL FUND OPERATING
EXPENSES (FEES THAT
ARE DEDUCTED FROM
FUND ASSETS)
Management Fees*...... 1.00% 1.00% 1.00% 1.00% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80%
Distribution and/or
Service (12b-1)
Fees................ 0.25% 1.00% 1.00% None 0.25% 1.00% 1.00% None 0.25% 1.00% 1.00% None
Other Expenses**...... 0.38% 0.46% 0.41% 0.35% 0.22% 0.24% 0.23% 0.21% 0.21% 0.23% 0.22% 0.20%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Annual Fund
Operating Expenses.. 1.63% 2.46% 2.41% 1.35% 1.27% 2.04% 2.03% 1.01% 1.26% 2.03% 2.02% 1.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Management Fee
Waiver/Expense
Reimbursement***.... N/A N/A N/A N/A (0.01)% (0.01)% (0.01)% (0.01)% N/A N/A N/A N/A
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Expenses***....... 1.63% 2.46% 2.41% 1.35% 1.26% 2.03% 2.02% 1.00% 1.26% 2.03% 2.02% 1.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
---------------------------
* For both Funds, "Management Fees" include fees paid to Mitchell Hutchins
for administrative services.
** "Other Expenses" for PACE Small/Medium Company Value 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 class.
*** PACE Trust and Mitchell Hutchins have entered into a written agreement with
respect to PACE Small/Medium Company Value 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 1.00% (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.
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 Small/Medium
Company Value Fund's expenses are lower due to the agreement 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>
SMALL CAP FUND
Class A....................... $608 $ 941 $1,297 $2,296
Class B (assuming sale of all
shares at end of period).... 749 1,067 1,511 2,403
Class B (assuming no sale of
shares)..................... 249 767 1,311 2,403
Class C (assuming sale of all
shares at end of period).... 344 751 1,285 2,746
Class C (assuming no sale of
shares)..................... 244 751 1,285 2,746
Class Y....................... 137 428 739 1,624
PACE SMALL/MEDIUM COMPANY
VALUE FUND
Class A....................... $573 $ 833 $1,114 $1,913
Class B (assuming sale of all
shares at end of period).... 706 938 1,296 1,988
Class B (assuming no sale of
shares)..................... 206 638 1,096 1,988
Class C (assuming sale of all
shares at end of period).... 305 635 1,091 2,357
Class C (assuming no sale of
shares)..................... 205 635 1,091 2,357
Class Y....................... 102 320 556 1,234
PRO FORMA PACE SMALL/MEDIUM
COMPANY VALUE FUND
Class A....................... $573 $ 832 $1,110 $1,904
Class B (assuming sale of all
shares at end of period).... 706 937 1,293 1,979
Class B (assuming no sale of
shares)..................... 206 637 1,093 1,979
Class C (assuming sale of all
shares at end of period).... 305 634 1,088 2,348
Class C (assuming no sale of
shares)..................... 205 634 1,088 2,348
Class Y....................... 102 318 552 1,225
</TABLE>
SUMMARY COMPARISON OF THE FUNDS
INVESTMENT OBJECTIVES AND POLICIES
Small Cap Fund and PACE Small/Medium Company Value Fund have similar
investment objectives, overall risk characteristics and investment policies in
that each Fund seeks capital appreciation and invests primarily in stocks of
companies with limited market capitalizations. PACE Small/Medium Company Value
Fund pursues this objective by investing primarily in stocks of companies that
are believed to be undervalued or overlooked in the marketplace and that have
total market capitalizations of less than $4.0 billion at the time of purchase,
and may invest, to a limited extent, in stocks of companies with larger total
market capitalizations and other securities, including securities convertible
into stocks. Small Cap Fund pursues its objective by investing primarily in
common stocks of small capitalization companies that are believed to have
substantial potential for capital growth and that have market capitalizations of
up to $1.5 billion at the time of purchase, and may invest, to a lesser extent,
in stocks of larger companies and in bonds and money market instruments.
Mitchell Hutchins allocates each Fund's assets between the same two
sub-advisers -- Ariel Capital Management, Inc. ("Ariel") and ICM Asset
Management, Inc. ("ICM").
4
<PAGE>
INVESTMENT ADVISORY SERVICES
Mitchell Hutchins has served as the investment manager and administrator for
PACE Small/Medium Company Value 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 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-advisers -- Ariel and ICM -- have
managed the Fund's investment portfolio since October 4, 1999 (Ariel) and
October 10, 2000 (ICM). Prior to October 4, 1999, a different sub-adviser
managed all the Fund's assets.
Mitchell Hutchins has served as the investment manager or investment adviser
and as administrator for Small Cap Fund since its inception in February 1993 and
directly managed the investment portfolio of Small Cap Fund from April 1996 to
October 10, 2000. Prior to April 1996, a different sub-adviser was responsible
for managing the Fund's assets. On October 10, 2000, the Funds' two current
sub-advisers -- Ariel and ICM -- assumed responsibility for managing the assets
of the Fund as allocated to them by Mitchell Hutchins.
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 Small/Medium Company Value
Fund did not offer Class A, Class B, Class C and Class Y shares to the public
prior to November 27, 2000. The purchase and redemption procedures for PACE
Small/Medium Company Value Fund's Class A, Class B, Class C and Class Y shares
are the same as those currently in effect for the corresponding classes of
shares of Small Cap Fund. You may exchange Class A, Class B or Class C shares of
PACE Small/Medium Company Value Fund for shares of the same class of most other
PACE funds or PaineWebber Money Market Fund. Exchanges between other 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 similar risk factors associated with their
investments in stocks of companies with limited market capitalizations. 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:
EQUITY RISK -- The prices of common stocks and other equity securities
generally fluctuate more than those of other investments. They reflect changes
in the issuing company's financial condition and changes in the overall market.
A Fund may lose a substantial part, or even all, of its investment in a
company's stock.
LIMITED CAPITALIZATION RISK -- Securities of mid and small capitalization
companies generally involve greater risk than securities of larger
capitalization companies because they may be more vulnerable to adverse business
or economic developments. Mid and small capitalization companies also may have
limited product lines, markets, or financial resources, and they may be
dependent on a relatively small management group. Securities of mid and small
cap companies may be less liquid and more volatile than securities of larger
capitalization companies or the market averages in general. In addition, small
cap companies may not be well-known to the investing public, may not have
institutional ownership and may have only cyclical, static or moderate growth
prospects. In general, all of these risks are greater for small cap companies
than for mid cap companies.
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
5
<PAGE>
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
FOREIGN INVESTING RISK -- Because Small Cap Fund may invest in U.S. dollar
denominated securities of foreign issuers, the Fund is subject to foreign
investing risk. Foreign investing involves risks relating to political, social
and economic developments abroad to a greater extent than investing in the
securities of U.S. issuers. In addition, there are differences between U.S. and
foreign regulatory requirements and market practices. Small Cap Fund may invest
up to 25% of its total assets in these securities, while PACE Small/Medium
Company Value Fund generally does not invest in these securities.
COMPARISON OF THE FUNDS
INVESTMENT OBJECTIVES
The Funds have similar investment objectives. PACE Small/Medium Company
Value Fund seeks capital appreciation. Small Cap Fund seeks long-term capital
appreciation.
