<PAGE>
As filed with the Securities and Exchange Commission on May 1, 1996
1933 Act Registration No. 33-10438
1940 Act Registration No. 811-4919
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-lA
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
Pre-Effective Amendment No. [ ]
----
Post-Effective Amendment No. 23 [ X ]
----
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. 22
----
(Check appropriate box or boxes.)
PAINEWEBBER SERIES TRUST
(Exact name of registrant as specified in charter)
1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 713-2000
DIANNE E. O'DONNELL, Esq.
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)
Copies to:
ELINOR W. GAMMON, Esq.
Kirkpatrick & Lockhart LLP
Second Floor
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036-1800
Telephone: (202) 778-9000
It is proposed that this filing will become effective:
[___] Immediately upon filing pursuant to Rule 485(b)
[___] On _________________ pursuant to Rule 485(b)
[ X ] 60 days after filing pursuant to Rule 485(a)(i)
[___] On _________________ pursuant to Rule 485(a)(i)
[___] 75 days after filing pursuant to Rule 485(a)(ii)
[___] On _________________ pursuant to Rule 485(a)(ii)
If appropriate, check the following box:
[___] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Registrant has filed a declaration pursuant to Rule 24f-2 under the Investment
Company Act of 1940 and filed the notice required by such Rule for its most
recent fiscal year on February 28, 1996.
<PAGE>
PaineWebber Series Trust
Contents of Registration Statement
This registration statement consists of the following papers and documents:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheet
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
PaineWebber Series Trust
Form N-1A Cross Reference Sheet
<TABLE>
<CAPTION>
Part A Item No.
and Caption Prospectus Caption
--------------- ------------------
<S> <C>
1. Cover Page....................... Cover Page
2. Synopsis......................... Not Applicable
3. Condensed Financial
Information...................... Financial Highlights
4. General Description of
Registrant....................... The Fund, Its Investment Objectives
and Policies; Description of
Securities and Investment
Techniques; General Information
5. Management of the Fund........... Management; General Information
6. Capital Stock and
Other Securities................. Cover Page; Dividends, Other
Distributions and Federal Tax;
General Information
7. Purchase of Securities
Being Offered.................... Purchases, Redemptions and Exchanges;
Valuation of Shares
8. Redemption or
Repurchase....................... Purchases, Redemptions and Exchanges
9. Pending Legal
Proceedings...................... Not Applicable
<CAPTION>
Part B Item No. Statement of Additional
and Caption Information Caption
--------------- -----------------------
<S> <C>
10. Cover Page....................... Cover Page
11. Table of Contents................ Table of Contents
12. General Information
and History...................... Not Applicable
</TABLE>
<PAGE>
<TABLE>
<S> <C>
13. Investment Objective
and Policies..................... Investment Policies and
Restrictions; Hedging and Option
Income Strategies; Portfolio
Transactions
14. Management of the Fund........... Trustees and Officers
15. Control Persons and
Principal Holders of
Securities....................... Trustees and Officers
16. Investment Advisory
and Other Services............... Investment Advisory Services; Other
Information
17. Brokerage Allocation............. Portfolio Transactions
18. Capital Stock and
Other Securities................. Dividends and Other Distributions;
Other Information
19. Purchase, Redemption
and Pricing of Securities
Being Offered.................... Additional Purchase and Redemption
Information; Valuation of Shares
20. Tax Status....................... Taxes
21. Underwriters..................... Not Applicable
22. Calculation of
Performance Data................. Not Applicable
23. Financial Statements............. Financial Statements
</TABLE>
Part C
- ------
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
PAINEWEBBER SERIES TRUST
1285 Avenue of the Americas
New York, New York 10019
PaineWebber Series Trust ("Fund") is a professionally managed, open-end
investment company that offers the nine series of shares ("Portfolios") listed
below. All the Portfolios except the Global Income Portfolio are diversified,
and each has its own investment objective and policies. Shares of each
Portfolio are offered only to insurance company separate accounts that fund
certain variable contracts ("Contracts"). Advisory and administrative services
are provided to the Fund by Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins"), a wholly owned subsidiary of PaineWebber Incorporated
("PaineWebber"), and certain Portfolios, as indicated below, have sub-advisers
("Sub-Advisers").
* The MONEY MARKET PORTFOLIO seeks maximum current income consistent with
liquidity and conservation of capital. This Portfolio invests in high
grade money market instruments and repurchase agreements secured by such
instruments. An investment in the Portfolio is neither insured nor
guaranteed by the U.S. government. While the Portfolio seeks to maintain
a stable net asset value of $1.00 per share, there can be no assurance
that it will be able to do so.
* The HIGH GRADE FIXED INCOME PORTFOLIO primarily seeks current income
consistent with the preservation of capital and secondarily seeks
capital appreciation. This Portfolio invests primarily in debt
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities and high quality corporate debt securities and
mortgage-backed and asset-backed securities of private issuers.
* The STRATEGIC FIXED INCOME PORTFOLIO seeks total return consisting of
capital appreciation and income. This Portfolio invests primarily in
fixed income securities of varying maturities with a dollar-weighted
average portfolio duration between three and eight years. Pacific
Investment Management Company serves as sub-adviser to this Portfolio.
* The GLOBAL INCOME PORTFOLIO primarily seeks high current income and
secondarily seeks capital appreciation. This Portfolio invests
principally in high quality debt securities of foreign and U.S. issuers.
* The BALANCED PORTFOLIO seeks a high total return with low volatility.
This Portfolio invests primarily in a combination of equity securities,
investment grade debt obligations and money market instruments, based on
Mitchell Hutchins' assessment of the optimal allocation of the
Portfolio's assets.
* The GROWTH AND INCOME PORTFOLIO seeks current income and capital growth.
This Portfolio invests primarily in dividend-paying equity securities
believed by Mitchell Hutchins to have the potential for rapid earnings
growth.
* The GROWTH PORTFOLIO seeks long-term capital appreciation. This
Portfolio invests primarily in equity securities of companies that, in
the judgment of Mitchell Hutchins, have substantial potential for
capital growth.
* The AGGRESSIVE GROWTH PORTFOLIO seeks to maximize long-term capital
appreciation. This Portfolio invests primarily in the common stocks of
U.S. companies. Nicholas-Applegate Capital Management serves as sub-
adviser to this Portfolio.
* The GLOBAL GROWTH PORTFOLIO seeks long-term capital appreciation. This
Portfolio invests primarily in common stocks of companies based in the
United States, Europe, Japan and the Pacific Basin. GE Investment
Management Incorporated serves as the sub-adviser to this Portfolio.
This Prospectus concisely sets forth information about the Fund that a
prospective investor should know before investing. Investors are advised to
read this Prospectus and the applicable Contract prospectus and retain them for
future reference. A Statement of Additional Information dated May 1, 1996
(which is incorporated by reference herein) has been filed with the Securities
and Exchange Commission. The Statement of Additional Information can be
obtained without charge and further inquiries can be made by contacting the
Fund or your PaineWebber investment executive or by calling toll free 1-800-
986-0088.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 1996.
PW 1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Financial Highlights...................................................... PW 3
The Fund, Its Investment Objectives and Policies.......................... PW 10
Description of Securities and Investment Techniques....................... PW 15
Purchases, Redemptions and Exchanges...................................... PW 25
Dividends, Other Distributions and Federal Income Tax..................... PW 25
Valuation of Shares....................................................... PW 27
Management................................................................ PW 27
General Information....................................................... PW 31
Appendix A................................................................ PW 32
Appendix B................................................................ PW 35
</TABLE>
PW 2
<PAGE>
FINANCIAL HIGHLIGHTS
The tables below provide selected per share data and ratios for one share of
each Portfolio during the periods shown. This information is supplemented by
the financial statements and accompanying notes appearing in the Fund's Annual
Report to Shareholders for the fiscal year ended December 31, 1995, which are
incorporated by reference into the Statement of Additional Information. The
financial statements and notes, as well as the information in the tables
appearing below insofar as it relates to the five years in the period ended
December 31, 1995, have been audited by Ernst & Young LLP, independent
auditors, whose report thereon is also included in the Annual Report to
Shareholders. Further information about the performance of each Portfolio is
also included in the Annual Report to Shareholders, which may be obtained
without charge. The information appearing below for periods prior to the year
ended December 31, 1991 also has been audited by Ernst & Young LLP, whose
reports thereon were unqualified.
The financial highlights information pertains to the Portfolios of the Fund
and does not reflect charges related to the separate account. You should refer
to the appropriate separate account prospectus for additional information
regarding such charges.
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
-------------------------------------------------------------------------------------
FOR THE
PERIOD
MAY 4,
FOR THE YEARS ENDED DECEMBER 31, 1987+ TO
------------------------------------------------------------------- DECEMBER 31,
1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning
of period.............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. 0.05 0.03 0.02 0.03 0.05 0.05 0.08 0.06 0.03
------- ------- ------- ------- ------- ------ ------ ------ ------
Dividends from net
investment income...... (0.05) (0.03) (0.02) (0.03) (0.05) (0.05) (0.08) (0.06) (0.03)
------- ------- ------- ------- ------- ------ ------ ------ ------
Net asset value, end of
period................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= ====== ====== ====== ======
Total investment
return(1).............. 5.22% 3.43% 2.45% 3.00% 5.00% 5.00% 8.00% 6.00% 3.40%
======= ======= ======= ======= ======= ====== ====== ====== ======
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000's)........ $21,974 $25,042 $15,468 $19,383 $20,249 $8,720 $4,367 $3,278 $2,974
Expenses to average net
assets**.............. 0.79% 0.88% 0.86% 0.81% 1.00% 2.02% 1.55% 1.56% 1.54%*
Net investment income
to average net
assets**.............. 5.23% 3.56% 2.43% 3.13% 4.92% 6.13% 7.62% 5.74% 5.40%*
</TABLE>
- --------
* Annualized.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends at net
asset value on the payable date, and a sale at net asset value on the last
day of each period reported. Total returns for periods less than one year
are not annualized.
** During certain periods presented above, Mitchell Hutchins agreed to
reimburse the Portfolio for a portion of its operating expenses and waived
all or a portion of its advisory fee. If such reimbursements and waivers
had not been made, the annualized ratio of expenses to average net assets
and the annualized ratio of net investment income to average net assets
would have been 2.04% and 6.11%, 2.17% and 6.99%, 2.36% and 4.94%, and
4.60% and 2.34%, respectively, for the years ending December 31, 1990, 1989
and 1988 and for the period ended December 31, 1987.
+ Commencement of operations.
PW 3
<PAGE>
<TABLE>
<CAPTION>
STRATEGIC FIXED INCOME PORTFOLIO
------------------------------------------------------------------
FOR THE
PERIOD
JULY 5,
FOR THE YEARS ENDED DECEMBER 31, 1989+ TO
---------------------------------------------------- DECEMBER 31,
1995 1994 1993 1992 1991 1990 1989
------- ------- ------- ------- ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 10.34 $ 11.93 $ 11.58 $ 11.61 $ 10.49 $10.17 $10.00
------- ------- ------- ------- ------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. 0.88 0.85 0.87 0.74 0.47 0.45 0.10
Net realized and
unrealized gains
(losses) from
investment
transactions.......... 1.03 (1.49) 0.48 0.05 1.12 0.32 0.17
------- ------- ------- ------- ------- ------ ------
TOTAL INCOME (LOSS) FROM
INVESTMENT OPERATIONS.. 1.91 (0.64) 1.35 0.79 1.59 0.77 0.27
------- ------- ------- ------- ------- ------ ------
DIVIDENDS AND
DISTRIBUTIONS FROM:
Net investment income.. (0.88) (0.85) (0.87) (0.74) (0.47) (0.45) (0.10)
Net realized gains on
investments........... (0.76) (0.10) (0.13) (0.08) -- -- --
------- ------- ------- ------- ------- ------ ------
TOTAL DIVIDENDS AND
DISTRIBUTIONS.......... (1.64) (0.95) (1.00) (0.82) (0.47) (0.45) (0.10)
------- ------- ------- ------- ------- ------ ------
Net asset value, end of
period................. $ 10.61 $ 10.34 $ 11.93 $ 11.58 $ 11.61 $10.49 $10.17
======= ======= ======= ======= ======= ====== ======
Total investment
return(1).............. 18.51% (5.34)% 11.66% 6.76% 15.17% 7.58% 2.70%
======= ======= ======= ======= ======= ====== ======
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000's)........ $13,741 $17,020 $22,354 $24,103 $15,690 $5,192 $1,294
Expenses to average net
assets**.............. 0.99% 0.89% 0.79% 0.76% 1.25% 1.55% 1.55%*
Net investment income
to average
net assets**.......... 6.35% 6.64% 6.13% 6.59% 6.43% 6.80% 6.17%*
Portfolio turnover...... 234% 54% 8% 23% 1% 66% 0%
</TABLE>
- --------
* Annualized.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
capital gain distributions at net asset value on the payable date, and a
sale at net asset value on the last day of each period reported. Total
returns for periods less than one year are not annualized.
** During certain periods presented above, Mitchell Hutchins agreed to
reimburse the Portfolio for a portion of its operating expenses and waived
all or a portion of its advisory fee. If such reimbursements and waivers
had not been made, the annualized ratio of expenses to average net assets
and the annualized ratio of net investment income (loss) to average net
assets would have been 1.28% and 6.40%, 3.14% and 5.20% and 13.87% and
(6.15)%, respectively, for the years ending December 31, 1991 and 1990, and
for the period ended December 31, 1989.
+ Commencement of operations.
PW 4
<PAGE>
<TABLE>
<CAPTION>
GLOBAL INCOME PORTFOLIO
---------------------------------------------------------------------------
FOR THE
PERIOD
MAY 1,
FOR THE YEARS ENDED DECEMBER 31, 1988+ TO
------------------------------------------------------------- DECEMBER 31,
1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 10.88 $ 11.72 $ 11.17 $ 11.65 $ 11.16 $ 10.19 $10.67 $10.00
------- ------- ------- ------- ------- ------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income
(loss) ............... (0.05) 0.97 0.96 0.80 0.75 0.52 0.94 0.28
Net realized and
unrealized gains
(losses) from
investment
transactions.......... 1.52 (1.60) 0.90 (0.65) 0.40 1.00 (0.22) 0.39
------- ------- ------- ------- ------- ------- ------ ------
TOTAL INCOME (LOSS) FROM
INVESTMENT OPERATIONS.. 1.47 (0.63) 1.86 0.15 1.15 1.52 0.72 0.67
------- ------- ------- ------- ------- ------- ------ ------
DIVIDENDS AND
DISTRIBUTIONS FROM/IN:
Net investment income.. (1.15) (0.21) (0.94) (0.56) (0.65) (0.52) (1.06) --
Excess of net
investment income..... -- -- (0.16) -- -- -- -- --
Net realized gains on
investments........... -- -- (0.21) (0.07) (0.01) (0.03) (0.14) --
------- ------- ------- ------- ------- ------- ------ ------
TOTAL DIVIDENDS AND
DISTRIBUTIONS.......... (1.15) (0.21) (1.31) (0.63) (0.66) (0.55) (1.20) --
------- ------- ------- ------- ------- ------- ------ ------
Net asset value, end of
period................. $ 11.20 $ 10.88 $ 11.72 $ 11.17 $ 11.65 $ 11.16 $10.19 $10.67
======= ======= ======= ======= ======= ======= ====== ======
Total investment
return(1).............. 13.58% (5.56)% 16.65% 1.29% 10.30% 14.92% 6.80% 6.70%
======= ======= ======= ======= ======= ======= ====== ======
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000's)........ $35,700 $52,688 $64,610 $63,172 $51,988 $30,778 $7,425 $7,298
Expenses to average net
assets**.............. 1.19% 1.17% 0.98% 1.07% 1.20% 1.72% 1.86% 1.86%*
Net investment income
to average net
assets**.............. 7.21% 7.23% 7.47% 7.20% 7.59% 8.64% 9.00% 6.35%*
Portfolio turnover ..... 160% 97% 69% 75% 14% 110% 32% 136%
</TABLE>
- --------
* Annualized.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each fiscal period reported, reinvestment of all dividends
and capital gain distributions at net asset value on the payable date, and
a sale at net asset value on the last day of each period reported. Total
returns for periods less than one year are not annualized.
** During certain periods presented above, Mitchell Hutchins agreed to
reimburse the Portfolio for a portion of its operating expenses and waived
all or a portion of its advisory fee. If such reimbursements and waivers
had not been made, the annualized ratio of expenses to average net assets
and the annualized ratio of net investment income to average net assets
would have been 1.75% and 8.61%, 2.59% and 8.27% and 3.30% and 4.91%,
respectively, for the years ended December 31, 1990 and 1989, and for the
period ended December 31, 1988.
+ Commencement of operations.
PW 5
<PAGE>
<TABLE>
<CAPTION>
BALANCED PORTFOLIO
(FORMERLY ASSET ALLOCATION PORTFOLIO)
----------------------------------------------------------------------------
FOR THE
PERIOD
JUNE 1,
FOR THE YEARS ENDED DECEMBER 31, 1988+ TO
-------------------------------------------------------------- DECEMBER 31,
1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning
of period....... $ 9.54 $ 11.95 $ 11.63 $ 11.39 $ 9.99 $ 10.37 $ 10.54 $ 10.00
------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM
INVESTMENT
OPERATIONS:
Net investment
income......... 0.35 0.30 0.33 0.35 0.47 0.65 0.66 0.28
Net realized and
unrealized
gains (losses)
from investment
transactions... 1.88 (1.44) 1.48 0.24 1.40 (0.38) 0.52 0.26
------- ------- ------- ------- ------- ------- ------- -------
TOTAL INCOME
(LOSS) FROM
INVESTMENT
OPERATIONS...... 2.23 (1.14) 1.81 0.59 1.87 0.27 1.18 0.54
------- ------- ------- ------- ------- ------- ------- -------
DIVIDENDS AND
DISTRIBUTIONS
FROM:
Net investment
income......... (0.35) (0.30) (0.33) (0.35) (0.47) (0.65) (0.94) --
Net realized
gains on
investments.... (0.72) (0.97) (1.16) -- -- -- (0.41) --
------- ------- ------- ------- ------- ------- ------- -------
TOTAL DIVIDENDS AND
DISTRIBUTIONS... (1.07) (1.27) (1.49) (0.35) (0.47) (0.65) (1.35) --
------- ------- ------- ------- ------- ------- ------- -------
Net asset value,
end of period... $ 10.70 $ 9.54 $ 11.95 $ 11.63 $ 11.39 $ 9.99 $ 10.37 $ 10.54
======= ======= ======= ======= ======= ======= ======= =======
Total investment
return(1)....... 23.27% (9.59)% 15.76% 5.18% 18.73% 2.63% 11.10% 5.40%
======= ======= ======= ======= ======= ======= ======= =======
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000's). $23,413 $23,263 $33,367 $38,583 $33,327 $25,681 $26,851 $22,845
Expenses to
average net
assets**....... 1.09% 1.03% 0.95% 0.93% 0.94% 1.48% 1.25% 1.24%*
Net investment
income to
average net
assets**....... 2.88% 2.30% 2.27% 3.11% 4.64% 5.71% 6.54% 6.11%*
Portfolio
turnover........ 171% 112% 60% 31% 101% 169% 230% 70%
<CAPTION>
GROWTH AND INCOME PORTFOLIO
-----------------------------------------
FOR THE
FOR THE YEARS PERIOD
ENDED JANUARY 2,
DECEMBER 31, 1992+ TO
---------------------------- DECEMBER 31,
1995 1994 1993 1992
-------- --------- --------- ------------
<S> <C> <C> <C> <C>
Net asset value,
beginning
of period....... $ 9.16 $ 9.87 $ 10.26 $ 10.00
-------- --------- --------- ------------
INCOME FROM
INVESTMENT
OPERATIONS:
Net investment
income......... 0.10 0.10 0.16 0.08
Net realized and
unrealized
gains (losses)
from investment
transactions... 2.70 (0.71) (0.39) 0.26
-------- --------- --------- ------------
TOTAL INCOME
(LOSS) FROM
INVESTMENT
OPERATIONS...... 2.80 (0.61) (0.23) 0.34
-------- --------- --------- ------------
DIVIDENDS AND
DISTRIBUTIONS
FROM:
Net investment
income......... (0.10) (0.10) (0.16) (0.08)
Net realized
gains on
investments.... (0.03) -- -- --
-------- --------- --------- ------------
TOTAL DIVIDENDS AND
DISTRIBUTIONS... (0.13) (0.10) (0.16) (0.08)
-------- --------- --------- ------------
Net asset value,
end of period... $ 11.83 $ 9.16 $ 9.87 $ 10.26
======== ========= ========= ============
Total investment
return(1)....... 30.52% (6.18)% (2.26)% 3.40%
======== ========= ========= ============
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000's). $14,797 $12,872 $16,281 $20,037
Expenses to
average net
assets**....... 1.37% 1.35% 1.12% 1.29%*
Net investment
income to
average net
assets**....... 0.94% 1.06% 1.37% 1.21%*
Portfolio
turnover........ 134% 150% 52% 14%
</TABLE>
- -------
* Annualized.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
capital gain distributions at net asset value on the payable date, and a
sale at net asset value on the last day of each period reported. Total
returns for periods less than one year are not annualized.
** During certain periods presented above, Mitchell Hutchins agreed to
reimburse the Balanced Portfolio (formerly Asset Allocation Portfolio) for
a portion of its operating expenses and waived all or a portion of its
advisory fee. If such reimbursements and waivers had not been made, the
annualized ratio of expenses to average net assets and the annualized ratio
of net investment income to average net assets would have been 1.50% and
5.69%, 1.39% and 6.40% and 1.44% and 5.91%, respectively, for the years
ending December 31, 1990 and 1989 and for the period ended December 31,
1988.
+ Commencement of operations.
PW 6
<PAGE>
<TABLE>
<CAPTION>
GROWTH PORTFOLIO
------------------------------------------------------------------------------------
FOR THE
PERIOD
MAY 4,
FOR THE YEARS ENDED DECEMBER 31, 1987+ TO
---------------------------------------------------------------------- DECEMBER 31,
1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning
of period.............. $ 14.56 $ 18.06 $ 15.68 $ 14.92 $ 10.57 $ 11.66 $10.38 $ 8.76 $10.00
------- ------- ------- ------- ------- ------- ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. 0.04 0.01 -- 0.11 0.10 0.14 0.09 0.21 0.09
Net realized and
unrealized gains
(losses) from
investment
transactions.......... 4.68 (2.13) 3.08 0.76 4.35 (1.09) 3.90 1.41 (1.24)
------- ------- ------- ------- ------- ------- ------ ------ ------
TOTAL INCOME (LOSS) FROM
INVESTMENT OPERATIONS.. 4.72 (2.12) 3.08 0.87 4.45 (0.95) 3.99 1.62 (1.15)
------- ------- ------- ------- ------- ------- ------ ------ ------
DIVIDENDS AND
DISTRIBUTIONS FROM:
Net investment income.. (0.08) (0.01) -- (0.11) (0.10) (0.14) (0.30) -- (0.09)
Net realized gains on
investments........... (1.63) (1.37) (0.70) -- -- -- (2.41) -- --
------- ------- ------- ------- ------- ------- ------ ------ ------
TOTAL DIVIDENDS AND
DISTRIBUTIONS.......... (1.71) (1.38) (0.70) (0.11) (0.10) (0.14) (2.71) -- (0.09)
------- ------- ------- ------- ------- ------- ------ ------ ------
Net asset value, end of
period................. $ 17.57 $ 14.56 $ 18.06 $ 15.68 $ 14.92 $ 10.57 $11.66 $10.38 $ 8.76
======= ======= ======= ======= ======= ======= ====== ====== ======
Total investment
return(1).............. 32.50% (11.65)% 19.61% 5.83% 42.10% (8.15)% 38.44% 18.49% (11.52)%
======= ======= ======= ======= ======= ======= ====== ====== ======
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000's)........ $42,784 $39,135 $51,696 $46,479 $37,470 $12,283 $4,264 $ 802 $3,891
Expenses to average net
assets**.............. 1.02% 1.00% 0.92% 0.94% 1.13% 1.85% 1.76% 1.80% 1.79%*
Net investment income
to average net
assets**.............. 0.23% 0.04% 0.00% 0.78% 1.07% 1.90% 1.53% 0.63% 3.00%*
Portfolio turnover...... 41% 27% 35% 29% 28% 35% 68% 190% 2%
</TABLE>
- --------
* Annualized.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
capital gain distributions at net asset value on the payable date, and a
sale at net asset value on the last day of each period reported. Total
returns for periods less than one year are not annualized.
** During certain periods presented above, Mitchell Hutchins agreed to
reimburse the Portfolio for a portion of its operating expenses and waived
all or a portion of its advisory fee. If such reimbursements and waivers
had not been made, the annualized ratio of expenses to average net assets
and the annualized ratio of net investment income (loss) to average net
assets would have been 1.91% and 1.84%, 3.61% and (0.31)%, 3.58% and
(1.15)%, and 5.44% and (0.64)%, respectively, for the years ending December
31, 1990, 1989 and 1988 and for the period ended December 31, 1987.
+ Commencement of operations.
PW 7
<PAGE>
<TABLE>
<CAPTION>
GLOBAL GROWTH PORTFOLIO
-------------------------------------------------------------------------------------
FOR THE
PERIOD
MAY 4,
FOR THE YEARS ENDED DECEMBER 31, 1987+ TO
----------------------------------------------------------------------- DECEMBER 31,
1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning
of period.............. $ 12.44 $ 14.97 $ 11.10 $ 12.06 $ 11.76 $ 11.43 $10.49 $ 8.35 $10.00
------- ------- ------- ------- ------- ------- ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income
(loss)................ 0.01 (0.03) 0.03 0.10 0.23 0.19 0.07 0.07 0.05
Net realized and
unrealized gains
(losses) from
investment
transactions.......... (0.45) (1.76) 4.42 (1.01) 0.35 0.67 1.94 2.07 (1.59)
------- ------- ------- ------- ------- ------- ------ ------ ------
TOTAL INCOME (LOSS) FROM
INVESTMENT OPERATIONS.. (0.44) (1.79) 4.45 (0.91) 0.58 0.86 2.01 2.14 (1.54)
------- ------- ------- ------- ------- ------- ------ ------ ------
DIVIDENDS AND
DISTRIBUTIONS FROM/IN:
Net investment income.. -- (0.01) -- (0.05) (0.23) (0.19) (0.07) -- (0.05)
Excess of net
investment income..... -- -- -- -- -- -- (0.19) -- --
Net realized gains on
investments........... -- (0.73) (0.58) -- (0.05) (0.34) (0.81) -- (0.06)
------- ------- ------- ------- ------- ------- ------ ------ ------
TOTAL DIVIDENDS AND
DISTRIBUTIONS.......... 0.00 (0.74) (0.58) (0.05) (0.28) (0.53) (1.07) -- (0.11)
------- ------- ------- ------- ------- ------- ------ ------ ------
Net asset value, end of
period................. $ 12.00 $ 12.44 $ 14.97 $ 11.10 $ 12.06 $ 11.76 $11.43 $10.49 $ 8.35
======= ======= ======= ======= ======= ======= ====== ====== ======
Total investment
return(1).............. (3.54)% (11.94)% 40.02% (7.55)% 4.93% 7.53% 19.18% 25.63% (15.42)%
======= ======= ======= ======= ======= ======= ====== ====== ======
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000's)........ $28,507 $40,493 $38,035 $21,493 $24,308 $16,149 $3,806 $3,250 $3,135
Expenses to average net
assets**.............. 1.96% 1.48% 1.40% 1.46% 1.53% 2.07% 2.10% 2.08% 2.10%*
Net investment
income (loss) to
average
net assets**.......... 0.10% (0.13)% 0.38% 0.82% 2.12% 3.29% 0.71% 0.68% 1.09%*
Portfolio turnover...... 157% 175% 267% 127% 89% 120% 201% 33% 5%
</TABLE>
- --------
* Annualized.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each fiscal period reported, reinvestment of all dividends
and capital gain distributions at net asset value on the payable date, and
a sale at net asset value on the last day of each period reported. Total
returns for periods less than one year are not annualized.
** During certain periods presented above, Mitchell Hutchins agreed to
reimburse the Portfolio for a portion of its operating expenses and waived
all or a portion of its advisory fee. If such reimbursements and waivers
had not been made, the annualized ratio of expenses to average net assets
and the annualized ratio of net investment income (loss) to average net
assets would have been 2.19% and 3.17%, 4.35% and (1.54)%, 4.55% and
(1.79)% and 4.87% and (1.68)%, respectively, for the years ended December
31, 1990, 1989, and 1988 and for the period ended December 31, 1987.
+ Commencement of operations.
PW 8
<PAGE>
<TABLE>
<CAPTION>
AGGRESSIVE GROWTH HIGH GRADE FIXED INCOME
PORTFOLIO PORTFOLIO
--------------------------------- -------------------------------
FOR THE YEARS FOR THE PERIOD FOR THE YEARS FOR THE PERIOD
ENDED NOVEMBER 2, ENDED NOVEMBER 8,
DECEMBER 31, 1993+ TO DECEMBER 31, 1993+ TO
---------------- DECEMBER 31, -------------- DECEMBER 31,
1995 1994 1993 1995 1994 1993
------- ------- -------------- ------ ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 9.65 $ 9.95 $10.00 $ 8.71 $ 9.61 $10.00
------- ------- ------ ------ ------ ------
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income.. 0.03 0.01 0.01 0.56 0.26 0.02
Net realized and
unrealized gains
(losses) from
investment
transactions.......... 2.00 (0.30) (0.05) 0.79 (0.89) (0.39)
------- ------- ------ ------ ------ ------
TOTAL INCOME (LOSS) FROM
INVESTMENT OPERATIONS.. 2.03 (0.29) (0.04) 1.35 (0.63) (0.37)
------- ------- ------ ------ ------ ------
Dividends from net
investment income...... (0.02) (0.01) (0.01) (0.57) (0.27) (0.02)
Distributions from net
realized gains from
investments............ (0.32) -- -- -- -- --
------- ------- ------ ------ ------ ------
Total dividends and
distributions.......... (0.34) (0.01) (0.01) (0.57) (0.27) (0.02)
------- ------- ------ ------ ------ ------
Net asset value, end of
period................. $ 11.34 $ 9.65 $ 9.95 $ 9.49 $ 8.71 $ 9.61
======= ======= ====== ====== ====== ======
Total investment
return(1).............. 21.04% (2.90)% (0.36)% 15.44% (6.56)% (3.73)%
======= ======= ====== ====== ====== ======
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000's)........ $17,660 $13,600 $2,814 $9,147 $7,638 $1,480
Expenses to average net
assets**.............. 1.29% 1.59% 0.00% 1.01% 1.56% 0.00%
Net investment income
to average net
assets**.............. 0.23% 0.07% 3.31%* 5.56% 4.61% 3.90%*
Portfolio turnover..... 119% 90% 0% 136% 36% 0%
</TABLE>
- --------
* Annualized.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
capital gain distributions at net asset value on the payable date, and a
sale at net asset value on the last day of each period reported. Total
returns for periods less than one year are not annualized.
** During the period ended December 31, 1993, Mitchell Hutchins agreed to
reimburse the Portfolios for all of their operating expenses and waived all
of their advisory fees. If such reimbursements and waivers had not been
made, the annualized ratio of expenses to average net assets and the
annualized ratio of net investment income (loss) to average net assets
would have been 12.28% and (8.97)%, and 23.52% and (19.62)%, respectively,
for the Aggressive Growth and High Grade Fixed Income Portfolios,
respectively.
+ Commencement of operations.
PW 9
<PAGE>
THE FUND, ITS INVESTMENT OBJECTIVES AND POLICIES
The Fund is a professionally managed mutual fund. The Fund offers nine
Portfolios, each of which represents a segregated, separately managed portfolio
of securities with its own investment objective, as set forth on page PW 1, and
its own investment policies, which are summarized on page PW 1 and set forth in
more detail below. There can be no assurance that any Portfolio's investment
objective will be met. The Global Income Portfolio is managed as a non-
diversified investment company; the other Portfolios are all managed as
diversified investment companies.
Shares of each Portfolio are offered only to insurance company separate
accounts that fund the Contracts. An insurance company separate account's
interest is limited to the Portfolio(s) in which the separate account invests.
Separate accounts may purchase or redeem shares at net asset value without any
sales or redemption charge. Fees and charges imposed by the separate account,
however, will affect the actual return to the holder of a Contract. A separate
account may also impose certain restrictions or limitations on the allocation
of purchase payments or Contract value to one or more Portfolios, and not all
Portfolios may be available in connection with a particular Contract.
Prospective investors should consult the applicable Contract prospectus for
information regarding fees and expenses of the Contract and separate account
and any applicable restrictions or limitations.
Shares of all the Portfolios are offered to the separate account of PaineWebber
Life Insurance Company. Shares of the Portfolios other than High Grade Fixed
Income Portfolio and Aggressive Growth Portfolio also are offered to the
separate accounts of American Republic Insurance Company and American Benefit
Life Insurance Company and shares of any or all of the Portfolios may be
offered to the separate accounts of other unaffiliated insurance companies
("shared funding"). Shares of the Portfolios may serve as the underlying
investments for both annuity and life insurance Contracts ("mixed funding").
Due to differences in tax treatment or other considerations, the interests of
various Contract owners might at some time be in conflict. The Fund currently
does not foresee any such conflict. However, the Fund's board of trustees
intends to monitor events to identify any material irreconcilable conflict that
may arise and to determine what action, if any, should be taken in response to
such conflict. If such a conflict were to occur, one or more insurance
companies' separate accounts might be required to withdraw its investments in
one or more Portfolios. This might force a Portfolio to sell securities at
disadvantageous prices.
The MONEY MARKET PORTFOLIO invests in high grade money market instruments, with
remaining maturities of 13 months or less, and repurchase agreements secured by
such instruments and maintains a dollar-weighted average portfolio maturity of
90 days or less. These instruments include (1) U.S. government securities
(which may or may not be backed by the full faith and credit of the United
States), (2) obligations (including certificates of deposit, bankers'
acceptances, time deposits maturing in seven days or less and similar
obligations) of U.S. banks, including foreign branches of domestic banks and
domestic branches of foreign banks, having total assets in excess of $1.5
billion at the time of purchase, (3) interest-bearing savings deposits in U.S.
commercial and savings banks having total assets of $1.5 billion or less,
provided that the principal amounts at each such bank are fully insured by the
Federal Deposit Insurance Corporation and the aggregate amount of such deposits
(plus interest earned) does not exceed 5% of the Portfolio's asset value and
(4) commercial paper and other short-term corporate obligations including
variable and floating rate securities and participation interests.
Participation interests are pro rata interests in securities held by others.
The commercial paper and other short-term corporate obligations purchased by
the Money Market Portfolio consist only of obligations that Mitchell Hutchins
determines, pursuant to procedures adopted by the Fund's board of trustees,
present minimal credit risks and are either (1) rated in the highest short-term
rating category by at least two nationally recognized statistical rating
organizations ("NRSROs"), (2) rated in the highest short-term rating category
by a single NRSRO if
PW 10
<PAGE>
only that NRSRO has assigned the obligations a short-term rating or (3)
unrated, but determined by Mitchell Hutchins to be of comparable quality
("First Tier Securities"). The Money Market Portfolio generally may invest no
more than 5% of its total assets in the securities of a single issuer (other
than securities issued by the U.S. government, its agencies or
instrumentalities).
