<PAGE>
As filed with the Securities and Exchange Commission on December 17, 1997
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. 25 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 24
--
(Check appropriate box or boxes.)
MITCHELL HUTCHINS SERIES TRUST
(formerly 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.
BENJAMIN J. HASKIN, 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)
[_] 60 days after filing pursuant to Rule 485(a)(i)
[_] On pursuant to Rule 485(a)(i)
[X] 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
Title of Securities Being Registered: Shares of Beneficial Interest.
<PAGE>
Mitchell Hutchins 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>
Mitchell Hutchins Series Trust
Form N-1A Cross Reference Sheet
<TABLE>
<CAPTION>
Part A Item No. and Caption Prospectus Caption
----------------------------------- -----------------------------------------------------------
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Investment Objectives and Policies; Description of
Securities, Related Risks and Investment Techniques;
General Information
5. Management of the Fund Management; General Information
5A. Management's Discussion of Fund Financial Highlights
Performance
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. and Caption Statement of Additional Information Caption
------------------------------------- ------------------------------------------------------------
<S> <C> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Other Information
13. Investment Objective and Policies Investment Policies and Limitations; Hedging and Related
Strategies Using Derivative Instruments; Portfolio
Transactions
14. Management of the Fund Trustees and Officers; Principal Holders of Securities
15. Control Persons and Principal Trustees and Officers; Principal Holders of Securities
Holders of Securities
16. Investment Advisory and Other Investment Advisory Services; Other Information
Services
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
17. Brokerage Allocation Portfolio Transactions
18. Capital Stock and Other Securities Dividends; Other Information
19. Purchase, Redemption and Pricing of Additional Purchase and Redemption Information; Valuation
Securities Being Offered 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>
MITCHELL HUTCHINS SERIES TRUST
1285 Avenue of the Americas
New York, New York 10019
Mitchell Hutchins Series Trust ("Fund") is a professionally managed, open-end
investment company that offers shares in the Portfolios listed below. All the
Portfolios except Strategic Income Portfolio and 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
("Accounts") that fund benefits under variable annuity contracts and/or
variable life insurance contracts (collectively, "Contracts").
* MONEY MARKET 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.
* HIGH GRADE FIXED INCOME PORTFOLIO invests primarily in U.S. government
bonds, including those backed by mortgages, and high quality corporate
bonds and mortgage-backed and asset-backed securities of private
issuers.
* STRATEGIC FIXED INCOME PORTFOLIO invests primarily in bonds and other
fixed income securities of varying maturities with a dollar-weighted
average portfolio duration between three and eight years.
* STRATEGIC INCOME PORTFOLIO strategically allocates its investments among
three bond market categories: U.S. government and investment grade
corporate bonds; U.S. high yield, high risk corporate bonds; and foreign
and emerging market bonds.
* GLOBAL INCOME PORTFOLIO invests principally in high quality bonds of
foreign and U.S. issuers.
* HIGH INCOME PORTFOLIO invests primarily in a diversified range of high
yield, high risk, U.S. and foreign corporate bonds.
* BALANCED PORTFOLIO invests primarily in a combination of equity
securities, investment grade bonds and money market instruments.
* GROWTH AND INCOME PORTFOLIO invests primarily in dividend-paying equity
securities believed to have the potential for rapid earnings growth.
* TACTICAL ALLOCATION PORTFOLIO follows a disciplined investment strategy
that allocates its assets between common stocks and U.S. Treasury notes
or U.S. Treasury bills.
* GROWTH PORTFOLIO invests primarily in equity securities of companies
believed to have substantial potential for capital growth.
* AGGRESSIVE GROWTH PORTFOLIO invests primarily in the common stocks of
U.S. companies expected to grow faster in assets and stock prices than
the average rate of companies in the S&P 500 Composite Stock Price
Index.
* SMALL CAP PORTFOLIO invests primarily in equity securities of small
capitalization ("small cap") companies.
* GLOBAL GROWTH PORTFOLIO invests primarily in common stocks of companies
based in the United States, Europe, Japan and the Pacific Basin.
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 March 1, 1998
(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 March 1, 1998.
PW 1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Financial Highlights...................................................... PW 3
Investment Objectives and Policies........................................ PW 12
Description of Securities, Related Risks and Investment Techniques........ PW 20
Purchases, Redemptions and Exchanges...................................... PW 29
Dividends, Other Distributions and Federal Income Tax..................... PW 29
Valuation of Shares....................................................... PW 31
Management................................................................ PW 31
General Information....................................................... PW 35
Appendix.................................................................. PW 36
</TABLE>
PW 2
<PAGE>
FINANCIAL HIGHLIGHTS
The tables below provide data and ratios for one share of each Portfolio that
had operations during the periods shown. This information is supplemented by
the financial statements, accompanying notes and the report of Ernst & Young
LLP, independent auditors, which appear in the Fund's Annual Report to
Shareholders for the fiscal year ended December 31, 1997, and 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
relating to each of the five years in the period ended December 31, 1997, have
been audited by Ernst & Young LLP. Further information about the performance
of each Portfolio is also included in the Annual Report to Shareholders, which
may be obtained without charge by calling 1-800-986-0088. The information
appearing below for periods prior to the year ended December 31, 1993 also has
been audited by Ernst & Young LLP, whose reports thereon were unqualified.