INVESTMENT POLICIES
The Funds also have similar investment policies in that each invests
primarily in stocks of companies with limited market capitalizations. PACE
Small/Medium Company Value Fund invests primarily in stocks of companies that
are believed to be undervalued or overlooked in the marketplace and that have
total market capitalizations of less than $4.0 billion at the time of purchase.
These stocks also generally have price-to-earnings ("P/E") ratios below the
market average. The Fund invests only in stocks that are traded on major
exchanges or the over-the-counter market. The Fund may invest, to a limited
extent, in stocks of companies with larger total market capitalizations and
other securities, including securities convertible into stocks.
Small Cap Fund invests primarily in common stocks of small capitalization
companies that are believed to have substantial potential for capital growth and
that have market capitalizations of up to $1.5 billion at the time of purchase.
The Fund also invests, to a lesser extent, in stocks of larger companies and in
bonds and money market instruments.
Mitchell Hutchins allocates each Fund's assets between the same two
sub-advisers -- Ariel and ICM. In managing its share of each Fund's assets,
Ariel invests in stocks of companies that it believes are misunderstood or
undervalued. It seeks to identify companies in consistent industries with
distinct market niches and excellent management teams. It focuses on value
stocks, which it defines as stocks that have a low price-to-earnings ratio based
on forward earnings and that trade at a significant discount to the private
market value that Ariel calculates for each stock. Ariel generally sells stocks
that cease to meet these criteria or that are at risk for fundamental
deterioration.
In managing its share of each Fund's assets, ICM invests primarily in common
stocks of companies believed to offer good relative value that have either
fallen into disfavor among investors or are under-researched. In deciding which
stocks to buy for each Fund, ICM uses a top-down analysis to identify broad
sectors of the market believed to offer good relative value and then seeks to
identify individual companies within those sectors that meet ICM's investment
criteria. ICM also performs a bottom-up analysis to attempt to discover
inefficiently priced stocks in a broad range of sectors, including those not
identified in the top-down analysis. These two approaches are combined in
various proportions depending on market conditions. Regardless of which approach
is used to identify stock candidates, ICM also applies fundamental research
analysis. ICM generally sells stocks that meet price objectives, no longer meet
its
6
<PAGE>
selection criteria, are at risk for fundamental deterioration or when it
identifies more attractive investment opportunities.
SECURITIES OF FOREIGN ISSUERS. Small Cap Fund may invest up to 25% of its
total assets in U.S. dollar denominated securities of foreign companies that are
traded on recognized U.S. exchanges or in the U.S. over-the-counter market,
while PACE Small/Medium Company Value Fund generally does not invest in
securities of foreign companies.
DEBT SECURITIES. Each Fund may invest up to 35% of its total assets in U.S.
government bonds and corporate bonds. Both Funds generally limit these
investments to investment grade bonds, but Small Cap Fund may invest up to 10%
of its total assets in convertible bonds that are not investment grade.
DERIVATIVES. The Funds have identical policies with respect to the use of
derivatives relating to the securities in which they normally invest. Each 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.
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 Small/Medium Company Value Fund is normally fully
invested in accordance with its investment objective and policies. However, with
the concurrence of Mitchell Hutchins, PACE Small/ Medium Company Value 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 up to 33 1/3% of its total assets to qualified broker-dealers or
institutional investors. Each Fund may borrow money from banks or through
reverse repurchase agreements, but not in excess of 10% of its total assets.
Neither Fund may purchase securities while borrowings in excess of 5% of its
total assets are outstanding.
PORTFOLIO TURNOVER. Each Fund may engage in frequent trading to achieve its
investment objective. Frequent trading may result in portfolio turnover of 100%
or more (high portfolio turnover). Frequent trading may increase the portion of
a Fund's capital gains that is 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 is
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 Small
Cap Fund for the last two fiscal years ended July 31, 2000 and 1999, were 83%
and 61%, respectively, while the portfolio turnover rates for PACE Small/Medium
Company Value Fund's last two fiscal years ended July 31, 2000 and 1999, were
83% and 57%, respectively.
Both Funds changed their investment management arrangements on October 10,
2000. PACE Small/ Medium Company Value Fund replaced one of its sub-advisers and
Small Cap Fund appointed two new sub-advisers to manage its investment
portfolio. The new sub-advisers are continuing to realign their portion of each
Fund's portfolio to reflect their proprietary investment strategies. As a
result, starting after October 10, 2000 and continuing through the date of this
Proxy Statement/Prospectus, both Funds have
7
<PAGE>
experienced higher portfolio turnover than normal, which may result in higher
overall portfolio turnover for the current fiscal year. This portfolio turnover
is greater for Small Cap Fund because all its assets were allocated between two
new sub-advisers.
OPERATIONS OF PACE SMALL/MEDIUM COMPANY VALUE FUND FOLLOWING THE REORGANIZATION
It is not expected that PACE Small/Medium Company Value Fund will revise any
of its policies following the Reorganization to reflect those of Small Cap Fund.
Ariel and ICM have reviewed Small Cap Fund's current portfolio and determined
that Small Cap Fund's holdings generally are compatible with PACE Small/Medium
Company Value Fund's portfolio. As a result, Mitchell Hutchins believes that, if
the Reorganization is approved, a substantial portion of Small Cap Fund's assets
could be transferred to and held by PACE Small/Medium Company Value Fund.
It is expected, however, that some of Small Cap Fund's holdings may not
remain at the time of the Reorganization due to normal portfolio turnover and
the ongoing realignment of Small Cap Fund's portfolio to reflect the proprietary
investment strategies of its new sub-advisers. It is not expected that any of
Small Cap Fund's holdings will be incompatible with PACE Small/Medium Company
Value Fund's holdings. However, if the shareholders of Small Cap Fund approve
the Reorganization, it is expected that some of the Fund's current holdings
(less than 20% as of November 30, 2000) may be sold in the months following the
Reorganization to adjust the proportion of the stocks of companies with smaller
total market capitalizations ($1.5 billion and lower) in the combined Fund's
portfolio. The amount of Small Cap Fund's assets that would be sold by the
post-merger combined Fund for this purpose and the timing of those sales will
depend on market conditions and on the applicable sub-adviser's continuing
assessment of the appropriate proportion of stocks of companies with smaller
total market capitalizations in the combined Fund's portfolio.
PERFORMANCE
The following bar chart and table provide information about the performance
of PACE Small/ Medium Company Value 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 Small/Medium Company Value Fund's performance
has varied from calendar year to calendar 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 Small/Medium Company Value 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. The table does, however,
reflect the maximum annual PACE-SM- Select Advisors Program fee of 1.50%
applicable only to Class P shares. The program fee does not apply to shares
received in the Reorganization. A footnote to this table shows the performance
of PACE Small/Medium Company Value Fund's Class P shares for the same periods
without deduction of this fee. 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, expenses and program fees.