The HIGH GRADE FIXED INCOME PORTFOLIO invests in U.S. government securities,
which include U.S. Treasury obligations and obligations issued or guaranteed by
U.S. government agencies or instrumentalities, including mortgage-backed
securities. The Portfolio may also invest in corporate debt securities,
including corporate bonds, debentures and non-convertible fixed income
preferred stocks, and may invest in mortgage- and asset-backed securities of
private issuers. The Portfolio will invest only in those debt securities of
private issuers that are, at the time of purchase, rated within one of the two
highest grades assigned by Standard & Poor's Ratings Services ("S&P") or
Moody's Investors Service Inc. ("Moody's"), except that the Portfolio may
invest up to 35% of its total assets in investment grade debt securities that
are rated at the time of purchase lower than the two highest grades assigned by
S&P or Moody's. The Portfolio may invest in debt securities that are assigned
comparable ratings by another NRSRO and may invest in unrated debt securities
that Mitchell Hutchins determines are of comparable quality to rated securities
in which the Portfolio may invest. The Portfolio may invest up to 15% of its
total assets in U.S. dollar-denominated bonds sold in the United States by
foreign issuers if the securities are traded on recognized U.S. exchanges or in
the U.S. over-the-counter ("OTC") market. The Portfolio will not invest more
than 25% of its total assets in mortgage- and asset-backed securities of
private issuers. No more than 55% of the total assets of the Portfolio may be
represented by U.S. Treasury obligations to assure the Portfolio's compliance
with the diversification requirements imposed by the Internal Revenue Code on
segregated asset accounts used to fund variable annuity contracts. Mitchell
Hutchins will seek to vary the average maturity of the Portfolio's securities
depending on Mitchell Hutchins' perception of future interest rate movements,
so that the average maturity will be shortened when Mitchell Hutchins believes
that interest rates may rise and will be lengthened when Mitchell Hutchins
anticipates a decline in interest rates.
The STRATEGIC FIXED INCOME PORTFOLIO invests in a portfolio of fixed income
securities of varying maturities with a dollar-weighted average portfolio
duration between three and eight years. Portfolio holdings will be invested in
areas of the bond market (based on quality, sector, coupon or maturity) that
its Sub-Adviser, Pacific Investment Management Company ("PIMCO"), believes to
be relatively undervalued. Under normal circumstances, the Portfolio invests at
least 65% of its assets in fixed income securities, which include obligations
issued or guaranteed by the U.S. government, its agencies and
instrumentalities, corporate and other debt obligations, convertible
securities, mortgage- and asset-backed securities, obligations of foreign
governments or their subdivisions, agencies or instrumentalities, obligations
of supranational and quasi-governmental entities, commercial paper,
certificates of deposit, money market instruments, foreign currency exchange-
related securities and loan participations and assignments. The Portfolio may
invest up to 35% of its total assets in privately issued mortgage-related
securities. All of the securities purchased for the Portfolio will be
investment grade, except that the Portfolio may invest up to 20% of its total
assets in securities rated below investment grade, but rated at least B by S&P
or Moody's assigned a comparable rating by another nationally recognized
statistical ratings service ("NRSRO") or, if unrated, determined by the Sub-
Adviser to be of comparable quality. Securities rated below investment grade
are commonly known as "junk bonds." The Portfolio may invest up to 20% of its
total assets in a combination of U.S. dollar-denominated debt of any foreign
issuer, Yankee bonds, Eurodollar bonds and debt securities denominated in
foreign currencies, except that not more than 10% of the Portfolio's total
assets shall be invested in debt securities denominated in foreign currencies.
Yankee bonds are U.S. dollar-denominated obligations of foreign issuers and
Eurodollar bonds are U.S. dollar-denominated obligations of domestic issuers
that are held outside the United States, primarily in Europe.
PW 11
<PAGE>
The GLOBAL INCOME PORTFOLIO invests principally in high quality debt securities
of foreign and U.S. issuers. Debt securities will be considered high quality if
they are assigned one of S&P's or Moody's two highest ratings. The Portfolio
may invest in debt securities that are assigned comparable ratings by another
NRSRO and may invest in unrated debt securities that Mitchell Hutchins
determines are of comparable quality to rated securities in which the Portfolio
may invest. Normally, at least 65% of the Portfolio's total assets are invested
in high quality debt securities, denominated in foreign currencies or U.S.
dollars, that are issued or guaranteed by foreign and U.S. governments or their
agencies, instrumentalities or political subdivisions or by supranational
organizations such as the International Bank for Reconstruction and Development
("World Bank"), or that are issued by foreign and U.S. companies, banks and
bank holding companies. Such issuers will be located in at least five of the
following countries: Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Hong Kong, Ireland, Italy, Japan, the Netherlands, New
Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, Thailand, the
United Kingdom and the United States. No more than 20% of the Portfolio's total
assets will be invested in securities of issuers located in any one country,
except that the Portfolio may invest up to 35% of its total assets in
securities of issuers located in any one of the following countries: Australia,
Canada, France, Germany, Japan and the United Kingdom. There is no limit on the
amount of assets that may be invested in securities of U.S. issuers. Mitchell
Hutchins expects that normally more than 50% of the Portfolio's total assets
will be invested in U.S. and foreign government securities in order to minimize
credit risk and to capitalize on opportunities that historically have been
presented by, and are perceived to exist today with respect to, such
instruments. Up to 35% of the Portfolio's total assets may be invested in debt
securities rated below the two highest grades assigned by a NRSRO. Within this
35% limitation, the Portfolio may invest up to 20% of its total assets in
sovereign debt securities rated below investment grade but no lower than BB by
S&P or Ba by Moody's or, in the case of such securities assigned a commercial
paper rating, no lower than B by S&P. Mitchell Hutchins will purchase
securities rated below investment grade for the Portfolio only when it
concludes that the anticipated return to the Portfolio on such investment
warrants exposure to the additional level of risk. Fundamental economic
strength, credit quality and currency and interest rate trends are the
principal determinants of the various country, geographic and industry sector
weightings within the Portfolio. Up to 5% of the Portfolio's total assets may
be invested in debt securities convertible into equity, although the Portfolio
does not expect to convert such securities into equity or hold them as equity
upon conversion under normal circumstances.
The Global Income Portfolio is "non-diversified," as that term is defined in
the Investment Company Act of 1940 ("1940 Act"), but intends to continue to
qualify as a "regulated investment company" for federal income tax purposes.
This means, in general, that although more than 5% of the Portfolio's total
assets may be invested in the securities of one issuer (including a foreign
government), at the close of each quarter of the Portfolio's taxable year the
aggregate amount of such holdings may not exceed 50% of the value of its total
assets, and no more than 25% of the value of its total assets may be invested
in the securities of a single issuer. To the extent that the Portfolio at times
may hold the securities of a smaller number of issuers than if it were
"diversified" (as defined in the 1940 Act), the Portfolio will at such times be
subject to greater risk with respect to its portfolio securities than a fund
that invests in a broader range of securities, because changes in the financial
condition or market assessments of a single issuer may cause greater
fluctuations in the Portfolio's total return and the net asset value of its
shares.
PW 12
<PAGE>
The BALANCED PORTFOLIO invests primarily in a combination of equity securities,
investment grade debt obligations and money market instruments, based on
Mitchell Hutchins' assessment of the optimal allocation of the Portfolio's
assets. The Portfolio seeks to maintain a dollar-weighted average maturity for
its fixed income investments (comprised of debt securities and money market
instruments) of three to ten years. Under normal conditions, at least 25% of
the Portfolio's assets are invested in debt obligations, including money market
instruments. Mitchell Hutchins believes that capital market returns reflect the
consensus expectations for key economic variables, such as interest rates,
profit growth and inflation, and that superior performance can be obtained by
reallocating assets from time to time before changes in the consensus outlook
have been fully discounted by the market. To implement this strategy, Mitchell
Hutchins regularly surveys market participants and generates a consensus
forecast of economic variables affecting returns on equity, fixed income and
money market investments. Mitchell Hutchins then applies fundamental valuation
techniques to the consensus data to determine what it believes is the optimal
asset allocation for the Portfolio. Portfolio managers specializing in each
asset class then select specific securities for their allocated portions of the
portfolio. Mitchell Hutchins regularly monitors market outlooks and changes
asset allocations when there are significant changes in expected returns.
Equity Securities. In selecting equity securities for the Portfolio, Mitchell
Hutchins follows a disciplined methodology under which stocks from a universe
of approximately 2,000 companies are ranked utilizing quantitative measures of
value, earnings and price momentum in the context of Mitchell Hutchins'
economic forecast. Stocks are selected for the Portfolio based on fundamental
analysis of the highest ranking stocks.
Debt Securities. The Portfolio's investments in debt securities are based on
analyses of the maturity structure and the risk structure (comparing yields on
U.S. Treasury securities to yields on riskier types of debt securities). The
Portfolio may invest in a broad range of investment grade bonds, securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities,
including mortgage-backed securities, and other fixed income securities. The
maturity of a mortgage-backed security is deemed to be its effective life
(i.e., the average time in which it is expected that the principal amount of
the security will be repaid), as estimated by Mitchell Hutchins based upon
scheduled principal amortization and an anticipated rate of principal
prepayments, which, in turn, is based upon past prepayment patterns, prevailing
interest rates and other factors. The effective life of a mortgage-backed
security generally is substantially shorter than its stated maturity.
The Portfolio also may invest in convertible securities rated below investment
grade but rated at least B by S&P or Moody's, comparably rated by another NRSRO
or, if unrated, determined by Mitchell Hutchins to be of comparable quality,
provided that the Portfolio will not do so if, as a result, more than 10% of
its total assets will be invested in non-investment grade convertible
securities. Securities rated below investment grade are commonly known as "junk
bonds."
Money Market Instruments. The Portfolio may invest in high grade money market
instruments, which are debt securities with maturities of 13 months or less.
Such instruments will be chosen by Mitchell Hutchins based on its judgment of
their utility in furthering the Portfolio's investment objective. For a more
detailed description of the money market instruments in which the Portfolio's
invests, see the Statement of Additional Information.
The Portfolio may invest in U.S. dollar-denominated securities of foreign
issuers that are traded on recognized U.S. exchanges or in the U.S. OTC market.
PW 13
<PAGE>
The GROWTH AND INCOME PORTFOLIO, under normal circumstances, invests at least
65% of its total assets in dividend-paying equity securities (common and
preferred stocks) believed by Mitchell Hutchins to have the potential for rapid
earnings growth. In managing the Portfolio, Mitchell Hutchins follows a
disciplined methodology under which stocks from a universe of approximately
2,000 companies are ranked utilizing quantitative measures of value, earnings
and price momentum in the context of Mitchell Hutchins' economic forecast.
Stocks are selected for the Portfolio based on fundamental analysis of the
highest ranking stocks. The Portfolio may invest up to 35% of its total assets
in equity securities not meeting the above criteria, as well as convertible
securities, U.S. government securities, investment grade corporate debt
securities and money market securities. The Portfolio is permitted to invest up
to 10% of its total assets in convertible securities rated below investment
grade but no lower than B by S&P or Moody's, comparably rated by another NRSRO
or, if unrated, determined by Mitchell Hutchins to be of comparable quality.
The Portfolio will invest in instruments other than equity securities when, in
the opinion of Mitchell Hutchins, their projected total return is equal to or
greater than that of equity securities or when such holdings might reduce the
volatility of its portfolio. The Portfolio may invest up to 25% of its total
assets in U.S. dollar-denominated securities of foreign issuers that are traded
on recognized U.S. exchanges or in the U.S. OTC market.
Over the past 65 years, the total return of equity investments, as measured by
the Standard & Poor's 500 Composite Stock Price Index ("S&P 500"), has exceeded
the inflation rate, as measured by the Consumer Price Index, as well as total
return on long-term Treasury bonds, long-term corporate bonds and short-term
Treasury bills. However, year-to-year fluctuations in each of these indices and
instruments have been significant, and total return for the S&P 500 for some
periods has been negative. There can be no assurance that this trend will
continue, and the Portfolio performance may be better or worse than that of the
S&P 500.
The GROWTH PORTFOLIO invests primarily in equity securities (common and
preferred stocks and securities convertible into common or preferred stocks)
issued by companies that, in the judgment of Mitchell Hutchins, have
substantial potential for capital growth. In selecting equity securities for
investment by the Portfolio, Mitchell Hutchins considers all of those factors
it believes affect potential for capital appreciation, including an issuer's
current and projected revenues, earnings, cash flow and assets, as well as
general market conditions in relevant industries. Under normal circumstances,
at least 65% of the Portfolio's total assets is invested in equity securities.
For potential capital appreciation (when, for instance, Mitchell Hutchins
anticipates that market interest rates may decline or credit factors or ratings
affecting particular issues may improve), the Portfolio's investment policies
also permit investment of up to 35% of the Portfolio's total assets in
investment grade debt securities. The Portfolio's investments in equity
securities may include investments of up to 35% of its total assets in
convertible debt securities that are rated below investment grade but no lower
than B by S&P or Moody's, comparably rated by another NRSRO or, if unrated,
determined by Mitchell Hutchins to be of comparable quality. Consistent with
its investment objective, the Portfolio may also invest up to 25% of its total
assets in U.S. dollar-denominated securities of foreign issuers if the
securities are traded on recognized U.S. exchanges or in the U.S. OTC market.
The AGGRESSIVE GROWTH PORTFOLIO invests primarily in common stocks of U.S.
companies the assets and stock prices of which are expected by the Portfolio's
Sub-Adviser, Nicholas-Applegate Capital Management ("Nicholas-Applegate"), to
grow faster than the average rate of companies in the S&P 500. Companies in
which the Portfolio invests are diversified over a cross-section of industries
and may be growth companies, cyclical companies or companies believed to be
undergoing a basic change in operations or markets which, in the opinion of
Nicholas-Applegate, would result in a significant improvement in earnings. The
securities of such companies may be subject to more volatile market movements
than securities of larger, more established companies. The Portfolio is not
restricted to investments in companies of any particular size.
PW 14
<PAGE>
Under normal market conditions, the Aggressive Growth Portfolio invests at
least 75% of its total assets in common stocks. The Portfolio may invest up to
25% of its total assets in preferred and convertible securities issued by
similar growth companies, investment grade corporate debt securities, and
securities issued or guaranteed by the U.S. government, its agencies and
instrumentalities.
In making decisions with respect to common stocks for the Aggressive Growth
Portfolio, Nicholas-Applegate uses a proprietary investment methodology that
consists of investment techniques and processes designed to identify companies
with attractive earnings growth potential and to evaluate their investment
prospects.
The Aggressive Growth Portfolio may invest up to 25% of its total assets in
U.S. dollar-denominated securities of foreign issuers that are traded on
recognized U.S. exchanges or in the U.S. OTC market.
The GLOBAL GROWTH PORTFOLIO invests primarily in the common stocks of companies
based in the United States, Europe, Japan and the Pacific Basin. Under normal
conditions, at least 65% of the Portfolio's total assets is invested in common
stocks and securities convertible into common stocks. The Portfolio will at all
times hold securities of issuers located in at least five countries and will
invest no more than 20% of its total assets in issuers located in any single
country outside the United States, except that the Portfolio may invest up to
35% of its total assets in issuers located in Japan. The Portfolio's Sub-
Adviser, GE Investment Management Incorporated ("GEIM"), seeks to identify
companies that have potential for growth and whose value has not been fully
recognized by the marketplace. GEIM concentrates primarily on medium to large-
size companies that it believes meet this undervalued growth criterion. The
Portfolio may also hold other types of securities, including non-convertible
investment grade corporate debt securities, government and money market
securities of U.S. and foreign issuers, and cash (foreign currencies or U.S.
dollars), in such proportions as, in the opinion of GEIM, prevailing market,
economic or political conditions warrant.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
U.S. GOVERNMENT SECURITIES. The High Grade Fixed Income Portfolio, Strategic
Fixed Income Portfolio, Global Income Portfolio and Balanced Portfolio are
authorized to invest a substantial portion of their assets in U.S. government
securities and the other Portfolios may invest in U.S. government securities
consistent with their investment objectives. The U.S. government securities in
which the Portfolios may invest include direct obligations of the U.S.
government (such as Treasury bills, notes and bonds) and obligations issued by
U.S. government agencies and instrumentalities, including securities that are
backed by the full faith and credit of the U.S. government (such as Government
National Mortgage Association ("Ginnie Mae") certificates) and securities that
are supported primarily or solely by the creditworthiness of the issuer (such
as securities of the Federal National Mortgage Association ("Fannie Mae"), the
Federal Home Loan Mortgage Corporation ("Freddie Mac") and the Tennessee Valley
Authority). U.S. government securities are considered among the most
creditworthy of fixed income investments. Because of this, the yields available
from U.S. government securities are generally lower than the yields available
from corporate debt securities. Nevertheless, the values of U.S. government
securities (like those of fixed income securities generally) will change as
interest rates fluctuate.
MORTGAGE- AND ASSET-BACKED SECURITIES. Mortgage-backed securities represent
direct or indirect participations in, or are secured by and payable from,
mortgage loans secured by real property and include single- and multi-class
pass-through securities and collateralized mortgage obligations. Multi-class
pass-through securities and collateralized mortgage obligations are
collectively referred to herein as CMOs. U.S. government mortgage-backed
securities include mortgage-backed securities issued or guaranteed as to the
payment of principal and interest (but not as to market value) by
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Ginnie Mae, Fannie Mae or Freddie Mac. Other mortgage-backed securities are
issued by private issuers, generally originators of and investors in mortgage
loans, including savings associations, mortgage bankers, commercial banks,
investment bankers and special purpose entities (collectively, "Private
Mortgage Lenders"). Payments of principal and interest (but not the market
value) of such private mortgage-backed securities may be supported by pools of
mortgage loans or other mortgage-backed securities that are guaranteed,
directly or indirectly, by the U.S. government or one of its agencies or
instrumentalities, or they may be issued without any government guarantee of
the underlying mortgage assets but with some form of non-governmental credit
enhancement.
Asset-backed securities have structural characteristics similar to mortgage-
backed securities. However, the underlying assets are not first-lien mortgage
loans or interests therein, but include assets such as motor vehicle
installment sales contracts, other installment loan contracts, home equity
loans, leases of various types of real and personal property and receivables
from revolving credit (credit card) agreements. Such assets are securitized
through the use of trusts or special purpose corporations. Payments or
distributions of principal and interest on asset-backed securities may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution
unaffiliated with the issuer or other credit enhancements may be present.
Asset-backed securities are discussed further in the Statement of Additional
Information.
The yield characteristics of mortgage- and asset-backed securities differ from
those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently on mortgage- and
asset-backed securities, usually monthly, and that principal may be prepaid at
any time because the underlying mortgage loans or other assets generally may be
prepaid at any time. As a result, if a Portfolio purchases these securities at
a premium, a prepayment rate that is faster than expected will reduce yield to
maturity, while a prepayment rate that is slower than expected will have the
opposite effect of increasing yield to maturity. Conversely, if a Portfolio
purchases these securities at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will reduce, yield to
maturity. Amounts available for reinvestment are likely to be greater during a
period of declining interest rates and, as a result, are likely to be
reinvested at lower interest rates than during a period of rising interest
rates. Accelerated prepayments on securities purchased by a Portfolio at a
premium also impose a risk of loss of principal because the premium may not
have been fully recovered at the time the principal is repaid in full. The
market for privately issued mortgage- and asset-backed securities is smaller
and less liquid than the market for mortgage-backed securities of government
issuers.
CMO classes may be specially structured in a manner that provides any of a wide
variety of investment characteristics, such as yield, effective maturity and
interest rate sensitivity. As market conditions change, however, and
particularly during periods of rapid or unanticipated changes in market
interest rates, the attractiveness of the CMO classes and the ability of the
structure to provide the anticipated investment characteristics may be
significantly reduced. These changes can result in volatility in the market
value, and in some instances reduced liquidity, of the CMO class.
Certain classes of CMOs and other mortgage-backed securities are structured in
a manner that makes them extremely sensitive to changes in prepayment rates.
Interest-only ("IO") and principal-only ("PO") classes are examples of this.
IOs are entitled to receive all or a portion of the interest, but none (or only
a nominal amount) of the principal payments, from the underlying mortgage
assets. If the mortgage assets underlying an IO experience greater than
anticipated principal prepayments, then the total amount of interest payments
allocable to the IO class, and therefore the yield to investors, generally will
be reduced. In some instances, an investor in an IO may fail to recoup all of
his or her initial investment, even if the security is government issued or
guaranteed or is rated AAA or the equivalent. Conversely, PO classes are
entitled to receive all or a portion of the principal payments, but none of the
interest, from the underlying mortgage assets. PO classes are purchased
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at substantial discounts from par, and the yield to investors will be reduced
if principal payments are slower than expected. Some IOs and POs, as well as
other CMO classes, are structured to have special protections against the
effects of prepayments. These structural protections, however, normally are
effective only within certain ranges of prepayment rates and thus will not
protect investors in all circumstances.
Some CMO classes are structured to pay interest at rates that are adjusted in
accordance with a formula, such as a multiple or fraction of the change in a
specified interest rate index, so as to pay at a rate that will be attractive
in certain interest rate environments but not in others. For example, an
inverse floating rate CMO class pays interest at a rate that increases as a
specified interest rate index decreases but decreases as that index increases.
For other CMO classes, the yield may move in the same direction as market
interest rates--i.e. the yield may increase as rates increase and decrease as
rates decrease--but may do so more rapidly or to a greater degree. The market
value of such securities generally is more volatile than that of a fixed rate
obligation. Such interest rate formulas may be combined with other CMO
characteristics. For example, a CMO class may be an "inverse IO," on which the
holders are entitled to receive no payments of principal and are entitled to
receive interest at a rate that will vary inversely with a specified index or a
multiple thereof.
During 1994, the value and liquidity of many mortgage-backed securities
declined sharply due primarily to increases in interest rates. There can be no
assurance that such declines will not recur. The market value of certain
mortgage-backed securities, including IO and PO classes of mortgage-backed
securities and inverse floating rate securities, can be extremely volatile and
these securities may become illiquid. Mitchell Hutchins or the applicable Sub-
Adviser seeks to manage each Portfolio so that its volatility, taken as a
whole, is consistent with the Portfolio's investment objective. If Mitchell
Hutchins or the applicable Sub-Adviser incorrectly forecasts interest rate
changes or other factors that may affect the volatility of securities held by
the Portfolio, the Portfolio's ability to meet its investment objective may be
reduced.
See Appendix A to this Prospectus for more information concerning the types of
mortgage-backed securities in which the Portfolios may invest.
FOREIGN SECURITIES. The Global Growth and Global Income Portfolios invest a
substantial portion of their assets in foreign securities and the Strategic
Fixed Income Portfolio may invest up to 10% of its assets in securities
denominated in foreign currencies. In addition, all the Portfolios may invest
in U.S. dollar-denominated securities of foreign issuers. Accordingly, an
investment in any of these Portfolios involves risks relating to political,
social and economic developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign issuers and
markets are subject. These risks are greater with respect to the Global Growth
and Global Income Portfolios because a substantially greater portion of their
assets may be invested in such securities and because these Portfolios may
invest substantially in foreign securities that are denominated in foreign
currencies and traded outside the U.S. securities markets. These risks may
include expropriation, confiscatory taxation, withholding taxes on dividends
and interest, limitations on the use or transfer of Portfolio assets and
political or social instability or diplomatic developments. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position. Securities of many foreign companies may be less liquid and
their prices more volatile than securities of comparable U.S. companies. While
the Portfolios generally invest only in securities that are traded on
recognized exchanges or in OTC markets, from time to time foreign securities
may be difficult to liquidate rapidly without significantly depressing the
price of such securities. There may be less publicly available information
concerning foreign issuers of securities held by these Portfolios than is
available concerning U.S. companies. Transactions in foreign securities may be
subject to less efficient settlement practices. Foreign securities trading
practices, including those involving securities settlement where Portfolio
assets
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may be released prior to receipt of payment, may expose a Portfolio to
increased risk in the event of a failed trade or the insolvency of a foreign
broker-dealer. Legal remedies for defaults and disputes may have to be pursued
in foreign courts, whose procedures differ substantially from those of U.S.
courts.
Because foreign securities ordinarily are denominated in currencies other than
the U.S. dollar (as are some securities of U.S. issuers), changes in foreign
currency exchange rates will affect a Portfolio's net asset value, the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and capital gain, if any, to be
distributed to shareholders by the Portfolio. If the value of a foreign
currency rises against the U.S. dollar, the value of a Portfolio's assets
denominated in that currency will increase; correspondingly, if the value of a
foreign currency declines against the U.S. dollar, the value of a Portfolio's
assets denominated in that currency will decrease. The exchange rates between
the U.S. dollar and other currencies are determined by supply and demand in the
currency exchange markets, international balances of payments, speculation and
other economic and political conditions. In addition, some foreign currency
values may be volatile and there is the possibility of governmental controls on
currency exchange or governmental intervention in currency markets. Any of
these factors could adversely affect these Portfolios.
The costs attributable to foreign investing that the Global Growth, Global
Income and Strategic Fixed Income Portfolios must bear frequently are higher
than those attributable to domestic investing. For example, the costs of
maintaining custody of securities in foreign countries exceed custodian costs
for domestic securities.
The Strategic Fixed Income, Global Income and the Global Growth Portfolios may
invest in securities of issuers located in emerging market countries. The risks
of investing in foreign securities may be greater with respect to securities of
issuers in, or denominated in the currencies of, emerging market countries. The
economies of emerging market countries generally are heavily dependent upon
international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade. Many emerging market countries have experienced substantial,
and in some periods extremely high, rates of inflation for many years.
Inflation and rapid fluctuations in inflation rates have had and may continue
to have very negative effects on the economies and securities markets of
certain emerging market countries. The securities markets of emerging market
countries are substantially smaller, less developed, less liquid and more
volatile than the securities markets of the U.S. and other developed countries.
Disclosure and regulatory standards in many respects are less stringent in
emerging market countries than in the U.S. and other major markets. There also
may be a lower level of monitoring and regulation of emerging markets and the
activities of investors in such markets, and enforcement of existing
regulations may be extremely limited. Investing in local markets, particularly
in emerging market countries, may require these Portfolios to adopt special
procedures, seek local government approvals or take other actions, each of
which may involve additional costs to the Portfolios. Certain emerging market
countries may also restrict investment opportunities in issuers in industries
deemed important to national interests.
FOREIGN GOVERNMENT SECURITIES. Foreign government securities generally consist
of obligations supported by national, state or provincial governments or
similar political subdivisions. Foreign government securities also include debt
obligations of supranational entities, which include international
organizations designated or supported by governmental entities to promote
economic reconstruction or development, international banking institutions and
related government agencies. Examples include the World Bank, the European Coal
and Steel Community, the Asian Development Bank and the InterAmerican
Development Bank.
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Foreign government securities also include debt securities of "quasi-
governmental agencies" and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). An example of a
multinational currency unit is the European Currency Unit ("ECU"). An ECU
represents specified amounts of the currencies of certain member states of the
European Union. Debt securities of quasi-governmental agencies are issued by
entities owned by either a national, state or equivalent government or are
obligations of a political unit that are not backed by the national
government's full faith and credit and general taxing powers. Foreign
government securities also include mortgage-related securities issued or
guaranteed by national, state or provincial governmental instrumentalities,
including quasi-governmental agencies.
FOREIGN BANK AND FOREIGN BRANCH INSTRUMENTS. The Money Market Portfolio may
invest in obligations of domestic branches of foreign banks and foreign
branches of domestic banks. The Global Income Portfolio may invest in these
instruments and also in obligations of bank holding companies and foreign
banks. The other Portfolios may invest in such securities consistent with their
investment objectives and policies. Such investments may involve risks that are
different from investments in obligations of U.S. branches of domestic banks.
These risks may include future unfavorable political and economic developments,
possible withholding taxes, seizure of foreign deposits, currency controls,
interest limitations or other governmental restrictions that might affect the
payment of principal or interest on the securities held by a Portfolio.
Additionally, there may be less publicly available information about foreign
banks and foreign branches of U.S. banks, as these institutions may not be
subject to the same regulatory requirements as domestic banks.
DEBT SECURITIES. The High Grade Fixed Income Portfolio, Strategic Fixed Income,
Global Income, Balanced, Growth and Income, Growth, Aggressive Growth and
Global Growth Portfolios all may invest a substantial portion of their assets
in debt securities rated within any one of the four highest grades assigned by
S&P or Moody's or assigned a comparable rating by another NRSRO (commonly
referred to as "investment grade debt securities"). Debt securities rated Baa
by Moody's or BBB by S&P are investment grade, although Moody's considers
securities rated Baa to have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity for such securities to make principal and interest payments than is
the case for higher grade debt securities. The Balanced, Growth and Income and
Growth Portfolios may invest in non-investment grade convertible debt
securities. The Strategic Fixed Income may invest in non-investment grade
convertible and non-convertible debt securities, and Global Income Portfolio
may invest in non-investment grade sovereign debt securities. Debt securities
rated below investment grade are deemed by these NRSROs to be predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal and may involve major risk exposures to adverse conditions. Such
securities are commonly referred to as "junk bonds." In the event that, due to
the downgrade of one or more debt securities, a Portfolio holds securities
rated below investment grade in an amount in excess of the percentage permitted
under these investment policies, the Portfolio will engage in an orderly
disposition of these securities to the extent necessary to reduce the
Portfolio's holdings to the specified percentage. All Portfolios are permitted
to purchase debt securities that are not rated by S&P, Moody's or another NRSRO
but that Mitchell Hutchins or the applicable Sub-Adviser determines to be of
comparable quality to that of rated securities in which such Portfolio may
invest. Such securities are included in the computation of any percentage
limitations applicable to the comparable rated securities.
The market value of debt securities generally varies inversely with interest
rate changes. Ratings of debt securities represent the rating agency's opinion
regarding their quality, are not a guarantee of quality and may be reduced
after a Portfolio has acquired the security. Mitchell Hutchins or the
applicable Sub-Adviser will consider such an event in determining whether the
Portfolio should continue to hold the security but the Portfolio is not
required to dispose of it. Credit ratings attempt to evaluate the safety of
principal and interest payments and do not evaluate the risks of fluctuations
PW 19
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in market value. Also, rating agencies may fail to make timely changes in
response to subsequent events, so that an issuer's financial condition may be
better or worse than the rating indicates.
Lower rated debt securities generally offer a higher current yield than that
available from higher grade issues, but they involve higher risks, in that they
are especially subject to adverse changes in general economic conditions and in
the industries in which the issuers are engaged, to changes in the financial
condition of the issuers and to price fluctuation in response to changes in
interest rates. During periods of economic downturn or rising interest rates,
highly leveraged issuers may experience financial stress which could adversely
affect their ability to make payments of principal and interest and increase
the possibility of default. In addition, such issuers may not have more
traditional methods of financing available to them, and may be unable to repay
debt at maturity by refinancing. The risk of loss due to default by such
issuers is significantly greater because such securities frequently are
unsecured and subordinated to the prior payment of senior indebtedness.
The market for lower rated securities has expanded rapidly in recent years, and
its growth paralleled a long economic expansion. In the past, the prices of
many lower rated debt securities declined substantially, reflecting an
expectation that many issuers of such securities might experience financial
difficulties. As a result, the yields on lower rated debt securities rose
dramatically, but such higher yields did not reflect the value of the income
stream that holders of such securities expected, but rather the risk that
holders of such securities could lose a substantial portion of their value as a
result of the issuers' financial restructuring or default. There can be no
assurance that such declines will not recur. The market for lower rated debt
securities generally is thinner and less active than that for higher quality
securities, which may limit a Portfolio's ability to sell such securities at
fair value in response to changes in the economy or the financial markets.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of lower rated securities,
especially in a thinly traded market.
DURATION. Duration is a measure of the expected life of a fixed income security
that was developed as a more precise alternative to the concept of "term to
maturity." Duration incorporates a bond's yield, coupon interest payments,
final maturity and call features into one measure. Duration is one of the
fundamental tools used by Mitchell Hutchins or a Sub-Adviser in selection of
debt securities for the Portfolios.
Traditionally, a debt security's "term to maturity" has been used as a proxy
for the sensitivity of the security's price to changes in interest rates (which
is the "interest rate risk" or "volatility" of the security). However, "term to
maturity" measures only the time until a debt security provides its final
payments, taking no account of the pattern of the security's payments prior to
maturity. Duration is a measure of the expected life of a fixed income security
on a present value basis. Duration takes the length of the time intervals
between the present time and the time that the interest and principal payments
are scheduled or, in the case of a callable bond, expected to be received, and
weights them by the present values of the cash to be received at each future
point in time. For any fixed income security with interest payments occurring
prior to the payment of principal, duration is always less than maturity. In
general, all other things being equal, the lower the stated or coupon rate of
interest of a fixed income security, the longer the duration of the security;
conversely, the higher the stated or coupon rate of interest of a fixed income
security, the shorter the duration of the security.
Futures contracts (sometimes referred to as "futures"), options and options on
futures have duration which in general, are closely related to the duration of
the securities which underlie them. Holding long futures or call option
positions (backed by a segregated account of cash and cash equivalents) will
lengthen a Portfolio's duration by approximately the same amount that selling
an equivalent amount of the underlying securities would.
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Short futures or put option positions have durations roughly equal to the
negative duration of the securities that underlie these positions, and have the
effect of reducing portfolio duration by approximately the same amount that
selling an equivalent amount of the underlying securities would.
There are some situations where even the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or
more years; however, their interest rate exposure corresponds to the frequency
of the coupon reset. Another example where the interest rate exposure is not
properly captured by duration is the case of mortgage pass-through securities.
The stated final maturity of such securities is generally 30 years, but current
prepayment rates are more critical in determining the securities' interest rate
exposure. In these and other similar situations, the sub-adviser will use more
sophisticated analytical techniques that incorporate the economic life of a
security into the determination of its interest rate exposure.
Duration allows Mitchell Hutchins or a Sub-Adviser to make certain predictions
as to the effect that changes in the level of interest rates will have on the
value of a Portfolio's investments. For example, when the level of interest
rates increases by 1%, a fixed income security having a positive duration of
three years generally will decrease in value by approximately 3%. Accordingly,
if Mitchell Hutchins or the Sub-Adviser calculates the duration of the
portfolio as being three years, it normally would expect the portfolio to
change in value by approximately 3% for every 1% change in the level of
interest rates. However, various factors, such as changes in anticipated
prepayment rates, qualitative considerations and market supply and demand, can
cause particular securities to respond somewhat differently to changes in
interest rates than indicated in the above example. Moreover, in the case of
mortgage-backed and other complex securities, duration calculations are
estimates and are not precise. This is particularly true during periods of
market volatility. Accordingly, the net asset value of a Portfolio's
investments may vary in relation to interest rates by a greater or lesser
percentage than indicated by the above example.
CONVERTIBLE SECURITIES. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged for a
prescribed amount of common or preferred stock of the same or a different
issuer within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest paid or accrued on
debt or dividends paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Convertible securities have
unique investment characteristics in that they generally (1) have higher yields
than common stocks, but lower yields than comparable non-convertible
securities, (2) are less subject to fluctuation in value than the underlying
stock because they have fixed income characteristics, and (3) provide the
potential for capital appreciation if the market price of the underlying common
or preferred stock increases. While no securities investment is without some
risk, investments in convertible securities generally entail less risk than the
issuer's common stock, although the extent to which such risk is reduced
depends in large measure upon the degree to which the convertible security
sells above its value as a fixed income security.
ZERO COUPON AND PAYMENT-IN KIND SECURITIES. High Grade Fixed Income, Strategic
Fixed Income, Global Income and Balanced Portfolios may invest in certain zero
coupon securities that are "stripped" U.S. Treasury notes and bonds. The
Strategic Fixed Income Portfolio also may invest in zero coupon securities of
corporate issuers and other securities that are issued with original issue
discount ("OID") and payment-in-kind ("PIK") securities. Federal tax law
requires that a holder of a security with OID accrue a portion of the OID on
the security as income each year, even though the holder may receive no
interest payment on the security during the year. Accordingly, although the
investing Portfolio will receive no payments on its zero coupon securities
prior to their maturity or disposition, it will have income attributable to
such securities. Similarly, while PIK securities may
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pay interest in the form of additional securities rather than cash, that
interest must be included in the annual income of Strategic Fixed Income
Portfolio.