The financial highlights information pertains to the Portfolios and does not
reflect charges related to the separate accounts that fund the Contracts. You
should refer to the appropriate Account prospectus for additional information
regarding such charges.
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
---------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ------- ------- ------- ------- ------- ------- ------ ------ ------
<S> <C> <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
--- ------- ------- ------- ------- ------- ------- ------ ------ ------
Net investment income... 0.04 0.05 0.03 0.02 0.03 0.05 0.05 0.08 0.06
--- ------- ------- ------- ------- ------- ------- ------ ------ ------
Dividends from net
investment income...... (0.04) (0.05) (0.03) (0.02) (0.03) (0.05) (0.05) (0.08) (0.06)
--- ------- ------- ------- ------- ------- ------- ------ ------ ------
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).................... 4.32% 5.22% 3.43% 2.45% 3.00% 5.00% 5.00% 8.00% 6.00%
=== ======= ======= ======= ======= ======= ======= ====== ====== ======
Ratios/Supplemental
Data:
Net assets, end of
period (000's)......... $12,287 $21,974 $25,042 $15,468 $19,383 $20,249 $8,720 $4,367 $3,278
Expenses to average net
assets**............... 1.17% 0.79% 0.88% 0.86% 0.81% 1.00% 2.02% 1.55% 1.56%
Net investment income to
average net assets**... 4.27% 5.23% 3.56% 2.43% 3.13% 4.92% 6.13% 7.62% 5.74%
</TABLE>
- -------
* 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
(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 dates, and a sale at net asset value on the
last day of each period reported. The figures do not include additional
Contract level charges; results would be lower if such charges were
included. Total investment returns for periods of less than one year have
not been annualized.
PW 3
<PAGE>
<TABLE>
<CAPTION>
HIGH GRADE FIXED INCOME
PORTFOLIO
--------------------------------------------
FOR THE YEARS FOR THE PERIOD
ENDED NOVEMBER 8,
DECEMBER 31, 1993+ TO
--------------------------- DECEMBER 31,
1997 1996 1995 1994 1993
---- ------ ------ ------ --------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................... $ 9.49 $ 8.71 $ 9.61 $10.00
--- ------ ------ ------ ------
Net investment income (loss)...... 1.04 0.56 0.26 0.02
Net realized and unrealized gains
(losses) from investments........ (0.91) 0.79 (0.89) (0.39)
--- ------ ------ ------ ------
Total income (loss) from
investment operations............ 0.13 1.35 (0.63) (0.37)
--- ------ ------ ------ ------
Dividends from net investment
income........................... (0.52) (0.57) (0.27) (0.02)
Distributions from net realized
gains from investments........... -- -- -- --
--- ------ ------ ------ ------
Total dividends and distributions. (0.52) (0.57) (0.27) (0.02)
--- ------ ------ ------ ------
Net asset value, end of period.... $ 9.10 $ 9.49 $ 8.71 $ 9.61
=== ====== ====== ====== ======
Total investment return (1)....... 1.41% 15.44% (6.56)% (3.73)%
=== ====== ====== ====== ======
Ratios/Supplemental Data:
Net assets, end of period (000's). $7,902 $9,147 $7,638 $1,480
Expenses to average net assets**.. 1.62% 1.01% 1.56% 0.00%
Net investment income (loss) to
average net assets**............. 5.04% 5.56% 4.61% 3.90%*
Portfolio turnover................ 282% 136% 36% 0%
Average commission rate paid (2).. -- -- -- --
</TABLE>
- --------
* Annualized
** During the period ended December 31, 1993, Mitchell Hutchins agreed to
reimburse the Portfolio for all of its operating expenses and waived all of
its 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 23.52%
and (19.62)%, respectively.
+ Commencement of operations
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates, and a sale
at net asset value on the last day of each period reported. The figures do
not include additional contract level charges; results would be lower if
such charges were included. Total investment return for periods of less
than one year have not been annualized.
(2) Effective for fiscal years beginning on or after September 1, 1995, the
Portfolio is required to disclose the average commission rate paid per
share of common stock investments purchased or sold.