The second table that follows the bar chart shows the average annual total
returns over several time periods for Small Cap 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 Small/Medium Company Value Fund. The performance of
Small Cap Fund's Class Y shares for the 1999 calendar year can thus be compared
to that of the Class P shares of PACE Small/Medium Company Value
8
<PAGE>
Fund before deduction of the PACE-SM- Select Advisors Program fee, as shown in
the footnote to that Fund's table.
The tables also compare each Fund's returns to returns of a broad-based
market index that is unmanaged and, therefore, does not reflect the deduction of
any fees or expenses. The two Funds have historically used different indices --
the Standard & Poor's SmallCap 600 Index for Small Cap Fund and the Russell 2500
Value Index for PACE Small/Medium Company Value 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 because, during the periods
shown, Mitchell Hutchins or a sub-advisor managed the assets of Small Cap Fund
prior to October 10, 2000. A different sub-adviser managed all the assets of
PACE Small/Medium Company Value Fund prior to October 4, 1999. Ariel assumed
day-to-day management of a portion of PACE Small/Medium Company Value Fund's
assets on October 4, 1999, and ICM assumed responsibility for managing a portion
of the Fund's assets on October 10, 2000.
PACE SMALL/MEDIUM COMPANY VALUE 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>
PERCENTAGES
<S> <C>
CALENDAR YEAR
1996 22.35%
1997 37.26%
1998 -9.34%
1999 -2.79%
</TABLE>
Total return January 1 to September 30, 2000 -- 4.00%
Best quarter during years shown: 2nd quarter, 1999 -- 21.25%
Worst quarter during years shown: 3rd quarter, 1998 -- (20.00)%
PACE SMALL/MEDIUM COMPANY VALUE FUND
AVERAGE ANNUAL TOTAL RETURNS*
(as of December 31, 1999)
<TABLE>
<CAPTION>
CLASS CLASS P RUSSELL 2500 S&P SMALLCAP
(INCEPTION DATE) (8/24/95) VALUE INDEX 600 INDEX
---------------- --------- ------------ ------------
<S> <C> <C> <C>
One Year........................... (4.24)% 1.49% 12.41%
Life of Class...................... 7.76% 13.13% 13.65%
</TABLE>
-------------------
* The above performance reflects the deduction of the maximum annual PACE-SM-
Select Advisors Program fee of 1.50% (which does not apply to shares
received in the Reorganization). If the program fee were not deducted, the
average annual total returns of the Fund's Class P shares would be (2.79)%
for the year ended December 31, 1999 and 9.39% for "Life of Class."
9
<PAGE>
SMALL CAP FUND
AVERAGE ANNUAL TOTAL RETURNS
(as of December 31, 1999)
<TABLE>
<CAPTION>
CLASS CLASS A CLASS B* CLASS C CLASS Y S&P SMALLCAP RUSSELL 2500
(INCEPTION DATE) (2/1/93) (2/1/93) (2/1/93) (7/26/96) 600 INDEX VALUE INDEX
---------------- -------- -------- -------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
One Year................. (2.39)% (3.68)% 0.41% 2.57% 12.41% 1.49%
Five Years............... 9.73% 9.76% 9.88% N/A 17.05% 16.01%
Life of Class............ 7.91% 7.88% 7.78% 10.65% ** **
</TABLE>
-------------------
* Assumes conversion of Class B shares to Class A shares after six years.
** Average annual total returns for the S&P SmallCap 600 Index and the Russell
2500 Value Index for the life of each class were as follows: Class A --
13.63% and 13.41%; Class B -- 13.63% and 13.41%; Class C -- 13.63% and
13.41%; and Class Y -- 15.41% and 14.30%, respectively.
SALES CHARGES
No sales charges apply when Small Cap Fund shareholders receive shares of
PACE Small/Medium Company Value Fund in connection with the Reorganization.
DIVIDENDS AND OTHER DISTRIBUTIONS
Each Fund normally pays dividends and distributes 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 Small/ Medium
Company Value Fund, Class P shares) would have the highest dividends.
As a shareholder of PACE Small/Medium Company Value Fund, you will receive
dividends in additional shares of the Fund unless you elect to receive them in
cash. Your current dividend distribution election 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, Small Cap 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.
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.
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.
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<PAGE>
FLEXIBLE PRICING: BUYING, SELLING AND EXCHANGING SHARES OF
PACE SMALL/MEDIUM COMPANY VALUE FUND
FLEXIBLE PRICING
PACE Small/Medium Company Value 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 PACE Small/ Medium Company Value 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 Small Cap Fund. Prior to November 27, 2000, PACE
Small/Medium Company Value Fund offered only Class P shares, which are available
only to participants in the PaineWebber PACE-SM- Select Advisors Program.
No sales charges apply when Small Cap Fund shareholders receive Class A,
Class B, Class C or Class Y shares of PACE Small/Medium Company Value Fund as
part of the Reorganization. PACE Small/ Medium Company Value Fund is offering
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 Small/Medium Company Value 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
Small Cap 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.
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 $50,000.................. 4.50% 4.71% 4.25%
$50,000 to $99,999................. 4.00 4.17 3.75
$100,000 to $249,999............... 3.50 3.63 3.25
$250,000 to $499,999............... 2.50 2.56 2.25
$500,000 to $999,999............... 1.75 1.78 1.50
$1,000,000 and over (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.
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<PAGE>
* 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 or PaineWebber PACE 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
-- 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
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<PAGE>
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 whether to
convert your Class B shares to Class A shares, the holding period for the
Class B shares of PACE Small/Medium Company Value Fund that you receive in
connection with the Reorganization will include the period for which you held
the corresponding Class B shares of Small Cap Fund and any other PaineWebber
fund whose shares you exchanged for Class B shares of Small Cap Fund.
To minimize your deferred sales charge, we will assume that you are selling:
- First, Class B shares representing reinvested dividends, and
- 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.
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<PAGE>
Class C 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.
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 1.00% 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 Small/Medium Company Value Fund that you receive
in connection with the Reorganization will include the period for which you held
the corresponding Class C shares of Small Cap Fund and any other PaineWebber
fund whose shares you exchanged for shares of Small Cap 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 the 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;
- 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 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
14
<PAGE>
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.
You do not have to complete an application when you make additional
investments in the 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 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
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<PAGE>
- 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 same
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.
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.
Other PaineWebber funds may have different minimum investment amounts. 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
16
<PAGE>
- A guarantee of your signature. (See "Selling 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
those 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.
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 its
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. Judgment plays a greater role in valuing thinly traded securities
because there is less reliable, objective data available. 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 manager and administrator of each Fund. 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. UBS AG, with headquarters in
Zurich, Switzerland, is an internationally diversified organization with
operations in many areas of the financial services industry. On October 31,
2000, Mitchell Hutchins was adviser or sub-adviser of 31 investment companies
with 75 separate portfolios and aggregate assets of approximately
$58.3 billion.
As investment manager for PACE Small/Medium Company Value 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
17
<PAGE>
the sub-advisory contracts between Mitchell Hutchins and the sub-advisers
without obtaining shareholder approval.
As investment manager for Small Cap Fund, Mitchell Hutchins recommends
sub-advisers to the Board of Securities Trust and monitors and reviews the
performance of those sub-advisers. Since October 10, 2000, Mitchell Hutchins and
the sub-advisers have provided investment management services to the Fund under
interim contracts approved by the Board of Securities Trust. Prior to
October 10, 2000, Mitchell Hutchins managed Small Cap Fund's assets directly.