Companies such as the Portfolios, which seek to qualify for pass-through
federal income tax treatment as regulated investment companies ("RIC"), must
distribute substantially all of their net investment income each year,
including non-cash income. Accordingly, each Portfolio will be required to
include in its dividends an amount equal to the income attributable to its zero
coupon, other OID and PIK securities. Those dividends will be paid from the
cash assets of a Portfolio or by liquidation of portfolio securities, if
necessary, at a time when the Portfolio otherwise might not have done so. Zero
coupon and PIK securities usually trade at a substantial discount from their
face or par value and will be subject to greater fluctuations of market value
in response to changing interest rates than debt obligations of comparable
maturities that make current distributions of interest in cash.
LENDING OF PORTFOLIO SECURITIES. Each Portfolio is authorized to lend up to 33
1/3% of the total value of its portfolio securities to broker-dealers or
institutional investors that Mitchell Hutchins or the applicable Sub-Adviser
deems qualified. Lending securities enables a Portfolio to earn additional
income, but could result in a loss or delay in recovering the Portfolio's
securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase
securities on a "when-issued" basis or may purchase or sell securities for
delayed delivery. In when-issued or delayed delivery transactions, delivery of
the securities occurs beyond normal settlement periods, but a Portfolio would
not pay for such securities or start earning interest on them until they are
delivered. However, when a Portfolio purchases securities on a when-issued or
delayed delivery basis, it immediately assumes the risks of ownership,
including the risk of price fluctuation. Failure by a counter party to deliver
a security purchased on a when-issued or delayed delivery basis may result in a
loss or missed opportunity to make an alternative investment. Depending on
market conditions, a Portfolio's when-issued and delayed-delivery purchase
commitments could cause its net asset value per share to be more volatile,
because such securities may increase the amount by which the Portfolio's total
assets, including the value of when-issued and delayed-delivery securities held
by the Portfolio, exceed its net assets.
REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements.
Repurchase agreements are transactions in which a Portfolio purchases
securities from a bank or recognized securities dealer and simultaneously
commits to resell the securities to the bank or dealer at an agreed-upon date
and price reflecting a market rate of interest unrelated to the coupon rate or
maturity of the purchased securities. Repurchase agreements carry certain risks
not associated with direct investments in securities, including possible
decline in the market value of the underlying securities and delays and costs
to a Portfolio if the other party to the repurchase agreement becomes
insolvent, each Portfolio intends to enter into repurchase agreements only with
banks and dealers in transactions believed by Mitchell Hutchins or the
applicable Sub-Adviser to present minimal credit risks in accordance with
guidelines established by the Fund's board of trustees.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. The Strategic Fixed Income and
Global Income Portfolio may enter into reverse repurchase agreements with banks
and broker-dealers. Such agreements involve the sale of securities held by the
Portfolio subject to the Portfolio's agreement to repurchase the securities at
an agreed-upon date and price. Such agreements are considered to be borrowings
and for the Global Income Portfolio may be entered into only for temporary
purposes. The market value of securities sold under reverse repurchase
agreements typically is greater than the proceeds of the sale, and accordingly,
the market value of the securities sold is likely to be greater than the value
of the securities in which the Portfolio invests those proceeds. Thus, reverse
repurchase agreements involve the risk that the buyer of the securities sold by
the Portfolio might be unable to deliver them when the Portfolio seeks to
repurchase. In the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, such buyer or its
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trustee or receiver may receive an extension of time to determine whether to
enforce the Portfolio's obligation to repurchase the securities and the
Portfolio's use of the proceeds of the reverse repurchase agreement may
effectively be restricted pending such decision.
The Strategic Fixed Income Portfolio may enter into dollar rolls, in which the
Portfolio sells mortgage-backed or other securities for delivery in the current
month and simultaneously contracts to repurchase substantially similar
securities on a specified future date. In the case of dollar rolls involving
mortgage-backed securities, the mortgage-backed securities that are repurchased
will be of the same type, and will have the same interest rate and maturity, as
those sold but generally will be supported by different pools of mortgages with
substantially similar prepayment characteristics. The Portfolio forgoes
principal and interest paid during the roll period on the securities sold in a
dollar roll, but the Portfolio is compensated by the difference between the
current sales price and the lower price for the future purchase as well as by
any interest earned on the proceeds of the securities sold. The Portfolio also
could be compensated through the receipt of fee income equivalent to a lower
forward price.
The dollar rolls and reverse repurchase agreements entered into by the
Strategic Fixed Income Portfolio normally will be arbitrage transactions in
which the Portfolio will invest the proceeds of the dollar roll or reverse
repurchase agreement in high quality securities that mature on or before the
settlement date on the related dollar roll or reverse repurchase agreement or
in repurchase agreements that mature in no more than seven days. Because the
Portfolio will invest the proceeds of its borrowings and will earn interest on
those investments, these transactions involve leverage. However, because the
borrowing proceeds are invested in short-term, high quality debt securities or
repurchase agreements, as described above, Mitchell Hutchins or the applicable
Sub-Adviser believes that such arbitrage transactions do not present the risks
to the Portfolio that are associated with other types of leverage.
Dollar rolls and reverse repurchase agreements are considered to be borrowings
and, accordingly, are subject to the respective Portfolio's limitations on
borrowings, which restricts the aggregate of such transactions (plus any other
borrowings) to 10% of the Global Income Portfolio's total assets (33 1/3% for
Strategic Fixed Income Fund). A Portfolio will not enter into dollar rolls or
reverse repurchase agreements, other than in arbitrage transactions as
described above, in an aggregate amount in excess of 5% of the Portfolio's
total assets. The Strategic Fixed Income Portfolio has no present intention to
enter into dollar rolls other than in such arbitrage transactions, and neither
Portfolio has any present intention to enter into reverse repurchase agreements
other than in such arbitrage transactions or for temporary or emergency
purposes.
HEDGING AND RELATED STRATEGIES. Except for the Money Market Portfolio, each
Portfolio may use options (both exchange-traded and OTC) and futures contracts
to attempt to enhance income and return and may attempt to reduce the overall
risk of its investments (hedge) by using options and futures contracts,
although the Aggressive Growth Portfolio does not expect to use these
instruments during the coming year. The Strategic Fixed Income, Global Income
and Global Growth Portfolios may also use forward currency contracts. A
Portfolio's ability to use these strategies may be limited by market
conditions, regulatory limits and tax considerations. Appendix B to this
Prospectus describes the hedging instruments that the Portfolios may use. The
Statement of Additional Information contains further information on these
strategies.
Each Portfolio eligible to use hedging and related income and return strategies
may write (sell) covered call and put options, buy call and put options on
securities in which it is authorized to invest and on stock indexes, sell stock
index or interest rate futures contracts and buy put and call options and write
covered call options on such futures contracts. The Strategic Fixed Income,
Global Income and Global Growth Portfolios each may write covered call options
and buy put and call options on foreign currencies, buy or sell foreign
currency futures contracts, buy put and call options and write
PW 23
<PAGE>
covered call options on such contracts. These Portfolios may enter into forward
currency contracts for the purchase or sale of a specified currency at a
specified future date either with respect to specific transactions or with
respect to portfolio positions. For example, when Mitchell Hutchins or the
applicable Sub-Adviser anticipates making a currency exchange transaction in
connection with the purchase or sale of a security, a Portfolio may enter into
a forward contract in order to set the exchange rate at which the transaction
will be made. A Portfolio also may enter into a forward contract to sell an
amount of a foreign currency approximating the value of some or all of the
Portfolio's securities positions denominated in such currency. A Portfolio may
use forward contracts in one currency or a basket of currencies to hedge
against fluctuations in the value of another currency when Mitchell Hutchins or
the applicable sub-adviser anticipates that there will be a correlation between
the two and may use forward currency contracts to shift a Portfolio's exposure
to foreign currency fluctuations from one country to another. The purpose of
entering into these contracts is to minimize the risk to a Portfolio from
adverse changes in the relationship between the U.S. dollar and foreign
currencies.
The High Grade Fixed Income, Strategic Fixed Income and Global Income
Portfolios may enter into interest rate protection transactions, including
interest rate swaps and interest rate caps, collars and floors, for hedging
purposes. For example, each Portfolio may enter into interest rate protection
transactions to preserve a return or spread on a particular investment or
portion of its portfolio or to protect against any increase in the price of
securities the Portfolio anticipates purchasing at a later date. The Portfolio
will enter into interest rate protection transactions only with banks and
recognized securities dealers believed by Mitchell Hutchins or the Sub-Adviser
to present minimal credit risks in accordance with guidelines established by
the Fund's board of trustees.
A Portfolio might not employ any of the strategies described above, and there
can be no assurance that any strategy used will succeed. If Mitchell Hutchins
or the Sub-Adviser incorrectly forecasts interest rates, market values or other
economic factors for a Portfolio, the Portfolio would be in a better position
had it not hedged at all. The use of these strategies involves certain special
risks, including (1) the fact that skills needed to use hedging instruments are
different from those needed to select the Portfolios' securities, (2) possible
imperfect correlation, or even no correlation, between price movements of
hedging instruments and price movements of the investments being hedged, (3)
the fact that, while hedging strategies can reduce the risk of loss, they can
also reduce the opportunity for gain, or even result in losses, by offsetting
favorable price movements in hedged investments and (4) the possible inability
of a Portfolio to purchase or sell a portfolio security at a time that
otherwise would be favorable for it to do so, or the possible need for a
Portfolio to sell a portfolio security at a disadvantageous time, due to the
need for the Portfolio to maintain "cover" or to segregate securities in
connection with hedging transactions and the possible inability of a Portfolio
to close out or to liquidate its hedged position.
DERIVATIVES. Some of the instruments described above may be referred to as
"derivatives," because their value depends on (or "derives" from) the value of
an underlying asset, reference rate or index. These instruments include
options, futures contracts, interest rate protection contracts and similar
instruments that may be used in hedging and related strategies. There is only
limited consensus as to what constitutes a "derivative" security. However, in
Mitchell Hutchins' and the Sub-Advisers' view, derivative securities include
"stripped" securities, such as GATS and TIGRs, and specially structured types
of mortgage- and asset-backed securities, such as IOs, POs and inverse
floaters, and dollar-denominated securities whose value is linked to foreign
currencies. The market value of derivative instruments and securities sometimes
is more volatile than that of other investments, and each type of derivative
instrument may pose its own special risks. Mitchell Hutchins and the Sub-
Advisers take these risks into account in their management of the Portfolios.
ILLIQUID SECURITIES. Each Portfolio may invest up to 10% of its net assets (15%
for the Strategic Fixed Income and Aggressive Growth Portfolios) in illiquid
securities. The term "illiquid securities" for this
PW 24
<PAGE>
purpose means securities that cannot be disposed of within seven days in the
ordinary course of business at approximately the price at which the Portfolio
has valued the securities. Under current guidelines of the staff of the SEC,
IOs and POs are considered illiquid. However, IO and PO classes of fixed-rate
mortgage-backed securities issued by the U.S. government or one of its agencies
or instrumentalities will not be considered illiquid if Mitchell Hutchins or
the Sub-Adviser has determined that they are liquid pursuant to guidelines
established by the Trust's board of trustees. Illiquid securities also are
considered to include, among other things, written OTC options, repurchase
agreements with maturities in excess of seven days and securities whose
disposition is restricted under the federal securities laws (other than "Rule
144A" securities that Mitchell Hutchins or the Sub-Adviser has determined to be
liquid under procedures approved by the Trust's board of trustees).
Rule 144A establishes a "safe harbor" from the requirements of the Securities
Act of 1933 ("1933 Act"). Institutional markets for restricted securities have
developed as a result of Rule 144A, providing both readily ascertainable values
for restricted securities and the ability to liquidate an investment to satisfy
share redemption orders. An insufficient number of qualified institutional
buyers interested in purchasing Rule 144A-eligible restricted securities held
by a Portfolio, however, could affect adversely the marketability of such
portfolio securities and the Portfolio might be unable to dispose of such
securities promptly or at favorable prices.
A Portfolio may not be able to sell illiquid securities when Mitchell Hutchins
or the Sub-Adviser considers it desirable to do so or may have to sell such
securities at a price lower than could be obtained if they were more liquid.
Also the sale of illiquid securities may require more time and may result in
higher dealer discounts and other selling expenses than does the sale of
securities that are not illiquid. Illiquid securities may be more difficult to
value due to the unavailability to reliable market quotations for such
securities, and investments in illiquid securities may have an adverse impact
on net asset value.
ASSIGNMENTS AND PARTICIPATIONS. The Strategic Fixed Income Portfolio may invest
in secured or unsecured fixed or floating rate loans ("Loans") arranged through
private negotiations between a borrowing corporation and one or more financial
institutions ("Lenders"). The Portfolio's investments in Loans are expected in
most instances to be in the form of participations ("Participations") and
assignments ("Assignments") of all or a portion of Loans from third parties.
Participations typically result in the Portfolio's having a contractual
relationship only with the Lender, not with the borrower. The Portfolio has the
right to receive payments of principal, interest and any fees to which it is
entitled only from the lender selling the Participation and only upon receipt
by the Lender of the payments from the borrower. In connection with purchasing
Participations, the Portfolio generally has no direct right to enforce
compliance by the borrower with the terms of the loan agreement relating to the
Loan, nor any rights of set-off against the borrower, and the Portfolio may not
benefit directly from any collateral supporting the Loan in which it has
purchased the Participation. As a result, the Portfolio assumes the credit risk
of both the borrower and the Lender that is selling the Participation. In the
event of the insolvency of the Lender selling a Participation, the Portfolio
may be treated as a general creditor of the Lender and may not benefit from any
set-off between the Lender and the borrower. The Portfolio will acquire
Participations only if the lender interpositioned between the Portfolio and the
borrower is determined by the sub-adviser to be creditworthy.
When the Strategic Fixed Income Portfolio purchases Assignments from Lenders,
it acquires direct rights against the borrower on the Loan. However, because
Assignments are arranged through private negotiations between potential
assignees and assignors, the rights and obligations acquired by the Portfolio
as the purchaser of an Assignment may differ from, and be more limited than,
those held by the assigning Lender.
PW 25
<PAGE>
Assignments and Participations are generally not registered under the 1933 Act
and thus are subject to the Strategic Fixed Income Portfolio's limitation to
15% of its net assets with respect to its investments in illiquid securities.
Because there is no liquid market for these securities, the Portfolio
anticipates that these securities could be sold only to a limited number of
institutional investors. The lack of a liquid secondary market will have an
adverse impact of the value of these securities and on the Portfolio's ability
to dispose of particular Assignments and Participations when necessary to meet
the Portfolio's liquidity needs or in response to a specific economic event,
such as a deterioration in the creditworthiness of the borrower.
PORTFOLIO TURNOVER. The portfolio turnover rate may vary greatly from year to
year and will not be a limiting factor when Mitchell Hutchins or the Sub-
Adviser deems portfolio changes appropriate. A higher turnover rate may involve
correspondingly greater transaction costs, which will be borne directly by the
affected Portfolio and may increase the potential for short-term capital gains.
OTHER INFORMATION. When Mitchell Hutchins or the applicable Sub-Adviser
believes unusual circumstances warrant a defensive posture, each Portfolio
temporarily may commit all or any portion of its assets to cash, U.S.
government securities or money market instruments, including repurchase
agreements. The Strategic Fixed Income, Global Income and Global Growth
Portfolios may hold cash in U.S. dollars or foreign currencies and money market
instruments of U.S. or foreign issuers, including instruments backed by the
U.S. or foreign governments, their agencies or instrumentalities and repurchase
agreements secured thereby. Each Portfolio may borrow money for temporary
purposes but not in excess of 10% of its total assets (33 1/3% for the
Strategic Fixed Income and High Grade Fixed Income Portfolios and 20% for the
Aggressive Growth Portfolio).
Each Portfolio's investment objective and certain investment limitations, as
described in the Statement of Additional Information, are fundamental policies
that may not be changed without shareholder approval. All other investment
policies may be changed by the Fund's board of trustees without shareholder
approval.
New types of mortgage- and asset-backed securities, derivative securities,
hedging instruments and risk management techniques are developed and marketed
from time to time. Each Portfolio may invest in these securities and
instruments and use these techniques to the extent consistent with its
investment objective and limitations and with regulatory and tax
considerations.
PURCHASES, REDEMPTIONS AND EXCHANGES
Shares of the Portfolios are offered only to the insurance company separate
accounts that fund the Contracts. All such shares may be purchased or redeemed
by the separate accounts without any sales or redemption charge at net asset
value. Proceeds from redemptions in any of the Portfolios will be paid on or
before the seventh day following the request for redemption by a Contract
holder.
A separate account may exchange shares of one Portfolio for shares of another
Portfolio at their relative net asset values per share.
DIVIDENDS, OTHER DISTRIBUTIONS AND FEDERAL INCOME TAX
DIVIDENDS AND OTHER DISTRIBUTIONS. With the exception of the Money Market
Portfolio, each Portfolio distributes all of its net investment income as
dividends to its shareholders shortly after the close of the Fund's fiscal year
on December 31. At the same time, those Portfolios also distribute to their
shareholders all of their net short-term capital gain and their net capital
gain (the excess of net long-term capital gain over net short-term capital
loss) and any net gains from foreign currency
PW 26
<PAGE>
transactions. Those Portfolios may make a second distribution of net investment
income, net short-term capital gain, net capital gain and net gains from
foreign currency transactions if necessary to avoid income tax.
The Money Market Portfolio declares as dividends on each Business Day all of
its net investment income, payable to shareholders of record as of the close of
regular trading on the New York Stock Exchange ("NYSE") (currently 4:00 p.m.,
Eastern time) on the preceding Business Day; those dividends are paid monthly.
A "Business Day" is any day, Monday through Friday, on which the NYSE is open
for business. Net investment income of the Portfolio consists of accrued
interest and earned discount (including both original issue and market
discounts), less amortization of market premium and applicable expenses. Net
investment income is calculated and dividends are declared immediately prior to
the determination of net asset value per share. The Portfolio generally
distributes to its shareholders any net short-term capital gain annually after
the end of its fiscal year on December 31 but may make more frequent
distributions of that gain if necessary to maintain its net asset value per
share at $1.00 or to avoid income tax. The Portfolio does not expect to realize
long-term capital gain and thus does not anticipate any distributions of net
capital gain.
Dividends and capital gain distributions from a Portfolio are paid in
additional shares of that Portfolio at net asset value per share, unless the
Fund's transfer agent is instructed otherwise. See the applicable Contract
prospectus for information regarding the federal income tax treatment of
distributions to the separate accounts.
FEDERAL INCOME TAX. Each Portfolio intends to continue to qualify for treatment
as a regulated investment company ("RIC") under Subchapter M of the Internal
Revenue Code so that it will be relieved of federal income tax on that part of
its investment company taxable income (consisting generally of net investment
income, net gains from certain foreign currency transactions and net short-term
capital gain) and net capital gain that is distributed to its shareholders.
Dividends and other distributions declared by a Portfolio in October, November
or December of any year and payable to shareholders of record on a date in any
of those months will be deemed to have been paid by the Portfolio and received
by the shareholders on December 31 of that year if the distributions are paid
by the Portfolio during the succeeding January.
Portfolio shares are offered only to insurance company separate accounts that
fund variable annuity and variable life insurance contracts. Under the Internal
Revenue Code, no tax is imposed on an insurance company with respect to income
of a qualifying separate account properly allocable to the value of eligible
variable annuity or variable life insurance contracts. See the applicable
Contract prospectus for a discussion of the federal income tax status of (1)
the separate accounts that purchase and hold shares of the Portfolios and (2)
the holders of Contracts funded through those accounts.
Each Portfolio intends to continue to comply with the diversification
requirements imposed by section 817(h) of the Internal Revenue Code and the
regulations thereunder. These requirements, which are in addition to the
diversification requirements imposed on the Portfolios by the 1940 Act and
Subchapter M, place certain limitations on the assets of each separate
account--and, because section 817(h) and those regulations treat the assets of
each Portfolio as assets of the related separate account, of each Portfolio--
that may be invested in securities of a single issuer. Specifically, the
regulations provide that, except as permitted by the "safe harbor" described
below, as of the end of each calendar quarter or within 30 days thereafter no
more than 55% of the total assets of a Portfolio may be represented by any one
investment, no more than 70% by any two investments, no more than 80% by any
three investments and no more than 90% by any four investments. For this
purpose, all securities of the same issuer are considered a single investment,
and each U.S. government agency and instrumentality is considered a separate
issuer. Section 817(h) provides, as a safe harbor, that a separate account will
be treated as being adequately diversified if the diversification requirements
PW 27
<PAGE>
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items, government securities and
securities of other RICs. Failure of a Portfolio to satisfy the section 817(h)
requirements would result in taxation of the insurance company issuing the
Contracts and treatment of the Contract holders other than as described in the
applicable Contract prospectus.
The foregoing is only a summary of some of the important federal income tax
considerations generally affecting the Portfolios and their shareholders; see
the Statement of Additional Information for a more detailed discussion.
Prospective shareholders are urged to consult their tax advisers.
VALUATION OF SHARES
The net asset value of each Portfolio's shares, other than the Money Market
Portfolio, fluctuates and is determined for all Portfolios as of the close of
regular trading on the NYSE (currently 4:00 p.m., Eastern time) on each
Business Day. For each Portfolio other than the Money Market Portfolio, net
asset value per share is computed by dividing the value of the securities held
by the Portfolio plus any cash or other assets minus all liabilities by the
total number of Portfolio shares outstanding. Except for the Money Market
Portfolio, each Portfolio values its assets based on the current market value
where market quotations are readily available. If such value cannot be
established, the assets are valued at fair value as determined in good faith
by or under the direction of the Fund's board of trustees. The amortized cost
method of valuation generally is used to value debt obligations with 60 days
or less remaining to maturity, unless the board of trustees determines that
this does not represent fair value. All investments denominated in foreign
currency are valued daily in U.S. dollars on the basis of the then-prevailing
exchange rates.
The Money Market Portfolio intends to use its best efforts to maintain its net
asset value at $1.00 per share. The value of each share of this Portfolio is
computed by dividing its net assets by the number of its outstanding shares.
"Net assets" equals the value of the investments and other assets minus its
liabilities. The Money Market Portfolio values its portfolio securities using
the amortized cost method of valuation, under which market value is
approximated by amortizing the difference between the acquisition cost and
value at maturity of the instrument on a straight-line basis over its
remaining life. All cash, receivables and current payables are generally
carried at their face value. Other assets are valued at fair value as
determined in good faith by or under the direction of the Fund's board of
trustees. All investments denominated in foreign currencies are valued daily
in U.S. dollars based on the then-prevailing exchange rate. It should be
recognized that judgment plays a greater role in valuing lower rated debt
securities because there is less reliable, objective data available.
MANAGEMENT
The Fund's board of trustees, as part of its overall management
responsibility, oversees various organizations responsible for each
Portfolio's day-to-day management. Mitchell Hutchins, the investment adviser
and administrator for each Portfolio, makes and implements all investment
decisions and supervises all aspects of the operations of the Money Market,
High Grade Fixed Income, Global Income, Balanced, Growth and Income and Growth
Portfolios. PIMCO, Nicholas-Applegate and GEIM, as Sub-Advisers for the
Strategic Fixed Income, Aggressive Growth and Global Growth Portfolios,
respectively, make and implement all investment decisions for these
Portfolios. Mitchell Hutchins supervises the activities of the Sub-Advisers
for these Portfolios and supervises all other aspects of these Portfolios'
operations. Brokerage transactions for the Portfolios may be conducted through
PaineWebber or its affiliates in accordance with procedures adopted by the
Fund's board of trustees.
PW 28
<PAGE>
For advisory and administrative services, the Fund pays Mitchell Hutchins a
fee, computed daily and paid monthly, at the annual rates set forth below for
each Portfolio. The Portfolios also incur other expenses in their operations
and, for the fiscal year ended December 31, 1995, total expenses for each
Portfolio, stated as a percentage of average net assets, were as set forth
below.
<TABLE>
<CAPTION>
TOTAL EXPENSES
% OF AVERAGE AS A % OF AVERAGE
PORTFOLIO DAILY NET ASSETS NET ASSETS
<S> <C> <C>
Money Market Portfolio 0.50 0.79
High Grade Fixed Income Portfolio 0.50 1.01
Strategic Fixed Income Portfolio 0.50 0.99
Global Income Portfolio 0.75 1.19
Balanced Portfolio 0.75 1.02
Growth and Income Portfolio 0.70 1.37
Growth Portfolio 0.75 1.09
Aggressive Growth Portfolio 0.80 1.29
Global Growth Portfolio 0.75 1.96
</TABLE>
The fee of 0.75% of average net assets paid by the Global Income, Growth and
Global Growth Portfolios and the fee of 0.80% of average net assets paid by the
Aggressive Growth Portfolio are higher than those paid by most funds to their
advisers but not higher than fees paid by many funds with similar objectives
and policies. THE FEE OF 0.75% OF AVERAGE NET ASSETS PAID BY THE BALANCED
PORTFOLIO IS HIGHER THAN THAT PAID BY FUNDS WITH SIMILAR INVESTMENT OBJECTIVES
AND POLICIES TO THEIR ADVISERS.
Mitchell Hutchins is located at 1285 Avenue of the Americas, New York, New York
10019. It is a wholly owned subsidiary of PaineWebber, which is in turn wholly
owned by Paine Webber Group Inc., a publicly owned financial services holding
company. At March 31, 1996 Mitchell Hutchins was adviser or sub-adviser to 31
investment companies with separate portfolios and aggregate assets of
approximately $ billion.
Mitchell Hutchins (not the Fund) pays PIMCO a fee for its services as sub-
adviser for the Strategic Fixed Income Portfolio at the annual rate of 0.25% of
the portfolio's average daily net assets. PIMCO is located at 840 Newport
Center Drive, Suite 360, Newport Beach, California 92660. PIMCO is a subsidiary
partnership of PIMCO Advisers L.P. ("PIMCO Advisers"), a publicly held
investment advisory firm. A majority interest in PIMCO Advisers is held by
PIMCO Partners, G.P. ("PIMCO Partners"), a general partnership between Pacific
Financial Asset Management Corporation, an indirect wholly owned subsidiary of
Pacific Mutual Life Insurance Company, and PIMCO Partners, L.P., a limited
partnership controlled by the PIMCO Managing Directors. As of March 31, 1996,
PIMCO had approximately $ billion in assets under management and was adviser
or sub-adviser of investment companies with portfolios and aggregate assets
of approximately $ billion. PIMCO is one of the largest fixed income
management firms in the nation. Included among PIMCO's institutional clients
are many "Fortune 500" companies.
Mitchell Hutchins (not the Fund) pays GEIM a fee for its services as sub-
adviser for the Global Growth Portfolio at an annual rate of 0.29% of the
Fund's average daily net assets. GEIM is located at 3003 Summer Street, P.O.
Box 7900, Stamford, Connecticut 06904-7900 and is a wholly owned subsidiary of
General Electric Company. GEIM is a registered investment adviser, and its
principal officers and directors serve in similar capacities with respect to
General Electric Investment Corporation ("GEIC"), also a registered investment
adviser and a wholly owned subsidiary of General Electric Company. GEIM and
GEIC provide investment management services to various institutional accounts
with total assets exceeding $ billion as of March 31, 1996.
PW 29
<PAGE>
Mitchell Hutchins (not the Fund) pays Nicholas-Applegate a fee for its services
as sub-adviser for the Aggressive Growth Portfolio in the amount of 0.50% of
the Portfolio's average daily net assets. Nicholas-Applegate is located at 600
West Broadway, 29th Floor, San Diego, California 92101 and is a California
limited partnership. Nicholas-Applegate's general partner is Nicholas-Applegate
Capital Management Holdings, L.P., a California limited partnership controlled
by Arthur E. Nicholas. He and 14 other partners manage a staff of approximately
300 employees. As of March 31, 1996, Nicholas-Applegate managed a total of
approximately $29.7 billion in assets for its client accounts, which include
employee benefit plans of corporations, public retirement systems and unions,
university endowments and other institutional investors.
David H. Edington, a PIMCO Managing Director, is primarily responsible for the
day-to-day management of the Strategic Fixed Income Portfolio. Mr. Edington has
been associated with PIMCO for eight years as a senior member of the fixed
income portfolio management group.
Stuart Waugh is primarily responsible for the day-to-day management of the
Global Income Portfolio. Mr. Waugh is a vice president of the Fund, a managing
director and a portfolio manager of Mitchell Hutchins responsible for global
fixed income investments and currency trading. He has held his Global Income
Portfolio responsibilities since its inception in May 1988 and has been
employed by Mitchell Hutchins as a portfolio manager for more than 5 years.
Mark A. Tincher is primarily responsible for the day-to-day management of the
Growth and Income Portfolio. Mr. Tincher is a managing director and chief
investment officer of equity investments of Mitchell Hutchins responsible for
overseeing the management of domestic equity investments for Mitchell Hutchins.
Prior to joining Mitchell Hutchins in March 1995, Mr. Tincher worked for Chase
Manhattan Private Bank, where he was vice president and directed the U.S. funds
management and equity research area. At Chase since 1988, Mr. Tincher oversaw
the management of all Chase equity funds (the Vista Funds and Trust Investment
Funds). Mr. Tincher has held his Growth and Income Portfolio responsibilities
since April 1995. Effective April 3, 1995, in connection with Mr. Tincher
taking over the day-to-day management of the Portfolio, a prior sub-advisory
agreement between Mitchell Hutchins and Mitchell Hutchins Institutional
Investors Inc. was terminated.
Ellen R. Harris is primarily responsible for the day-to-day management of the
Growth Portfolio. Ms. Harris is a vice president of the Fund and a managing
director of Mitchell Hutchins. She has held her Growth Portfolio
responsibilities since its inception in May 1987 and has been employed by
Mitchell Hutchins as a portfolio manager since 1983.
The Systems Driven Internal Research team at Nicholas-Applegate, which is
primarily responsible for the day-to-day management of the Aggressive Growth
Portfolio, is currently under the supervision of Arthur E. Nicholas (since
February 1994). Mr. Nicholas has been the chief investment officer and managing
partner of Nicholas-Applegate since its organization in 1984. The Research team
at Nicholas-Applegate has held its Aggressive Growth Portfolio responsibilities
since its inception in November 1993.
Ralph R. Layman is primarily responsible for the day-to-day management of the
Global Growth Portfolio. Mr. Layman is a chartered Financial Analyst and an
executive vice president and a senior investment manager of GEIM. From 1989 to
1991, Mr. Layman served as executive vice president, partner and portfolio
manager of Northern Capital Management Co., and prior thereto, served as vice
president and portfolio manager of Templeton Investment Counsel, Inc., and vice
president of the Templeton Emerging Markets Fund. Mr. Layman has held his
Global Growth responsibilities since March 1995.
T. Kirkham Barneby is responsible for the asset allocation decisions for the
Balanced Portfolio. Mr. Barneby is a managing director and chief investment
officer--quantitative investments of
PW 30
<PAGE>
Mitchell Hutchins. Mr. Barneby rejoined Mitchell Hutchins in 1994, after being
with Vantage Global Management for one year. During the eight years that Mr.
Barneby was previously with Mitchell Hutchins, he was senior vice president
responsible for quantitative management and asset allocation models. Before
joining Mitchell Hutchins, Mr. Barneby served as director of pension investment
strategy at the Continental Group in Stamford, Connecticut and held positions
in the economics departments at both Citibank, N.A. and Merrill Lynch.
Mark A. Tincher is responsible for the day-to-day management of the equity
portion of the Balanced Portfolio. Please refer to Mr. Tincher's prior
experience provided under the "Growth and Income Portfolio" above.
Dennis L. McCauley is primarily responsible for the day-to-day management of
the High Grade Fixed Income Portfolio and the fixed income portion of the
Balanced Portfolio. Mr. McCauley is a managing director and chief investment
officer--fixed income of Mitchell Hutchins responsible for overseeing all
active fixed income investments, including domestic and global taxable and tax-
exempt mutual funds. Prior to joining Mitchell Hutchins in 1994, Mr. McCauley
worked for IBM Corporation, where he was director of fixed income investments
responsible for developing and managing investment strategy for all fixed
income and cash management investments of IBM's pension fund and self-insured
medical funds. Mr. McCauley has also served as vice president of IBM Credit
Corporation's mutual funds and as a member of the Retirement Fund Investment
Committee.
Nirmal Singh, Craig Varrelman and Jim Keegan assist Mr. McCauley in managing
the High Grade Fixed Income Portfolio and Nirmal Singh and Craig M. Varrelman
assist Mr. McCauley in managing the Balanced Portfolio's fixed income
investments. Mr. Singh is a vice president of Mitchell Hutchins and Mr.
Varrelman is a first vice president of Mitchell Hutchins. Prior to joining
Mitchell Hutchins in 1993, Mr. Singh was with Merrill Lynch Asset Management,
Inc., where he was a member of the portfolio management team responsible for
managing several diversified funds, including mortgage-backed securities funds
with assets totaling approximately $8 billion. From 1990 to 1993, Mr. Singh was
a senior portfolio manager at Nomura Mortgage Fund Management Corporation,
where he was responsible for managing approximately $3 billion in mortgage
assets. From 1987 to 1990, Mr. Singh was vice president of Lehman Brothers. Mr.
Varrelman has been with Mitchell Hutchins as a portfolio manager since 1998 and
manages fixed income portfolios with an emphasis on U.S. government securities.
Mr. Keegan is a senior vice president of Mitchell Hutchins and oversees all
corporate bond investments. Prior to joining Mitchell Hutchins in March 1996,
Mr. Keegan was the director of fixed income strategy and research at the
Merrion Group.
Messrs. McCauley, Singh and Varrelman first assumed responsibility for the High
Grade Fixed Income Fund in July 1995 and Mr. Keegan assumed his responsibility
for this Portfolio in April 1996. Messrs. Barneby, Tincher, McCauley, Singh and
Varrelman and Ms. Messina first assumed their responsibilities for the Balanced
Portfolio in August 1995.
Susan Messina is responsible for the day-to-day management of the Money Market
Portfolio and the cash portion of all the other Portfolios except the
Aggressive Growth Portfolio, the Strategic Fixed Income Portfolio, and the
Global Growth Portfolio, the Portfolios assets are invested in money market
instruments. Ms. Messina has been with Mitchell Hutchins since 1982 and is a
senior vice president of Mitchell Hutchins.
Investment personnel of Mitchell Hutchins and the Sub-Advisers may engage in
securities transactions for their own accounts pursuant to each firm's code of
ethics, which establishes procedures for personal investing and restricts
certain transactions.
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GENERAL INFORMATION
The Fund is registered with the SEC as an open-end management investment
company and was organized as a business trust under the laws of the
Commonwealth of Massachusetts by Declaration of Trust dated November 21, 1986.
The Fund commenced operations as an investment company on May 4, 1987. The
trustees have authority to issue an unlimited number of shares of beneficial
interest of separate series, par value $.001 per share. Shares of nine series
are authorized.
The Fund does not hold annual meetings of shareholders. There normally will be
no meetings of shareholders to elect trustees unless fewer than a majority of
the trustees holding office have been elected by shareholders. Shareholders of
record of no less than two-thirds of the outstanding shares of the Fund may
remove a trustee by votes cast in person or by proxy at a meeting called for
that purpose. The trustees are required to call a meeting of shareholders for
the purpose of voting upon the question of removal of any trustee when so
requested in writing by the shareholders of record of not less than 10% of the
Fund's outstanding shares. Each share of a Portfolio has equal voting, dividend
and liquidation rights. The shares of each Portfolio will be voted separately
except when an aggregate vote of all series is required by the 1940 Act.