PW 4
<PAGE>
<TABLE>
<CAPTION>
STRATEGIC FIXED INCOME PORTFOLIO
--------------------------------------------------------------------------------
FOR THE
PERIOD
JULY 5,
FOR THE YEARS ENDED DECEMBER 31, 1989+ TO
------------------------------------------------------------------ DECEMBER 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989
---- ------- ------- ------- ------- ------- ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 10.61 $ 10.34 $ 11.93 $ 11.58 $ 11.61 $ 10.49 $10.17 $10.00
--- ------- ------- ------- ------- ------- ------- ------ ------
Net investment income... 1.40 0.88 0.85 0.87 0.74 0.47 0.45 0.10
Net realized and
unrealized gains
(losses) from
investments............ (1.01) 1.03 (1.49) 0.48 0.05 1.12 0.32 0.17
--- ------- ------- ------- ------- ------- ------- ------ ------
Total income (loss) from
investment operations.. 0.39 1.91 (0.64) 1.35 0.79 1.59 0.77 0.27
--- ------- ------- ------- ------- ------- ------- ------ ------
Dividends from net
investment income...... (0.70) (0.88) (0.85) (0.87) (0.74) (0.47) (0.45) (0.10)
Distributions from net
realized gains from
investments............ (0.09) (0.76) (0.10) (0.13) (0.08) -- -- --
--- ------- ------- ------- ------- ------- ------- ------ ------
Total dividends and
distributions.......... (0.79) (1.64) (0.95) (1.00) (0.82) (0.47) (0.45) (0.10)
--- ------- ------- ------- ------- ------- ------- ------ ------
Net asset value, end of
period................. $ 10.21 $ 10.61 $ 10.34 $ 11.93 $ 11.58 $ 11.61 $10.49 $10.17
=== ======= ======= ======= ======= ======= ======= ====== ======
Total investment return
(1).................... 3.79% 18.51% (5.34)% 11.66% 6.76% 15.17% 7.58% 2.70%
=== ======= ======= ======= ======= ======= ======= ====== ======
Ratios/Supplemental
Data:
Net assets, end of
period (000's)......... $10,689 $13,741 $17,020 $22,354 $24,103 $15,690 $5,192 $1,294
Expenses to average net
assets**............... 1.52% 0.99% 0.89% 0.79% 0.76% 1.25% 1.55% 1.55%*
Net investment income to
average
net assets**........... 5.88% 6.35% 6.64% 6.13% 6.59% 6.43% 6.80% 6.17%*
Portfolio turnover...... 317% 234% 54% 8% 23% 1% 66% 0%
</TABLE>
- --------
* 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
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates, and a sale
at net asset value on the last day of each period reported. The figures do
not include additional contract level charges; results would be lower if
such charges were included. Total investment returns for periods of less
than one year have not been annualized.
PW 5
<PAGE>
<TABLE>
<CAPTION>
GLOBAL INCOME PORTFOLIO
-----------------------------------------------------------------------------------------
FOR THE
PERIOD
MAY 1,
FOR THE YEARS ENDED DECEMBER 31, 1988+ TO
--------------------------------------------------------------------------- DECEMBER 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ------- ------- ------- ------- ------- ------- ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 11.20 $ 10.88 $ 11.72 $ 11.17 $ 11.65 $ 11.16 $ 10.19 $10.67 $10.00
--- ------- ------- ------- ------- ------- ------- ------- ------ ------
Net investment income
(loss)................. 0.87 (0.05) 0.97 0.96 0.80 0.75 0.52 0.94 0.28
Net realized and
unrealized gains
(losses) from
investments............ (0.13) 1.52 (1.60) 0.90 (0.65) 0.40 1.00 (0.22) 0.39
--- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total income (loss) from
investment operations.. 0.74 1.47 (0.63) 1.86 0.15 1.15 1.52 0.72 0.67
--- ------- ------- ------- ------- ------- ------- ------- ------ ------
Dividends from net
investment income...... (0.79) (1.15) (0.21) (0.94) (0.56) (0.65) (0.52) (1.06) --
Distributions in excess
of net investment
income................. -- -- -- (0.16) -- -- -- -- --
Distributions from net
realized gains on
investments............ (0.01) -- -- (0.21) (0.07) (0.01) (0.03) (0.14) --
--- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total dividends and
distributions.......... (0.80) (1.15) (0.21) (1.31) (0.63) (0.66) (0.55) (1.20) --
--- ------- ------- ------- ------- ------- ------- ------- ------ ------
Net asset value, end of
period................. $ 11.14 $ 11.20 $ 10.88 $ 11.72 $ 11.17 $ 11.65 $ 11.16 $10.19 $10.67
=== ======= ======= ======= ======= ======= ======= ======= ====== ======
Total investment return
(1).................... 6.62% 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)......... $24,436 $35,700 $52,688 $64,610 $63,172 $51,988 $30,778 $7,425 $7,298
Expenses to average net
assets**............... 1.56% 1.19% 1.17% 0.98% 1.07% 1.20% 1.72% 1.86% 1.86%*
Net investment income to
average net assets**... 6.56% 7.21% 7.23% 7.47% 7.20% 7.59% 8.64% 9.00% 6.35%*
Portfolio turnover ..... 134% 160% 97% 69% 75% 14% 110% 32% 136%
</TABLE>
- --------
* 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
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates, and a sale
at net asset value on the last day of each period reported. The figures do
not include additional contract level charges; results would be lower if
such charges were included. Total investment returns for periods of less
than one year have not been annualized.