SUB-ADVISERS
The same two sub-advisers -- Ariel and ICM -- manage the assets of each Fund
allocated to them by Mitchell Hutchins. Ariel is located at 307 North Michigan
Avenue, Suite 500, Chicago, Illinois 60601. It is an investment manager with
approximately $4.6 billion in assets under management as of September 30, 2000.
Eric T. McKissack is primarily responsible for the day-to-day management of each
Fund's assets allocated to Ariel. He has held his responsibilities for PACE
Small/Medium Company Value Fund since October 4, 1999 and Small Cap Fund since
October 10, 2000. He has been with Ariel since 1986 and is currently its vice
chair and co-chief investment officer.
ICM is located at 601 W. Main Avenue, Suite 600, Spokane, WA 99201. As of
September 30, 2000, it had approximately $1.86 billion in assets under
management. ICM uses a team approach in the day-to-day management of its share
of each Fund's assets and has held its responsibilities for each Fund since
October 10, 2000. ICM's team is led by Kevin A. Jones, CFA, and James M.
Simmons, CFA. Five experienced analysts round out the research team led by
Messrs. Simmons and Jones.
Mr. Simmons is the founder and chief investment officer of ICM. Mr. Jones is
a senior portfolio manager with ICM and has managed small- and mid-cap
portfolios since 1997. Prior to his appointment as senior portfolio manager in
October 1998, Mr. Jones covered numerous industries as a research analyst.
Before joining ICM, Mr. Jones spent time as a portfolio analyst for another
Northwest investment adviser and as a financial consultant for two major
brokerage firms. He has over 12 years experience in the securities industry.
ADVISORY FEES AND FUND EXPENSES
PACE Small/Medium Company Value Fund pays fees to Mitchell Hutchins for
management and administration services at the combined annual contract rate of
0.80% of average daily net assets. This combined fee includes an annual contract
rate of 0.60% 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 Small/Medium Company Value Fund
paid Mitchell Hutchins at the lower effective rate of 0.79% of the Fund's
average daily net assets because Mitchell Hutchins waived a portion of its fee.
Small Cap 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 1.00% of the Fund's average daily net assets.
Mitchell Hutchins anticipates that shareholders of each class of shares of
Small Cap Fund who will become shareholders of the corresponding class of shares
of PACE Small/Medium Company Value Fund will be subject to total annual
operating expenses that are lower than the expenses they currently pay as
shareholders of Small Cap Fund due to economies of scale and the lower
management and administrative services fees paid by PACE Small/Medium Company
Value Fund to Mitchell Hutchins.
ADDITIONAL INFORMATION ABOUT THE REORGANIZATION
REASONS FOR THE REORGANIZATION
Mitchell Hutchins and Securities Trust's Board believe that Small Cap Fund's
shareholders will benefit from the Reorganization because the combined Fund
would have a larger asset base, which should provide
18
<PAGE>
greater opportunities for diversifying investments and realizing economies of
scale. In addition, the Board and Mitchell Hutchins believe that operating two
funds that offer significantly overlapping investments and similar management
would result in higher expenses and less efficient operations than a single fund
that combines the assets of the two original funds.
At the meeting of Securities Trust's Board on October 6, 2000 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 Small Cap Fund,
would be served by continuing to operate the funds under their current
arrangements. For Small Cap 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 PACE Small/Medium Company Value Fund has a
similar investment objective and, like Small Cap Fund, invests primarily in
companies with limited market capitalizations. Mitchell Hutchins noted, however,
that PACE Small/Medium Company Value Fund invests primarily in companies with
market capitalizations of up to $4.0 billion at the time of purchase, while
Small Cap Fund invests primarily in companies with market capitalizations of up
to $1.5 billion at the time of purchase. Mitchell Hutchins also advised the
Board of Securities Trust that the investment management arrangements for PACE
Small/Medium Company Value Fund were recently changed. Mitchell Hutchins had
concluded that one of the Fund's two sub-advisers should be replaced with ICM.
The Board of PACE Trust approved Mitchell Hutchins' recommendations. Effective
October 10, 2000, ICM started managing a portion of the Fund's investments with
Ariel continuing to manage the other portion of the Fund's assets. (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 would likely
benefit Small Cap Fund's shareholders because the larger asset base of the
combined Fund could provide greater opportunities to diversify investments and
realize greater economies of scale. Mitchell Hutchins also noted that the
investment management and administrative services fees currently paid by PACE
Small/Medium Company Value Fund are less than those currently paid by Small Cap
Fund. Mitchell Hutchins explained that it anticipated that current shareholders
of each class of shares of Small Cap Fund who will become shareholders of the
combined Fund if the Reorganization is approved will be subject to total annual
operating expenses that are lower than the expenses they currently pay as
shareholders of Small Cap Fund due to economies of scale and the lower
management and administrative services fees. (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 also stated its belief that Small Cap Fund's shareholders
will not be adversely affected by the Reorganization because PACE Small/Medium
Company Value Fund invests a significant portion of its assets in stocks of
small capitalization companies. In addition, while there can be no guarantee of
the performance of the combined Fund, Mitchell Hutchins stated its belief that
the combined Fund's ability to invest in companies within a somewhat wider range
of market capitalizations is more likely to produce better long-term performance
results at reduced risk than may be true for Small Cap Fund.
Mitchell Hutchins then proposed immediate changes in the investment
management arrangements for Small Cap Fund. Mitchell Hutchins advised the Board
of Securities Trust that the proposed investment management changes represented
its judgment of the best management structure for the Fund and its belief that
the proposed changes would be more likely to help Small Cap Fund achieve its
investment objective. 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 Securities Trust
that ICM and Ariel be retained on an interim basis to manage the assets of Small
Cap Fund, with Mitchell Hutchins having responsibility for allocating the Fund's
assets between the two sub-advisers. After consideration of all the
19
<PAGE>
information presented by Mitchell Hutchins, inquiries into the ability and
resources of each proposed sub-adviser to provide appropriate investment
management services for its allocated portion of Small Cap Fund's assets and
interviews with personnel of the proposed sub-advisers, Securities Trust's Board
determined to implement the new investment management arrangements effective
October 10, 2000.
To implement the new investment management arrangements for Small Cap Fund,
the Board of Securities Trust, effective October 10, 2000, terminated the
existing investment advisory and administration contract between the Fund and
Mitchell Hutchins and approved a new interim investment management and
administration contract with Mitchell Hutchins and an interim sub-advisory
contract between Mitchell Hutchins and each sub-adviser. Under the Interim
Management and Administration Contract ("Interim Management Contract"), Mitchell
Hutchins serves as investment manager for Small Cap 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 contracts 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, Small Cap Fund and PACE Small/Medium
Company Value Fund would be managed in a similar manner, except for the
overlapping but different market capitalization limitations on the companies in
which each Fund primarily invests. Except for the different market
capitalization requirements for each Fund's primary investments the selection
criteria for each Fund's investments would be similar. Mitchell Hutchins also
stated that the two Funds are likely to appeal to the same investors because of
their focus on stocks of companies with relatively limited market
capitalizations. Mitchell Hutchins noted its belief that operating two funds
that offer significantly overlapping 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 Small/Medium Company Value
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 Fund's
shareholders.