CUSTODIAN AND TRANSFER AGENT. State Street Bank and Trust Company, 1776
Heritage Drive, North Quincy, Massachusetts 02171, is custodian of the assets
of the Money Market, Strategic Fixed Income, High Grade Fixed Income, Balanced,
Growth and Income, Growth, Aggressive Growth and Global Growth Portfolios.
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109, is
custodian of the assets of the Global Income Portfolio. Both custodians employ
foreign subcustodians approved by the board of trustees in accordance with
those requirements to provide custody of the foreign assets of the Strategic
Fixed Income, Global Income and Global Growth Portfolios. PFPC Inc., a
subsidiary of PNC Bank, National Association, whose principal business address
is 400 Bellevue Parkway, Wilmington, Delaware 19809, is the Fund's transfer and
dividend disbursing agent.
CONFIRMATIONS AND STATEMENTS. Shareholders receive confirmations of purchases
and redemptions of Portfolio shares. Monthly statements sent to each separate
account report that account's Portfolio activity.
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APPENDIX A
GINNIE MAE CERTIFICATES. Ginnie Mae guarantees certain mortgage pass-through
certificates ("Ginnie Mae certificates") that are issued by Private Mortgage
Lenders and that represent ownership interests in individual pools of
residential mortgage loans. These securities are designed to provide monthly
payments of interest and principal to the investor. Timely payment of interest
and principal (but not the market value of the security itself) is backed by
the full faith and credit of the U.S. government. Each mortgagor's monthly
payments to his lending institution on his residential mortgage are "passed
through" to certificateholders such as a Portfolio. Mortgage pools consist of
whole mortgage loans or participations in loans. The terms and characteristics
of the mortgage instruments are generally uniform within a pool but may vary
among pools. Lending institutions that originate mortgages for the pools are
subject to certain standards, including credit and other underwriting criteria
for individual mortgages included in the pools.
FANNIE MAE CERTIFICATES. Fannie Mae facilitates a national secondary market in
residential mortgage loans insured or guaranteed by U.S. government agencies
and in privately insured or uninsured residential mortgage loans (sometimes
referred to as "conventional mortgage loans" or "conventional loans") through
its mortgage purchase and mortgage-backed securities sales activities. Fannie
Mae issues guaranteed mortgage pass-through certificates ("Fannie Mae
certificates"), which represent pro rata shares of all interest and principal
payments made and owed on the underlying pools. Fannie Mae guarantees timely
payment of interest and principal (but not the market value of the security
itself) on Fannie Mae certificates. The Fannie Mae guarantee is not backed by
the full faith and credit of the U.S. government.
FREDDIE MAC CERTIFICATES. Freddie Mac also facilitates a national secondary
market for conventional residential and U.S. government-issued mortgage loans
through its mortgage purchase and mortgage-backed securities sales activities.
Freddie Mac issues two types of mortgage pass-through securities: mortgage
participation certificates ("PCs") and guaranteed mortgage certificates
("GMCs"). Each PC represents a pro rata share of all interest and principal
payments made and owed on the underlying pool. Freddie Mac generally guarantees
timely monthly payment of interest on PCs and the ultimate payment of
principal, but it also has a PC program under which it guarantees timely
payment of both principal and interest. GMCs also represent a pro rata interest
in a pool of mortgages. These instruments, however, pay interest semi-annually
and return principal once a year in guaranteed minimum payments. Freddie Mac
does not guarantee the market value of the security itself. The Freddie Mac
guarantee is not backed by full faith and credit of the U.S. government.
PRIVATE, RTC AND SIMILAR MORTGAGE-BACKED SECURITIES. Mortgage-backed securities
issued by Private Mortgage Lenders are structured similarly to the CMOs or
single class mortgage-backed securities issued or guaranteed by Ginnie Mae,
Fannie Mae and Freddie Mac. Such mortgage-backed securities may be supported by
pools of U.S. government or agency insured or guaranteed mortgage loans or by
other mortgage-backed securities issued by a government agency or
instrumentality, but they generally are supported by pools of conventional
(i.e., non-government guaranteed or insured) mortgage loans. Since such
mortgage-backed securities normally are not guaranteed by an entity having the
credit standing of Ginnie Mae, Fannie Mae or Freddie Mac, they normally are
structured with one or more types of credit enhancement. See "--Types of Credit
Enhancement." Such credit enhancements do not protect investors from changes in
market value.
The Resolution Trust Corporation ("RTC"), which was organized by the U.S.
government in connection with the savings and loan crisis, held assets of
failed savings associations as either a conservator or receiver for such
associations, or it acquired such assets in its corporate capacity. These
assets include, among other things, single family and multi-family mortgage
loans, as well as commercial mortgage loans. In order to dispose of such assets
in an orderly manner, RTC established
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a vehicle registered with the SEC through which it sold mortgage-backed
securities. RTC mortgage-backed securities represent pro rata interests in
pools of mortgage loans that RTC held or had acquired, as described above, and
are supported by one or more of the types of private credit enhancements used
by Private Mortgage Lenders.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS MORTGAGE PASS-THROUGHS.
CMOs are debt obligations that are collateralized either by mortgage loans,
mortgage pass-through securities or other CMOs (such collateral collectively
being called "Mortgage Assets"). CMOs may be issued by Private Mortgage Lenders
or by government entities such as Fannie Mae or Freddie Mac. Multi-class
mortgage pass-through securities are interests in trusts that are comprised of
Mortgage Assets and that have multiple classes similar to those of CMOs. Unless
the context indicates otherwise, references herein to CMOs include multi-class
mortgage pass-through securities. Payments of principal of and interest on the
Mortgage Assets (and in the case of CMO's any reinvestment income thereon)
provide the funds to pay debt service on the CMOs or to make scheduled
distributions on the multi-class mortgage pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMO, also referred to as a "tranche," is issued at a specific fixed or
floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of a CMO (other than any principal-
only or PO class) on a monthly, quarterly or semi-annual basis. The principal
and interest on the Mortgage Assets may be allocated among the several classes
of a CMO in many ways. In one structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to the classes of a
CMO in the order of their respective stated maturities or final distribution
dates so that no payment of principal will be made on any class of the CMO
until all other classes having an earlier stated maturity or final distribution
date have been paid in full. In some CMO structures, all or a portion of the
interest attributable to one or more of the CMO classes may be added to the
principal amounts attributable to such classes, rather than passed through to
certificateholders on a current basis, until other classes of the CMO are paid
in full.
Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, which, as with other CMO structures, must be retired by its stated
maturity date or final distribution date but may be retired earlier.
ARM AND FLOATING RATE MORTGAGE-BACKED SECURITIES. ARM mortgage-backed
securities are mortgage-backed securities that represent a right to receive
interest payments at a rate that is adjusted to reflect the interest earned on
a pool of mortgage loans bearing variable or adjustable rates of interest (such
mortgage loans are referred to as "ARMs"). Floating rate mortgage-backed
securities are classes of mortgage-backed securities that have been structured
to represent the right to receive interest payments at rates that fluctuate in
accordance with an index but that generally are supported by pools comprised of
fixed-rate mortgage loans. Because the interest rates on ARM and floating rate
mortgage-backed securities are reset in response to changes in a specified
market index, the values of such securities tend to be less sensitive to
interest rate fluctuations than the values of fixed-rate securities.
TYPES OF CREDIT ENHANCEMENT. To lessen the effect of failures by obligors on
Mortgage Assets to make payments, mortgage-backed securities may contain
elements of credit enhancement. Such credit enhancement falls into two
categories: (1) liquidity protection; and (2) protection against losses
resulting after default by an obligor on the underlying assets and collection
of all amounts recoverable directly from the obligor and through liquidation of
the collateral. Liquidity protection
PW 34
<PAGE>
refers to the provision of advances, generally by the entity administering the
pool of assets (usually the bank, savings association or mortgage banker that
transferred the underlying loans to the issuer of the security), to ensure that
the receipt of payments on the underlying pool occurs in a timely fashion.
Protection against losses resulting after default and liquidation ensures
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches. The Portfolios will not pay any additional fees for such credit
enhancement, although the existence of credit enhancement may increase the
price of a security.
Examples of credit enhancement arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal
thereof and interest thereon, with the result that defaults on the underlying
assets are borne first by the holders of the subordinated class), creation of
"spread accounts" or "reserve funds" (where cash or investments, sometimes
funded from a portion of the payments on the underlying assets, are held in
reserve against future losses) and "over-collateralization" (where the
scheduled payments on, or the principal amount of, the underlying assets exceed
that required to make payment of the securities and pay any servicing or other
fees). The degree of credit enhancement provided for each issue generally is
based on historical information regarding the level of credit risk associated
with the underlying assets. Delinquency or loss in excess of that anticipated
could adversely affect the return on an investment in such a security.
SPECIALLY STRUCTURED CMOS AND NEW TYPES OF MORTGAGE-BACKED SECURITIES
The Portfolios may invest in IOs, POs, inverse floating rate CMOs and other
specially structured CMO classes. See "Risk Factors and Other Investment
Policies--Risks of Mortgage- and Asset-Backed Securities."
New types of mortgage-backed securities are developed and marketed from time to
time and, consistent with their investment limitations, the Portfolios expect
to invest in those new types of mortgage-backed securities that Mitchell
Hutchins or the applicable sub-adviser believes may assist a Portfolio in
achieving its investment objective. Similarly, the Portfolios may invest in
mortgage-backed securities issued by new or existing governmental or private
issuers other than those identified above. The Fund's prospectus or statement
of additional information will be supplemented to the extent that new types of
mortgage-backed securities or those issued by issuers other than those
identified above involve materially different risks than the securities or
issuers described herein.
PW 35
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APPENDIX B
HEDGING AND OPTION INCOME INSTRUMENTS
Certain Portfolios may use the following hedging instruments:
OPTIONS ON EQUITY AND DEBT SECURITIES AND FOREIGN CURRENCIES--A call option
is a short-term contract pursuant to which the purchaser of the option, in
return for a premium, has the right to buy the security or currency
underlying the option at a specified price at any time during the term of
the option. The writer of the call option, who receives the premium, has
the obligation, upon exercise of the option during the option term, to
deliver the underlying security or currency against payment of the exercise
price. A put option is a similar contract that gives its purchaser, in
return for a premium, the right to sell the underlying security or currency
at a specified price during the option term. The writer of the put option,
who receives the premium, has the obligation, upon exercise of the option
during the option term, to buy the underlying security or currency at the
exercise price.
OPTIONS ON STOCK INDEXES--A stock index assigns relative values to the
stocks included in the index and fluctuates with changes in the market
values of those stocks. A stock index option operates in the same way as a
more traditional stock option, except that exercise of a stock index option
is effected with cash payment and does not involve delivery of securities.
Thus, upon exercise of a stock index option, the purchaser will realize,
and the writer will pay, an amount based on the difference between the
exercise price and the closing price of the stock index.
STOCK INDEX FUTURES CONTRACTS--A stock index futures contract is a
bilateral agreement pursuant to which one party agrees to accept, and the
other party agrees to make, delivery of an amount of cash equal to a
specified dollar amount times the difference between the stock index value
at the close of trading of the contract and the price at which the futures
contract is originally struck. No physical delivery of the stocks
comprising the index is made. Generally, contracts are closed out prior to
the expiration date of the contract.
INTEREST RATE AND FOREIGN CURRENCY FUTURES CONTRACTS--Interest rate and
foreign currency futures contracts are bilateral agreements pursuant to
which one party agrees to make, and the other party agrees to accept,
delivery of a specified type of debt security or currency at a specified
future time and at a specified price. Although such futures contracts by
their terms call for actual delivery or acceptance of debt securities or
currency, in most cases the contracts are closed out before the settlement
date without the making or taking of delivery.
OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar to
options on securities or currency, except that an option on a futures
contract gives the purchaser the right, in return for the premium, to
assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put), rather than to purchase
or sell a security or currency, at a specified price at any time during the
option term. Upon exercise of the option, the delivery of the futures
position to the holder of the option will be accompanied by delivery of the
accumulated balance that represents the amount by which the market price of
the futures contract exceeds, in the case of a call, or is less than, in
the case of a put, the exercise price of the option on the future. The
writer of an option, upon exercise, will assume a short position in the
case of a call and a long position in the case of a put.
FORWARD CURRENCY CONTRACTS--A forward currency contract involves an
obligation to purchase or sell a specific currency at a specified future
date, which may be any fixed number of days from the contract date agreed
upon by the parties, at a price set at the time the contract is entered
into.
PW 36
<PAGE>
MAY 1, 1996
PAINEWEBBER SERIES TRUST
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
PaineWebber Series Trust ("Fund") is a professionally managed mutual fund
that offers the nine series of shares ("Portfolios") listed below. All the
Portfolios except the Global Income Portfolio are diversified and each has its
own investment objective and policies. Shares of each Portfolio are offered
only to insurance company separate accounts that fund certain variable
contracts ("Contracts"). Advisory and administrative services are provided to
the Fund by Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a
wholly owned subsidiary of PaineWebber Incorporated ("PaineWebber") and certain
portfolios, as indicated below, have sub-advisers ("Sub-Advisers").
*The MONEY MARKET PORTFOLIO seeks maximum current income consistent with
liquidity and conservation of capital. This Portfolio invests in high grade
money market instruments and repurchase agreements secured by such
instruments.
*The HIGH GRADE FIXED INCOME PORTFOLIO primarily seeks current income
consistent with the preservation of capital and secondarily seeks capital
appreciation. This Portfolio invests primarily in debt securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities and
high quality corporate debt securities and mortgage- and asset-backed
securities of private issuers.
*The STRATEGIC FIXED INCOME seeks total return consisting of capital
appreciation and income. This Portfolio invests primarily in fixed income
securities of varying maturities with a dollar-weighted average portfolio
duration between three and eight years. Pacific Investment Management
Company serves as sub-adviser to this Portfolio.
*The GLOBAL INCOME PORTFOLIO primarily seeks high current income and
secondarily seeks capital appreciation. This Portfolio invests principally
in high quality debt securities of foreign and U.S. issuers.
*The BALANCED PORTFOLIO seeks a high total return with low volatility.
This Portfolio invests primarily in a combination of equity securities,
investment grade debt obligations and money market instruments, based on
Mitchell Hutchins' assessment of the optimal allocation of the Portfolio's
assets.
*The GROWTH AND INCOME PORTFOLIO seeks current income and capital growth.
This Portfolio invests primarily in dividend-paying equity securities
believed by Mitchell Hutchins to have the potential for rapid earnings
growth.
*The GROWTH PORTFOLIO seeks long-term capital appreciation. This
Portfolio invests primarily in equity securities of companies that, in the
judgment of Mitchell Hutchins, have substantial potential for capital
growth.
*The AGGRESSIVE GROWTH PORTFOLIO seeks to maximize long-term capital
appreciation. This Portfolio invests primarily in the common stocks of U.S.
companies. Nicholas-Applegate Capital Management serves as sub-adviser to
this Portfolio.
*The GLOBAL GROWTH PORTFOLIO seeks long-term capital appreciation. This
Portfolio invests primarily in common stocks of companies based in the
United States, Europe, Japan and the Pacific Basin. GE Investment
Management Incorporated serves as the Sub-Adviser to this Portfolio.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Fund's current Prospectus, dated May 1, 1996.
A copy of the Prospectus may be obtained by contacting the Fund or your
PaineWebber investment executive.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Investment Policies and Limitations........................................ 3
Hedging and Related Strategies............................................. 11
Trustees and Officers...................................................... 19
Investment Advisory Services............................................... 26
Portfolio Transactions..................................................... 27
Additional Purchase and Redemption Information............................. 30
Valuation of Shares........................................................ 30
Taxes...................................................................... 32
Dividends.................................................................. 34
Other Information.......................................................... 34
Financial Statements....................................................... 35
Description of Commercial Paper and Bond Ratings........................... 35
</TABLE>
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INVESTMENT POLICIES AND LIMITATIONS
The following supplements the information contained in the Fund's Prospectus
concerning the investment policies and limitations of its ten Portfolios.
SPECIAL CONSIDERATIONS RELATING TO FOREIGN SECURITIES. As noted in the
Prospectus, the Global Income Portfolio, Global Growth Portfolio and Strategic
Fixed Income Portfolio each invests in securities of foreign issuers. In
addition, the High Grade Fixed Income Portfolio, Balanced Portfolio, Growth and
Income Portfolio, Growth Portfolio and Aggressive Growth Portfolio each may
invest in U.S. dollar-denominated securities of foreign issuers. Many of the
foreign securities held by these Portfolios are not registered with the
Securities and Exchange Commission ("SEC"), nor are the issuers thereof subject
to its reporting requirements. Accordingly, there may be less publicly
available information concerning foreign issuers of securities held by those
Portfolios than is available concerning U.S. companies. Foreign companies are
not generally subject to uniform accounting, auditing and financial reporting
standards or to other regulatory requirements comparable to those applicable to
U.S. companies.
In addition to purchasing securities of foreign issuers in foreign markets,
the Global Income and Global Growth Portfolios may invest in American
Depository Receipts ("ADRs"), European Depository Receipts ("EDRs") or other
securities convertible into securities of companies based in foreign countries.
These securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. Generally, ADRs, in registered
form, are denominated in U.S. dollars and are designed for use in the U.S.
securities markets and EDRs, in bearer form, may be denominated in other
currencies and are designed for use in European securities markets. ADRs are
receipts typically issued by a U.S. bank or trust company evidencing ownership
of the underlying securities. EDRs are European receipts evidencing a similar
arrangement. The High Grade Fixed Income, Balanced, Growth and Income, Growth
and Aggressive Growth Portfolios generally invest in securities of foreign
companies only if such securities are traded in the U.S. securities markets
directly or through ADRs. For purposes of the Fund's investment policies, ADRs
and EDRs are deemed to have the same classification as the underlying
securities they represent. Thus, an ADR or EDR evidencing ownership of common
stock will be treated as common stock.
The Global Growth Portfolio anticipates that its brokerage transactions
involving securities of companies headquartered in countries other than the
United States will be conducted primarily on the principal exchanges of such
countries. Foreign security trading practices, including those involving
securities settlement where Portfolio assets may be released prior to receipt
of payment, may expose the Portfolio to increased risk in the event of a failed
trade or the insolvency of a foreign broker-dealer. Transactions on foreign
exchanges are usually subject to fixed commissions that are generally higher
than negotiated commissions on U.S. transactions, although the Portfolio will
endeavor to achieve the best net results in effecting portfolio transactions.
There is generally less government supervision and regulation of exchanges and
brokers in foreign countries than in the United States.
Investment income on certain foreign securities may be subject to foreign
withholding or other taxes that could reduce the return on these securities.
Tax treaties between the United States and foreign countries, however, may
reduce or eliminate the amount of foreign taxes to which the Portfolio would be
subject.
SOVEREIGN DEBT. Investment in debt securities issued by foreign governments
and their political subdivisions or agencies ("Sovereign Debt") involves
special risks. The issuer of the debt or the governmental authorities that
control the repayment of the debt may be unable or unwilling to repay principal
and/or interest when due in accordance with the terms of such debt, and the
Portfolio may have limited legal recourse in the event of a default.
Sovereign Debt differs from debt obligations issued by private entities in
that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is therefore somewhat diminished. Political
conditions, especially a sovereign entity's willingness to meet the terms of
its debt
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<PAGE>
obligations, are of considerable significance. Also, there can be no assurance
that the holders of commercial bank debt issued by the same sovereign entity
may not contest payments to the holders of Sovereign Debt in the event of
default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and interest
due in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
principal international lenders and the political constraints to which a
sovereign debtor may be subject. Increased protectionism on the part of a
country's trading partners, or political changes in those countries, could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any, or the credit standing of a particular local
government or agency.
The occurrence of political, social or diplomatic changes in one or more of
the countries issuing Sovereign Debt could adversely affect a Portfolio's
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their Sovereign Debt. While Mitchell Hutchins or the applicable Sub-Adviser
manages the Portfolios' investments in a manner that is intended to minimize
the exposure to such risks, there can be no assurance that adverse political
changes will not cause a Portfolio to suffer a loss of interest or principal on
any of its holdings.
FOREIGN CURRENCY TRANSACTIONS. Although each of the Strategic Fixed Income,
Global Income and Global Growth Portfolios values its assets daily in U.S.
dollars, it does not intend to convert its holdings of foreign currencies to
U.S. dollars on a daily basis. The Portfolios' foreign currencies may be held
as "foreign currency call accounts" at foreign branches of foreign or domestic
banks. These accounts bear interest at negotiated rates and are payable upon
relatively short demand periods. If a bank became insolvent, a Portfolio could
suffer a loss of some or all of the amounts deposited. The Portfolios may
convert foreign currency to U.S. dollars from time to time. Although foreign
exchange dealers generally do not charge a stated commission or fee for
conversion, the prices posted generally include a "spread," which is the
difference between the prices at which the dealers are buying and selling
foreign currencies.
SELECTION OF INVESTMENTS BY BALANCED PORTFOLIO. The money market instruments
in which the Balanced Portfolio may invest include U.S. Treasury bills and
other obligations issued or guaranteed as to interest and principal by the U.S.
government, its agencies and instrumentalities; obligations of U.S. banks
(including certificates of deposit and bankers' acceptances) having total
assets at the time of purchase in excess of $1.5 billion and interest-bearing
savings deposits in U.S. commercial and savings banks in principal amounts at
each such bank not greater than are fully insured by the Federal Deposit
Insurance Corporation, provided that the aggregate amount of such deposits does
not exceed 5% of the value of the Portfolio's assets; commercial paper and
other short-term corporate obligations; and variable and floating rate
securities and repurchase agreements. The Portfolio may also hold cash.
The commercial paper and other short-term corporate obligations purchased by
the Portfolio will consist only of obligations of U.S. corporations that are
(1) rated at least Prime-2 by Moody's Investors Service ("Moody's") or A-2 by
Standard & Poor's ("S&P"), (2) comparably rated by another nationally
recognized statistical rating organization ("NRSRO") or (3) unrated and
determined by Mitchell Hutchins to be of comparable quality. These obligations
may include variable amount master demand notes, which are unsecured
obligations redeemable upon notice that permit investment of fluctuating
amounts at varying rates of interest pursuant to direct arrangements with the
issuer of the instrument. Such obligations are usually unrated by a rating
agency.
The Portfolio may purchase variable rate securities with remaining maturities
of one year or more issued by U.S. government agencies or instrumentalities or
guaranteed by the U.S. government. The Portfolio may also acquire certain
variable and floating rate instruments issued by U.S. companies. The yield of
these securities varies in relation to changes in specific money market rates
such as the prime rate. These changes
4
<PAGE>
are reflected in adjustments to the yields of the variable rate securities at
least semi-annually, and different securities may have different adjustment
rates.
ADJUSTABLE RATE AND FLOATING RATE MORTGAGE-BACKED SECURITIES. Certain
Portfolios may invest in adjustable rate mortgage ("ARM") and floating rate
mortgage-backed securities. Because the interest rates on ARM and floating rate
mortgage-backed securities are reset in response to changes in a specified
market index, the values of such securities tend to be less sensitive to
interest rate fluctuations than the values of fixed-rate securities. As a
result, during periods of rising interest rates, ARMs generally do not decrease
in value as much as fixed rate securities. Conversely, during periods of
declining interest rates, ARMs generally do not increase in value as much as
fixed rate securities. ARM mortgage-backed securities represent a right to
receive interest payments at a rate that is adjusted to reflect the interest
earned on a pool of ARMs. ARMs generally provide that the borrower's mortgage
interest rate may not be adjusted above a specified lifetime maximum rate or,
in some cases, below a minimum lifetime rate. In addition, certain ARMs provide
for limitations on the maximum amount by which the mortgage interest rate may
adjust for any single adjustment period. ARMs also may provide for limitations
on changes in the maximum amount by which the borrower's monthly payment may
adjust for any single adjustment period. In the event that a monthly payment is
not sufficient to pay the interest accruing on the ARM, any such excess
interest is added to the mortgage loan ("negative amortization"), which is
repaid through future monthly payments. If the monthly payment exceeds the sum
of the interest accrued at the applicable mortgage interest rate and the
principal payment that would have been necessary to amortize the outstanding
principal balance over the remaining term of the loan, the excess reduces the
principal balance of the ARM. Borrowers under ARMs experiencing negative
amortization may take longer to build up their equity in the underlying
property and may be more likely to default.
The rates of interest payable on certain ARMs, and therefore on certain ARM
mortgage-backed securities, are based on indices, such as the one-year constant
maturity Treasury rate, that reflect changes in market interest rates. Others
are based on indices, such as the 11th District Federal Home Loan Bank Cost of
Funds index ("COFI"), that tend to lag behind changes in market interest rates.
The values of ARM mortgage-backed securities supported by ARMs that adjust
based on lagging indices tend to be somewhat more sensitive to interest rate
fluctuations than those reflecting current interest rate levels, although the
values of such ARM mortgage-backed securities still tend to be less sensitive
to interest rate fluctuations than fixed-rate securities.
Floating rate mortgage-backed securities are classes of mortgage-backed
securities that have been structured to represent the right to receive interest
payments at rates that fluctuate in accordance with an index but that generally
are supported by pools comprised of fixed-rate mortgage loans. As with ARM
mortgage-backed securities, interest rate adjustments on Floating Rate
mortgage-backed securities may be based on indices that lag behind market
interest rates. Interest rates on floating rate mortgage-backed securities
generally are adjusted monthly. Floating rate mortgage-backed securities are
subject to lifetime interest rate caps, but they generally are not subject to
limitations on monthly or other periodic changes in interest rates or monthly
payments.
SPECIAL CHARACTERISTICS OF MORTGAGE- AND ASSET-BACKED SECURITIES. Prepayments
on a pool of mortgage loans are influenced by a variety of economic,
geographic, social and other factors, including changes in mortgagors' housing
needs, job transfers, unemployment, mortgagors' net equity in the mortgaged
properties and servicing decisions. Generally, however, prepayments on fixed-
rate mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Similar factors apply to
prepayments on asset-backed securities, but the receivables underlying asset-
backed securities generally are of a shorter maturity and thus are less likely
to experience substantial prepayments. Such securities, however, often provide
that for a specified time period the issuers will replace receivables in the
pool that are repaid with comparable obligations. If the issuer is unable to do
so, repayment of principal on the asset-backed securities may commence at an
earlier date. Mortgage- and asset-backed securities may decrease in value as a
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result of increases in interest rates and may benefit less than other fixed-
income securities from declining interest rates because of the risk of
prepayment.
ARMS also may be subject to a greater rate of prepayments in a declining
interest rate environment. For example, during a period of declining interest
rates, prepayments on ARMs could increase because the availability of fixed
mortgage loans at competitive interest rates may encourage mortgagors to "lock-
in" at a lower interest rate. Conversely, during a period of rising interest
rates, prepayments on ARMs might decrease. The rate of prepayments with respect
to ARMs has fluctuated in recent years.
The rate of interest on mortgage-backed securities is lower than the interest
rates paid on the mortgages included in the underlying pool due to the annual
fees paid to the servicer of the mortgage pool for passing through monthly
payments to certificateholders and to any guarantor, and due to any yield
retained by the issuer. Actual yield to the holder may vary from the coupon
rate, even if adjustable, if the mortgage-backed securities are purchased or
traded in the secondary market at a premium or discount. In addition, there is
normally some delay between the time the issuer receives mortgage payments from
the servicer and the time the issuer makes the payments on the mortgage-backed
securities, and this delay reduces the effective yield to the holder of such
securities.
ILLIQUID SECURITIES. Each Portfolio may invest up to 10% (15% for the
Strategic Fixed Income and Aggressive Growth Portfolios) of its net assets in
illiquid securities. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which a Portfolio has valued the
securities and includes, among other things, purchased over-the-counter ("OTC")
options, repurchase agreements maturing in more than seven days and restricted
securities other than those securities Mitchell Hutchins or the applicable Sub-
Adviser has determined are liquid pursuant to guidelines established by the
Fund's board of trustees. The assets used as cover for OTC options written by a
Portfolio will be considered illiquid unless the OTC options are sold to
qualified dealers who agree that the Portfolio may repurchase any OTC option it
writes at a maximum price to be calculated by a formula set forth in the option
agreement. The cover for an OTC option written subject to this procedure will
be considered illiquid only to the extent that the maximum repurchase price
under the option formula exceeds the intrinsic value of the option. Illiquid
restricted securities may be sold only in privately negotiated transactions or
in public offerings with respect to which a registration statement is in effect
under the Securities Act of 1933 ("1933 Act"). Restricted securities acquired
by the Strategic Fixed Income, Global Income and Global Growth Portfolios
include those that are subject to restrictions contained in the securities laws
of other countries. For these Portfolios, securities that are freely marketable
in the country where they are principally traded, but would not be freely
marketable in the United States, will not be considered illiquid. Where
registration is required, a Portfolio may be obligated to pay all or part of
the registration expenses and a considerable period may elapse between the time
of the decision to sell and the time it may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the Portfolio might obtain a less favorable
price than prevailed when it decided to sell.
Not all restricted securities are illiquid. In recent years a large
institutional market has developed for certain securities that are not
registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities and corporate bonds and notes.
These instruments are often restricted securities because the securities are
sold in transactions not requiring registration. Institutional investors
generally will not seek to sell these instruments to the general public, but
instead will often depend either on an efficient institutional market in which
such unregistered securities can be readily resold or on an issuer's ability to
honor a demand for repayment. Therefore, the fact that there are contractual or
legal restrictions on resale to the general public or certain institutions is
not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted
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securities have developed as a result of Rule 144A, providing both readily
ascertainable values for restricted securities and the ability to liquidate an
investment to satisfy share redemption orders. Such markets might include
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. An insufficient number
of qualified buyers interested in purchasing Rule 144A-eligible restricted
securities held by a Portfolio, however, could affect adversely the
marketability of such portfolio securities and a Portfolio might be unable to
dispose of such securities promptly or at favorable prices.
The board of trustees has delegated the function of making day-to-day
determinations of liquidity to Mitchell Hutchins or the applicable Sub-Adviser,
pursuant to guidelines approved by the board. Mitchell Hutchins or the
applicable Sub-Adviser takes into account a number of factors in reaching
liquidity decisions, including but not limited to (1) the frequency of trades
for the security, (2) the number of dealers that make quotes for the security,
(3) the number of dealers that have undertaken to make a market in the
security, (4) the number of other potential purchasers and (5) the nature of
the security and how trading is effected (e.g., the time needed to sell the
security, how bids are solicited and the mechanics of transfer). Mitchell
Hutchins or the applicable Sub-Adviser monitors the liquidity of restricted
securities in each Portfolio and reports periodically on such decisions to the
board of trustees.
SECTION 4(2) PAPER. Commercial paper issues in which the Portfolios may
invest include securities issued by major corporations without registration
under the 1933 Act in reliance on the exemption from such registration afforded
by Section 3(a)(3) thereof, and commercial paper issued in reliance on the so-
called "private placement" exemption from registration which is afforded by
Section 4(2) of the 1933 Act ("Section 4(2) paper"). Section 4(2) paper is
restricted as to disposition under the federal securities laws in that any
resale must similarly be made in an exempt transaction. Section 4(2) paper is
normally resold to other institutional investors through or with the assistance
of investment dealers who make a market in Section 4(2) paper, thus providing
liquidity. Section 4(2) paper that is issued by a company that files reports
under the Securities Exchange Act of 1934 is generally eligible to be sold in
reliance on the safe harbor of Rule 144A described under "Illiquid Securities"
above. The Portfolios' 10% (15% for the Strategic Fixed Income and Aggressive
Growth Portfolios) limitation on investments in illiquid securities includes
Section 4(2) paper other than Section 4(2) paper that Mitchell Hutchins or the
applicable Sub-Adviser has determined to be liquid pursuant to guidelines
established by the Fund's board of trustees. The board has delegated to
Mitchell Hutchins or the applicable Sub-Adviser the function of making day-to-
day determinations of liquidity with respect to Section 4(2) paper, pursuant to
guidelines approved by the board that require Mitchell Hutchins or the
applicable Sub-Adviser to take into account the same factors described under
"Illiquid Securities" above for other restricted securities and require
Mitchell Hutchins or the applicable Sub-Adviser to perform the same monitoring
and reporting functions.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
Portfolio purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated to
the coupon rate or maturity of the purchased securities. The Portfolio
maintains custody of the underlying securities prior to their repurchase; thus,
the obligation of the bank or dealer to pay the repurchase price on the date
agreed to is, in effect, secured by such securities. If the value of these
securities is less than the repurchase price, plus any agreed-upon additional
amount, the other party to the agreement must provide additional collateral so
that at all times the collateral is at least equal to the repurchase price plus
any agreed-upon additional amount. The difference between the total amount to
be received upon repurchase of the securities and the price that was paid by
the Portfolio upon their acquisition is accrued as interest and included in the
Portfolio's net investment income.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to a Portfolio if the other
party to a repurchase agreement becomes insolvent. Each Portfolio intends to
enter into repurchase
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agreements only with banks and dealers in transactions believed by Mitchell
Hutchins or the applicable Sub-Adviser to present minimum credit risks in
accordance with guidelines established by the Fund's board of trustees.
Mitchell Hutchins or the applicable Sub-Adviser will review and monitor the
creditworthiness of those institutions under the board's general supervision.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio may enter into reverse
repurchase agreements with banks and securities dealers up to an aggregate
value of not more than 5% (33 1/3% for the Strategic Fixed Income Portfolio and
10% for the Global Income Portfolio) of its total assets. Such agreements
involve the sale of securities held by the Portfolio subject to the Portfolio's
agreement to repurchase the securities at an agreed-upon date and price
reflecting a market rate of interest. Such agreements are considered to be
borrowings and may be entered into by Portfolios other than the Strategic Fixed
Income Portfolio only for temporary purposes. While a reverse repurchase
agreement is outstanding, a Portfolio's custodian segregates assets to cover
the amount of the Portfolio's obligations under the reverse repurchase
agreement. See "Investment Policies and Limitations--Segregated Accounts." No
Portfolio other than the Strategic Fixed Income Portfolio will purchase
securities while borrowings (including reverse repurchase agreements) in excess
of 5% of its total assets are outstanding. No Portfolio other than the
Strategic Fixed Income and Global Income Portfolios currently expects to enter
into reverse repurchase agreements during the coming year.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. A security purchased on a when-
issued or delayed delivery basis is recorded as an asset on the commitment date
and is subject to changes in market value, generally based upon changes in the
level of interest rates. Thus, fluctuation in the value of the security from
the time of the commitment date will affect the Fund's net asset value. When a
Portfolio commits to purchase securities on a when-issued or delayed delivery
basis, its custodian segregates assets to cover the amount of the commitment.
See "Investment Policies and Limitations--Segregated Accounts." The Portfolios
purchase when-issued securities only with the intention of taking delivery, but
may sell the right to acquire the security prior to delivery if Mitchell
Hutchins or the applicable Sub-Adviser deems it advantageous to do so, which
may result in a capital gain or loss to a Portfolio.
LENDING OF PORTFOLIO SECURITIES. As indicated in the Prospectus, each
Portfolio is authorized to lend up to 33 1/3% of the total value of its
portfolio securities. A Portfolio may lend its portfolio securities to broker-
dealers or institutional investors that Mitchell Hutchins or the applicable
Sub-Adviser deems qualified, but only when the borrower maintains with the
Portfolio's custodian bank acceptable collateral with the Portfolio's
custodian, marked to market daily, in an amount at least equal to the market
value of the securities loaned, plus accrued interest and dividends. Acceptable
collateral is limited to cash, U.S. government securities and irrevocable
letters of credit that meet certain guidelines established by Mitchell
Hutchins. In determining whether to lend securities to a particular broker-
dealer or institutional investor, Mitchell Hutchins or the applicable Sub-
Adviser will consider, and during the period of the loan will monitor, all
relevant facts and circumstances, including the creditworthiness of the
borrower. The Portfolios will retain authority to terminate any loans at any
time. A Portfolio may pay reasonable administrative and custodial fees in
connection with a loan and may pay a negotiated portion of the interest earned
on the cash or money market instruments held as collateral to the borrower or
placing broker. A Portfolio will receive reasonable interest on the loan or a
flat fee from the borrower and amounts equivalent to any dividends, interest or
other distributions on the securities loaned. A Portfolio will regain record
ownership of loaned securities to exercise beneficial rights, such as voting
and subscription rights and rights to dividends, interest or other
distributions, when regaining such rights is considered to be in the
Portfolio's interest.