PW 6
<PAGE>
<TABLE>
<CAPTION>
BALANCED PORTFOLIO*
------------------------------------------------------------------------------------------
FOR THE
PERIOD
JUNE 1,
FOR THE YEARS ENDED DECEMBER 31, 1988+ TO
---------------------------------------------------------------------------- DECEMBER 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ------- ------- ------- ------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning
of period.............. $ 10.70 $ 9.54 $ 11.95 $ 11.63 $ 11.39 $ 9.99 $ 10.37 $ 10.54 $ 10.00
--- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income... 0.57 0.35 0.30 0.33 0.35 0.47 0.65 0.66 0.28
Net realized and
unrealized gains
(losses) from
investments............ 1.21 1.88 (1.44) 1.48 0.24 1.40 (0.38) 0.52 0.26
--- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total income (loss) from
investment operations.. 1.78 2.23 (1.14) 1.81 0.59 1.87 0.27 1.18 0.54
--- ------- ------- ------- ------- ------- ------- ------- ------- -------
Dividends from net
investment income...... (0.28) (0.35) (0.30) (0.33) (0.35) (0.47) (0.65) (0.94) --
Distributions from net
realized gains on
investments............ (1.25) (0.72) (0.97) (1.16) -- -- -- (0.41) --
--- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total dividends and
distributions.......... (1.53) (1.07) (1.27) (1.49) (0.35) (0.47) (0.65) (1.35) --
--- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
period................. $ 10.95 $ 10.70 $ 9.54 $ 11.95 $ 11.63 $ 11.39 $ 9.99 $ 10.37 $ 10.54
=== ======= ======= ======= ======= ======= ======= ======= ======= =======
Total investment return
(1).................... 16.82% 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)......... $29,224 $23,413 $23,263 $33,367 $38,583 $33,327 $25,681 $26,851 $22,845
Expenses to average net
assets***.............. 1.24% 1.09% 1.03% 0.95% 0.93% 0.94% 1.48% 1.25% 1.24%**
Net investment income to
average net assets***.. 2.29% 2.88% 2.30% 2.27% 3.11% 4.64% 5.71% 6.54% 6.11%**
Portfolio turnover...... 235% 171% 112% 60% 31% 101% 169% 230% 70%
Average commission rate
paid (2)............... $0.0616 -- -- -- -- -- -- -- --
</TABLE>
- -------
* Prior to January 26, 1996, Balanced Portfolio was known as Asset Allocation
Portfolio.
** 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 1.50% 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
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
capital gain distributions at net asset value on the payable dates, and a
sale at net asset value on the last day of each period reported. The
figures do not include additional contract level charges; results would be
lower if such charges were included. Total investment return for periods
of less than one year have not been annualized.
(2) Effective for fiscal years beginning on or after September 1, 1995, the
Portfolio is required to disclose the average commission rate paid per
share of common stock investments purchased or sold.
PW 7
<PAGE>
<TABLE>
<CAPTION>
GROWTH AND INCOME PORTFOLIO
-------------------------------------------------------------
FOR THE YEARS ENDED FOR THE PERIOD
DECEMBER 31, JANUARY 2, 1992+
------------------------------------------ TO DECEMBER 31,
1997 1996 1995 1994 1993 1992
---- ------- ------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 11.83 $ 9.16 $ 9.87 $ 10.26 $ 10.00
--- ------- ------- ------- ------- -------
Net investment income... 0.13 0.10 0.10 0.16 0.08
Net realized and
unrealized gains
(losses) from
investments............ 2.46 2.70 (0.71) (0.39) 0.26
--- ------- ------- ------- ------- -------
Total income (loss) from
investment operations.. 2.59 2.80 (0.61) (0.23) 0.34
--- ------- ------- ------- ------- -------
Dividends from net
investment income...... (0.06) (0.10) (0.10) (0.16) (0.08)
Distributions from net
realized gains from
investments............ (2.09) (0.03) -- -- --
--- ------- ------- ------- ------- -------
Total dividends and
distributions.......... (2.15) (0.13) (0.10) (0.16) (0.08)
--- ------- ------- ------- ------- -------
Net asset value, end of
period................. $ 12.27 $ 11.83 $ 9.16 $ 9.87 $ 10.26
=== ======= ======= ======= ======= =======
Total investment return
(1).................... 22.12 % 30.52 % (6.18)% (2.26)% 3.40 %
=== ======= ======= ======= ======= =======
Ratios/Supplemental
Data:
Net assets, end of
period (000's)......... $14,520 $14,797 $12,872 $16,281 $20,037
Expenses to average net
assets................. 1.58 % 1.37 % 1.35 % 1.12 % 1.29 %*
Net investment income to
average net assets..... 0.49 % 0.94 % 1.06 % 1.37 % 1.21 %*
Portfolio turnover...... 99 % 134 % 150 % 52 % 14 %
Average commission rate
paid (2)............... $0.0598 -- -- -- --
</TABLE>
- --------
* Annualized
+ Commencement of operations
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates, and a sale
at net asset value on the last day of each period reported. The figures do
not include additional contract level charges; results would be lower if
such charges were included. Total investment return for periods of less
than one year have not been annualized.
(2) Effective for fiscal years beginning on or after September 1, 1995, the
Portfolio is required to disclose the average commission rate paid per
share of common stock investments purchased or sold.