Finally, Mitchell Hutchins reviewed with the Board of Securities Trust the
principal terms of the Plan. Mitchell Hutchins informed the Board that the
Reorganization would be tax-free to Small Cap Fund and its shareholders, that
shareholders of the combined Fund could continue to exchange into other
PaineWebber open-end funds after the Reorganization without having to pay an
additional sales load should their investment priorities change, and that no
sales charges would be imposed on any PACE Small/ Medium Company Value Fund
shares issued in connection with the Reorganization. Furthermore, Mitchell
Hutchins informed the Board of Securities 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
Small Cap Fund would include the holding period for the shares of Small Cap Fund
and any other PaineWebber fund shares of the same class that were exchanged for
shares of Small Cap Fund.
As part of its consideration, the Board of Securities 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 Small/Medium Company Value Fund and
that expense ratio relative to Small Cap 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 Small Cap 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 Small Cap Fund and will
not dilute their interests;
20
<PAGE>
(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,
Ariel and ICM; 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 Securities Trust, including a majority of its
Independent Trustees, determined that the Reorganization would be in the best
interests of Small Cap Fund and that the interests of existing Small Cap Fund
shareholders would not be diluted as a result of the Reorganization. THEREFORE,
THE BOARD OF SECURITIES TRUST UNANIMOUSLY APPROVED THE REORGANIZATION AND
RECOMMENDED THE APPROVAL OF THE PLAN BY THE SHAREHOLDERS OF SMALL CAP 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 which is attached as Appendix A to this Proxy
Statement/Prospectus.
The Plan contemplates (1) PACE Small/Medium Company Value Fund's acquiring
on the Closing Date all the assets of Small Cap Fund in exchange solely for PACE
Small/Medium Company Value Fund shares and PACE Small/Medium Company Value
Fund's assumption of all of Small Cap Fund's stated liabilities and (2) the
distribution of those shares to Small Cap Fund shareholders. Small Cap 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 Small/Medium Company Value Fund will assume
from Small Cap 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 Small Cap Fund's most recent annual audited financial
statements, or incurred by Small Cap Fund subsequent to the date of those
financial statements and disclosed in writing to and accepted by PACE Trust
(collectively, the "Liabilities"). Small Cap Fund agreed in the Plan to use its
best efforts to discharge all of its known Liabilities prior to the Effective
Time.
The value of the Assets to be acquired, and the amount of the Liabilities to
be assumed, by PACE Small/Medium Company Value Fund and the NAV per share of
each class of PACE Small/Medium Company Value Fund shares 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 Small/
Medium Company Value Fund's then-current Prospectus and SAI. These procedures
are identical to those used by Small Cap Fund and described in its current
Prospectus and SAI. Small Cap Fund's NAV will be the value of the Assets to be
acquired by PACE Small/Medium Company Value Fund, less the amount of the
Liabilities, as of the Valuation Time.
On, or as soon as practicable after, the Closing Date, Small Cap Fund will
distribute to its shareholders of record as of the Effective Time the PACE
Small/Medium Company Value Fund shares it receives, by class, so that each Small
Cap Fund shareholder will receive the number of full and fractional shares of
the corresponding class of PACE Small/Medium Company Value Fund equal in
aggregate NAV to the shareholder's shares in Small Cap Fund. That distribution
will be accomplished by opening accounts on the books of PACE Small/Medium
Company Value Fund in the names of Small Cap Fund's shareholders and crediting
those accounts with the approximate number of PACE Small/Medium Company Value
Fund shares. Fractional shares of PACE Small/Medium Company Value Fund will be
rounded to the third decimal place.
21
<PAGE>
The NAV per share of PACE Small/Medium Company Value 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.
Small Cap 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 Small Cap Fund shareholders. If the
Reorganization is not approved by shareholders at the Meeting, Small Cap Fund
will continue to operate as a series of Securities 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 Small/Medium Company Value 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 Small/Medium Company Value 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 other distributions will 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.
TEMPORARY WAIVER OF INVESTMENT RESTRICTIONS
Certain fundamental investment restrictions of Small Cap 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) of the Code. Securities Trust and PACE Trust will
each receive an opinion of Kirkpatrick & Lockhart LLP, counsel to Securities
Trust and tax counsel to PACE Trust, substantially to the following effect:
(1) PACE Small/Medium Company Value Fund's acquisition of the Assets in
exchange solely for its shares and its assumption of the Liabilities,
followed by Small Cap Fund's distribution of those shares PRO RATA to its
shareholders constructively in exchange for their Small Cap Fund 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;
(2) Small Cap Fund will recognize no gain or loss on its transfer of
the Assets to PACE Small/ Medium Company Value Fund in exchange solely for
PACE Small/Medium Company Value Fund shares and PACE Small/Medium Company
Value Fund's assumption of the Liabilities or on the subsequent distribution
of those shares to Small Cap Fund's shareholders in constructive exchange
for their Small Cap Fund shares;
22
<PAGE>
(3) PACE Small/Medium Company Value Fund will recognize no gain or loss
on its receipt of the Assets in exchange solely for its shares and its
assumption of the Liabilities;
(4) PACE Small/Medium Company Value Fund's basis in the Assets will be
the same as Small Cap Fund's basis therein immediately before the
Reorganization, and PACE Small/Medium Company Value Fund's holding period
for the Assets will include Small Cap Fund's holding period therefor;
(5) A Small Cap Fund shareholder will recognize no gain or loss on the
constructive exchange of all its Small Cap Fund shares solely for PACE
Small/Medium Company Value Fund shares pursuant to the Reorganization; and
(6) A Small Cap Fund shareholder's aggregate basis in the PACE
Small/Medium Company Value Fund shares it receives in the Reorganization
will be the same as the aggregate basis for its Small Cap Fund shares it
constructively surrenders in exchange for those PACE Small/Medium Company
Value Fund shares, and its holding period for those PACE Small/Medium
Company Value Fund shares will include its holding period for those Small
Cap 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.
Utilization by PACE Small/Medium Company Value Fund after the Reorganization
of any pre-Reorganization capital losses realized by Small Cap 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 Small Cap 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.
-------------------
23
<PAGE>
ORGANIZATION OF THE FUNDS
PACE Small/Medium Company Value 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.