SHORT SALES "AGAINST THE BOX". Each Portfolio may engage in short sales of
securities it owns or has the right to acquire at no added cost through
conversion or exchange of other securities it owns (short sales "against the
box") to defer realization of gains or losses for tax or other purposes. To
make delivery to the purchaser in a short sale, the executing broker borrows
the securities being sold short on behalf of the Portfolio, and the Portfolio
is obligated to replace the securities borrowed at a date in the future. When a
Portfolio sells short, it will establish a margin account with the broker
effecting the short sale, and will deposit
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collateral with the broker. In addition, the Portfolio will maintain with its
custodian, in a segregated account, the securities that could be used to cover
the short sale. A Portfolio will incur transaction costs, including interest
expense, in connection with opening, maintaining and closing short sales
against the box. None of the Portfolios currently intends to have obligations
under short-sales that at any time during the coming year exceed 5% of the
Portfolio's net assets.
A Portfolio might make a short sale "against the box" in order to hedge
against market risks when Mitchell Hutchins or an Adviser believes that the
price of a security may decline, thereby causing a decline in the value of a
security owned by the Portfolio or a security convertible into or exchangeable
for a security owned by the Portfolio, or when Mitchell Hutchins or an Adviser
want to sell a security that the Portfolio owns at a current price, but also
wishes to defer recognition of gain or loss for federal income tax purposes.
In such case, any loss in the Portfolio's long position after the short sale
should be reduced by a gain in the short position. Conversely, any gain in the
long position should be reduced by a loss in the short position. The extent to
which gains or losses in the long position are reduced will depend upon the
amount of the securities sold short relative to the amount of the securities
the Portfolio owns, either directly or indirectly, and in the case where the
Portfolio owns convertible securities, changes in the investment values or
conversion premiums of such securities
SEGREGATED ACCOUNTS. When a Portfolio enters into certain transactions that
involve obligations to make future payments to third parties, including dollar
rolls, reverse repurchase agreements or the purchase of securities on a when-
issued or delayed delivery basis, the Portfolio will maintain with an approved
custodian in a segregated account cash, U.S. government securities or other
liquid high grade debt securities, marked to market daily, in an amount at
least equal to the Portfolio's obligation or commitment under such
transactions. As described below under "Hedging and Related Strategies,"
segregated accounts may also be required in connection with certain
transactions involving options or futures contracts, interest rate protection
transactions or forward currency contracts.
INVESTMENT LIMITATIONS. Each Portfolio will not:
(1) purchase any security if, as a result of that purchase, 25% or more
of the Portfolio's total assets would be invested in securities of issuers
having their principal business activities in the same industry, except
that this limitation does not apply to securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities or to municipal
securities (or, in the case of Money Market Portfolio, to certificates of
deposit and bankers' acceptances of domestic branches of U.S. banks).
For Money Market Portfolio only--the following interpretation applies to,
but is not a part of, this fundamental restriction: With respect to this
limitation, domestic and foreign banking will be considered to be different
industries.
(2) issue senior securities or borrow money, except as permitted under
the 1940 Act and then not in excess of 33 1/3% of the Portfolio's total
assets (including the amount of the senior securities issued but reduced by
any liabilities not constituting senior securities) at the time of the
issuance or borrowing, except that the Portfolio may borrow up to an
additional 5% of its total assets (not including the amount borrowed) for
temporary or emergency purposes.
(3) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers'
acceptances or similar instruments will not be considered the making of a
loan.
(4) engage in the business of underwriting securities of other issuers,
except to the extent that the Portfolio might be considered an underwriter
under the federal securities laws in connection with its disposition of
portfolio securities.
(5) purchase or sell real estate, except that investments in securities
of issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments
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supported by interests in real estate are not subject to this limitation,
and except that the Portfolio may exercise rights under agreements relating
to such securities, including the right to enforce security interests and
to hold real estate acquired by reason of such enforcement until that real
estate can be liquidated in an orderly manner.
(6) purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but the Portfolio may purchase,
sell or enter into financial options and futures, forward and spot currency
contracts, swap transactions and other financial contracts or derivative
instruments.
The following investment restriction shall apply to all Portfolios except
Global Income Portfolio:
(7) purchase securities of any one issuer if, as a result, more than 5%
of the Portfolio's total assets would be invested in securities of that
issuer or the Portfolio would own or hold more than 10% of the outstanding
voting securities of that issuer, except that up to 25% of the Portfolio's
total assets may be invested without regard to this limitation, and except
that this limitation does not apply to securities issued or guaranteed by
the U.S. government, its agencies and instrumentalities or to securities
issued by other investment companies.
The following interpretation applies to, but is not a part of, this
fundamental limitation: Mortgage- and asset-backed securities will not be
considered to have been issued by the same issuer by reason of the
securities having the same sponsor, and mortgage- and asset-backed
securities issued by a finance or other special purpose subsidiary that are
not guaranteed by the parent company will be considered to be issued by a
separate issuer from the parent company.
The foregoing fundamental investment limitations cannot be changed with
respect to a Portfolio without the affirmative vote of the lesser of (a) more
than 50% of the outstanding shares of the Portfolio or (b) 67% or more of the
Portfolio's shares present at a meeting of its shareholders if more than 50% of
the outstanding shares of the Portfolio are represented at the meeting in
person or by proxy. If a percentage restriction is adhered to at the time of an
investment or transaction, a later change in percentage resulting from a change
in values of portfolio securities or amount of total assets will not be
considered a violation of any of the foregoing limitations.
The following investment restrictions may be changed by the vote of the
Fund's board of trustees without shareholder approval. Each Portfolio will not:
(1) hold assets of any issuers, at the end of any calendar quarter (or
within 30 days thereafter), to the extent such holdings would cause the
Portfolio to fail to comply with the diversification requirements imposed
by section 817(h) of the Internal Revenue Code and the Treasury regulations
issued thereunder on segregated asset accounts used to fund variable
annuity contracts.
(2) mortgage, pledge or hypothecate any assets except in connection with
permitted borrowings or the issuance of senior securities.
(3) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions and except that the Portfolio may
make margin deposits in connection with its use of financial options and
futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments.
(4) engage in short sales of securities or maintain a short position,
except that the Portfolio may (a) sell short "against the box" and (b)
maintain short positions in connection with its use of financial options
and futures, forward and spot currency contracts, swap transactions and
other financial contracts or derivative instruments.
(5) invest in oil, gas or mineral exploration or development programs or
leases, except that investments in securities of issuers that invest in
such programs or leases and investments in asset-backed securities
supported by receivables generated from such programs or leases are not
subject to this prohibition.
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(6) purchase securities of other investment companies, except to the
extent permitted by the 1940 Act and except that this limitation does not
apply to securities received or acquired as dividends, through offers of
exchange, or as a result of reorganization, consolidation, or merger.
HEDGING AND RELATED STRATEGIES
As discussed in the Prospectus, Mitchell Hutchins or the applicable Sub-
Adviser may use a variety of financial instruments ("Hedging Instruments"),
including certain options, futures contracts (sometimes referred to as
"futures") and options on futures contracts, to attempt to hedge the
Portfolios' investments or attempt to enhance the Portfolios' income or return.
For the Strategic Fixed Income, Global Income and Global Growth Portfolios,
Mitchell Hutchins or the applicable Sub-Adviser also may use forward currency
contracts, foreign currency options and futures and options thereon. High Grade
Fixed Income, Strategic Fixed Income and Global Income Portfolios also may
enter into interest rate protection transactions. The particular Hedging
Instruments are described in Appendix B to the Prospectus. The Money Market is
not authorized to engage in hedging or related strategies.
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Hedging Instrument intended
partially or fully to offset potential declines in the value of one or more
investments held by a Portfolio. Thus, in a short hedge a Portfolio takes a
position in a Hedging Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged. For example, a
Portfolio might purchase a put option on a security to hedge against a
potential decline in the value of that security. If the price of the security
declined below the exercise price of the put, the Portfolio could exercise the
put and thus limit its loss below the exercise price to the premium paid plus
transaction costs. In the alternative, because the value of the put option can
be expected to increase as the value of the underlying security declines, the
Portfolio might be able to close out the put option and realize a gain to
offset the decline in the value of the security.
Conversely, a long hedge is a purchase or sale of a Hedging Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that a Portfolio intends to acquire. Thus, in a
long hedge a Portfolio takes a position in a Hedging Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. For example, a Portfolio might purchase a call option
on a security it intends to purchase in order to hedge against an increase in
the cost of the security. If the price of the security increased above the
exercise price of the call, the Portfolio could exercise the call and thus
limit its acquisition cost to the exercise price plus the premium paid and
transaction costs. Alternatively, the Portfolio might be able to offset the
price increase by closing out an appreciated call option and realizing a gain.
A Portfolio may purchase and write (sell) covered straddles on securities and
stock indices. A long straddle is a combination of a call and a put option
purchased on the same security or on the same futures contract, where the
exercise price of the put is less than or equal to the exercise price of the
call. A Portfolio might enter into a long straddle when Mitchell Hutchins or
the applicable Sub-Adviser believes it likely that interest rates will be more
volatile during the term of the option than the option pricing implies. A short
straddle is a combination of a call and a put written on the same security
where the exercise price of the put is less than or equal to the exercise price
of the call. A Portfolio might enter into a short straddle when Mitchell
Hutchins or the applicable Sub-Adviser believes it unlikely that interest rates
will be as volatile during the term of the option as the option pricing
implies.
Hedging Instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that a Portfolio owns
or intends to acquire. Hedging Instruments on stock indices, in contrast,
generally are used to hedge against price movements in broad equity market
sectors in which the Portfolio has invested or expects to invest. Hedging
Instruments on debt securities may be used to hedge either individual
securities or broad fixed income market sectors.
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The use of Hedging Instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon which they are traded, the
Commodity Futures Trading Commission ("CFTC") and various state regulatory
authorities. In addition, a Portfolio's ability to use Hedging Instruments will
be limited by tax considerations. See "Taxes."
In addition to the products, strategies and risks described below and in the
Prospectus, Mitchell Hutchins or the applicable Sub-Adviser expects to discover
additional opportunities in connection with options, future contracts, forward
currency contracts and other hedging techniques. These new opportunities may
become available as Mitchell Hutchins or the applicable Sub-Adviser develops
new techniques, as regulatory authorities broaden the range of permitted
transactions and as new options, futures contracts, forward currency contracts
or other techniques are developed. Mitchell Hutchins or the applicable Sub-
Adviser may utilize these opportunities to the extent that they are consistent
with the Portfolios' investment objectives and permitted by the Portfolios'
investment limitations and applicable regulatory authorities. The Fund's
Prospectus or Statement of Additional Information will be supplemented to the
extent that new products or techniques involve materially different risks than
those described below or in the Prospectus.
SPECIAL RISKS OF HEDGING STRATEGIES. The use of Hedging Instruments involves
special considerations and risks, as described below. Risks pertaining to
particular Hedging Instruments are described in the sections that follow.
(1) Successful use of most Hedging Instruments depends upon Mitchell
Hutchins' or the applicable Sub-Adviser's ability to predict movements of
the overall securities, currency and interest rate markets, which requires
different skills than predicting changes in the prices of individual
securities. While Mitchell Hutchins or the applicable Sub-Adviser is
experienced in the use of Hedging Instruments, there can be no assurance
that any particular hedging strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Hedging Instrument and price movements of the
investments being hedged. For example, if the value of a Hedging Instrument
used in a short hedge increased by less than the decline in value of the
hedged investment, the hedge would not be fully successful. Such a lack of
correlation might occur due to factors unrelated to the value of the
investments being hedged, such as speculative or other pressures on the
markets in which Hedging Instruments are traded. The effectiveness of
hedges using Hedging Instruments or indices will depend on the degree of
correlation between price movements in the index and price movements in the
securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly
or partially offsetting the negative effect of unfavorable price movements
in the investments being hedged. However, hedging strategies can also
reduce opportunity for gain by offsetting the positive effect of favorable
price movements in the hedged investments. For example, if a Portfolio
entered into a short hedge because Mitchell Hutchins or the applicable Sub-
Adviser projected a decline in the price of a security held by a Portfolio,
and the price of that security increased instead, the gain from that
increase might be wholly or partially offset by a decline in the price of
the Hedging Instrument. Moreover, if the price of the Hedging Instrument
declined by more than the increase in the price of the security, the
Portfolio could suffer a loss. In either such case, the Portfolio would
have been in a better position had it not hedged at all.
(4) As described below, a Portfolio might be required to maintain assets
as "cover," maintain segregated accounts or make margin payments when it
takes positions in Hedging Instruments involving obligations to third
parties (i.e., Hedging Instruments other than purchased options). If a
Portfolio were unable to close out its positions in such Hedging
Instruments, it might be required to continue to maintain such assets or
accounts or make such payments until the position expired or matured. These
requirements might impair a Portfolio's ability to sell a portfolio
security or make an investment at a time when it would otherwise be
favorable to do so, or require that a Portfolio sell a portfolio security
at a disadvantageous time. A Portfolio's ability to close out a position in
a Hedging Instrument prior to expiration or maturity depends on the
existence of a liquid secondary market or, in the absence of such
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a market, the ability and willingness of a contra party to enter into a
transaction closing out the position. Therefore, there is no assurance that
any hedging position can be closed out at a time and price that is
favorable to the Portfolio.
COVER FOR HEDGING STRATEGIES. Transactions using Hedging Instruments, other
than purchased options, expose a Portfolio to an obligation to another party. A
Portfolio will not enter into any such transactions unless it owns either (1)
an offsetting ("covered") position in securities, currencies or other options,
futures contracts or forward currency contracts or (2) cash and short-term
liquid debt securities, with a value sufficient at all times to cover its
potential obligations to the extent not covered as provided in (1) above. Each
Portfolio will comply with SEC guidelines regarding cover for hedging
transactions and will, if the guidelines so require, set aside cash, U.S.
government securities or other liquid, high-grade debt securities in a
segregated account with its custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while the
position in the corresponding Hedging Instrument is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion of
a Portfolio's assets to cover or segregated accounts could impede portfolio
management or the Portfolio's ability to meet redemption requests or other
current obligations.
OPTIONS. Each Portfolio that may use options may purchase put and call
options, and write (sell) covered put and call options, on equity and debt
securities and, in the case of Strategic Fixed Income, Global Income and Global
Growth Portfolios, on foreign currencies. Each Portfolio that may use options
may purchase put and call options and write (sell) covered call options on
stock indices. The purchase of call options may serve as a long hedge, and the
purchase of put options may serve as a short hedge. In addition, the purchase
of a call option on a debt security or stock index can enable a Portfolio to
enhance return by obtaining exposure to the debt or equity markets without
making direct purchases of debt or equity securities. Writing covered put or
call options can enable a Portfolio to enhance income by reason of the premiums
paid by the purchasers of such options. Writing covered put options serves as a
limited long hedge because increases in the value of the hedged instrument
would be offset to the extent of the premium received for writing the option.
However, if the market price of the security underlying a covered put option
declines to less than the exercise price of the option, minus the premium
received, the Portfolio would expect to suffer a loss. Writing covered call
options serves as a limited short hedge, because declines in the value of the
hedged investment would be offset to the extent of the premium received for
writing the option. However, if the security appreciates to a price higher than
the exercise price of the call option, it can be expected that the option will
be exercised and the Portfolio will be obligated to sell the security at less
than its market value. The securities or other assets used as cover for OTC
options written by a Portfolio would be considered illiquid to the extent
described under "Investment Policies and Restrictions--Illiquid Securities."
The value of an option position will reflect, among other things, the current
market value of the underlying investment, the time remaining until expiration,
the relationship of the exercise price to the market price of the underlying
investment, the historical price volatility of the underlying investment and
general market conditions. Options normally have expiration dates of up to nine
months. Options that expire unexercised have no value.
A Portfolio may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, a Portfolio may terminate
its obligation under a call option that it had written by purchasing an
identical call option; this is known as a closing purchase transaction.
Conversely, a Portfolio may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a
closing sale transaction.
The Portfolios may purchase or write both exchange-traded and OTC options.
Currently, many options on equity securities are exchange-traded. Exchange
markets for options on debt securities and foreign currencies exist but are
relatively new, and these instruments are primarily traded on the OTC market.
13
<PAGE>
Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed which,
in effect, guarantees completion of every exchange-traded option transaction.
In contrast, OTC options are contracts between the Portfolio and its contra
party (usually a securities dealer or a bank) with no clearing organization
guarantee. Thus, when the Portfolio purchases or writes an OTC option, it
relies on the contra party to make or take delivery of the underlying
investment upon exercise of the option. Failure by the contra party to do so
would result in the loss of any premium paid by the Portfolio as well as the
loss of any expected benefits of the transaction. A Portfolio will enter into
OTC option transactions only with contra parties that have a net worth of at
least $20 million.
Generally, the OTC debt and foreign currency options used by the Portfolios
are European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
A Portfolio's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. Each Portfolio intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although a
Portfolio will enter into OTC options only with contra parties that are
expected to be capable of entering into closing transactions with the
Portfolio, there is no assurance that the Portfolio will in fact be able to
close out an OTC option position at a favorable price prior to expiration. In
the event of insolvency of the contra party, the Portfolio might be unable to
close out an OTC option position at any time prior to its expiration.
If the Portfolio were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call
option written by a Portfolio could cause material losses because the Portfolio
would be unable to sell the investment used as cover for the written option
until the option expires or is exercised.
LIMITATIONS ON THE USE OF OPTIONS. The Portfolios' use of options is governed
by the following guidelines, which can be changed by the Fund's board of
trustees without shareholder vote:
(1) A Portfolio may purchase a put or call option, including any
straddles or spreads, only if the value of its premium, when aggregated
with the premiums on all other options held by the Portfolio, does not
exceed 5% of the Portfolio's total assets.
(2) The aggregate value of securities underlying put options written by a
Portfolio, determined as of the date the put options are written, will not
exceed 50% of the Portfolio's net assets.
(3) The aggregate premiums paid on all options (including options on
securities, foreign currencies and stock or bond indices and options on
futures contracts) purchased by a Portfolio that are held at any time will
not exceed 20% of the Portfolio's net assets.
FUTURES. The purchase of futures or call options thereon can serve as a long
hedge, and the sale of futures or the purchase of put options thereon can serve
as a short hedge. Writing covered call options on futures contracts can serve
as a limited short hedge, using a strategy similar to that used for writing
covered call options on securities and indices. The purchase of a debt security
or stock index futures contract or a call option thereon can enable a Portfolio
to enhance return by obtaining exposure to the debt or equity markets without
making direct purchases of debt or equity securities.
Futures strategies also can be used to manage the average duration of a
Portfolio. If Mitchell Hutchins or the applicable Sub-Adviser wishes to shorten
the average duration of a Portfolio, the Portfolio may sell a futures contract
or a call option thereon, or purchase a put option on that futures contract. If
Mitchell Hutchins or the applicable Sub-Adviser wishes to lengthen the average
duration of a Portfolio, the Portfolio may buy a futures contract or a call
option thereon.
14
<PAGE>
The Strategic Fixed Income, Global Income and Global Growth Portfolios may
also write put options on foreign currency futures contracts while at the same
time purchasing call options on the same futures contracts in order
synthetically to create a long futures contract position. Such options would
have the same strike prices and expiration dates. Each Portfolio will engage in
this strategy only when it is more advantageous to the Portfolio than is
purchasing the futures contract.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Portfolio is required to deposit in a
segregated account with its custodian, in the name of the futures broker
through whom the transaction was effected, "initial margin" consisting of cash,
U.S. government securities or other liquid, high-grade debt securities, in an
amount generally equal to 10% or less of the contract value. Margin must also
be deposited when writing an option on a futures contract, in accordance with
applicable exchange rules. Unlike margin in securities transactions, initial
margin on futures contracts does not represent a borrowing, but rather is in
the nature of a performance bond or good-faith deposit that is returned to the
Portfolio at the termination of the transaction if all contractual obligations
have been satisfied. Under certain circumstances, such as periods of high
volatility, the Portfolio may be required by an exchange to increase the level
of its initial margin payment, and initial margin requirements might be
increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Portfolio's obligations to or from a
futures broker. When a Portfolio purchases an option on a future, the premium
paid plus transaction costs is all that is at risk. In contrast, when a
Portfolio purchases or sells a futures contract or writes a call option
thereon, it is subject to daily variation margin calls that could be
substantial in the event of adverse price movements. If the Portfolio has
insufficient cash to meet daily variation margin requirements, it might need to
sell securities at a time when such sales are disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
Each Portfolio intends to enter into futures transactions only on exchanges or
boards of trade where there appears to be a liquid secondary market. However,
there can be no assurance that such a market will exist for a particular
contract at a particular time.
Under certain circumstances, futures exchanges may establish daily limits on
the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If a Portfolio were unable to liquidate a futures or related options position
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. The Portfolio would continue to be
subject to market risk with respect to the position. In addition, except in the
case of purchased options, the Portfolio would continue to be required to make
daily variation margin payments and might be required to maintain the position
being hedged by the future or option or to maintain cash or securities in a
segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options
markets are subject to daily variation margin calls and might be compelled to
liquidate futures or related options positions whose prices are moving
unfavorably to avoid being subject to further calls. These liquidations could
increase price
15
<PAGE>
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, "program trading" and
other investment strategies might result in temporary price distortions.
LIMITATIONS ON THE USE OF FUTURES. The Portfolios' use of futures is governed
by the following guidelines, which can be changed by the Fund's board of
trustees without shareholder vote.
(1) To the extent a Portfolio enters into futures contracts, options on
futures positions and options on foreign currencies trade on a commodities
exchange that are not for bona fide hedging purposes (as defined by the
CFTC), the aggregate initial margin and premiums on those positions
(excluding the amount by which options are "in-the-money") may not exceed
5% of the Portfolio's net assets.
(2) The aggregate premiums on all options (including options on
securities, foreign currencies and stock indices and options on futures
contracts) purchased by a Portfolio that are held at any time will not
exceed 20% of the Portfolio's net assets.
(3) The aggregate margin deposits on all futures contracts and options
thereon held at any time by a Portfolio will not exceed 5% of the
Portfolio's total assets.
FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS. The Strategic
Fixed Income, Global Income and Global Growth Portfolios may use options and
futures on foreign currencies, as described above, and forward currency forward
contracts, as described below, to hedge against movements in the values of the
foreign currencies in which the Portfolios' securities are denominated. Such
currency hedges can protect against price movements in a security that a
Portfolio owns or intends to acquire that are attributable to changes in the
value of the currency in which it is denominated. Such hedges do not, however,
protect against price movements in the securities that are attributable to
other causes.
The Portfolios might seek to hedge against changes in the value of a
particular currency when no Hedging Instruments on that currency are available
or such Hedging Instruments are more expensive than certain other Hedging
Instruments. In such cases, a Portfolio may hedge against price movements in
that currency by entering into transactions using Hedging Instruments on
another foreign currency or a basket of currencies, the values of which
Mitchell Hutchins or the applicable Sub-Adviser believes will have a high
degree of positive correlation to the value of the currency being hedged. The
risk that movements in the price of the Hedging Instrument will not correlate
perfectly with movements in the price of the currency being hedged is magnified
when this strategy is used.
The value of Hedging Instruments on foreign currencies depends on the value
of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Hedging
Instruments, the Portfolios could be disadvantaged by having to deal in the odd
lot market (generally consisting of transactions of less than $1 million) for
the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a
global, round-the-clock market. To the extent the U.S. options or futures
markets are closed while the markets for the underlying currencies remain open,
significant price and rate movements might take place in the underlying markets
that cannot be reflected in the markets for the Hedging Instruments until they
reopen.
16
<PAGE>
Settlement of hedging transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency.
Thus, a Portfolio might be required to accept or make delivery of the
underlying foreign currency in accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking arrangements by U.S. residents and
might be required to pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.
FORWARD CURRENCY CONTRACTS. The Strategic Fixed Income, Global Income and
Global Growth Portfolios may enter into forward currency contracts to purchase
or sell foreign currencies for a fixed amount of U.S. dollars or another
foreign currency. Such transactions may serve as long hedges--for example, a
Portfolio may purchase a forward currency contract to lock in the U.S. dollar
price of a security denominated in a foreign currency that the Portfolio
intends to acquire. Forward currency contract transactions may also serve as
short hedges--for example, a Portfolio may sell a forward currency contract to
lock in the U.S. dollar equivalent of the proceeds from the anticipated sale of
a security denominated in a foreign currency.
As noted above, these Portfolios may seek to hedge against changes in the
value of a particular currency by using forward contracts on another foreign
currency or a basket of currencies, the value of which Mitchell Hutchins or the
applicable Sub-Adviser believes will have a positive correlation to the values
of the currency being hedged. In addition, the Portfolios may use forward
currency contracts to shift exposure to foreign currency fluctuations from one
country to another. For example, if a Portfolio owns securities denominated in
a foreign currency and Mitchell Hutchins or the applicable Sub-Adviser believes
that currency will decline relative to another currency, it might enter into a
forward contract to sell an appropriate amount of the first foreign currency,
with payment to be made in the second foreign currency. Transactions that use
two foreign currencies are sometimes referred to as "cross hedging." Use of a
different foreign currency magnifies the risk that movements in the price of
the Hedging Instrument will not correlate or will correlate unfavorably with
the foreign currency being hedged.
The cost to the Portfolios engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and
the market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
When a Portfolio enters into a forward currency contract, it relies on the
contra party to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the contra party to do so would result in
the loss of any expected benefit of the transaction.
As is the case with future contracts, parties to forward currency contracts
can enter into offsetting closing transactions, similar to closing transactions
on futures, by entering into an instrument identical to the instrument held or
written, but in the opposite direction. Secondary markets generally do not
exist for forward currency contracts, with the result that closing transactions
generally can be made for forward currency contracts only by negotiating
directly with the contra party. Thus, there can be no assurance that a
Portfolio will in fact be able to close out a forward currency contract at a
favorable price prior to maturity. In addition, in the event of insolvency of
the contra party, the Portfolio might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the Portfolio would
continue to be subject to market risk with respect to the position, and would
continue to be required to maintain a position in securities denominated in the
securities or currencies that are the subject of the hedge or to maintain cash
or securities in a segregated account.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the
foreign currency contract has been established. Thus, a Portfolio might need to
purchase or sell foreign currencies in the spot (cash) market to the extent
such foreign currencies are not covered by forward contracts. The projection of
short-term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
17
<PAGE>
LIMITATIONS ON THE USE OF FORWARD CURRENCY CONTRACTS. The Strategic Fixed
Income, Global Income and Global Growth Portfolios may enter into forward
currency contracts or maintain a net exposure to such contracts only if (1) the
consummation of the contracts would not obligate the Portfolio to deliver an
amount of foreign currency in excess of the value of the position being hedged
by such contracts or (2) the Portfolio maintains appropriate assets in a
segregated account in an amount not less than the value of its total assets
committed to the consummation of the contract and not covered as provided in
(1) above, as described above in "Investment Policies and Limitations--
Segregated Accounts."
INTEREST RATE PROTECTION TRANSACTIONS. The High Grade Fixed Income, Strategic
Fixed Income and Global Income Portfolios may enter into interest rate
protection transactions, including interest rate swaps and interest rate caps,
collars and floors. Interest rate swap transactions involve an agreement
between two parties to exchange payments that are based, for example, on
variable and fixed rates of interest and that are calculated on the basis of a
specified amount of principal (the "notional principal amount") for a specified
period of time. Interest rate cap and floor transactions involve an agreement
between two parties in which the first party agrees to make payments to the
counterparty when a designated market interest rate goes above (in the case of
a cap) or below (in the case of a floor) a designated level on predetermined
dates or during a specified time period. Interest rate collar transactions
involve an agreement between two parties in which payments are made when a
designated market interest rate either goes above a designated ceiling level or
goes below a designated floor level on predetermined dates or during a
specified time period.
Each Portfolio expects to enter into interest rate protection transactions to
preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities it
anticipates purchasing at a later date. The Portfolios intend to use these
transactions as a hedge and not as a speculative investment. Interest rate
protection transactions are subject to risks comparable to those described
above with respect to other hedging strategies.
The Portfolios each may enter into interest rate swaps, caps, collars and
floors on either an asset-based or liability-based basis, depending on whether
it is hedging its assets or its liabilities, and will usually enter into
interest rate swaps on a net basis, i.e., the two payment streams are netted
out, with the Portfolio receiving or paying, as the case may be, only the net
amount of the two payments. Inasmuch as these interest rate protection
transactions are entered into for good faith hedging purposes, and inasmuch as
segregated accounts will be established with respect to such transactions,
Mitchell Hutchins and the Portfolios believe such obligations do not constitute
senior securities and, accordingly, will not treat them as being subject to the
Portfolio's borrowing restrictions. The net amount of the excess, if any, of a
Portfolio's obligations over its entitlements with respect to each interest
rate swap will be accrued on a daily basis and appropriate Portfolio assets
having an aggregate net asset value at least equal to the accrued excess will
be maintained in a segregated account as described above in "Investment
Policies and Restrictions--Segregated Accounts." Each Portfolio also will
establish and maintain such segregated accounts with respect to its total
obligations under any interest rate swaps that are not entered into on a net
basis and with respect to any interest rate caps, collars and floors that are
entered into by the Portfolio.
Each Portfolio will enter into interest rate protection transactions only
with banks and recognized securities dealers believed by Mitchell Hutchins or
the Sub-Adviser to present minimal credit risks in accordance with guidelines
established by the Fund's board of trustees. If there is a default by the other
party to such a transaction, the Portfolio will have to rely on its contractual
remedies (which may be limited by bankruptcy, insolvency or similar laws)
pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. Caps, collars and floors are more
recent innovations for which documentation is less standardized, and,
accordingly, they are less liquid than swaps.
18
<PAGE>
TRUSTEES AND OFFICERS
The trustees and executive officers of the Fund, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
NAME AND ADDRESS*; AGE POSITION WITH THE FUND AND OTHER DIRECTORSHIPS
---------------------- ---------------------- -----------------------
<C> <C> <S>
Margo N. Alexander**; 49 Trustee and President Mrs. Alexander is presi-
dent, chief executive of-
ficer and a director of
Mitchell Hutchins (since
January 1995) and also is
an executive vice presi-
dent and director of
PaineWebber. Mrs. Alexan-
der is president and a
director or trustee of 30
investment companies for
which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
Richard Q. Armstrong; 60 Trustee Mr. Armstrong is chairman
78 West Brother Drive and principal of RQA En-
Greenwich, CT 06830 terprises (management
consulting firm) (since
April 1991 and principal
occupation since March
1995). Mr. Armstrong is
also a director of Hi Lo
Automotive, Inc. He was
chairman of the board,
chief executive officer
and co-owner of Adiron-
dack Beverages (producer
and distributor of soft
drinks and
sparkling/still waters)
(October 1993-March
1995). He was a partner
of The New England Con-
sulting Group (management
consulting firm) (Decem-
ber 1992-September 1993).
He was managing director
of LVMH U.S. Corporation
(U.S. subsidiary of the
French luxury goods con-
glomerate, Luis Vuitton
Moet Hennessey Corpora-
tion) (1987-1991) and
chairman of its wine and
spirits subsidiary,
Schieffelin & Somerset
Company (1987-1991). Mr.
Armstrong is a director
or trustee of 29 invest-
ment companies for which
Mitchell Hutchins or
PaineWebber serves as in-
vestment adviser.
E. Garrett Bewkes, Jr.**; 69 Trustee and Chairman Mr. Bewkes is a director
of the Board of of Paine Webber Group
Trustees Inc. ("PW Group") (hold-
ing company of
PaineWebber and Mitchell
Hutchins). Prior to De-
cember 1995, he was a
consultant to PW Group.
Prior to 1988 he was
chairman of the board,
president and chief exec-
utive officer of American
Bakeries Company. Mr.
Bewkes is also a director
of Interstate Bakeries
Corporation, NaPro
BioTherapeutics, Inc. and
a director or trustee of
30 investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment ad-
viser.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
NAME AND ADDRESS*; AGE POSITION WITH THE FUND AND OTHER DIRECTORSHIPS
---------------------- ---------------------- -----------------------
<C> <C> <S>
Richard R. Burt; 49 Trustee Mr. Burt is chairman of
1101 Connecticut Avenue, N.W. International Equity
Washington, D.C. 20036 Partners (international
investments and consult-
ing firm) (since March
1994) and a partner of
McKinsey & Company (man-
agement consulting firm)
(since 1991). He is also
a director of American
Publishing Company. He
was the chief negotiator
in the Strategic Arms
Reduction Talks with the
former Soviet Union
(1989-1991) and the U.S.
Ambassador to the Fed-
eral Republic of Germany
(1985-1989). Mr. Burt is
also a director or
trustee of 29 investment
companies for which
Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Mary C. Farrell**; 46 Trustee Ms. Farrell is a managing
director, senior invest-
ment strategist and mem-
ber of the Investment
Policy Committee of
PaineWebber in 1982. She
is a member of the Fi-
nancial Women's Associa-
tion and Women's Eco-
nomic Roundtable, and is
employed as a regular
panelist on Wall Street
Week with Louis
Rukeyser. She also
serves on the Board of
Overseers of New York
University's Stern
School of Business. Ms.
Farrell also is a direc-
tor or trustee of 29 in-
vestment companies for
which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
Meyer Feldberg; 54 Trustee Mr. Feldberg is Dean and
Columbia University Professor of Management
101 Uris Hall of the Graduate School
New York, New York 10027 of Business, Columbia
University. Prior to
1989, he was president
of the Illinois Insti-
tute of Technology. Dean
Feldberg is also a di-
rector of AMSCO Interna-
tional Inc., Federated
Department Stores, Inc.,
and New World Communica-
tions Group Incorporated
and a director or
trustee of 29 investment
companies for which
Mitchell Hutchins or
PaineWebber serves as
investment adviser.
George W. Gowen; 66 Trustee Mr. Gowen is a partner in
666 Third Avenue the law firm of Dunning-
New York, New York 10017 ton, Bartholow & Miller.
Prior to May 1994 he was
a partner in the law
firm of Fryer, Ross &
Gowen. Mr. Gowen is also
a director of Columbia
Real Estate Investments,
Inc. and a director or
trustee of 29 investment
companies for which
Mitchell Hutchins or
PaineWebber serves as
investment adviser.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
NAME AND ADDRESS*; AGE POSITION WITH THE FUND AND OTHER DIRECTORSHIPS
---------------------- ---------------------- -----------------------
<C> <C> <S>
Frederic V. Malek; 59 Trustee Mr. Malek is Chairman of
901 15th Street, N.W. Thayer Capital Partners
Suite 300 (investment bank) and a
Washington, D.C. 20005 co-chairman and director
of CB Commercial Group
Inc. (real estate). From
January 1992 to November
1992 he was campaign man-
ager of Bush-Quayle '92.
From 1990 to 1992, he was
vice chairman and, from
1989 to 1990, he was pres-
ident of Northwest Air-
lines Inc., NWA Inc.
(holding company of North-
west Airlines Inc.) and
Wings Holdings Inc. (hold-
ing company of NWA Inc.).