PW 8
<PAGE>
<TABLE>
<CAPTION>
GROWTH PORTFOLIO
---------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------ ------- ------- ------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning
of period.............. $17.57 $ 14.56 $ 18.06 $ 15.68 $ 14.92 $ 10.57 $ 11.66 $10.38 $ 8.76
------ ------- ------- ------- ------- ------- ------- ------- ------ ------
Net investment income
(loss)................. (0.06) 0.04 0.01 0.00 0.11 0.10 0.14 0.09 0.21
Net realized and
unrealized gains
(losses) from
investments............ 3.29 4.68 (2.13) 3.08 0.76 4.35 (1.09) 3.90 1.41
------ ------- ------- ------- ------- ------- ------- ------- ------ ------
Total income (loss) from
investment operations.. 3.23 4.72 (2.12) 3.08 0.87 4.45 (0.95) 3.99 1.62
------ ------- ------- ------- ------- ------- ------- ------- ------ ------
Dividends from net
investment income...... -- (0.08) (0.01) -- (0.11) (0.10) (0.14) (0.30) --
Distributions from net
realized gains from
investments............ (3.32) (1.63) (1.37) (0.70) -- -- -- (2.41) --
------ ------- ------- ------- ------- ------- ------- ------- ------ ------
Total dividends and
distributions.......... (3.32) (1.71) (1.38) (0.70) (0.11) (0.10) (0.14) (2.71) --
------ ------- ------- ------- ------- ------- ------- ------- ------ ------
Net asset value, end of
period................. $17.48 $ 17.57 $ 14.56 $ 18.06 $ 15.68 $ 14.92 $ 10.57 $11.66 $10.38
====== ======= ======= ======= ======= ======= ======= ======= ====== ======
Total investment
return (1)............. 18.70% 32.50% (11.65)% 19.61% 5.83% 42.10% (8.15)% 38.44% 18.49%
====== ======= ======= ======= ======= ======= ======= ======= ====== ======
Ratios/Supplemental
Data:
Net assets, end of
period (000's)......... $36,357 $42,784 $39,135 $51,696 $46,479 $37,470 $12,283 $4,264 $ 802
Expenses to average net
assets**............... 1.14% 1.02% 1.00% 0.92% 0.94% 1.13% 1.85% 1.76% 1.80%
Net investment income
(loss) to average net
assets**............... (0.29)% 0.23% 0.04% 0.00% 0.78% 1.07% 1.90% 1.53% 0.63%
Portfolio turnover...... 53% 41% 27% 35% 29% 28% 35% 68% 190%
Average commission rate
paid (2)............... $0.0600 -- -- -- -- -- -- -- --
</TABLE>
- --------
* 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
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates, and a sale
at net asset value on the last day of each period reported. The figures do
not include additional contract level charges; results would be lower if
such charges were included. Total investment returns for periods of less
than one year have not been annualized.
(2) Effective for fiscal years beginning on or after September 1, 1995, the
Portfolio is required to disclose the average commission rate paid per
share of common stock investments purchased or sold.
PW 9
<PAGE>
<TABLE>
<CAPTION>
GLOBAL GROWTH PORTFOLIO
-------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ------- ------- ------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning
of period.............. $ 12.00 $ 12.44 $ 14.97 $ 11.10 $ 12.06 $ 11.76 $ 11.43 $10.49 $ 8.35
--- ------- ------- ------- ------- ------- ------- ------- ------ ------
Net investment income
(loss)................. 0.14 0.01 (0.03) 0.03 0.10 0.23 0.19 0.07 0.07
Net realized and
unrealized gains
(losses) from
investments............ 1.68 (0.45) (1.76) 4.42 (1.01) 0.35 0.67 1.94 2.07
--- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total income (loss) from
investment operations.. 1.82 (0.44) (1.79) 4.45 (0.91) 0.58 0.86 2.01 2.14
--- ------- ------- ------- ------- ------- ------- ------- ------ ------
Dividends from net
investment income...... (0.08) -- (0.01) -- (0.05) (0.23) (0.19) (0.07) --
Excess of net investment
income................. -- -- -- -- -- -- -- (0.19) --
Distributions from net
realized gains from
investments............ -- -- (0.73) (0.58) -- (0.05) (0.34) (0.81) --
--- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total dividends and
distributions.......... (0.08) 0.00 (0.74) (0.58) (0.05) (0.28) (0.53) (1.07) --
--- ------- ------- ------- ------- ------- ------- ------- ------ ------
Net asset value, end of
period................. $ 13.74 $ 12.00 $ 12.44 $ 14.97 $ 11.10 $ 12.06 $ 11.76 $11.43 $10.49
=== ======= ======= ======= ======= ======= ======= ======= ====== ======
Total investment
return (1)............. 15.14% (3.54)% (11.94)% 40.02% (7.55)% 4.93% 7.53% 19.18% 25.63%
=== ======= ======= ======= ======= ======= ======= ======= ====== ======
Ratios/Supplemental
Data:
Net assets, end of
period (000's)......... $25,701 $28,507 $40,493 $38,035 $21,493 $24,308 $16,149 $3,806 $3,250
Expenses to average net
assets**............... 1.10% 1.96% 1.48% 1.40% 1.46% 1.53% 2.07% 2.10% 2.08%
Net investment income
(loss) to average
net assets**........... 0.46% 0.10% (0.13)% 0.38% 0.82% 2.12% 3.29% 0.71% 0.68%
Portfolio turnover...... 44% 157% 175% 267% 127% 89% 120% 201% 33%
Average commission rate
paid (2)............... $0.0110 -- -- -- -- -- -- -- --
</TABLE>
- --------
* 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
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates, and a sale
at net asset value on the last day of each period reported. The figures do
not include additional contract level charges; results would be lower if
such charges were included. Total investment returns for periods of less
than one year have not been annualized.
(2) Effective for fiscal years beginning on or after September 1, 1995, the
Portfolio is required to disclose the average commission rate paid per
share of common stock investments purchased or sold.