Small Cap Fund is a diversified series of Securities Trust and commenced
operations on February 1, 1993. Securities Trust was organized as a
Massachusetts business trust on December 3, 1992, and is registered under the
1940 Act as an open-end management investment company. The operations of
Securities Trust, as a Massachusetts business trust, are governed by its
Declaration of Trust, By-Laws and Massachusetts law.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand
PACE Small/Medium Company Value 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 Small/Medium Company Value 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
SMALL/MEDIUM COMPANY VALUE EQUITY 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.... $ 15.75 $ 17.39 $ 17.52 $ 12.29 $ 12.00
-------- -------- -------- -------- -------
Net investment income.... 0.10 0.06 0.10 0.12 0.10
Net realized and
unrealized gains
(losses) from
investments............ (1.79) (0.06) 1.14 5.55 0.23
-------- -------- -------- -------- -------
Net increase (decrease)
from investment
operations............. (1.69) 0.00 1.24 5.67 0.33
-------- -------- -------- -------- -------
Dividends from net
investment income...... (0.06) (0.09) (0.13) (0.10) (0.04)
Distributions from net
realized gains from
investments............ (0.67) (1.55) (1.24) (0.34) --
-------- -------- -------- -------- -------
Total dividends and
distributions.......... (0.73) (1.64) (1.37) (0.44) (0.04)
-------- -------- -------- -------- -------
Net asset value, end of
period................. $ 13.33 $ 15.75 $ 17.39 $ 17.52 $ 12.29
======== ======== ======== ======== =======
Total investment
return (1)............. (10.59)% 1.16% 6.97% 46.99% 2.76%
======== ======== ======== ======== =======
Ratios/Supplemental Data:
Net assets, end of period
(000's)................ $213,749 $206,131 $183,558 $135,047 $63,894
Expenses to average net
assets, net of fee
waivers and expense
reimbursements......... 1.00% 1.00% 0.99% 1.00% 1.00%*
Expenses to average net
assets, before fee
waivers and expense
reimbursements......... 1.01% 1.01% 1.00% 1.12% 1.51%*
Net investment income to
average net assets, net
of fee waivers and
expense
reimbursements......... 0.77% 0.42% 0.61% 1.00% 1.07%*
Net investment income to
average net assets,
before fee waivers and
expense
reimbursements......... 0.76% 0.41% 0.60% 0.88% 0.56%*
Portfolio turnover....... 83% 57% 42% 39% 30%
</TABLE>
-------------------
+ For the period August 24, 1995 (commencement of operations) through
July 31, 1996.
* Annualized.
# As of October 4, 1999, Ariel Capital Management Inc. sub-advised a portion
of the Portfolio. Brandywine Asset Management, Inc. continued to sub-advise
a portion of the Portfolio.
(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 the period of less
than one year has not been annualized.
25
<PAGE>
CAPITALIZATION
The following table shows the capitalization of each of Small Cap Fund and
PACE Small/Medium Company Value Fund as of July 31, 2000, and the PRO FORMA
capitalization as of the same date, giving effect to the Reorganization:
<TABLE>
<CAPTION>
PRO FORMA CLASS A
PACE SMALL/MEDIUM COMBINED PACE
SMALL CAP FUND: COMPANY VALUE FUND: SMALL/MEDIUM COMPANY
CLASS A CLASS A VALUE FUND
--------------- ------------------- --------------------
<S> <C> <C> <C>
Net Assets......................... $40,482,113 $ 0 $ 40,482,113
Shares Outstanding................. 3,294,688 0 3,036,846
Net Asset Value Per Share.......... $ 12.29 $ 0 $ 13.33
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA CLASS B
PACE SMALL/MEDIUM COMBINED PACE
SMALL CAP FUND: COMPANY VALUE FUND: SMALL/MEDIUM COMPANY
CLASS B CLASS B VALUE FUND
--------------- ------------------- --------------------
<S> <C> <C> <C>
Net Assets......................... $11,592,905 $ 0 $ 11,592,905
Shares Outstanding................. 1,008,312 0 869,665
Net Asset Value Per Share.......... $ 11.50 $ 0 $ 13.33
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA CLASS C
PACE SMALL/MEDIUM COMBINED PACE
SMALL CAP FUND: COMPANY VALUE FUND: SMALL/MEDIUM COMPANY
CLASS C CLASS C VALUE FUND
--------------- ------------------- --------------------
<S> <C> <C> <C>
Net Assets......................... $12,648,217 $ 0 $ 12,648,217
Shares Outstanding................. 1,099,604 0 948,831
Net Asset Value Per Share.......... $ 11.50 $ 0 $ 13.33
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA CLASS Y
PACE SMALL/MEDIUM COMBINED PACE
SMALL CAP FUND: COMPANY VALUE FUND: SMALL/MEDIUM COMPANY
CLASS Y CLASS Y VALUE FUND
--------------- ------------------- --------------------
<S> <C> <C> <C>
Net Assets......................... $ 1,830,951 $ 0 $ 1,830,951
Shares Outstanding................. 147,392 0 137,352
Net Asset Value Per Share.......... $ 12.42 $ 0 $ 13.33
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA CLASS P
PACE SMALL/MEDIUM COMBINED PACE
SMALL CAP FUND: COMPANY VALUE FUND: SMALL/MEDIUM COMPANY
CLASS P CLASS P VALUE FUND
--------------- ------------------- --------------------
<S> <C> <C> <C>
Net Assets......................... $ 0 $213,748,869 $213,748,869
Shares Outstanding................. 0 16,034,793 16,034,793
Net Asset Value Per Share.......... $ 0 $ 13.33 $ 13.33
</TABLE>
LEGAL MATTERS
Certain legal matters concerning the issuance of PACE Small/Medium Company
Value Fund shares as part of the Reorganization will be passed upon by Willkie
Farr & Gallagher, 787 Seventh 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 Securities 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 Securities 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].
EXPERTS
The audited financial statements of Small Cap Fund incorporated by reference
in the SAI have been audited by PricewaterhouseCoopers LLP, independent
accountants, whose report thereon is included in Small Cap Fund's Annual Report
to Shareholders for the fiscal year ended July 31, 2000. The audited financial
statements of PACE Small/Medium Company Value 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
Small/Medium Company Value Fund's Annual Report to Shareholders for the fiscal
year ended July 31, 2000. The financial statements audited by
PricewaterhouseCoopers LLP and Ernst & Young LLP have been incorporated by
reference in the SAI in reliance on their reports given on their authority as
experts in auditing and accounting.
OTHER INFORMATION
SHAREHOLDER PROPOSALS. As a general matter, Securities Trust does not hold
annual or other regular meetings of shareholders. Any shareholder who wishes to
submit proposals to be considered at a special meeting of Small Cap Fund's
shareholders should send such proposals to Small Cap 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 or
otherwise considered. Moreover, consideration 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. Securities 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 Small Cap
Fund's shareholders arise, the proxies will vote thereon according to their best
judgment in the interests of the Fund.
27
<PAGE>
APPENDIX A
FORM OF AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
THIS AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION ("Agreement") is
made as of , 2001, by and among PaineWebber PACE Select Advisors
Trust, a Delaware business trust ("PACE Trust"), on behalf of PACE Small/Medium
Company Value Equity Investments, a segregated portfolio of assets ("series")
thereof ("Acquiring Fund"), PaineWebber Securities Trust, a Massachusetts
business trust ("Target Trust"), on behalf of PaineWebber Small Cap 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").
A-1
<PAGE>
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 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 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 9, 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 July 31, 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
July 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 frequency of dispositions of shares of Target as a series of an
open-end investment company,
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(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 [not]
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) ("Reorganization Expenses").
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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
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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) rely, as to certain factual matters, on a
certificate of Target 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 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 reasonably 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. The Reorganization Expenses will be borne by Mitchell Hutchins.