Prior to 1989, he was em-
ployed by the Marriott
Corporation (hotels, res-
taurants, airline catering
and contract feeding),
where he most recently was
an executive vice presi-
dent and president of
Marriott Hotels and Re-
sorts. Mr. Malek is also a
director of American Man-
agement Systems, Inc., Au-
tomatic Data Processing,
Inc., Avis, Inc., FPL
Group, Inc., ICF Interna-
tional, Manor Care, Inc.
and National Education
Corporation and a director
or trustee of 29 invest-
ment companies for which
Mitchell Hutchins or
PaineWebber serves as in-
vestment adviser.
Carl W. Schafer; 60 Trustee Mr. Schafer is president of
P.O. Box 1164 the Atlantic Foundation
Princeton, New Jersey 08542 (charitable foundation
supporting mainly oceano-
graphic exploration and
research). He also is a
director of Roadway Ex-
press, Inc. (trucking),
The Guardian Group of Mu-
tual Funds, Evans Systems,
Inc. (a motor fuels, con-
venience store and diver-
sified company), Hidden
Lake Gold Mines Ltd. (gold
mining), Electronic Clear-
ing House, Inc. (financial
transactions processing),
Wainoco Oil Corporation
and Nutraceutix Inc. (bio-
technology). Prior to Jan-
uary 1993, Mr. Schafer was
chairman of the Investment
Advisory Committee of the
Howard Hughes Medical In-
stitute. Mr. Schafer also
is a director or trustee
of 29 investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment ad-
viser.
John R. Torell III; 56 Trustee Mr. Torell is chairman of
767 Fifth Avenue Torell Management, Inc.
Suite 4605 (financial advisory firm)
New York, NY 10153 (since 1989), chairman of
Telesphere Corporation
(electronic provider of
financial information) and
a partner of Zilkha & Com-
pany (merchant banking and
private investment compa-
ny). He is the former
chairman and chief execu-
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
NAME AND ADDRESS*; AGE POSITION WITH THE FUND AND OTHER DIRECTORSHIPS
---------------------- ---------------------- -----------------------
<C> <C> <S>
tive officer of Fortune
Bancorp (since 1990-1991 and
1990-1994, respectively), the
former chairman, president and
chief executive officer of
CalFed, Inc. (savings associa-
tion) (1988 to 1989) and for-
mer president of Manufacturers
Hanover Corp. (bank) (prior to
1988). Mr. Torell is also a
director of American Home
Products Corp., New Colt Inc.
(armament manufacturer) and
Volt Information Sciences Inc.
Mr. Torell is a director or
trustee of 29 investment com-
panies for which Mitchell
Hutchins or PaineWebber serves
as investment adviser.
T. Kirkham Barneby; 49 Vice President Mr. Barneby is a managing di-
rector and Chief investment
officer--Quantitative Invest-
ment of Mitchell Hutchins.
Prior to September 1994, he
was a senior vice president at
Vantage Global Management.
Prior to June 1993, a senior
vice president at Mitchell
Hutchins. Mr. Barneby is also
a vice president of four in-
vestment companies for which
Mitchell Hutchins or
PaineWebber serves as invest-
ment adviser.
Teresa M. Boyle; 37 Vice President Ms. Boyle is a first vice pres-
ident and manager-- advisory
administration of Mitchell
Hutchins. Prior to November
1993, she was compliance man-
ager of Hyperion Capital Man-
agement, Inc., an investment
advisory firm. Prior to April
1993, Ms. Boyle was a vice
president and manager--legal
administration of Mitchell
Hutchins. Ms. Boyle is also a
vice president of 30 invest-
ment companies for which
Mitchell Hutchins or
PaineWebber serves as invest-
ment adviser.
Ellen R. Harris; 49 Vice President Ms. Harris is a managing direc-
tor of Mitchell Hutchins. Ms.
Harris is also a vice presi-
dent of two investment compa-
nies for which Mitchell
Hutchins or PaineWebber serves
as investment adviser.
C. William Maher; 35 Vice President and Mr. Maher is a first vice pres-
Assistant Treasurer ident and the senior manager
of the Fund Administration Di-
vision of Mitchell Hutchins.
Mr. Maher is also a vice pres-
ident and assistant treasurer
of 30 investment companies for
which Mitchell Hutchins or
PaineWebber serves as invest-
ment adviser.
Dennis McCauley; 49 Vice President Mr. McCauley is a managing di-
rector and Chief Investment
Officer--Fixed Income of
Mitchell Hutchins. Prior to
December 1994, he was Director
of Fixed Income Investments of
IBM Corporation. Mr. McCauley
is also a vice president of 19
investment companies for which
Mitchell Hutchins or
PaineWebber serves as invest-
ment adviser.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
NAME AND ADDRESS*; AGE POSITION WITH THE FUND AND OTHER DIRECTORSHIPS
---------------------- ---------------------- -----------------------
<C> <C> <S>
Susan Messina; 35 Vice President Ms. Messina is a senior vice
president of Mitchell
Hutchins. Ms. Messina has
been with Mitchell Hutchins
since 1982. Ms. Messina is
also a vice president of
five investment companies
for which Mitchell Hutchins
or PaineWebber serves as in-
vestment adviser.
Ann E. Moran; 38 Vice President and Ms. Moran is a vice president
Assistant Treasurer of Mitchell Hutchins. Ms.
Moran is also a vice presi-
dent and assistant treasurer
of 30 investment companies
for which Mitchell Hutchins
or PaineWebber serves as in-
vestment adviser.
Dianne E. O'Donnell; 44 Vice President and Ms. O'Donnell is a senior
Secretary vice president and deputy
general counsel of Mitchell
Hutchins. Ms. O'Donnell is
also a vice president and
secretary of 30 investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment advis-
er.
Victoria E. Schonfeld; 49 Vice President Ms. Schonfeld is a managing
director and general counsel
of Mitchell Hutchins. From
April 1990 to May 1994, she
was a partner in the law
firm of Arnold & Porter. Ms.
Schonfeld is also a vice
president and assistant sec-
retary of 30 investment com-
panies for which Mitchell
Hutchins or PaineWebber
serves as investment advis-
er.
Paul H. Schubert; 33 Vice President and Mr. Schubert is a first vice
Assistant Treasurer president and a senior man-
ager of the mutual fund fi-
nance division of Mitchell
Hutchins. From August 1992
to August 1994, he was a
vice president at BlackRock
Financial Management L.P.
Prior to August 1992, he was
an audit manager with Ernst
& Young LLP. Mr. Schubert is
also a vice president and
assistant secretary of 30
investment companies for
which Mitchell Hutchins or
PaineWebber serves as in-
vestment adviser.
Nirmal Singh; 39 Vice President Mr. Singh is a vice president
of Mitchell Hutchins. Prior
to 1993, he was a member of
the portfolio management
team at Merrill Lynch Asset
Management, Inc. Mr. Singh
is also vice president of
five investment companies
for which Mitchell Hutchins
or PaineWebber serves as in-
vestment adviser.
Julian F. Sluyters; 35 Vice President and Mr. Sluyters is a senior vice
Treasurer president and the director
of the mutual fund finance
division of Mitchell
Hutchins. Prior to 1991, he
was an audit senior manager
with Ernst & Young LLP. Mr.
Sluyters is also a vice
president and treasurer of
30 investment companies for
which Mitchell Hutchins or
PaineWebber serves as in-
vestment adviser.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
NAME AND ADDRESS*; AGE POSITION WITH THE FUND AND OTHER DIRECTORSHIPS
---------------------- ---------------------- -----------------------
<C> <C> <S>
Mark A. Tincher; 40 Vice President Mr. Tincher is a managing direc-
tor and chief investment offi-
cer--U.S. equity investments of
Mitchell Hutchins. Prior to
March 1995, he was a vice pres-
ident and directed the U.S.
funds management and equity re-
search areas of Chase Manhattan
Private Bank. Mr. Tincher is
also vice president of 13 in-
vestment companies for which
Mitchell Hutchins or
PaineWebber serves as invest-
ment adviser.
Craig M. Varrelman; 37 Vice President Mr. Varrelman is a first vice
president of Mitchell Hutchins.
Mr. Varrelman is also vice
president of five investment
companies for which Mitchell
Hutchins or PaineWebber serves
as investment adviser.
Stuart Waugh; 40 Vice President Mr. Waugh is a managing director
and a portfolio manager of
Mitchell Hutchins responsible
for global fixed income invest-
ments and currency trading. Mr.
Waugh is also a vice president
of five investment companies
for which Mitchell Hutchins or
PaineWebber serves as invest-
ment adviser.
Keith A. Weller; 34 Vice President and Mr. Weller is a first vice pres-
Assistant Secretary ident and associate general
counsel of Mitchell Hutchins.
From September 1987 to May
1995, he was an attorney in
private practice. Mr. Weller is
also a vice president and as-
sistant secretary of 29 invest-
ment companies for which Mitch-
ell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
- --------
*Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
**Mrs. Alexander, Mr. Bewkes and Ms. Farrell are "interested persons" of the
Fund as defined in the Investment Company Act of 1940 ("1940 Act") by virtue
of their positions with Mitchell Hutchins, PaineWebber and/or PW Group.
24
<PAGE>
The Fund pays trustees who are not "interested persons" of the Fund $500 per
Portfolio annually and $150 per meeting of the board or any committee thereof.
Trustees are reimbursed for any expenses incurred in attending meetings.
Because Mitchell Hutchins performs substantially all of the services necessary
for the operation of the Fund, the Fund requires no employees. No officer,
director or employee of Mitchell Hutchins or PaineWebber receives any
compensation from the Fund for acting as a trustee or officer. The table below
includes certain information relating to the compensation of the Fund's current
trustees who held office during the fiscal year ended December 31, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PREFERRED
OR TOTAL
RETIREMENT COMPENSATION
BENEFITS FROM THE
AGGREGATE ACCRUED AS ESTIMATED FUND AND THE
COMPENSATION PART OF ANNUAL FUND COMPLEX
FROM THE FUND'S BENEFITS UPON PAID TO
NAME OF PERSON, POSITION THE FUND* EXPENSES RETIREMENT TRUSTEES+
------------------------ ------------ ---------- ------------- ------------
<S> <C> <C> <C> <C>
Richard Q. Armstrong,
Trustee................... $ -- -- -- $ 9,000
Richard R. Burt,
Trustee................... -- -- -- 7,750
Meyer Feldberg,
Trustee................... 6,750 -- -- 106,375
George W. Gowen,
Trustee................... 6,750 -- -- 99,750
Frederic V. Malek,
Trustee................... 6,750 -- -- 99,750
Carl W. Schafer,
Trustee................... -- -- -- 118,175
John R. Torell, III,
Trustee................... -- -- -- 28,125
</TABLE>
- --------
Only independent members of the board of trustees are compensated by the Fund
and identified above; trustees who are "interested persons," as defined by the
1940 Act, do not receive compensation.
* Represents fees paid to each trustee during the fiscal year ended December
31, 1995.
+ Represents total compensation paid to each trustee during the calendar year
ended December 31, 1995.
25
<PAGE>
INVESTMENT ADVISORY SERVICES
Mitchell Hutchins acts as the investment adviser and administrator of each
Portfolio pursuant to a contract with the Fund dated April 21, 1988 as
supplemented by Fee Agreements dated May 1, 1989, December 30, 1991 and
September 1, 1993 ("Advisory Contract"). Under the Advisory Contract, the Fund
pays Mitchell Hutchins a fee for each Portfolio, computed daily and payable
monthly, according to the schedule set forth in the Prospectus.
During each of the three years in the period ended December 31, 1995,
Mitchell Hutchins earned (or accrued) advisory fees (net of any waivers) in the
amounts set forth below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
PORTFOLIO 1995 1994 1993
- --------- -------- -------- --------
<S> <C> <C> <C>
Money Market Portfolio.............................. $128,777 $103,238 $ 78,323
High Grade Fixed Income Portfolio................... 48,852 23,797 291
Strategic Fixed Income Portfolio.................... 90,046 105,843 132,588
Global Income Portfolio............................. 351,681 473,755 519,148
Balanced Portfolio.................................. 110,377 236,113 302,573
Growth and Income Portfolio......................... 94,315 93,915 139,064
Growth Portfolio.................................... 334,603 355,689 373,942
Aggressive Growth Portfolio......................... 133,956 79,623 948
Global Growth Portfolio............................. 257,692 332,624 201,799
</TABLE>
The Advisory Contract authorizes Mitchell Hutchins to retain one or more sub-
advisers but does not require Mitchell Hutchins to do so. Under a Sub-Advisory
Contract dated September 21, 1995, Pacific Investment Management Company
("PIMCO") serves as sub-adviser to the Strategic Fixed Income Portfolio and was
paid (or accrued) by Mitchell Hutchins (not the Portfolio) sub-advisory fees of
$11,324 for the fiscal year ended December 31, 1995. Under a Sub-Advisory
Contract dated September 1, 1993, Nicholas-Applegate Capital Management serves
as sub-adviser to the Aggressive Growth Portfolio and was paid (or accrued) by
Mitchell Hutchins (not the Portfolio) sub-advisory fees of $83,723, $49,765 and
$0 for the fiscal years ended December 31, 1995, December 31, 1994 and December
31, 1993, respectively. Under a Sub-Advisory Contract dated March 23, 1995, GE
Investment Management Incorporated serves as sub-adviser to the Global Growth
Portfolio and was paid (or accrued) by Mitchell Hutchins (not the Portfolio)
sub-advisory fees of $74,893 for the fiscal year ended December 31, 1995.
Under a Sub-Advisory Contract dated September 1, 1993, Wolf, Webb, Burk &
Campbell served as sub-adviser to the High Grade Fixed Income Portfolio until
July , 1995 and was paid (or accrued) by Mitchell Hutchins (not the Portfolio)
sub-advisory fees of $15,832, $14,277 and $0 for the fiscal years ended
December 31, 1995, December 31, 1994 and December 31, 1993, respectively. Under
a Sub-Advisory Contract dated May 26, 1994, Mitchell Hutchins Institutional
Investors Inc. served as sub-adviser to the Growth and Income Portfolio until
April , 1995 and was paid (or accrued) by Mitchell Hutchins (not the
Portfolio) sub-advisory fees of $7,400 and $27,400 for the fiscal years ended
December 31, 1995 and December 31, 1994, respectively.
Under the terms of the Advisory Contract, each Portfolio bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of the Fund not readily identifiable as belonging to
one of the Portfolios are allocated among the Portfolios by or under the
direction of the Fund's board of trustees in such manner as the board
determines to be fair and equitable. Expenses borne by each Portfolio include,
but are not limited to, the following (or the Portfolio's allocated share of
the following): (1) the cost (including brokerage commissions, if any) of
securities purchased or sold by the Portfolio and any losses incurred in
connection therewith; (2) fees payable to and expenses incurred on behalf of
the Portfolio by Mitchell Hutchins; (3) organizational expenses; (4) filing
fees and expenses relating to the registration and qualification of the Fund or
the shares of a Portfolio under federal and state securities laws
26
<PAGE>
and maintenance of such registrations and qualifications; (5) fees and salaries
payable to the trustees who are not "interested persons" of the Fund or
Mitchell Hutchins; (6) all expenses incurred in connection with the trustees'
services, including travel expenses; (7) taxes (including any income or
franchise taxes) and governmental fees; (8) costs of any liability,
uncollectible items of deposit and other insurance and fidelity bonds; (9) any
costs, expenses or losses arising out of a liability of or claim for damages or
other relief asserted against the Fund or Portfolio for violation of any law;
(10) legal, accounting and auditing expenses, including legal fees of special
counsel for the trustees who are not interested persons of the Fund; (11)
charges of custodians, transfer agents and other agents; (12) costs of
preparing share certificates, if any; (13) expenses of setting in type and
printing prospectuses and supplements thereto, statements of additional
information and supplements thereto, reports and proxy materials for existing
shareholders and costs of mailing such materials to shareholders; (14) any
extraordinary expenses (including fees and disbursements of counsel) incurred
by the Fund or Portfolio; (15) fees, voluntary assessments and other expenses
incurred in connection with membership in investment company organizations;
(16) costs of mailing and tabulating proxies and costs of meetings of
shareholders, the board and any committees thereof; (17) the cost of investment
company literature and other publications provided to the trustees and
officers; and (18) costs of mailing, stationery and communications equipment.
Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of Mitchell Hutchins in the performance of its duties or from reckless
disregard of its duties and obligations thereunder. Under each Sub-Advisory
Contract, the Sub-Adviser will not be liable for any error of judgment or
mistake of law or for any loss suffered by the Fund, the Portfolio, its
shareholders or Mitchell Hutchins in connection with the Sub-Advisory Contract,
except any liability to the Fund, the Portfolio, its shareholders or Mitchell
Hutchins to which the Sub-Adviser would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence on its part in the performance
of its duties or from reckless disregard by it of its obligations and duties
under the Sub-Advisory Contract.
The Advisory Contract terminates automatically upon assignment and is
terminable at any time without penalty by the Fund's board of trustees or by
vote of the holders of a majority of the Portfolio's outstanding voting
securities on 60 days' written notice to Mitchell Hutchins or by Mitchell
Hutchins on 60 days' written notice to the Fund. Each Sub-Advisory Contract
terminates automatically upon its assignment or the termination of the Advisory
Contract and is terminable at any time without penalty by the board of trustees
or by vote of the holders of a majority of the Portfolio's outstanding voting
securities on 60 days' notice to the Sub-Adviser, or by the Sub-Adviser on 120
days' written notice to Mitchell Hutchins. The Sub-Advisory Contract may also
be terminated by Mitchell Hutchins (1) upon material breach by the Sub-Adviser
of its representations and warranties; (2) if the Sub-Adviser becomes unable to
discharge its duties and obligations under the Sub-Advisory Contract or (3) on
120 days' notice to the Sub-Adviser.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Fund's board of trustees, Mitchell
Hutchins or the applicable Sub-Adviser is responsible for the execution of
portfolio transactions and the allocation of brokerage transactions for each
Portfolio. In executing portfolio transactions, Mitchell Hutchins or the
applicable Sub-Adviser seeks to obtain the best net results for each Portfolio
taking into account such factors as the price (including the applicable
brokerage commission or dealer spread), size of the order, difficulty of
execution and operational facilities of the firm involved. Prices paid to
dealers in principal transactions through which most debt securities and some
equity securities are traded generally include a "spread," which is the
difference between the prices at which the dealer is willing to purchase and
sell a specific security at that time. Each Portfolio may invest in securities
traded in the OTC markets and will engage primarily in transactions with the
dealers who make markets in such securities, unless a better price or execution
could be obtained by using a broker. While Mitchell Hutchins or the applicable
Sub-Adviser generally seeks reasonably competitive commission rates, payment of
the lowest commission is not necessarily consistent with obtaining the best net
results.
27
<PAGE>
During each of the three years in the period ended December 31, 1995, the
Portfolios paid the brokerage commissions set forth below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
PORTFOLIO 1995 1994 1993
- --------- ---------- ---------- ----------
<S> <C> <C> <C>
Money Market Portfolio........................ $ 0 $ 0 $ 0
High Grade Fixed Income Portfolio............. 0 0 0
Strategic Fixed Income Portfolio.............. 0 0 0
Global Income Portfolio....................... 0 0 0
Balanced Portfolio............................ 39,766 63,641 74,851
Growth and Income Portfolio................... 34,846 45,863 32,158
Growth Portfolio.............................. 52,967 37,100 32,332
Aggressive Growth Portfolio................... 57,802 49,178 0
Global Growth Portfolio....................... 341,107 397,060 442,008
</TABLE>
The Fund has no obligation to deal with any broker or group of brokers in the
execution of portfolio transactions. The Fund contemplates that, consistent
with the policy of obtaining the best net results, a substantial amount of the
Portfolios' brokerage transactions may be conducted through Mitchell Hutchins
or its affiliates, including PaineWebber. The Fund's board of trustees has
adopted procedures in conformity with Rule 17e-1 under the 1940 Act to ensure
that all brokerage commissions paid to Mitchell Hutchins or its affiliates are
fair and reasonable. Specific provisions included in the Advisory Contract
authorize Mitchell Hutchins and any of its affiliates that is a member of a
national securities exchange to effect securities transactions for the
Portfolios on such exchange and to retain compensation in connection with such
transactions. Any such transactions will be effected and related compensation
paid in accordance with applicable SEC regulations. During each of the three
years in the period ended December 31, 1995, the Portfolios paid to PaineWebber
the brokerage commissions set forth below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
PORTFOLIO 1995 1994 1993
- --------- --------------------- -----------
<S> <C> <C> <C>
Money Market Portfolio....................... $ 0 $ 0 $ 0
High Grade Fixed Income Portfolio............ 0 0 0
Strategic Fixed Income Portfolio............. 0 0 0
Global Income Portfolio...................... 0 0 0
Balanced Portfolio........................... 0 720 1,274
Growth and Income Portfolio.................. 0 1,817 2,283
Growth Portfolio............................. 900 600 595
Aggressive Growth Portfolio.................. 0 0 0
Global Growth Portfolio...................... 0 1,137 0
</TABLE>
The $900 in brokerage commissions paid by the Growth Portfolio to PaineWebber
during the fiscal year ended December 31, 1995 represented 2% of the aggregate
brokerage commissions paid by that Portfolio and 0.2% of the aggregate dollar
amount of transactions involving the payment of commissions.
Transactions in futures contracts are executed through futures commission
merchants ("FCMs") who receive brokerage commissions for their services. The
Fund's procedures in selecting FCMs to execute the Portfolios' transactions in
futures contracts, including procedures permitting the use of Mitchell Hutchins
and its affiliates, are similar to those in effect with respect to brokerage
transactions in securities.
Consistent with the interest of each Portfolio and subject to the review of
the Fund's board of trustees, Mitchell Hutchins or the applicable Sub-Adviser
may cause a Portfolio to purchase and sell portfolio securities from and to
brokers who provide the Portfolio with research, analysis, advice and similar
services. In return for such services, the Portfolio may pay to those brokers a
higher commission than may be charged by other brokers, provided that Mitchell
Hutchins or the applicable Sub-Adviser determines in good faith that such
commission is reasonable in terms either of that particular transaction or of
the overall responsibility of
28
<PAGE>
Mitchell Hutchins or the applicable Sub-Adviser to the Portfolio and its other
clients and that the total commissions paid by the Portfolio will be
reasonable in relation to the benefits to the Portfolio over the long term.
During the fiscal year ended December 31, 1995, the Portfolios directed the
portfolio transactions indicated below to brokers chosen because they provide
research and analysis, for which the Portfolios paid the brokerage commissions
indicated below:
<TABLE>
<CAPTION>
AMOUNT OF PORTFOLIO BROKERAGE
PORTFOLIO TRANSACTIONS COMMISSIONS PAID
- --------- ------------------- ----------------
<S> <C> <C>
Money Market Portfolio..................... $ 0 $ 0
High Grade Fixed Income Portfolio.......... $ 0 $ 0
Strategic Fixed Income Portfolio........... $ 0 $ 0
Global Income Portfolio.................... $ 0 $ 0
Balanced Portfolio......................... $ 5,385,765 $ 6,651
Growth and Income Portfolio................ $ 2,411,289 $ 3,914
Growth Portfolio........................... $ 359,960 $ 867
Aggressive Growth Portfolio................ $ $57,169
Global Growth Portfolio.................... $13,489,356 $10,841
</TABLE>
For purchases or sales with broker-dealer firms which act as principal,
Mitchell Hutchins seeks best execution. Although Mitchell Hutchins may receive
certain research or execution services in connection with these transactions,
Mitchell Hutchins or the applicable Sub-Adviser will not purchase securities
at a higher price or sell securities at a lower price than would otherwise be
paid if no weight was attributed to the services provided by the executing
dealer. Moreover, Mitchell Hutchins or the applicable Sub-Adviser will not
enter into any explicit soft dollar arrangements relating to principal
transactions and will not receive in principal transactions the types of
services which could be purchased for hard dollars. Mitchell Hutchins or the
applicable Sub-Adviser may engage in agency transactions in OTC equity and
debt securities in return for research and execution services. These
transactions are entered into only in compliance with procedures ensuring that
the transaction (including commissions) is at least as favorable as it would
have been if effected directly with a market-maker that did not provide
research or execution services. These procedures include Mitchell Hutchins or
the applicable Sub-Adviser receiving multiple quotes from dealers before
executing the transaction on an agency basis.
Information and research received from such brokers and dealers will be in
addition to, and not in lieu of, the services required to be performed by
Mitchell Hutchins or the applicable Sub-Adviser under the Advisory Contract or
Sub-Advisory Contract. Research services furnished by brokers or dealers
through which or with which the Portfolios effect securities transactions may
be used by Mitchell Hutchins or the applicable Sub-Adviser in advising other
funds or accounts and, conversely, research services furnished to Mitchell
Hutchins or the applicable Sub-Adviser in connection with these other funds or
accounts may be used in advising the Portfolios.
Investment decisions for each Portfolio and for other investment accounts
managed by Mitchell Hutchins or the applicable Sub-Adviser are made
independently of each other in light of differing considerations for the
various accounts. However, the same investment decision may occasionally be
made for a Portfolio and one or more of such accounts. In such cases,
simultaneous transactions are inevitable. Purchases or sales are then averaged
as to price and allocated between the Portfolio and such other account(s) as
to amount according to a formula deemed equitable to the Portfolio and such
account(s). While in some cases this practice could have a detrimental effect
upon the price or value of the security as far as a Portfolio is concerned, or
upon its ability to complete its entire order, in other cases it is believed
that coordination and the ability to participate in volume transactions will
be beneficial to the Portfolio.
The Portfolios will not purchase securities that are offered in
underwritings in which Mitchell Hutchins, the applicable Sub-Adviser or any of
their affiliates is a member of the underwriting or selling group, except
pursuant to procedures adopted by the Fund's board of trustees pursuant to
Rule 10f-3 under the 1940 Act.
29
<PAGE>
Among other things, these procedures require that the commission or spread paid
in connection with such a purchase be reasonable and fair, that the purchase be
at not more than the public offering price prior to the end of the first
business day after the date of the public offering and that Mitchell Hutchins,
the applicable Sub-Adviser or any affiliate thereof not participate in or
benefit from the sale to the Fund.
PORTFOLIO TURNOVER. The turnover rate may vary greatly from year to year for
any Portfolio and will not be a limiting factor when Mitchell Hutchins or the
applicable Sub-Adviser deems portfolio changes appropriate. The annual
portfolio turnover rate is calculated by dividing the lesser of a Portfolio's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of securities whose maturities at the time of acquisition were one year
or less) by the monthly average value of the securities except short-term
securities in the Portfolio during the year. For the fiscal years ended
December 31, 1995 and December 31, 1994, respectively, the portfolio turnover
rates were as set forth below:
<TABLE>
<CAPTION>
PORTFOLIO TURNOVER RATES
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
PORTFOLIO 1995 1994
- --------- ---- ------------
<S> <C> <C>
Money Market Portfolio............................ n/a n/a
High Grade Fixed Income Portfolio................. 136% 36%
Strategic Fixed Income Portfolio.................. 234% 54%
Global Income Portfolio........................... 160% 97%
Balanced Portfolio................................ 171% 112%
Growth and Income Portfolio....................... 134% 150%
Growth Portfolio.................................. 41% 27%
Aggressive Growth Portfolio....................... 119% 90%
Global Growth Portfolio........................... 157% 175%
</TABLE>
The substantial increase in the portfolio turnover rate for Strategic Fixed
Income Portfolio in 1995, as compared to 1994, was primarily attributable to
the realignment of that Portfolio's investments following the appointment of
PIMCO as Sub-Adviser in September 1995 and the Sub-Adviser's investment style.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The insurance company separate accounts purchase and redeem shares of each
Portfolio on each day on which the New York Stock Exchange, Inc. ("NYSE") is
open for trading ("Business Day") based on, among other things, the amount of
premium payments to be invested and surrendered and transfer requests to be
effected on that day pursuant to the variable contracts. Currently, the NYSE is
closed on the observance of New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Such purchases and redemptions of the shares of each Portfolio are effected at
their respective net asset values per share determined as of the close of
trading (currently 4:00 p.m., Eastern time) on that Business Day. Payment for
redemptions are made by the Fund within seven days thereafter. No fee is
charged the separate accounts when they purchase or redeem Portfolio shares.
The Fund may suspend redemption privileges of shares of any Portfolio or
postpone the date of payment during any period (1) when the NYSE is closed or
trading on the NYSE is restricted as determined by the SEC, (2) when an
emergency exists, as defined by the SEC, that makes it not reasonably
practicable for the Fund to dispose of securities owned by it or fairly to
determine the value of its assets or (3) as the SEC may otherwise permit. The
redemption price may be more or less than the shareholder's cost, depending on
the market value of the Portfolio's securities at the time.
VALUATION OF SHARES
Each Portfolio determines its net asset value as of the close of regular
trading (currently 4:00 p.m., Eastern time) on the NYSE on each Monday through
Friday when the NYSE is open.
Securities that are listed on U.S. and foreign stock exchanges are valued at
the last sale price on the day the securities are being valued or, lacking any
sales on such day, at the last available bid price. In cases where
30
<PAGE>
securities are traded on more than one exchange, the securities are generally
valued on the exchange considered by Mitchell Hutchins or the applicable Sub-
Adviser as the primary market. Securities traded in the OTC market and listed
on Nasdaq are valued at the last available sale price listed on Nasdaq at 4:00
p.m., Eastern time; other OTC securities are valued at the last available bid
price prior to the time of valuation.
When market quotations are readily available, the debt securities of the
Portfolios (with the exception of the Money Market Portfolio) are valued based
upon market quotations, provided such quotations adequately reflect, in the
judgment of Mitchell Hutchins or the applicable Sub-Adviser, the fair value of
the securities. The amortized cost method of valuation generally is used with
respect to debt obligations with 60 days or less remaining to maturity unless
the Fund's board of trustees determines that this does not represent fair
value. When market quotations for options and futures positions held by the
Portfolios are readily available, those positions are valued based upon such
quotations. Market quotations are not generally available for options traded
in the OTC market. When market quotations for options and futures positions,
or any other securities or assets of the Portfolios, are not available, they
are valued at fair value as determined in good faith by or under the direction
of the Fund's board of trustees. When practicable, such determinations are
based upon appraisals received from a pricing service using a computerized
matrix system or appraisals derived from information concerning the security
or similar securities received from recognized dealers in those securities.
All securities quoted in foreign currencies are valued daily in U.S. dollars
on the basis of the foreign currency exchange rates prevailing at the time
such valuation is determined. Foreign currency exchange rates generally are
determined prior to the close of the NYSE. Occasionally, events affecting the
value of foreign securities and such exchange rates occur between the time at
which they are determined and the close of the NYSE, which events would not be
reflected in the computation of a Portfolio's net asset value. If events
materially affecting the value of such securities or currency exchange rates
occurred during such time period, the securities will be valued at their fair
value as determined in good faith by or under the direction of the board of
trustees. The foreign currency exchange transactions of the Strategic Fixed
Income, Global Income and Global Growth Portfolios conducted on a spot (that
is, cash) basis are valued at the spot rate for purchasing or selling currency
prevailing on the foreign exchange market. This rate under normal market
conditions differs from the prevailing exchange rate in an amount generally
less than one-tenth of one percent due to the costs of converting from one
currency to another.
The Money Market Portfolio values its portfolio securities in accordance
with the amortized cost method of valuation under Rule 2a-7 under the 1940
Act. To use amortized cost to value its portfolio securities, the Portfolio
must adhere to certain conditions under that Rule relating to its investments,
some of which are discussed in the Prospectus. Amortized cost is an
approximation of market value, whereby the difference between acquisition cost
and value at maturity is amortized on a straight-line basis over the remaining
life of the instrument. The effect of changes in the market value of a
security as a result of fluctuating interest rates is not taken into account
and thus the amortized cost method of valuation may result in the value of a
security being higher or lower than its actual market value. In the event that
a large number of redemptions takes place at a time when interest rates have
increased, the Portfolio might have to sell portfolio securities prior to
maturity and at a price that might not be as desirable as the value at
maturity.
The Fund's board of trustees has established procedures for the purpose of
maintaining a constant net asset value of $1.00 per share for the Money Market
Portfolio, which include a review of the extent of any deviation of net asset
value per share, based on available market quotations, from the $1.00
amortized cost per share. Should that deviation exceed 1/2 of 1%, the trustees
will promptly consider whether any action should be initiated to eliminate or
reduce material dilution or other unfair results to shareholders. Such action
may include redeeming shares in kind, selling portfolio securities prior to
maturity, reducing or withholding dividends and utilizing a net asset value
per share as determined by using available market quotations. The Money Market
Portfolio will maintain a dollar-weighted average portfolio maturity of 90
days or less and will not purchase any instrument with a remaining maturity
greater than 13 months, will limit portfolio
31
<PAGE>
investments, including repurchase agreements, to those U.S. dollar-denominated
instruments that are of high quality and that the trustees determine present
minimal credit risks as advised by Mitchell Hutchins and will comply with
certain reporting and recordkeeping procedures. There is no assurance that
constant net asset per share value will be maintained. In the event amortized
cost ceases to represent fair value, the board will take appropriate action.
In determining the approximate market value of portfolio investments, the
Fund may employ outside organizations, which may use a matrix or formula
method that takes into consideration market indices, matrices, yield curves
and other specific adjustments. This may result in the securities being valued
at a price different from the price that would have been determined had the
matrix or formula method not been used. All cash, receivables and current
payables are carried at their face value. Other assets, if any, are valued at
fair value as determined in good faith by or under the direction of the board
of trustees.
TAXES
Shares of the Portfolios are offered only to insurance company separate
accounts that fund certain variable annuity and life insurance contracts
("Contracts"). See the applicable Contract prospectus for a discussion of the
special taxation of insurance companies with respect to such accounts and of
the Contract holders.
Each Portfolio is treated as a separate corporation for federal income tax
purposes. In order to continue to qualify for treatment as a regulated
investment company ("RIC") under the Internal Revenue Code, each Portfolio
must distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of net investment
income, net short-term capital gain and, for certain Portfolios, net gains
from certain foreign currency transactions) ("Distribution Requirement") and
must meet several additional requirements. With respect to each Portfolio,
these requirements include the following: (1) the Portfolio must derive at
least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures or forward currency contracts) derived with
respect to its business of investing in securities or those currencies
("Income Requirement"); (2) the Portfolio must derive less than 30% of its
gross income each taxable year from the sale or other disposition of
securities, or any of the following, that were held for less than three
months--options or futures (other than those on foreign currencies), or
foreign currencies (or options, futures or forward contracts thereon) that are
not directly related to the Portfolio's principal business of investing in
securities (or options and futures with respect to securities) ("Short-Short
Limitation"); (3) at the close of each quarter of the Portfolio's taxable
year, at least 50% of the value of its total assets must be represented by
cash and cash items, U.S. government securities, securities of other RICs and
other securities, with these other securities limited, in respect of any one
issuer, to an amount that does not exceed 5% of the value of the Portfolio's
total assets and that does not represent more than 10% of the issuer's
outstanding voting securities; and (4) at the close of each quarter of the
Portfolio's taxable year, not more than 25% of the value of its total assets
may be invested in securities (other than U.S. government securities or the
securities of other RICs) of any one issuer.
As noted in the Prospectus, each Portfolio must, and intends to continue to,
comply with the diversification requirements imposed by section 817(h) of the
Internal Revenue Code and the regulations thereunder. These requirements,
which are in addition to the diversification requirements mentioned above,
place certain limitations on the proportion of each Portfolio's assets that
may be represented by any single investment (which includes all securities of
the same issuer). For these purposes, each U.S. government agency or
instrumentality is treated as a separate issuer.