PW 10
<PAGE>
<TABLE>
<CAPTION>
AGGRESSIVE GROWTH
PORTFOLIO
------------------------------------------------
FOR THE YEARS FOR THE PERIOD
ENDED NOVEMBER 2,
DECEMBER 31, 1993+ TO
------------------------------- DECEMBER 31,
1997 1996 1995 1994 1993
---- ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period....................... $ 11.34 $ 9.65 $ 9.95 $10.00
--- ------- ------- ------- ------
Net investment income (loss).. (0.10) 0.03 0.01 0.01
Net realized and unrealized
gains (losses) from
investments.................. 2.93 2.00 (0.30) (0.05)
--- ------- ------- ------- ------
Total income (loss) from
investment operations........ 2.83 2.03 (0.29) (0.04)
--- ------- ------- ------- ------
Dividends from net investment
income....................... -- (0.02) (0.01) (0.01)
Distributions from net
realized gains from
investments.................. (1.08) (0.32) -- --
--- ------- ------- ------- ------
Total dividends and
distributions................ (1.08) (0.34) (0.01) (0.01)
--- ------- ------- ------- ------
Net asset value, end of
period....................... $ 13.09 $ 11.34 $ 9.65 $ 9.95
=== ======= ======= ======= ======
Total investment return (1)... 25.23% 21.04% (2.90)% (0.36)%
=== ======= ======= ======= ======
Ratios/Supplemental Data:
Net assets, end of period
(000's)...................... $19,167 $17,660 $13,600 $2,814
Expenses to average net
assets**..................... 1.52% 1.29% 1.59% 0.00%
Net investment income (loss)
to average net assets**...... (0.74)% 0.23% 0.07% 3.31%*
Portfolio turnover............ 115% 119% 90% 0%
Average commission rate paid
(2).......................... $0.0593 -- -- --
</TABLE>
- --------
* Annualized
** During the period ended December 31, 1993, Mitchell Hutchins agreed to
reimburse the Portfolio for all of its 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)%, respectively.
+ Commencement of operations
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates, and a sale
at net asset value on the last day of each period reported. The figures do
not include additional contract level charges; results would be lower if
such charges were included. Total investment return for periods of less
than one year have not been annualized.
(2) Effective for fiscal years beginning on or after September 1, 1995, the
Portfolio is required to disclose the average commission rate paid per
share of common stock investments purchased or sold.
PW 11
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Fund is a professionally managed mutual fund that offers the Portfolios
listed on the cover page and described in greater detail below. Each Portfolio
represents a segregated, separately managed portfolio of securities with its
own investment objective and its own investment policies. There can be no
assurance that any Portfolio's investment objective will be met. Strategic
Income Portfolio and Global Income Portfolio are managed as non-diversified
investment companies; the other Portfolios are all managed as diversified
investment companies. The following Portfolios are newly organized and have no
operating history: Strategic Income Portfolio, High Income Portfolio, Tactical
Allocation Portfolio and Small Cap Portfolio.
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
subsidiary of PaineWebber Incorporated ("PaineWebber"), provides investment
advisory and asset management administrative services to the Fund. Certain
Portfolios, as indicated below, have sub-advisers ("Sub-Advisers").
Shares of each Portfolio are offered only to Accounts that fund benefits under
variable annuity contracts and/or variable life insurance contracts
(collectively, "Contracts") issued by those insurance companies. An insurance
company separate account's interest is limited to the Portfolio(s) in which the
separate account invests. Not all Portfolios may be available for all Contracts
funded by a particular insurance company separate account. 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 the Portfolios may serve as the underlying investments for separate
accounts of unaffiliated insurance companies ("shared funding") and 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 ("board") 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.
MONEY MARKET PORTFOLIO has an investment objective of maximum current income
consistent with liquidity and conservation of capital. This 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. and 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 of U.S. and foreign issuers, including
variable and floating rate securities and participation interests.
PW 12
<PAGE>
Participation interests are pro rata interests in securities held by others.
The Portfolio may purchase only U.S. dollar-denominated obligations of foreign
issuers. The Portfolio may invest up to 10% of its net assets in illiquid
securities.
The commercial paper and other short-term corporate obligations purchased by
Money Market Portfolio consist only of obligations that Mitchell Hutchins
determines, pursuant to procedures adopted by the board, 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 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"). 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).
HIGH GRADE FIXED INCOME PORTFOLIO has a primary investment objective of current
income consistent with the preservation of capital and a secondary investment
objective of capital appreciation. This Portfolio invests in U.S. government
bonds, including those backed by mortgages. The Portfolio may also invest in
corporate bonds and may invest up to 25% of its total assets in mortgage- and
asset-backed securities of private issuers. The corporate bonds in which the
Portfolio may invest consist primarily of bonds that are, at the time of
purchase, rated within one of the two highest grades assigned by Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"), or Moody's
Investors Service Inc. ("Moody's"), except that the Portfolio may invest up to
35% of its total assets in investment grade bonds 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 bonds that are assigned comparable ratings by another
NRSRO and may invest in unrated bonds 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. 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 and/or life insurance contracts.
Mitchell Hutchins will seek to vary the average maturity of the Portfolio's
securities depending on its 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 Portfolio may invest up to 10% of
its net assets in illiquid securities.