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 July 1, 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 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.
A-13
<PAGE>
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> <C>
PAINEWEBBER SECURITIES TRUST,
acting on behalf of its series,
PaineWebber Small Cap Fund
By:
......................................
PAINEWEBBER PACE SELECT ADVISORS TRUST,
acting on behalf of its series,
PACE Small/Medium Company Value Equity
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 shareholders owned beneficially or of
record 5% or more of the Class Y shares of Small Cap Fund. Mitchell Hutchins did
not know of any other person who owned beneficially or of record 5% or more of
any class of either Fund's outstanding equity securities as of the Record Date.
SMALL CAP FUND
<TABLE>
<CAPTION>
PRO FORMA PERCENT BENEFICIAL
PERCENT BENEFICIAL OWNERSHIP OF COMBINED
OWNERSHIP OF PACE SMALL/MEDIUM
SHAREHOLDER'S NAME/ADDRESS* SMALL CAP FUND COMPANY VALUE FUND
--------------------------- ------------------ ----------------------------
<S> <C> <C>
PaineWebber Custodian 5.98% 5.98%
Richard A. Whitcomb (Class Y Shares) (Class Y Shares)
Joyce Straus Special 5.89% 5.89%
(Class Y Shares) (Class Y Shares)
</TABLE>
-------------------
* The shareholders listed may be contacted c/o Mitchell Hutchins Asset
Management Inc., 51 West 52nd Street, New York, NY 10019-6114.
B-1
<PAGE>
APPENDIX C
MANAGEMENT'S DISCUSSION OF PACE SMALL/MEDIUM COMPANY VALUE FUND'S PERFORMANCE
THE DISCUSSION BELOW WAS TAKEN FROM PACE SMALL/MEDIUM COMPANY VALUE 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.
ADVISERS: Ariel Capital Management, Inc./ Brandywine Asset Management, Inc.
PORTFOLIO MANAGERS: Eric T. McKissack of Ariel; Henry Otto and Steve
Tonkovich of Brandywine
OBJECTIVE: Capital appreciation
INVESTMENT PROCESS: The Portfolio invests primarily in equity securities
that are believed to be undervalued or overlooked in the marketplace and that
have market capitalizations of less than $4.0 billion at the time of purchase.
Brandywine and Ariel each manage a portion of the Portfolio. Ariel seeks to
identify companies in consistent industries with distinct market niches and
excellent management teams. Ariel defines value stocks generally as those that
have low price/earnings (P/E) ratios based on forward earnings and that trade at
significant discounts to the private market value that Ariel calculates for each
stock. Brandywine starts with quantitative analysis that focuses on stocks with
low P/E ratios. Brandywine then uses fundamental analysis to exclude stocks
based on earnings adjustments that raise P/E above the target range,
preannounced earnings changes that when formally reported will raise P/E, strong
recent price gains and severe or sudden fundamental deterioration.
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*........ 3.85% (11.92)% (2.57)% 6.37%
Without PACE program fee...... 4.63% (10.59)% (1.09)% 7.98%
Russell 2500 Value Index...... 10.92% 3.05% 5.08% 12.90%
Lipper Small-Cap Value Funds
Median...................... 10.36% 6.22% 2.42% 10.56%
</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 RUSSELL 2500 VALUE INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PORTFOLIO WITHOUT FEE PORTFOLIO WITH FEE* RUSSELL 2500 VALUE INDEX
<S> <C> <C> <C>
Aug-95 $10,017 $10,013 $10,000
Sep-95 $10,025 $10,009 $10,158
Oct-95 $9,617 $9,589 $9,886
Nov-95 $9,867 $9,826 $10,328
Dec-95 $9,992 $9,939 $10,548
Jan-96 $10,034 $9,968 $10,668
Feb-96 $10,142 $10,063 $10,820
Mar-96 $10,376 $10,283 $11,024
Apr-96 $10,711 $10,601 $11,242
May-96 $10,953 $10,827 $11,426
Jun-96 $10,786 $10,649 $11,361
Jul-96 $10,276 $10,132 $10,816
Aug-96 $10,276 $10,630 $11,325
Sep-96 $11,096 $10,913 $11,713
Oct-96 $11,246 $11,047 $11,910
Nov-96 $11,948 $11,722 $12,613
Dec-96 $12,225 $11,979 $12,887
Jan-97 $12,656 $12,386 $13,217
Feb-97 $12,777 $12,488 $13,364
Mar-97 $12,406 $12,111 $12,991
Apr-97 $12,389 $12,079 $13,242
May-97 $13,432 $13,080 $14,165
Jun-97 $14,346 $13,952 $14,832
Jul-97 $15,105 $14,672 $15,642
Aug-97 $15,337 $14,879 $15,721
Sep-97 $16,476 $15,963 $16,678
Oct-97 $16,165 $15,643 $16,184
Nov-97 $16,277 $15,732 $16,530
Dec-97 $16,781 $16,198 $17,150
Jan-98 $16,511 $15,918 $16,857
Feb-98 $17,645 $16,989 $17,902
Mar-98 $18,341 $17,638 $18,786
Apr-98 $18,592 $17,857 $18,775
May-98 $17,812 $17,086 $18,183
Jun-98 $17,422 $16,691 $18,114
Jul-98 $16,158 $15,461 $16,956
Aug-98 $13,770 $13,159 $14,294
Sep-98 $13,937 $13,303 $15,130
Oct-98 $14,402 $13,729 $15,805
Nov-98 $14,783 $14,074 $16,315
Dec-98 $15,214 $14,467 $16,820
Jan-99 $15,079 $14,321 $16,336
Feb-99 $13,803 $13,092 $15,498
Mar-99 $13,626 $12,908 $15,474
Apr-99 $15,380 $14,552 $17,002
May-99 $15,899 $15,024 $17,349
Jun-99 $16,522 $15,593 $17,953
Jul-99 $16,345 $15,407 $17,610
Aug-99 $15,567 $14,655 $16,934
Sep-99 $14,944 $14,051 $16,400
Oct-99 $14,488 $13,605 $16,417
Nov-99 $14,488 $13,588 $16,507
Dec-99 $14,789 $13,854 $17,070
Jan-00 $13,967 $13,067 $16,360
Feb-00 $13,178 $12,313 $16,643
Mar-00 $14,110 $13,167 $17,868
Apr-00 $14,033 $13,079 $17,861
May-00 $14,175 $13,196 $17,829
Jun-00 $14,164 $13,169 $17,761
Jul-00 $14,614 $13,570 $18,146
</TABLE>
The graph depicts the performance of PACE Small/Medium Company Value Equity
Investments versus the Russell 2500 Value Index. It is important to note that
PACE Small/Medium Company Value Equity 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>
ADVISERS' COMMENTS
ARIEL CAPITAL MANAGEMENT
The first seven months of 2000 witnessed distinct periods of under- and
outperformance by the value sectors of the market. Dominance of growth sectors
continued in January and February followed by the crumbling of the technology
sector in March. The factors driving broad stock market performance during the
remaining four months were clear--as the sector was toppled by its own excess, a
flight to quality ensued. Technology's dramatic turn hurt the entire U.S. stock
market and especially punished momentum investors heavily weighted in the most
popular aggressive growth stocks. The Portfolio, underweighted in technology,
enjoyed a measure of protection as the sector faltered.