The use of hedging and related income strategies, such as selling (writing)
and purchasing options and futures contracts and entering into forward
currency contracts, involves complex rules that will determine for income tax
purposes the character and timing of recognition of the gains and losses a
Portfolio realizes in connection therewith. Income from the disposition of
foreign currencies (except certain gains therefrom that
32
<PAGE>
may be excluded by future regulations), and income from transactions in
options, futures and forward currency contracts derived by a Portfolio with
respect to its business of investing in securities or foreign currencies, will
qualify as permissible income under the Income Requirement. However, income
from the disposition of options and futures contracts (other than those on
foreign currencies) will be subject to the Short-Short Limitation if they are
held for less than three months. Income from the disposition of foreign
currencies, and options, futures and forward contracts on foreign currencies,
that are not directly related to a Portfolio's principal business of investing
in securities (or options and futures with respect to securities) also will be
subject to the Short-Short Limitation if they are held for less than three
months.
If a Portfolio satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Portfolio satisfies
the Short-Short Limitation. Thus, only the net gain (if any) from the
designated hedge will be included in gross income for purposes of that
limitation. Each Portfolio will consider whether it should seek to qualify for
this treatment for its hedging transactions. To the extent a Portfolio does not
qualify for this treatment, it may be forced to defer the closing out of
certain options, futures and forward contracts beyond the time when it
otherwise would be advantageous to do so, in order for the Portfolio to
continue to qualify as a RIC.
Dividends and interest received by a Portfolio may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on that Portfolio's securities. Tax conventions
between certain countries and the United States may reduce or eliminate these
foreign taxes, however, and many foreign countries do not impose taxes on
capital gains in respect of investments by foreign investors.
Any Portfolio that may purchase or hold equity securities may invest in
"passive foreign investment companies" ("PFICs"). A PFIC is a foreign
corporation that, in general, meets either of the following tests: (1) at least
75% of its gross income is passive or (2) an average of at least 50% of its
assets produce, or are held for the production of, passive income. Under
certain circumstances, a Portfolio that holds stock of a PFIC will be subject
to federal income tax on a portion of any "excess distribution" received on the
stock or of any gain on disposition of the stock (collectively "PFIC income"),
plus interest thereon, even if the Portfolio distributes the PFIC income as a
taxable dividend to its shareholders. The balance of the PFIC income will be
included in the Portfolio's investment company taxable income and, accordingly,
will not be taxable to it to the extent that income is distributed to its
shareholders.
If a Portfolio invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund," then in lieu of the foregoing tax and interest obligation, the
Portfolio will be required to include in income each year its pro rata share of
the qualified electing fund's annual ordinary earnings and net capital gain
(the excess of net long-term capital gain over net short-term capital loss),
even if they are not received by the Portfolio; those amounts most likely would
have to be distributed to the Portfolio's shareholders to satisfy the
Distribution Requirement. In most instances it will be very difficult, if not
impossible, to make this election because of certain requirements thereof.
Pursuant to proposed regulations, open-end RICs, such as the Portfolios,
would be entitled to elect to "mark-to-market" their stock in certain PFICs.
"Marking-to-market," in this context, means recognizing as gain for each
taxable year the excess, as of the end of that year, of the fair market value
of each such PFIC's stock over the owner's adjusted basis in that stock
(including mark-to-market gain for each prior year for which an election was in
effect).
The foregoing is only a general summary of some of the important federal
income tax considerations generally affecting the Portfolios and their
shareholders. No attempt is made to present a complete explanation of the
federal tax treatment of the Portfolios' activities, and this discussion is not
intended as a substitute for careful tax planning. Accordingly, potential
investors are urged to consult their own tax advisers for more detailed
information and for information regarding any state, local or foreign taxes
applicable to the Portfolios and to dividends and other distributions
therefrom.
33
<PAGE>
DIVIDENDS
MONEY MARKET PORTFOLIO. Shares begin earning dividends on the day of
purchase; dividends are accrued to shareholder accounts daily and are
automatically reinvested in Portfolio shares monthly. The Portfolio does not
expect to realize net capital gain. In the event of a redemption of all of the
shares held by a shareholder, all accrued dividends declared on the shares up
to the date of redemption are credited to the shareholder's account.
The Fund's board of trustees may revise the above dividend policy, or
postpone the payment of dividends, if the Portfolio should have or anticipate
any large unexpected expense, loss or fluctuation in net assets that, in the
opinion of the board, might have a significant adverse effect on shareholders.
To date, no situation has arisen to cause the board of trustees to take any
such action.
OTHER INFORMATION
Prior to August 14, 1995, the name of the Growth and Income Portfolio was
"Dividend Growth Portfolio." Prior to September 21, 1995, the name of the
Strategic Fixed Income Portfolio was "Government Portfolio" and the name of the
High Grade Fixed Income Portfolio was "Fixed Income Portfolio." Prior to
January 26, 1996, the name of the Balanced Portfolio was "Asset Allocation
Portfolio."
The Fund is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund or a
Portfolio. However, the Fund's Declaration of Trust disclaims shareholder
liability for acts or obligations of the Fund or any Portfolio and requires
that notice of such disclaimer be given in each note, bond, contract,
instrument, certificate or undertaking made or issued by the trustees or by any
officers or officer by or on behalf of the Fund, the trustees or any of them in
connection with the Fund. The Declaration of Trust provides for indemnification
from Fund or Portfolio property, as appropriate, for all losses and expenses of
any shareholder held personally liable for the obligations of the Fund or
Portfolio. Thus, the risk of a shareholder's incurring financial loss on
account of shareholder liability is limited to circumstances in which the Fund
or Portfolio itself would be unable to meet its obligations, a possibility that
Mitchell Hutchins believes is remote and not material. Upon payment of any
liability incurred by a shareholder of a Portfolio, the shareholder paying such
liability will be entitled to reimbursement from the general assets of the
Portfolio. The trustees intend to conduct the operations of the Fund so as to
avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Fund and the Portfolios.
More than 99% of the outstanding shares of beneficial interest of the Money
Market, Strategic Fixed Income, Global Income, Balanced, Growth and Income,
Growth and Global Growth Portfolios is, at the date of this Prospectus, owned
by American Republic Variable Annuity Account, a segregated investment account
of American Republic Insurance Company, American Benefit Variable Annuity
Account, a segregated investment account of American Benefit Life Insurance
Company, and PaineWebber Life Variable Annuity Account, a segregated investment
account of PaineWebber Life Insurance Company. More than 99% of the outstanding
shares of beneficial interest of the High Grade Fixed Income and Aggressive
Growth Portfolios is, at the date of this Prospectus, owned by PaineWebber Life
Variable Annuity Account. American Benefit Life Insurance Company is a wholly
owned subsidiary of American Republic Insurance Company.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, counsel to the Fund, has passed upon
the legality of the shares offered by the Fund's Prospectus. Kirkpatrick &
Lockhart LLP also acts as counsel to Mitchell Hutchins and PaineWebber in
connection with other matters.
AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
serves as independent auditors for the Fund.
34
<PAGE>
FINANCIAL STATEMENTS
The Fund's Annual Report to shareholders for the fiscal year ended December
31, 1995 is a separate document supplied with this Statement of Additional
Information, and the financial statements, accompanying notes and report of
independent auditors appearing therein are incorporated by reference in this
Statement of Additional Information.
DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS
COMMERCIAL PAPER RATINGS. Moody's employs the designation "Prime-1," "Prime-
2" and "Prime-3" to indicate the repayment capacity of issuers of commercial
paper. Issuers rated Prime-1 have a superior capacity for repayment of short-
term promissory obligations. Prime-1 repayment capacity will normally be
evidenced by the following characteristics: leading market positions in well-
established industries; high rates of return on funds employed; conservative
capitalization structures with moderate reliance on debt and ample asset
protection; broad margins in earnings coverage of fixed financial charges and
high internal cash generation; well-established access to a range of financial
markets and assured sources of alternate liquidity. Issuers rated Prime-2 have
a strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained. Issuers rated Prime-3 have an acceptable capacity for repayment of
short-term promissory obligations. The effect of industry characteristics and
market composition may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection
measurements and the requirement for relatively high financial leverage.
Adequate alternate liquidity is maintained. Not Prime. Issuers assigned this
rating do not fall within any of the Prime rating categories.
S&P's ratings of commercial paper are graded into four categories ranging
from "A" for the highest quality obligations to "D" for the lowest. A--Issues
assigned this highest rating are regarded as having the greatest capacity for
timely payment. Issues in this category are delineated with numbers 1, 2, and 3
to indicate the relative degree of safety. A-1--This designation indicates that
the degree of safety regarding timely payment is either overwhelming or very
strong. Those issues determined to possess overwhelming safety characteristics
are denoted with a plus (+) sign designation. A-2--Capacity for timely payments
on issues with this designation is strong. However, the relative degree of
safety is not as high as for issues designated "A-1." A-3--Issues carrying this
designation have a satisfactory capacity for timely payment. They are, however,
somewhat more vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations. B--Issues rated B are
regarded as having only an adequate capacity for timely payment. However, such
capacity may be damaged by changing conditions or short-term adversities. C--
This rating is assigned to short-term debt obligations with a doubtful capacity
for payment. D--This rating indicates that the issue is either in default or is
expected to be in default upon maturity.
CORPORATE DEBT SECURITIES. Moody's rates the long-term debt securities issued
by various entities from "Aaa" to "D". Aaa--Best quality. These securities
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues. Aa--High quality by
all standards. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, fluctuation of protective
elements may be of greater amplitude, or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A-- Upper medium grade obligations. These bonds possess many favorable
investment attributes. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future. Baa--Medium grade obligations. Interest
payments and
35
<PAGE>
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well. Ba--Judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class. B--Generally lack
characteristics of the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the contract over any
long period of time may be small. Caa--Poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest. Ca--Obligations which are speculative in a high degree. Such issues
are often in default or have other marked shortcomings. C--Lowest rated class
of bonds; issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Note: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
S&P also rates the long-term debt securities of various entities in
categories ranging from "AAA" to "D" according to quality. AAA--Highest grade.
Capacity to pay interest and repay principal extremely strong. AA--High grade.
Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from AAA issues only in a small degree. A--Have a strong capacity
to pay interest and repay principal, although they are somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions. BBB--Regarded as having adequate capacity to pay interest and repay
principal. Whereas these bonds normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal than for debt in
higher rated categories. BB, B, CCC, CC, C--Regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions. CI--Reserved for income bonds on which no interest is being paid.
D--In default, and payment of interest and/or repayment of principal is in
arrears.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
36
<PAGE>
PART C. OTHER INFORMATION
--------------------------
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements:
Included in Part A of this Registration Statement:
- --------------------------------------------------
Financial Highlights for each of the Money Market, Growth and Global
Growth Portfolios for each of the eight years in the period ended December
31, 1995 and for the period May 4, 1987 (commencement of operations) to
December 31, 1987.
Financial Highlights for the Global Income Portfolio for each of the seven
years in the period ended December 31, 1995 and for the period May 1, 1988
(commencement of operations) to December 31, 1988.
Financial Highlights for the Balanced Portfolio for each of the seven
years in the period ended December 31, 1995 and for the period June 1,
1988 (commencement of operations) to December 31, 1988.
Financial Highlights for the Strategic Fixed Income Portfolio for each of
the six years in the period ended December 31, 1995 and for the period
July 5, 1989 (commencement of operations) to December 31, 1989.
Financial Highlights for the Growth and Income Portfolio for each of the
three years in the period ended December 31, 1995 and for the period
January 2, 1992 (commencement of operations) to December 31, 1992.
Financial Highlights for the Aggressive Growth Portfolio for each of the
two years in the period ended December 31, 1995 and for the period
November 2, 1993 (commencement of operations) to December 31, 1993.
Financial Highlights for the High Grade Fixed Income Portfolio for each of
the two years in the period ended December 31, 1995 and for the period
November 8, 1993 (commencement of operations) to December 31, 1993.
Included in Part B of this Registration Statement through incorporation by
- --------------------------------------------------------------------------
reference from the Annual Report to Shareholders (previously filed with the
- ---------------------------------------------------------------------------
Securities and Exchange Commission through EDGAR on February 27, 1996, Accession
- --------------------------------------------------------------------------------
No. 0000950112-96-000619:
- -------------------------
Portfolio of Investments at December 31, 1995
Statement of Assets and Liabilities at December 31, 1995
Statement of Operations for the year ended December 31, 1995
C-1
<PAGE>
Statement of Changes in Net Assets for each of the two years in the period
ended December 31, 1995 and December 31, 1994
Notes to Financial Statements
Financial Highlights for each of the five years in the period ended
December 31, 1995 for the Money Market, Growth, Global Growth, Global
Income, Strategic Fixed Income and Balanced Portfolios; for each of the
three years in the period ended December 31, 1995 and for the period
January 2, 1992 (commencement of operations) to December 31, 1992 for the
Growth and Income Portfolio; for each of the two years in the period ended
December 31, 1995 and for the period November 2, 1993 (commencement of
operations) to December 31, 1993 for the Aggressive Growth Portfolio; and
for each of the two years in the period ended December 31, 1995 and for
the period November 8, 1993 (commencement of operations) to December 31,
1993 for the High Grade Fixed Income Portfolio.
Report of Ernst & Young LLP, Independent Auditors, dated February 7, 1996.
(b) Exhibits:
(1) (a) Declaration of Trust 1/
-
(b) Amendment effective January 28, 1988 to Declaration of Trust 3/
-
(c) Amendment effective February 24, 1989 to Declaration of Trust 5/
-
(d) Amendment effective December 31, 1990 to Declaration of Trust 7/
-
(e) Amendment effective October 15, 1991 to Declaration of Trust 8/
-
(f) Amendment effective May 25, 1993 to Declaration of Trust 10/
--
(g) Amendment effective August 14, 1995 to Declaration of Trust 15/
--
(h) Amendment effective February 29, 1996 to Declaration of Trust
(filed herewith)
(2) (a) By-laws, as amended 1/
-
(b) Amendments effective March 19, 1991 to By-Laws 7/
-
(c) Amendment dated September 28, 1994 to By-Laws 13/
--
(3) Voting trust agreement - none
(4) Instruments defining the rights of holders of the Registrant's shares
of beneficial interest 14/
--
(5) Investment Advisory and Administration Contract 4/
-
(a) Investment Advisory and Administration Fee Agreement with
respect to the Strategic Fixed Income Portfolio 6/
-
(b) Investment Advisory and Administration Fee Agreement with
respect to the Growth and Income Portfolio 9/
-
(c) Investment Advisory and Administration Fee Agreement with
respect to the High Grade Fixed Income Portfolio 12/
--
(d) Investment Advisory and Administration Fee Agreement with
respect to the Balanced Portfolio 12/
--
(e) Investment Advisory and Administration Fee Agreement with
respect to the Aggressive Growth Portfolio 12/
--
(f) Sub-Investment Advisory Contract with respect to the Aggressive
Growth Portfolio 11/
--
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<PAGE>
(g) Sub-Advisory Agreement with respect to the Global Growth
Portfolio (filed herewith)
(h) Sub-Advisory Agreement with respect to the Strategic Fixed
Income Portfolio (filed herewith)
(6) Underwriting Contract - none
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement
(a) Custodian Agreement with State Street Bank and Trust Company
with respect to the assets of the Money Market and Growth
Portfolios 2/
-
(b) Addendum to Custodian Agreement with State Street Bank and Trust
Company for addition of the Balanced Portfolio 5/
-
(c) Amendment to Custodian Agreement with State Street Bank and
Trust Company for addition of the Strategic Fixed Income
Portfolio 6/
-
(d) Addendum to Custodian Agreement with State Street Bank and Trust
Company for addition of the Growth and Income Portfolio 9/
-
(e) Addendum to Custodian Agreement with State Street Bank and Trust
Company with respect to the assets of the Global Growth
Portfolio (filed herewith)
(f) Custodian Agreement with Brown Brothers Harriman & Co. with
respect to the assets of the Global Income Portfolio 5/
-
(9) Transfer Agency Services and Shareholder Services Agreement 9/
-
(10) (a) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel to
the Registrant 1/
-
(b) Opinion and Consent of Kirkpatrick & Lockhart LLP with respect
to the Growth and Income Portfolio 8/
-
(c) Opinion and Consent of Kirkpatrick & Lockhart LLP with respect
to the High Grade Fixed Income Portfolio and Aggressive Growth
Portfolio 10/
--
(11) Other opinions, appraisals, rulings and consents:
(a) Independent Auditors' Consent (filed herewith)
(12) Financial statements omitted from prospectus-none
(13) Letter of investment intent 1/
-
(14) Prototype Retirement Plan - none
(15) Plan pursuant to Rule 12b-1 - none
(16) Schedule of Computation for Performance Quotations - not applicable
(17) and
(27) Financial Data Schedule (filed herewith)
(18) Plan pursuant to Rule 18f-3 (not applicable)
______________________
1/ Incorporated by reference to Pre-Effective Amendment No. 1, SEC File
- - No. 33-10438, filed April 1, 1987.
2/ Incorporated by reference to Post-Effective Amendment No. 1, SEC File
- - No. 33-10438, filed September 30, 1987.
3/ Incorporated by reference to Post-Effective Amendment No. 3, SEC File
- - No. 33-10438, filed March 3, 1988.
C-3
<PAGE>
4/ Incorporated by reference to Post-Effective Amendment No. 4, SEC File
- - No. 33-10438, filed April 29, 1988.
5/ Incorporated by reference to Post-Effective Amendment No. 6, SEC File
- - No. 33-10438, filed April 28, 1989.
6/ Incorporated by reference to Post-Effective Amendment No. 8, SEC File
- - No. 33-10438, filed March 2, 1990.
7/ Incorporated by reference to Post-Effective Amendment No. 10, SEC File
- - No. 33-10438, filed May 1, 1991.
8/ Incorporated by reference to Post-Effective Amendment No. 11, SEC File
- - No. 33-10438, filed November 1, 1991.
9/ Incorporated by reference to Post-Effective Amendment No. 14, SEC File
- - No. 33-10438, filed April 30, 1993.
10/ Incorporated by reference to Post-Effective Amendment No. 15, SEC File
- -- No. 33-10438, filed July 2, 1993.
11/ Incorporated by reference to Post-Effective Amendment No. 16, SEC File
- -- No. 33-10438, filed March 2, 1994.
12/ Incorporated by reference to Post-Effective Amendment No. 17, SEC File
- -- No. 33-10438, filed April 21, 1994.
13/ Incorporated by reference to Post-Effective Amendment No. 20, SEC File
- -- No. 33-10438, filed April 28, 1995.
14/ Incorporated by reference from Articles III, VIII, IX, X, and XI of
- -- Registrant's Declaration of Trust, as amended effective August 13, 1987,
February 26, 1988, February 24, 1989, December 31, 1990, October 15, 1991,
May 25, 1993, August 14, 1995, and February 29, 1996, and from Articles
II, VII and X of Registrant's By-Laws, as amended March 19, 1993 and
September 28, 1994.
15/ Incorporated by reference to Post-Effective Amendment No. 21, SEC File
- -- No. 33-10438, filed September 1, 1995.
Item 25. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------
As of February 1, 1996, more than 99% of the outstanding shares of
beneficial interest of each of the ten operating portfolios of the Trust were
owned by American Republic Variable Annuity Account, a segregated investment
account of American Republic Insurance Company, American Benefit Variable
Annuity Account, a segregated investment account of American Benefit Life
Insurance Company and PaineWebber Life Variable Annuity Account, a segregated
investment account of PaineWebber Life Insurance Company. More than 99% of the
outstanding shares of beneficial interest of each of the Fixed Income, Balanced
and Aggressive Growth Portfolios is, at the date of this Prospectus, owned by
C-4
<PAGE>
PaineWebber Life Variable Annuity Account. Information about persons
controlled by or under common control of American Republic Insurance Company is
set forth under Item 26 of the most recent Post-Effective Amendment to the
Registration Statement of American Republic Variable Annuity Account, File No.
33-10417, and is hereby incorporated herein by reference. Information about
persons controlled by or under common control of American Benefit Life Insurance
Company is set forth under Item 26 of the most recent Post-Effective Amendment
to the Registration Statement of American Benefit Variable Annuity Account, File
No. 33-19254, and is hereby incorporated herein by reference. Information about
persons controlled by or under common control of PaineWebber Life Insurance
Company is set forth under Item 26 of the most recent Post-Effective Amendment
to the Registration Statements of the PaineWebber Life Separate Account, File
No. 33-58808 and File No. 33-61488, and is hereby incorporated by reference.
Item 26. Number of Holders of Securities
-------------------------------
<TABLE>
<CAPTION>
Title of Class of Shares Number of Record Holders
of Beneficial Interest as of February 20, 1996
------------------------ ------------------------
<S> <C>
Money Market Portfolio 4
Global Growth Portfolio 4
Growth Portfolio 4
Balanced Portfolio 4
Global Income Portfolio 4
Strategic Fixed Income Portfolio 4
Growth and Income Portfolio 4
High Grade Fixed Income Portfolio 2
Aggressive Growth Portfolio 2
</TABLE>
Item 27. Indemnification
---------------
Section 2 of "Indemnification" in Article X of the Declaration of Trust
provides that the appropriate series of the Registrant will indemnify its
trustees and officers to the fullest extent permitted by law against claims and
expenses asserted against or incurred by them by virtue of being or having been
a trustee or officer; provided that no such person shall be indemnified where
there has been an adjudication or other determination, as described in
Article X, that such person is liable to the Registrant or its shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office or did not act in
good faith in the reasonable belief that his action was in the best interest of
the Registrant. Section 2 of "Indemnification" in Article X also provides that
the Registrant may maintain insurance policies covering such rights of
indemnification.
Additionally, "Limitation of Liability" in Article X of the Declaration of
Trust provides that the trustees or officers of the Registrant shall not be
personally liable to any person extending credit to, contracting with or having
a claim against the Trust or a particular series thereof; and that, provided
they have exercised reasonable care and have acted under the reasonable belief
that their actions are in the best interest of the Registrant, the trustees and
officers shall not be liable for neglect or wrongdoing by them or any officer,
agent, employee or investment adviser of the Registrant.
C-5
<PAGE>
Section 2 of Article XI of the Declaration of Trust additionally provides
that, subject to the provisions of Section 1 of Article XI and to Article X,
trustees shall not be liable for errors of judgment or mistakes of fact or law,
or for any act or omission in accordance with the advice of counsel or other
experts, or failing to follow such advice, with respect to the meaning and
operation of the Declaration of Trust.
Article XI of the By-Laws provides that the Registrant may purchase and
maintain insurance on behalf of any person who is or was a trustee, officer or
employee of the Trust, or is or was serving at the request of the Trust as a
trustee, officer or employee of a corporation, partnership, joint venture, trust
or other enterprise against any liability asserted against him or her and
incurred by him or her in any such capacity or arising out of his or her status
as such, whether or not the Registrant would have the power to indemnify him or
her against such liability, provided that the Registrant may not acquire
insurance protecting any trustee or officer against liability to the Registrant
or the Registrant or its shareholders to which he or she would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his or her office.
Section 9 of the Investment Advisory and Administration Contract between
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") and the Registrant
provides that Mitchell Hutchins shall not be liable for any error of judgment or
mistake of law or for any loss suffered by Registrant in connection with the
matters to which the Contract relates, except for a loss resulting from the
willful misfeasance, bad faith, or gross negligence of Mitchell Hutchins in the
performance of its duties or from its reckless disregard of its obligations and
duties under the Contract. Section 10 of the Contract provides that the
trustees shall not be liable for any obligations of the Registrant or any series
under the Contract and that Mitchell Hutchins shall look only to the assets and
property of the Registrant in settlement of such right or claim and not to the
assets and property of the trustees.
Section 7 of each Sub-Advisory Agreement provides that the applicable
sub-adviser shall not be liable for any error of judgment or mistake of law or
for any loss suffered by the applicable Portfolio, the Registrant or its
shareholders or by Mitchell Hutchins in connection with the matters to which the
Sub-Advisory Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the sub-adviser's part in the
performance of its duties or from reckless disregard by it of its obligations
and duties under the Sub-Advisory Agreement.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be provided to trustees, officers and controlling
persons of the Registrant, pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding or payment pursuant to any insurance policy) is
asserted against the Registrant by such trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
C-6
<PAGE>
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
Mitchell Hutchins, a Delaware corporation, is a registered investment
adviser and is wholly owned by PaineWebber Incorporated ("PaineWebber"), which
is, in turn, a wholly owned subsidiary of Paine Webber Group Inc. Mitchell
Hutchins is primarily engaged in the investment advisory business. Information
as to the officers and directors of Mitchell Hutchins is included in its Form
ADV filed on as filed with the Securities and Exchange Commission (registration
number 801-13219) and is incorporated herein by reference.
Nicholas-Applegate Capital Management ("Nicholas-Applegate"), a California
limited partnership, is a registered investment adviser. Nicholas-Applegate's
general partner is Nicholas-Applegate Capital Management Inc., a California
corporation owned by Arthur E. Nicholas, its director and sole shareholder.
Nicholas-Applegate is primarily engaged in the investment advisory business and
provides investment advisory services to corporate, institutional and individual
clients as well as serving as adviser or sub-adviser to a number of registered
investment companies. Information as to the officers and directors of
Nicholas-Applegate is included in its Form ADV as filed with the Securities and
Exchange Commission (registration number 801-21442) and is incorporated herein
by reference.
GE Investment Management Incorporated ("GEIM"), a Delaware corporation, is
a registered investment adviser and is wholly owned by General Electric Company.
GEIM is primarily engaged in the investment advisory business. Information as to
the officers and directors of GEIM is included in its Form ADV as filed with the
Securities and Exchange Commission (registration number 801-31947) and is
incorporated herein by reference.
Pacific Investment Management Company ("PIMCO"), a Delaware partnership, is
a registered investment adviser and a subsidiary general partnership of PIMCO
Advisors L.P. ("PIMCO Advisors"). A majority interest in PIMCO Advisors is held
by PIMCO Partners, G.P., a general partnership between Pacific Financial Asset
Management Corporation, an indirect wholly owned subsidiary of Pacific Mutual
Life Insurance Company ("Pacific Mutual") and PIMCO Partners, L.L.C., a limited
liability company controlled by the PIMCO Managing Directors. PIMCO is primarily
engaged in the investment advisory business. Information as to the officers and
Managing Directors and partners of PIMCO is included in its Form ADV as filed
with the Securities and Exchange Commission (registration number 801-48187) and
is incorporated herein by reference.
Item 29. Principal Underwriters
----------------------
Not applicable
Item 30. Location of Accounts and Records
--------------------------------
The books and other documents required by paragraphs (b)(4), (c) and (d)
of Rule 31a-1 under the Investment Company Act of 1940 are maintained in the
physical possession of Registrant's investment adviser and administrator,
Mitchell Hutchins, 1285 Avenue of the Americas, New York, New York 10019. All
other accounts, books and documents required by Rule 31a-1 are maintained in the
physical possession of Registrant's transfer agent and custodians.
C-7
<PAGE>
Item 31. Management Services
-------------------
Not applicable.
Item 32. Undertakings
------------
Registrant hereby undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders
upon request and without charge.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Post-
Effective Amendment to the Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York and State of
New York, on the 26th day of April, 1996.
PaineWebber Series Trust
By: /s/ Dianne E. O'Donnell
-------------------------
Dianne E. O'Donnell
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Margo N. Alexander *, ** President and Trustee April 26, 1996
- ------------------------------ (Chief Executive Officer)
Margo N. Alexander
/s/ E. Garrett Bewkes, Jr. *** Trustee and Chairman April 26, 1996
- ------------------------------ of the Board of Trustees
E. Garrett Bewkes, Jr.
/s/ Richard Q. Armstrong ** Trustee April 26, 1996
- ------------------------------
Richard Q. Armstrong
/s/ Richard R. Burt ** Trustee April 26, 1996
- ------------------------------
Richard Burt
/s/ Mary C. Farrell ** Trustee April 26, 1996
- ------------------------------
Mary C. Farrell
/s/ Meyer Feldberg ** Trustee April 26, 1996
- ------------------------------
Meyer Feldberg
/s/ George W. Gowen **** Trustee April 26, 1996
- ------------------------------
George W. Gowen
/s/ Frederic V. Malek ** Trustee April 26, 1996
- ------------------------------
Frederic V. Malek
/s/ Carl W. Shafer ** Trustee April 26, 1996
- ------------------------------
Carl W. Schafer
/s/ John R. Torell III ** Trustee April 26, 1996
- ------------------------------
John R. Torell III
/s/ Julian F. Sluyters Vice President and Treasurer April 26, 1996
- ------------------------------ (Chief Financial and Accounting
Julian F. Sluyters Officer)
</TABLE>
<PAGE>
SIGNATURES (Continued)
* Signature affixed by Elinor W. Gammon pursuant to power of attorney dated
May 8, 1995 and incorporated by reference from Post-Effective Amendment
No. 34 to the registration statement of PaineWebber America Fund, SEC File
No. 2-78626, filed May 10, 1995.
** Signature affixed by Elinor W. Gammon pursuant to power of attorney dated
April 18, 1996 and incorporated by reference from Post-Effective Amendment
No. 20 to the registration statement of PaineWebber Mutual Fund Trust, SEC
File No. 2-98149, filed April 25, 1996.
*** Signature affixed by Elinor W. Gammon pursuant to power of attorney dated
January 3, 1994 and incorporated by reference from Post-Effective
Amendment No. 25 to the registration statement of PaineWebber Investment
Series, SEC File No. 33-11025, filed March 1, 1994.
**** Signature affixed by Elinor W. Gammon pursuant to power of attorney dated
March 27, 1990 and incorporated by reference from Post-Effective Amendment
No. 7 to the registration statement of PaineWebber Municipal Series, SEC
File No. 33-11611, filed June 29, 1990.
<PAGE>
Exhibit Index
-------------
Exhibits
- --------
(1) (a) Declaration of Trust 1/
-
(b) Amendment effective January 28, 1988 to Declaration of Trust 3/
-
(c) Amendment effective February 24, 1989 to Declaration of Trust 5/
-
(d) Amendment effective December 31, 1990 to Declaration of Trust 7/
-
(e) Amendment effective October 15, 1991 to Declaration of Trust 8/
-
(f) Amendment effective May 25, 1993 to Declaration of Trust 10/
--
(g) Amendment effective August 14, 1995 to Declaration of Trust 15/
--
(h) Amendment effective February 29, 1996 to Declaration of Trust
(filed herewith)
(2) (a) By-laws, as amended 1/
-
(b) Amendments effective March 19, 1991 to By-Laws 7/
-
(c) Amendment dated September 28, 1994 to By-Laws 13/
--
(3) Voting trust agreement - none
(4) Instruments defining the rights of holders of the Registrant's shares
of beneficial interest 14/
--
(5) Investment Advisory and Administration Contract 4/
-
(a) Investment Advisory and Administration Fee Agreement with respect
to the Strategic Fixed Income Portfolio 6/
-
(b) Investment Advisory and Administration Fee Agreement with respect
to the Growth and Income Portfolio 9/
-
(c) Investment Advisory and Administration Fee Agreement with respect
to the High Grade Fixed Income Portfolio 12/
--
(d) Investment Advisory and Administration Fee Agreement with respect
to the Balanced Portfolio 12/
--
(e) Investment Advisory and Administration Fee Agreement with respect
to the Aggressive Growth Portfolio 12/
--
(f) Sub-Investment Advisory Contract with respect to the Aggressive
Growth Portfolio 11/
--
(g) Sub-Advisory Agreement with respect to the Global Growth
Portfolio (filed herewith)
(h) Sub-Advisory Agreement with respect to the Strategic Fixed Income
Portfolio (filed herewith)
(6) Underwriting Contract - none
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement
(a) Custodian Agreement with State Street Bank and Trust Company
with respect to the assets of the Money Market and Growth
Portfolios 2/
-
(b) Addendum to Custodian Agreement with State Street Bank and Trust
Company for addition of the Balanced Portfolio 5/
-
(c) Amendment to Custodian Agreement with State Street Bank and Trust
Company for addition of the Strategic Fixed Income Portfolio 6/
-
(d) Addendum to Custodian Agreement with State Street Bank and Trust
Company for addition of the Growth and Income Portfolio 9/
-
(e) Addendum to Custodian Agreement with State Street Bank and Trust
Company with respect to the assets of the Global Growth Portfolio
(filed
<PAGE>
herewith)
(f) Custodian Agreement with Brown Brothers Harriman & Co. with
respect to the assets of the Global Income Portfolio 5/
-
(9) Transfer Agency Services and Shareholder Services Agreement 9/
-
(10) (a) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel to
the registrant 1/
-
(b) Opinion and Consent of Kirkpatrick & Lockhart LLP with respect to
the Growth and Income Portfolio 8/
-
(c) Opinion and Consent of Kirkpatrick & Lockhart LLP with respect to
the High Grade Fixed Income Portfolio and Aggressive Growth
Portfolio 10/
--
(11) Other opinions, appraisals, rulings and consents:
(a) Independent Auditors' Consent (filed herewith)
(12) Financial statements omitted from prospectus-none
(13) Letter of investment intent 1/
-
(14) Prototype Retirement Plan - none
(15) Plan pursuant to Rule 12b-1 - none
(16) Schedule of Computation for Performance Quotations - not applicable
(17) and
27) Financial Data Schedule (filed herewith)
(18) Plan pursuant to Rule 18f-3 (not applicable)
- ----------------------
1/ Incorporated by reference to Pre-Effective Amendment No. 1, SEC File
- - No. 33-10438, filed April 1, 1987.
2/ Incorporated by reference to Post-Effective Amendment No. 1, SEC File
- - No. 33-10438, filed September 30, 1987.
3/ Incorporated by reference to Post-Effective Amendment No. 3, SEC File
- - No. 33-10438, filed March 3, 1988.
4/ Incorporated by reference to Post-Effective Amendment No. 4, SEC File
- - No. 33-10438, filed April 29, 1988.
5/ Incorporated by reference to Post-Effective Amendment No. 6, SEC File
- - No. 33-10438, filed April 28, 1989.
6/ Incorporated by reference to Post-Effective Amendment No. 8, SEC File
- - No. 33-10438, filed March 2, 1990.
7/ Incorporated by reference to Post-Effective Amendment No. 10, SEC File
- - No. 33-10438, filed May 1, 1991.
8/ Incorporated by reference to Post-Effective Amendment No. 11, SEC File
- - No. 33-10438, filed November 1, 1991.
9/ Incorporated by reference to Post-Effective Amendment No. 14, SEC File
- - No. 33-10438, filed April 30, 1993.
10/ Incorporated by reference to Post-Effective Amendment No. 15, SEC File
- -- No. 33-10438,
<PAGE>
filed July 2, 1993.
11/ Incorporated by reference to Post-Effective Amendment No. 16, SEC File
- -- No. 33-10438, filed March 2, 1994.
12/ Incorporated by reference to Post-Effective Amendment No. 17, SEC File
- -- No. 33-10438, filed April 21, 1994.
13/ Incorporated by reference to Post-Effective Amendment No. 20, SEC File
- -- No. 33-10438, filed April 28, 1995.
14/ Incorporated by reference from Articles III, VIII, IX, X, and XI of
- -- Registrant's Declaration of Trust, as amended effective August 13, 1987,
February 26, 1988, February 24, 1989, December 31, 1990, October 15, 1991,
May 25, 1993, August 14, 1995, and February 29, 1996, and from Articles II,
VII and X of Registrant's By-Laws, as amended March 19, 1993 and September
28, 1994.
15/ Incorporated by reference to Post-Effective Amendment No. 21, SEC File
- -- No. 33-10438, filed September 1, 1995.
<PAGE>
EXHIBIT 1(h)
PAINEWEBBER SERIES TRUST
CERTIFICATE OF VICE PRESIDENT AND SECRETARY
I, Dianne E. O'Donnell, Vice President and Secretary of PaineWebber Series
Trust ("Trust"), hereby certify that the board of trustees of the Trust adopted
the following resolutions, which became effective on September 21, 1995, January
26, 1996 and February 29, 1996, respectively:
Resolutions Effective September 25, 1995:
- -----------------------------------------
RESOLVED, that the name of the Series of the Trust originally
designated as "Government Portfolio" be, and it hereby is, changed to
"Strategic Fixed Income Portfolio."