STRATEGIC FIXED INCOME PORTFOLIO has an investment objective of total return
with low volatility. This Portfolio invests in bonds and other fixed income
securities of varying maturities with a dollar-weighted average portfolio
duration between three and eight years. Portfolio holdings are 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 total assets in fixed income securities, which include U.S.
government and foreign government bonds (including bonds issued by
supranational and quasi-governmental entities and mortgage-backed securities of
private issuers), corporate bonds of U.S. and foreign issuers (including
mortgage- and asset-backed securities), convertible securities, foreign
currency exchange-related securities, loan participations and assignments and
money market instruments. All securities purchased for the Portfolio are
investment grade, except that the Portfolio may invest up to 20% of its total
assets in securities that are not investment grade, but rated at least B by S&P
or Moody's, assigned a comparable rating by another NRSRO or, if unrated,
PW 13
<PAGE>
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 bonds of any foreign issuer, Yankee bonds, Eurodollar bonds and
bonds denominated in foreign currencies, except that not more than 10% of the
Portfolio's total assets may be invested in bonds 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
issuers that are held outside the United States, primarily in Europe. The
Portfolio's investments in mortgage-backed securities of private issuers are
limited to 35% of its total assets. The Portfolio also may invest up to 5% of
its net assets in loan participations and assignments and may invest up to 15%
of its net assets in illiquid securities.
STRATEGIC INCOME PORTFOLIO has a primary investment objective of high current
income and a secondary investment objective of capital appreciation. This
Portfolio strategically allocates its investments among three distinct bond
market categories: (1) U.S. government and investment grade corporate bonds,
including mortgage- and asset-backed securities; (2) U.S. high yield, high risk
corporate bonds, including convertible bonds, and preferred stock; and (3)
foreign and emerging market bonds. A portion of the Portfolio's assets normally
is invested in each of these investment sectors. However, the Portfolio has the
flexibility at any time to invest all or substantially all of its assets in any
one sector. The Portfolio may invest without limit in bonds rated below
investment grade (commonly known as "junk bonds"), including high yield, high
risk bonds that are rated as low as D by S&P or C by Moody's. The foreign and
emerging market bonds in which the Portfolio may invest include: (1) government
bonds, including Brady bonds and other sovereign debt, and bonds issued by
multinational institutions such as the International Bank for Reconstruction
and Development and the International Monetary Fund; (2) corporate bonds and
preferred stock issued by entities located in foreign countries, or denominated
in or indexed to foreign currencies; and (3) interests in securitized or
reconstructed foreign loans, bonds or preferred stock. The Portfolio may invest
without limit in securities of issuers located in any country in the world,
including both industrialized and emerging market countries. The Portfolio
generally is not restricted in the portion of its assets that may be invested
in a single country or region, but the Portfolio's assets normally are invested
in issuers located in at least three countries. No more than 25% of the
Portfolio's total assets are invested in securities issued or guaranteed by any
single government. The Portfolio may invest in foreign and emerging market
bonds that do not meet any minimum credit rating standard or that are unrated.
The Portfolio may invest up to 10% of its total assets in preferred stock of
U.S. and foreign issuers. It also may acquire equity securities when attached
to bonds or as part of a unit including bonds or in connection with a
conversion or exchange of bonds. The Portfolio may invest without limit in
certificates of deposit issued by banks and savings associations and in
banker's acceptances. The Portfolio also may invest in loan participations and
assignments, zero coupon bonds, original issue discount and payment-in-kind
securities. The Portfolio may invest up to 15% of its net assets in illiquid
securities.
Mitchell Hutchins believes that Strategic Income Portfolio's strategy of sector
allocation should be less risky than investing in only one sector of the bond
market. Data from the Lehman Aggregate Bond Index, the Salomon Brothers High
Yield Index, the Merrill Lynch High Yield Index and the Salomon Brothers World
Government Bond Index indicate that these sectors are not closely correlated.
If successful, the Portfolio's strategy should enable the Portfolio to achieve
a higher level of investment return than if the Portfolio invested exclusively
in any one investment or allocated a fixed proportion of its assets to each
investment sector. The Portfolio is, however, more dependent on the ability of
Mitchell Hutchins to evaluate successfully the relative values of the
Portfolio's three investment sectors that is the case with a fund that does not
seek to adjust market sector allocations over time.
Strategic Income Portfolio is "non-diversified" as that term is defined in the
Investment Company Act of 1940 ("1940 Act"). That term and the associated risks
are described under "Description of Securities, Related Risks and Investment
Techniques--Risks--Non-Diversified Status" below.
PW 14
<PAGE>
GLOBAL INCOME PORTFOLIO has a primary investment objective of high current
income and a secondary investment objective of capital appreciation. This
Portfolio invests principally in high quality bonds of foreign and U.S.
issuers. Bonds are considered high quality if they are assigned one of S&P's or
Moody's two highest ratings. The Portfolio may invest in bonds that are
assigned comparable ratings by another NRSRO and may invest in unrated bonds
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 bonds (and receivables from the sale
of such securities), denominated in foreign currencies or U.S. dollars, that
are issued or guaranteed by foreign and U.S. governments or by supranational
organizations such as the International Bank for Reconstruction and
Development, or that are issued by foreign and U.S. companies, banks and bank
holding companies. Such issuers will be located in at least three of the
following countries: Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Hong Kong, Ireland, Italy, Japan, the Netherlands, New
Zealand, Norway, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland,
Thailand, the United Kingdom and the United States. No more than 40% of the
Portfolio's total assets will be invested in securities of issuers located in
any one country. There is no limit on the amount of assets that may be invested
in securities of U.S. issuers. Up to 35% of the Portfolio's total assets may be
invested in bonds rated below the two highest grades assigned by a NRSRO.