In addition, a number of holdings performed quite well when their value was
unlocked as a result of being taken over. The Portfolio benefited from the
announced acquisition of long-time favorite, Central Newspapers by Gannett at
$64 per share--a large premium over its $31.50 per share price at the time of
announcement. The purchase of refrigeration systems manufacturer Hussmann
International by Ingersoll-Rand for $29 a share offered another nice performance
lift--Hussmann shares traded at $13.38 at the time. Hussmann International
(1.5%)* and Central Newspapers (3.5%)* were sold in May and June of 2000,
respectively.
We have continued to utilize strong value ideals throughout the year and
have discovered several attractive stocks, which we feel offer excellent
opportunities for future appreciation. Two such examples are Cardinal Health
(1.2% as of July 31, 2000)* and the Tribune Company (0.8% as of July 31, 2000).*
In the healthcare sector, Cardinal Health maintains the second largest drug
distribution business, the largest manufacturing and medical-surgical
distribution operation and the largest pharmaceutical service portfolio in the
U.S. and was selling at a very attractive valuation. We also used weakness in
the newspaper/ publishing industry to initiate a position in an old-time
favorite, the Tribune Company. Tribune, one of the industry's largest players,
owns major newspaper and broadcasting properties in New York, Los Angeles,
Chicago, Atlanta and other major markets.
BRANDYWINE ASSET MANAGEMENT
For the fiscal year ended July 31, 2000, the U.S. equity market gained
despite rising interest rates, driven higher by strong consumer confidence and
investor optimism about technology spending. Market gains remained concentrated
in growth stocks. Value lagged due to investor disinterest.
The technology sector accounted for most of the Portfolio's underperformance
versus its benchmark. Our disciplined value approach kept the Portfolio
underweighted in technology stocks because of their steep valuations, yet
investors had a nearly insatiable appetite for these stocks. The Portfolio's
healthcare investments were the other major source of poor performance relative
to the benchmarks. Although we had only a small weighting in hospitals, HMOs,
nursing homes and rehabilitation centers, the stocks dropped dramatically due to
radical changes in Medicare reimbursement. These stocks later rallied as
Congress passed helpful regulatory changes.
For the year ended July 31, 2000, oil services companies were among the
Portfolio's strongest contributors to performance. The retail and consumer
product sectors also provided a positive contribution to the Portfolio as strong
consumer spending helped these stocks. Despite investor concerns about the
economy's sustainability, continued economic growth also helped the Portfolio's
cyclical holdings in trucking, steel, chemicals and textiles.
We have identified several potential catalysts for the realization of the
potential available in small cap value stocks. First, any decline in the
Internet euphoria followed by more realistic evaluation of stock prices relative
to fundamentals could benefit our style. Second, the dramatic rise in mergers,
acquisitions
* Weightings represent percentages of net assets as of the dates indicated.
The Portfolio is actively managed, and its composition will vary over time.
C-2
<PAGE>
and stock buybacks among the Portfolio's holdings indicates that corporate
decision-makers confirm that these stocks' business fundamentals do not justify
their current valuation discounts.
PACE SMALL/MEDIUM COMPANY VALUE EQUITY INVESTMENTS--PORTFOLIO STATISTICS
<TABLE>
<CAPTION>
CHARACTERISTICS* 7/31/00
---------------- -------
<S> <C>
Price/Earnings Ratio.............................. 7.3x
Price/Book Ratio.................................. 9.5x
Dividend Yield.................................... 1.8%
Net Assets ($MM).................................. $213.7
Number of Securities.............................. 638
Stocks............................................ 94.3%
Cash & Equivalents................................ 5.7%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS* 7/31/00
----------------- -------
<S> <C>
Consumer Cyclical................................. 37.0%
Financial Services................................ 18.0
Consumer Noncyclical.............................. 9.0
Technology........................................ 7.8
Basic Materials................................... 6.0
-----
Total............................................. 77.8%
</TABLE>
<TABLE>
<CAPTION>
TOP 10 STOCKS* 7/31/00
-------------- -------
<S> <C>
Herman Miller..................................... 2.6%
MBIA.............................................. 2.5
Rouse Co.......................................... 2.3
Houghton Mifflin Co............................... 2.1
MBNA.............................................. 2.1
International Game Technology..................... 2.0
Lee Enterprises................................... 1.9
Equifax........................................... 1.9
CenturyTel........................................ 1.8
McCormick & Company............................... 1.8
-----
Total............................................. 21.0%
</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-3
<PAGE>
EVERY SHAREHOLDER'S VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR
PROXY TODAY
Please detach at perforation before mailing.
PROXY PAINEWEBBER SMALL CAP FUND PROXY
(A SERIES OF PAINEWEBBER SECURITIES TRUST)
SPECIAL MEETING OF SHAREHOLDERS - JANUARY 25, 2001
THIS PROXY IS BEING SOLICITED FOR THE BOARD OF TRUSTEES OF PAINEWEBBER
SECURITIES TRUST ("TRUST") ON BEHALF OF THE FUND LISTED ABOVE, A SERIES OF THE
TRUST. The undersigned hereby appoints as proxies Robyn Green and Keith Weller,
and each of them (with the power of substitution) to vote for the undersigned
all shares of beneficial interest of the undersigned in the Fund listed above, 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.
VOTE VIA THE INTERNET: HTTPS://VOTE.PROXY-DIRECT.COM
VOTE VIA TELEPHONE: 1-800-597-7836
CONTROL NUMBER: [999 9999 9999 999]
NOTE: 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)
-----------------------------------------------------
Date
PM1_11293_A-I
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: /X/
FOR AGAINST ABSTAIN
1. Approval of the Agreement and Plan of / / / / / /
Reorganization and Termination that provides
for the reorganization of PaineWebber Small
Cap Fund, a series of PaineWebber Securities
Trust, into PACE Small/Medium Company Value
Equity Investments, a series of PaineWebber
PACE Select Advisors Trust.
PLEASE DATE AND SIGN THE REVERSE SIDE OF THIS CARD.
PM1_11293_A
<PAGE>
YOUR PROXY VOTE IS IMPORTANT!
AND NOW YOU CAN VOTE YOUR PROXY
ON THE PHONE OR ON
THE INTERNET.
IT SAVES MONEY! Telephone and Internet voting saves
postage costs. Savings which can help to minimize
expenses.
[graphic]
IT SAVES TIME! Telephone and Internet voting is
instantaneous - 24 hours a day.
IT'S EASY! Just follow these simple steps:
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1. Read your proxy statement and have it at hand.
2. Call toll-free 1-800-597-7836 for automated instructions,
OR GO TO WEBSITE: HTTPS://VOTE.PROXY-DIRECT.COM.
3. Enter your 14 digit CONTROL NUMBER from your Proxy Card.
4. Follow the recorded or on-screen directions.
5. Do NOT mail your Proxy Card when you vote by phone or internet.
6. If you have any questions regarding the meeting agenda or the
execution of your proxy, please call. 1-887-388-2844.
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