RESOLVED, that the name of the Series of the Trust originally
designated as "Fixed Income Portfolio" be, and it hereby is, changed to
"High Grade Fixed Income Portfolio."
Resolutions Effective January 26, 1996:
- ---------------------------------------
RESOLVED, that the Series of the Trust originally designated as
"Balanced Portfolio" ("Old Balanced Portfolio") be terminated and abolished
pursuant to Section 2 of Article III of the Declaration of Trust at such
time as all of the following conditions are satisfied: (1) the shares of
Asset Allocation Portfolio are substituted for shares of Old Balanced
Portfolio pursuant to an exemptive order issued by the Securities and
Exchange Commission, (2) Old Balanced Portfolio has no shares outstanding
and no assets and (3) provision has been made for the disposition of all
liabilities of Old Balanced Portfolio.
RESOLVED, that the name of the Series of the Trust originally
designated as "Asset Allocation Portfolio" be, and it hereby is, changed to
"Balanced Portfolio."
Resolutions Effective February 29, 1996:
- ----------------------------------------
WHEREAS, the Series of the Trust originally designated as "Balanced
Portfolio" has been terminated; and
WHEREAS, the name of the Series of the Trust originally designated as
"Asset Allocation Portfolio" has been changed to "Balanced Portfolio"; and
<PAGE>
WHEREAS, the name of the Series of the Trust originally designated as
"Fixed Income Portfolio" has been changed to "High Grade Fixed Income
Portfolio"; and
WHEREAS, the name of the Series of the Trust originally designated as
"Government Portfolio" has been changed to "Strategic Fixed Income
Portfolio"; now therefore be it
RESOLVED, that Section I of Article III of the Trust's Declaration of
Trust be, and it hereby is, amended to reflect the termination of one
Series and the change in the name of three other Series, the amended
section to read, in relevant part, as follows:
Section 1.... Without limiting the authority of the Trustees set forth
in this Section 1 to establish and designate any further Series, the
Trustees have established and designated nine Series of Shares to be
known as the "Money Market Portfolio," Growth Portfolio," "Growth and
Income Portfolio," "Global Growth Portfolio," "Global Income
Portfolio," "Balanced Portfolio," "Strategic Fixed Income Portfolio,"
"Aggressive Growth Portfolio" and "High Grade Fixed Income Portfolio."
Dated: April 26, 1996 By:/s/ Dianne E. O'Donnell
------------------------
Dianne E. O'Donnell
Vice President and
Secretary
PaineWebber Series Trust
New York, New York (ss)
Subscribed and sworn before me this 26th day of April, 1996.
/s/ Ilene Shore
- -----------------
Notary Public
<PAGE>
FORM OF PROPOSED SUB-ADVISORY AGREEMENT
SUB-ADVISORY AGREEMENT
Agreement made as of , 1995, between MITCHELL HUTCHINS ASSET
----------
MANAGEMENT INC. ("Mitchell Hutchins"), a Delaware corporation, and GE INVESTMENT
MANAGEMENT INCORPORATED ("Sub-Adviser" or "GEIM") a Delaware corporation (The
"Agreement").
RECITALS
--------
(1) Mitchell Hutchins has entered into an Investment Advisory and
Administration Contract dated April 21, 1988 (Management Agreement") with
PaineWebber Series Trust ("Trust"), an open-end management investment company
registered under the investment Company Act of 1940, as amended ("1940 Act")
with respect to the Global Growth Portfolio ("Portfolio") series of the Trust;
and
(2) Mitchell Hutchins wishes to retain the Sub-Adviser to furnish certain
investment advisory services to Mitchell Hutchins and the Portfolio, and the Sub
- -Adviser is willing to furnish those services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties agree as follows;
1. Appointment. Mitchell Hutchins hereby appoints the Sub-Adviser as an
investment sub-adviser with respect to the Portfolio for the period and on the
terms set forth in this Agreement. The Sub-Adviser accepts that appointment and
agrees to render the services herein set forth, for the compensation herein
provided.
2. Duties as Sub-Advisor.
(a) Subject to the supervision of and any guidelines adopted by the
Trust's Board of Trustees (the "Board"), the Sub-Adviser will provide a
continuous investment program for the Portfolio, including investment research
and management. The Sub-Adviser will determine from time to time what investment
will be purchased, retained or sold by the Portfolio. The Sub-Adviser will be
responsible for placing purchase and sell orders for investments and for other
related transactions. The Sub-Adviser will provide services under this Agreement
in accordance with the Portfolio's Investment objective, policies and
restrictions as stated in the Portfolio Registration Statement.
(b) The Sub-Adviser agrees that, in placing orders with brokers, it will
obtain the best net result in terms of price and execution: provided that, on
behalf of the Portfolio, the Sub-Adviser may, in its discretion, use brokers who
provide the Portfolio with research, analysis, advice and similar services to
execute portfolio transaction on behalf of the Portfolio, and the Sub-Adviser
may pay to those brokers in return for brokerage and research services a higher
commission than may be charged by other brokers, subject to the Sub-Adviser's
determining in good faith that such
<PAGE>
commission is reasonable in terms either of the particular transaction or of the
overall responsibility of the Sub-Adviser to the Portfolio and its other clients
and that the total commissions paid by the Portfolio will be reasonable in
relation to the benefits to the portfolio over the long term. In no instance
will portfolio securities be purchased from or sold to the Sub-Adviser, or any
affiliated person thereof, except in accordance with the federal securities laws
and the rules and regulations thereunder. Whenever the Sub-Adviser
simultaneously places orders to purchase or sell the same security on behalf of
the Portfolio and one or more other accounts advised by the Sub-Adviser, the
orders will be allocated as to price and amount among all such accounts in a
manner believed to be equitable by the Sub-Adviser over time to each account.
Mitchell Hutchins recognizes that in some cases this procedure may adversely
affect the results obtained for the Portfolio.
(c) The Sub-Adviser will maintain all books and records required to be
maintained by the Sub-Adviser pursuant to the 1940 Act and the rules and
regulations promulgated thereunder with respect to transactions on behalf of
the Portfolio, and will furnish the Board and Mitchell Hutchins with such
periodic and special reports as the Board or Mitchell Hutchins reasonably may
request. In compliance with the requirements of Rule 31a-3 under the 1940 Act,
the Sub-Adviser agrees that all records which it maintains for the
Portfolio are the property of the Trust, agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act any records which it maintains for
the Trust and which are required to be maintained by Rule 31a-1 under the 1940
Act, and further agrees to surrender promptly to the Trust any records which it
maintains for the Trust upon request by the Trust.
(d) At such times as shall be reasonably requested by the Board or
Mitchell Hutchins, the Sub-Adviser will provide the Board and Mitchell Hutchins
with economic and investment analyses and reports as well as quarterly reports
setting forth the Portfolio's performance and make available to the Board and
Mitchell Hutchins any economic, statistical and investment services normally
available to institutional or other customers of the Sub-Adviser.
(e) In accordance with procedures adopted by the Board, as amended from
time to time, the Sub-Adviser is responsible for assisting in the fair valuation
of any illiquid portfolio securities and will assist in providing independent
sources of market value for all other portfolio securities.
3. Further Duties. In all matters relating to the performance of this
Agreement, the Sub-Adviser will act in conformity with the Trust's Trust
Instrument, By-Laws and currently effective registration statement under the
1940 Act and any amendments or supplements thereto ("Registration Statement")
and with the written instructions and directions of the Board and Mitchell
Hutchins and will comply with the requirements of the 1940 Act, the Investment
Advisers Act of 1940, as amended ("Advisers Act"), the rules under each,
Subchapter M of the Internal Revenue Code as applicable to regulated investment
companies. In addition, the Sub-Adviser will act in conformity with all other
applicable federal and state laws and regulations either as reflected in the
Registration Statement or otherwise provided in writing to the Sub-Adviser by
Mitchell Hutchins. Mitchell Hutchins agrees to provide to the Sub-Adviser copies
of the Trust's Trust Instrument, By-Laws, Registration Statement, written
instructions and directions of the Board and Mitchell Hutchins, and any
amendments or supplements to any of these materials as soon as practicable after
such materials become available.
<PAGE>
4. Exclusivity. During the term of this Agreement, the Sub-Adviser agrees
that it will not provide investment advice on a discretionary or
non-discretionary basis for any global equity investment products offered to
retail customers in the United States by broker-dealers listed on Schedule A.
The Sub-Adviser shall deliver to Mitchell Hutchins in writing prompt and regular
reports of the Sub-Adviser's investment advisory activities in sufficient detail
to permit Mitchell Hutchins to monitor the terms of this Agreement.
5. Expenses. During the term of this Agreement, the Sub-Adviser will bear
all expenses incurred by it in connection with its investment sub-advisory
services under this Agreement.
6. Compensation.
(a) For the services provided and the expenses assumed by the Sub-Adviser
pursuant to this Agreement, Mitchell Hutchins, not the Portfolio, will pay to
the Sub-Adviser a fee, computed daily and payable monthly, as computed in the
manner set forth in Schedule B, together with a schedule showing the manner in
which the fee was computed.
(b) The fee shall be computed daily and payable monthly to the
Sub-Adviser on or before the fifteenth business day of the next succeeding
calendar month.
(c) If this Agreement becomes effective or terminates before the end of
any month, the fee for the period from the effective date to the end of the
month or from the beginning of such month to the date of termination, as the
case may be, shall be prorated according to the proportion which such period
bears to the full month in which such effectiveness or termination occurs.
7. Limitation Of Liability. The Sub-Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Portfolio,
the Trust or its shareholders or by Mitchell Hutchins in connection with the
matters to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard by it of its obligations and duties under this
Agreement.
8. Indemnification.
(a) Mitchell Hutchins agrees to indemnify GEIM, its officers and
directors, and any person who controls GEIM within the meaning of Section 15 of
the Securities Act of 1933 ("1933 Act") for any loss or expense (including
attorney's fees) arising out of any claim, demand, action or suit in the event
that GEIM has been found to be without fault and Mitchell Hutchins or its parent
company, PaineWebber Incorporated ("PaineWebber") has been found at fault (i) by
the final judgment of a court of competent jurisdiction or (ii) in any order of
settlement of any claim, demand, action or suit that has been approved by the
Board of Directors of Mitchell Hutchins or PaineWebber.
(b) GEIM agrees to indemnify Mitchell Hutchins, its officers and
directors, and any person who controls Mitchell Hutchins within the meaning of
Section 15 of the 1933 Act for any loss or expense (including attorneys' fees)
arising out of any claim, demand, action or suit in the event that Mitchell
Hutchins has been found to be without fault and GEIM, or its parent company,
General Electric Company ("GE"), has been found at fault (i) by the final
judgment of a court of competent
<PAGE>
jurisdiction or (II) in any order of settlement of any claim, demand, action or
suit that has been approved by the Board of Directors of GEIM or GE.
9. Representations of Sub-Adviser. The Sub-Adviser represents, warrants
and agrees as follows:
(a) The Sub-Adviser (I) is registered as an investment adviser under the
Advisers Act and will continue to be so registered for so long as this
Agreement remains in effect, (II) is not prohibited by the 1949 Act or the
Advisers Act from performing the services contemplated by this Agreement, (III)
has met, and will seek to continue to meet for so long as this Agreement remains
in effect, any other applicable federal or state requirements, or the applicable
requirements of any regulatory or industry self-regulatory agency, necessary to
be met in order to perform the services contemplated by this Agreement, (IV) has
the authority to enter into and perform the services contemplated by this
Agreement, and (V) will promptly notify Mitchell Hutchins of the occurrence of
any event that would disqualify the Sub-Adviser from serving as an investment
adviser of an investment company pursuant to Section 9(a) of the 1940 Act or
otherwise.
(b) The Sub-Adviser has adopted a written code of ethics complying with
the requirements of Rule 17j-1 under the 1940 Act and will provide Mitchell
Hutchins and the Board with a copy of that code of ethics, together with
evidence of its adoption. Within fifteen days of the end of the last calendar
quarter of each year that this Agreement is in effect, the president or a vice-
president of the Sub-Adviser shall certify to Mitchell Hutchins that the Sub-
Adviser has complied with the requirements of Rule 17j-1 during the previous
year and that there has been no violation of the Sub-Adviser's code of ethics
or,if such a violation has occurred, that appropriate action was taken in
response to such violation. Upon the written request of Mitchell Hutchins, the
Sub-Adviser shall permit Mitchell Hutchins, its employees or its agents to
examine the reports required to be made to the Sub-Adviser by Rule 17j-1(c)(1)
and all other records relevant to the Sub-Adviser's code of ethics.
(c) The Sub-Adviser has provided Mitchell Hutchins with a copy of its
Form ADV as most recently filed with the Securities and Exchange Commission
("SEC") and promptly will furnish a copy of all amendments to Mitchell Hutchins
at least annually.
(d) The Sub-Adviser will notify Mitchell Hutchins of any change of
control of the Sub-Adviser, including any change of its general partners or 25%
shareholders, as applicable, and any changes in the key personnel of the Sub-
Adviser, in each case prior to or promptly after such change.
10. Representations and Warranties of Mitchell Hutchins. Mitchell
Hutchins represents, warrants and agrees as follows:
(a) Mitchell Hutchins (I) is registered as an investment adviser under
the Advisers Act. and will continue to be so registered for so long as this
Agreement remains in effect: (II) is not prohibited by the 1940 Act from
performing the services contemplated by the Management Agreement: (III) has met,
and will seek to continue to meet for so long as this Agreement remains in
effect, any other applicable federal or state requirements of any regulatory or
industry self-regulatory agency, necessary to be met in order to perform the
services contemplated by the Management Agreement: (IV) has the authority to
enter into and perform the
<PAGE>
services contemplated by the Management Agreement; and (v)will promptly notify
the Sub-Adviser of the occurrence of any event that would disqualify Mitchell
Hutchins from serving as an investment adviser of an investment company pursuant
to Section 9(a) of the 1940 Act or otherwise.
(b) Mitchell Hutchins agrees that it will notify GEIM, to the extent
possible, within a reasonable period of time prior to any termination of this
Agreement by Mitchell Hutchins pursuant to Section 11(c) (including any
termination by assignment resulting from a foreseeable change in control of
Mitchell Hutchins that is a matter of public information), and that it will
notify GEIM promptly following any other termination of this Agreement pursuant
to Section 11(c).
11. Duration and Termination
(a) This Agreement shall become effective upon the date first above
written, provided that this Agreement shall not take effect unless it has first
been approved (i) by a vote of a majority of those trustees of the Trust who are
not parties to this Agreement or interested persons of any such party, cast in
person at a meeting called for the purpose of voting on such approval, and (ii)
by a vote of a majority of outstanding voting securities of the Portfolio.
(b) Unless sooner terminated as provided herein, this Agreement shall
continue in effect for two years from the above written date. Thereafter, if not
terminated, this Agreement will continue automatically for successive periods of
twelve months each, provided that such continuance is specifically approved at
least annually (i) by a vote of a majority of those trustees of the Trust who
are not parties to this Agreement or Interested persons of any such party, cast
in person at a meeting called for the purpose of voting on such approval, and
(ii) by the Board or by the holders of a vote of a majority of the outstanding
voting securities of the Portfolio.
(c) Notwithstanding the foregoing, this Agreement may be terminated
at any time, without the payment of any penalty, by vote of the Board or by a
vote of a majority of the outstanding voting securities of the Portfolio on 60
days' written notice to the Sub-Adviser. This Agreement may also be terminated,
without the payment of any penalty, by Mitchell Hutchins: (i) upon 120 days'
written notice to the Sub-Adviser, (ii) upon material breach by the Sub-Adviser
of any of the representations and warranties set forth in Paragraph 9 of this
Agreement; or (iii) if the Sub-Adviser becomes unable to discharge its duties
and obligations under this Agreement, including circumstances such as financial
insolvency of the Sub-Adviser or other circumstances that could adversely
affect the Portfolio. The Sub-Adviser may terminate this Agreement at any time,
without the payment of any penalty, on 120 days' written notice to Mitchell
Hutchins. This Agreement will terminate automatically in the event of its
assignment or upon termination of the Management Agreement.
12. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought, and no amendment to the terms of this
Agreement shall be effective until approved by vote of a majority of the
Portfolio's outstanding voting securities (unless the Trust receives an SEC
order permitting it to modify the Agreement without such vote).
<PAGE>
13. Governing Law. This Agreement shall be construed in accordance
with the 1940 Act and the laws of the State of Delaware, without giving effect
to the conflicts of laws principles thereof. To the extent that the applicable
laws of the State of Delaware conflict with the applicable provisions of the
1940 Act, the latter shall control.
14. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to the
parties hereto and their respective successors. As used in this Agreement, the
terms "majority of the outstanding voting," "affiliated person,"
"interested person," "assignment," "broker," "investment adviser," "net assets,"
"sale," "sell," and "security" shall have the same meaning as such terms have in
the 1940 Act, subject to such exemption as may be granted by the SEC by any
rule, regulation or order. Where the effect of a requirement of the federal
securities laws reflected in any provision of this Agreement is made less
restrictive by a rule, regulation or order of the SEC, whether of special or
general application, such provision shall be deemed to incorporate the effect
of such rule, regulation or order. This Agreement may be signed in counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their duly authorized signatories as to the date and year first
above written.
Attest: MITCHELL HUTCHINS ASSET MANAGEMENT INC.
By:------------------------------------
Name:
Title:
Attest: GE INVESTMENT MANAGEMENT INCORPORATED
By:------------------------------------
Name:
Title:
<PAGE>
SUB-ADVISORY AGREEMENT
----------------------
Agreement made as of________, 1995 ("Agreement") between MITCHELL HUTCHINS
ASSET MANAGEMENT INC., a Delaware corporation ("Mitchell Hutchins"), and PACIFIC
INVESTMENT MANAGEMENT COMPANY, a Delaware general partnership ("Sub-Adviser").
RECITALS
--------
(1) Mitchell Hutchins has entered into an Investment Advisory and
Administration Contract dated April 21, 1988, as supplemented by an investment
Advisory and Administration Fee Agreement dated May 1, 1990 (together, referred
to as "Advisory Contract") with PaineWebber Series Trust ("Trust"), an open-end
management investment company registered under the Investment Company Act of
1940, as amended ("1940 Act") with respect to the Strategic Fixed Income
Portfolio ("Portfolio") series of the Trust (formerly named "Government
Portfolio"); and
(2) Mitchell Hutchins wishes to retain the Sub-Adviser to furnish certain
investment advisory services to the Portfolio, and the Sub-Adviser is willing to
furnish those services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties agree as follows:
1. Appointment. Mitchell Hutchins hereby appoints the Sub-Adviser as an
------------
investment sub-adviser with respect to the Portfolio for the period and on the
terms set forth in this Agreement. The Sub-Adviser accepts that appointment and
agrees to render the services herein set forth, for the compensation herein
provided.
2. Duties as Sub-Adviser.
----------------------
(a) Subject to the supervision of and any guidelines adopted by the
Trust's Board of Trustees ("Board") and Mitchell Hutchins, the Sub-Adviser will
provide a continuous investment program for the Portfolio, including investment
research and management. The Sub-Adviser will determine from time to time what
investments will be purchased, retained or sold by the Portfolio. The Sub-
Adviser will be responsible for placing purchase and sell orders for investments
and for other related transactions. The Sub-Adviser will provide services under
this Agreement in accordance with the Portfolio's investment objective, policies
and restrictions as stated in the Trust's Registration Statement.
(b) The Sub-Adviser agrees that, in placing orders with brokers, it will
obtain the best net result in terms of price and execution; provided that, on
behalf of the portfolio, the Sub-Adviser may, in its discretion, use brokers who
provide the Sub-Adviser with research, analysis, advice and similar services to
execute portfolio transactions, and the Sub-Adviser may pay to those brokers in
return for brokerage and research services a higher commission than may be
charged by other brokers, subject to the Sub-Adviser's determining in good faith
that such commission is reasonable in terms either of the particular transaction
or of the overall responsibility of the Sub-Adviser to the Portfolio and its
other clients and that the total commissions paid by the Portfolio will be
reasonable in relation to the benefits to the Portfolio over the long term. In
no instance will portfolio securities be
<PAGE>
purchased from or sold to the Sub-Adviser, or any affiliated person thereof
except in accordance with the federal securities laws and the rules and
regulations thereunder. The Sub-Adviser may aggregate sales and purchase orders
with respect to the assets of the portfolio with simliar orders being made
simultaneously for other accounts advised by the Sub-Adviser or its
affiliates. Whenever the Sub-Adviser simultaneously places orders to purchase
or sell the same security on behalf of the Portfolio and one or more other
accounts advised by the Sub-Adviser, the orders will be allocated as to price
and amount among all such accounts in a manner believed to be equitable over
time to each account. Mitchell Hutchins recognizes that in some cases this
procedure may adversely affect the results obtained for the Portfolio.
(c) The Sub-Adviser will maintain all books and records required to be
maintained by the Sub-Adviser pursuant to the 1940 Act and the rules and
regulations promulgated thereunder with respect to transactions by the
Sub-Adviser on behalf of the Portfolio, and will furnish the Board and Mitchell
Hutchins with such periodic and special reports as the Board or Mitchell
Hutchins reasonably may request. In compliance with the requirements of Rule
31a-2 under the 1940 Act, the Sub-Adviser hereby agrees that all records which
it maintains for the Portfolio are the property of the Trust, agrees to preserve
for the periods prescribed by Rule 31a-2 under the 1940 Act any records which it
maintains for the Trust and which are required to be maintained by Rule 31a-1
under the 1940 Act, and further agrees to surrender promptly to the Trust any
records which it maintains for the Portfolio upon request by the Trust.
(d) At such times as shall be reasonably requested by the Board or
Mitchell Hutchins, the Sub-Adviser will provide the Board and Mitchell Hutchins
with economic and investment analyses and reports as well as quarterly reports
setting forth the Portfolio's performance and make available to the Board and
Mitchell Hutchins any economic, statistical and investment services normally
available to institutional or other customers of the Sub-Adviser.
(e) In accordance with procedures adopted by the Board, as amended from
time to time, the Sub-Adviser is responsible for assisting in the fair
valuation of all portfolio securities and will use its reasonable efforts to
arrange for the provision of a price(s) from a party(ies) independent of the
Sub-Adviser for each portfolio security for which the custodian does not obtain
prices in the ordinary course of business from an automated pricing service.
3. Further Duties. In all matters relating to the performance of this
--------------
Agreement, the Sub-Adviser will act in conformnity with the Trust's Trust
Instrument, By-Laws and currently effective registration statement under the
1940 Act and any amendments or supplements thereto ("Registration Statement")
and with the written instructions and written directions of the Board and
Mitchell Hutchins and will comply with the requirements of the 1940 Act , the
Investment Advisers act of 1940, as amended ("Advisers Act"), the rules under
each, Subchapter M of the Internal Revenue Code ("Code") as applicable to
regulated investment companies, the diversifications requirements applicable to
the Portfolio under Section 817(h) of the Code and all other applicable federal
and state laws and regulations. Mitchell Hutchins agrees to provide to the
Sub-Adviser copies of the Trust's Trust Instrument, By-Laws, Registration
Statement, written instructions and
<PAGE>
directions of the Board and Mitchell Hutchins, and any amendments or supplements
to any of these materials as soon as practicable after such materials become
available; provided however that the Sub-Adviser's duty under this Agreement to
----------------
act in conformity with any document, instruction, or guidelines produced by
the Trust or Mitchell Hutchins shall not arise until it has been delivered
to the Sub-Adviser. Any changes to the objectives, policies or restrictions will
make due allowance for the time within which the Sub-Adviser shall have to come
into compliance.
4. Expenses. During the term of this Agreement, the Sub-Adviser will bear
--------
all expenses incurred by it in connection with its services under this
Agreement. The Sub-Adviser shall not be responsible for any expenses incurred
by the Trust, the Portfolio or Mitchell Hutchins.
5. Compensation.
------------
(a) For the services provided and the expenses assumed by the Sub-Adviser
pursuant to this Agreement, Mitchell Hutchins, not the Portfolio will pay to
the Sub-Adviser a fee, computed daily and payable monthly, at an annual rate of
0.25% of the Portfolio's average daily net assets (computed in the manner
specified in the Advisory Contract), and will provide the Sub-Adviser with a
schedule showing the manner in which the fee was computed.
(b) The fee shall be computed daily and payable monthly to the Sub-Adviser
on or before the last business day of the next succeeding calendar month.
(c) For those periods in which Mitchell Hutchins has agreed to waive all
or a portion of its management fee, Mitchell Hutchins may ask the Sub-Adviser to
waive the same proportion of its fees, but the Sub-Adviser is under no
obligation to do so.
(d) If this Agreement becomes effective or terminates before the end of
any month, the fee for the period from the effective date to the end of the
month or from the beginning of such month to the date of termination, as the
case may be, shall be prorated according to the proportion which such period
bears to the full month in such effectiveness or termination occurs.
6. Limitation Of Liability. The Sub-Adviser shall not be liable for any
-----------------------
error of judgment or mistake of law or for any loss suffered by the Portfolio,
the Trust or its shareholders or by Mitchell Hutchins in connection with the
matters to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of
its duties or from reckless disregard by it or its obligations and duties under
this Agreement.
7. Representations of Sub-Adviser. The Sub-Adviser represents, warrants
------------------------------
and agrees as follows:
(a) The Sub-Adviser (i) is registered as an Investment adviser under the
Advisers Act and will continue to be so registered for so long as this Agreement
remains in effect; (ii) is not prohibited be the 1940 Act or the Advisers Act
from performing the services contemplated by this Agreement; (iii) has met, and
will seek to continue to meet for so long as this Agreement remains in effect,
any other applicable federal or state requirements, or the applicable
requirements of any regulatory or industry self-regulatory agency, necessary to
be met in order to perform the services
<PAGE>
contemplated by this Agreement: (iv) has the authority to enter into and perform
the services contemplated by this Agreement; and (v) will promptly notify
Mitchell Hutchins of the occurrence of any event that would disqualify the Sub-
Adviser from serving as an investment adviser of an investment company pursuant
to Section 9(a) of the 1940 Act or otherwise.
(b) The Sub-Adviser has adopted a written code of ethics complying with
the requirements of Rule 17j-1 under the 1940 Act and will provide Mitchell
Hutchins and the Board with a copy of such code of ethics, together with
evidence of its adoption. Within fifteen days of the end of the last calendar
quarter of each year that this Agreement is in effect, the president or a vice-
president of the Sub-Adviser shall certify to Mitchell Hutchins that the Sub-
Adviser has complied with the requirements of Rule 17j-1 during the previous
year and that there has been no violation of the Sub-Adviser's code of ethics
or, if such a violation has occurred, that appropriate action was taken in
response to such violation. Upon the written request of Mitchell Hutchins, the
Sub-Adviser shall permit Mitchell Hutchins, its employees or its agents to
examine the reports required to be made to the Sub-Adviser by Rule 17j-1(c)(1)
and all other records relevant to the Sub-Adviser's code of ethics.
(c) The Sub-Adviser has provided Mitchell Hutchins with a copy of its
Form ADV as most recently filed with the Securities and Exchange Commission
("SEC") and promptly will furnish a copy of all amendments to Mitchell
Hutchins at least annually.
(d) The Sub-Adviser will notify Mitchell Hutchins of any change of control
of the Sub-Adviser, including any change of its general partners or 25%
shareholders, as applicable, and any changes in the key personnel who are either
the portfolio manager(s) of the Portfolio or senior management of the Sub-
Adviser, in each case prior to or promptly after such change.
8. Services Not Exclusive. The Sub-Adviser may act as an investment
adviser to any other person, firm or corporation, and may perform management and
any other services for any other person, association, corporation, firm or other
entity pursuant to any contract or otherwise, and take any action or do anything
in connection therewith or related thereto, except as prohibited by applicable
law; and no such performance of management or other services or taking of any
such action or doing of any such thing shall be in any manner restricted or
otherwise affected by any aspect of any relationship of the Sub-Adviser to or
with the Trust, Portfolio or Michell Hutchins or deemed to violate or give rise
to any duty or obligation of the Sub-Adviser to the Trust, Portfolio or Mitchell
Hutchins except as otherwise imposed by law or by this Agreement.
9. Duration and Termination.
-------------------------
(a) This Agreement shall become effective upon the date first above
written, provided that this Agreement shall not take effect unless it has first
been approved (i) by a vote of a majority of those trustees of the trust who
are not parties to this Agreement or interested persons of any such party,
cast in person at a meeting called for the purpose of voting on such approval,
and (ii) by vote of a majority of the Portfolio's outstanding voting securities.
(b) Unless sooner terminated as provided herein, this Agreement shall
continue in effect for two years from its effective date. Thereafter, if not
terminated, this Agreement shall continue automatically for successive periods
of twelve months each, provided that such continuance is specifically approved
at least annually (i) by a vote of a majority of those trustees of
<PAGE>
the Trust who are not parties to this Agreement or interested persons of any
such party, cast in person at a meeting called for the purpose of voting on such
approval, and (ii) by the Board or by vote of a majority of the outstanding
voting securities of the Portfolio.
(c) Notwithstanding the foregoing, this Agreement may be terminated at
any time, without the payment of any penalty, by vote of the Board or by a vote
of a majority of the outstanding voting securities of the Portfolio on 60 days'
written notice to the Sub-Adviser. This Agreement may also be terminated,
without the payment of any penalty, by Mitchell Hutchins: (i) upon 120 days'
written notice to the Sub-Adviser; (ii) immediately upon material breach by the
Sub-Adviser of any of the representations and warranties set forth in Paragraph
7 of this Agreement; or (iii) immediately if, in the reasonable judgment of
Mitchell Hutchins, the Sub-Adviser becomes unable to discharge its duties
and obligations under this Agreement, including circumstances such as financial
insolvency of the Sub-Adviser or other circumstances that could adversely
affect the portfolio. The Sub-Adviser may terminate this Agreement at any
time, without the payment of any penalty, on 120 days' written notice to
Mitchell Hutchins. This Agreement will terminate automatically in the event
of its assignment or upon termination of the Management Agreement.
10. Amendment of this Agreement. No provision of this Agreement may be
---------------------------
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. No amendment of this Agreement shall be
effective until approved (i) by a vote of a majority of those trustees of the
Trust who are not parties to this Agreement or interested persons of any such
party, and (ii) by a vote of a majority of the Portfolio's outstanding voting
securities (unless in the case of (ii), the Trust receives an SEC order or No-
Action letter permitting it to modify the Agreement without such vote).
11. Governing Law. This Agreement shall be construed in accordance
-------------
with the 1940 Act and the laws of the State of Delaware, without giving effect
to the conflicts of laws principles thereof. To the extent that the applicable
laws of the State of Delaware conflict with the applicable provisions of the
1940 Act, the latter shall control.
12. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors. As used in this
Agreement, the terms "majority of the outstanding voting securities,"
""affilated person," "interested person," "assignment," "broker," "investment
adviser," "net assets," "sale," "sell" and "security" shall have the same
meaning as such terms have in the 1940 Act, subject to such exemption as may be
granted by the SEC by any rule, regulation or order. Where the effect of a
requirement of the federal securities laws reflected in any provision of this
Agreement is made less restrictive by the rule, regulation or order of the SEC,
whether of special or general application, such provision shall be deemed to
incorporate the effect of such rule, regulation or order. This Agreement may be
signed in counterpart.
<PAGE>
13. Notices. Any written notice herein required to be given to the Sub-
-------
Adviser or Mitchell Hutchins shall be deemed to have been given upon receipt of
the same at their respective addresses set forth below.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their duly authorized signatories as of the date and year first
above written.
Attest: MITCHELL HUTCHINS ASSET MANAGEMENT INC.
1285 Avenue of the Americas
New York, New York 10019
By:-------------------------------------
Name:
Title:
Attest: PACIFIC INVESTMENT MANAGEMENT COMPANY
840 Newport Center Drive
Suite 380
Newport Beach, California 92660
By: PIMCO Management, Inc.,
its general partner
Name:
Title:
<PAGE>
ADDENDUM TO CUSTODIAN AGREEMENT
DATED APRIL 1,1987 BETWEEN
PAINEWEBBER SERIES TRUST AND
STATE STREET BANK AND TRUST COMPANY
-----------------------------------
WHEREAS,PAINEWEBBER SERIES TRUST ("Fund") and STATE STREET BANK AND TRUST
COMPANY ("State Street") have entered into a Custodian Agreement, dated April 1,
1987 ("Custodian Agreement") pursuant to which State Street serves as custodian
of the assets of the Money Market Portfolio, Growth Portfolio, Asset Allocation
Portfolio, Government Portfolio, Dividend Growth Portfolio, Aggressive Growth
Portfolio, Balanced Portfolio and Fixed Income Portfolio; and
WHEREAS, the Fund's Board of Trustees has established the Aggressive Growth
Portfolio, the Balanced Portfolio and the Fixed Income Portfolio (each a
"Portfolio") as new series of shares of beneficial interest of the Fund;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained and in accordance with paragraph 12 of the Custodian Agreement,
the parties hereto agree as follows:
1. The Fund hereby appoints State Street to serve as custodian of the
assets of each Portfolio pursuant to the provisions of the Fund's Declaration of
Trust and subject to all the terms and provisions of the Custodian Agreement.
2. State Street accepts the appointment to serve as custodian of the
assets of each Portfolio, subject to all the terms and provisions of the
Custodian Agreement.
3. The Fund and State Street agree that State Street will be
compensated for its services as custodian of each Portfolio's assets in
accordance with the Fee Schedule attached hereto.
DATE: September 1, 1993
ATTEST: PAINEWEBBER SERIES TRUST
_____________________________ By: _______________________
ATTEST: STATE STREET BANK AND TRUST
COMPANY
_____________________________ By: _______________________
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" in the Propectus and "Auditors" in the Statement of Additional
Information and to the incorporation by reference therein of our report dated
February 7, 1996, in this Registration Statement (Form N-LA No. 33-10438) of
PaineWebber Series Trust.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
New York, New York
April 26, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000806591
<NAME> PAINEWEBBER SERIES TRUST
<SERIES>
<NUMBER> 1
<NAME> MONEY MARKET
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-1-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 22,031
<INVESTMENTS-AT-VALUE> 22,031
<RECEIVABLES> 42
<ASSETS-OTHER> 16
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 22,089
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<PAGE>
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<CIK> 0000806591
<NAME> PAINEWEBBER SERIES TRUST
<SERIES>
<NUMBER> 10
<NAME> HIGH GRADE FIXED INCOME PORTFOLIO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 9,104
<INVESTMENTS-AT-VALUE> 9,555
<RECEIVABLES> 118
<ASSETS-OTHER> 22
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9,695
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 548
<TOTAL-LIABILITIES> 548
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8760
<SHARES-COMMON-STOCK> 963
<SHARES-COMMON-PRIOR> 876
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (5)
<ACCUMULATED-NET-GAINS> (59)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 451
<NET-ASSETS> 9,147
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 642
<OTHER-INCOME> 0
<EXPENSES-NET> 99
<NET-INVESTMENT-INCOME> 543
<REALIZED-GAINS-CURRENT> 25
<APPREC-INCREASE-CURRENT> 832
<NET-CHANGE-FROM-OPS> 1,400
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (544)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 347
<NUMBER-OF-SHARES-REDEEMED> (285)
<SHARES-REINVESTED> 25
<NET-CHANGE-IN-ASSETS> 1,509
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (6)
<OVERDIST-NET-GAINS-PRIOR> (82)
<GROSS-ADVISORY-FEES> 49
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 99
<AVERAGE-NET-ASSETS> 9,770
<PER-SHARE-NAV-BEGIN> 8.71
<PER-SHARE-NII> 0.56
<PER-SHARE-GAIN-APPREC> 0.79
<PER-SHARE-DIVIDEND> (0.57)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.49
<EXPENSE-RATIO> 1.01
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