Except as noted below, these securities must be rated at least BBB by S&P, Baa
by Moody's or comparatively rated by another NRSRO or, if unrated, determined
by Mitchell Hutchins to be of comparable quality. Within this 35% limitation,
the Portfolio may invest up to 20% of its total assets in debt securities rated
as low as D by S&P, C by Moody's or comparably rated by another NRSRO or, in
the case of such securities assigned a short-term debt rating, as low as D by
S&P or comparably rated by another NRSRO or, if not so rated, determined by
Mitchell Hutchins to be of comparable quality. 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 20% of the Portfolio's total assets may
be invested in debt securities that are not paying current income. The
Portfolio may purchase these securities if Mitchell Hutchins believes that they
have a potential for capital appreciation. Up to 5% of the Portfolio's total
assets may be invested in bonds convertible into equity securities. The
Portfolio also may invest up to 10% of its net assets in illiquid securities.
Global Income Portfolio is "non-diversified" as that term is defined in the
1940 Act. That term and the associated risks are described under "Description
of Securities, Related Risks and Investment Techniques--Risks--Non-Diversified
Status" below.
HIGH INCOME PORTFOLIO has an investment objective of high income. This
Portfolio may invest without limit in bonds rated below investment grade
(commonly known as "junk bonds") and normally invests at least 65% of its total
assets in high yield, high risk, income producing corporate bonds of U.S. and
foreign issuers that, at the time of purchase, are rated B or better by S&P or
Moody's, comparably rated by another NRSRO or, if unrated, are considered to be
of comparable quality by Mitchell Hutchins. The Portfolio may include in this
65% of its total assets any equity securities (including common stocks and
rights and warrants for equity securities) that are attached to corporate bonds
or are part of a unit including corporate bonds, so long as the corporate bonds
meet these quality requirements. The Portfolio also may invest up to 35% of its
total assets in bonds that are rated below B (and rated as low as D by S&P or C
by Moody's) or comparable unrated bonds, U.S. government bonds, equity
securities and money market instruments. Up to 25% of the Portfolio's total
assets may be invested in bonds and equity securities that are not paying
current income. The Portfolio may purchase these securities if Mitchell
Hutchins believes that they have a potential for capital appreciation. Up to
35% of the Portfolio's net assets may be invested in securities
PW 15
<PAGE>
of foreign issuers. However, no more than 10% of the Portfolio's net assets may
be invested in securities of foreign issuers that are denominated and traded in
currencies other than the U.S. dollar. The Portfolio may invest in bonds that
are indexed to specific foreign currency exchange rates and may invest up to 5%
of its net assets in loan participations and assignments. The Portfolio also
may invest in zero coupon bonds, original issue discount and payment-in-kind
securities. The Portfolio may invest up to 15% of its net assets in illiquid
securities.
BALANCED PORTFOLIO has an investment objective of high total return with low
volatility. This Portfolio invests primarily in a combination of three asset
classes: stocks (equity securities), bonds (investment grade bonds) and cash
(money market instruments) and maintains a fixed income allocation (including
bonds and cash) of at least 25%. The Portfolio may invest in a broad range of
equity securities issued by companies believed by Mitchell Hutchins to have the
potential for rapid earnings growth; investment grade bonds; U.S. government
securities, convertible securities and money market instruments. 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. The Portfolio
may invest up to 10% of its assets in convertible securities rated below
investment grade but at least B by S&P or Moody's, comparably rated by another
NRSRO or determined by Mitchell Hutchins to be of comparable quality.
Securities rated below investment grade are commonly known as "junk bonds." The
Portfolio may invest up to 10% of its net assets in illiquid securities.
Mitchell Hutchins believes that returns on stocks and bonds 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 key investment advisors and generates a consensus
forecast of economic variables affecting returns on equity securities, bonds
and money market instruments. 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. Mitchell Hutchins uses the following investment process to determine
the individual securities for each portion of the Portfolio:
Equity Securities. Mitchell Hutchins uses its proprietary Factor Valuation
Model to identify stocks providing a combination of value and price momentum.
Refer to "Investment Techniques and Strategies" below, for a more detailed
discussion of the Factor Valuation Model.
Bonds. Mitchell Hutchins selects bonds based on its analysis of their maturity
and risk structures (comparing yields on U.S. Treasury securities to yields on
riskier types of debt securities).
Money Market Instruments. Mitchell Hutchins' decision to use these securities
is based on its judgment of how they can further the Portfolio's investment
objective.
GROWTH AND INCOME PORTFOLIO has an investment objective of current income and
capital growth. This Portfolio, under normal circumstances, invests at least
65% of its total assets in dividend-paying equity securities believed by
Mitchell Hutchins to have the potential for rapid earnings growth. In seeking
to balance capital growth with current income, Mitchell Hutchins follows a
disciplined investment process that relies on its Equity Research Team and its
proprietary Factor Valuation Model to identify stocks providing a combination
of value and price momentum. Refer to "Investment Techniques and Strategies"
below, for a more detailed discussion of the Factor Valuation Model. The
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<PAGE>
Portfolio may invest up to 35% of its total assets in equity securities not
meeting these selection criteria, as well as in U.S. government bonds,
corporate bonds and money market instruments, including 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. Securities rated
below investment grade are commonly known as "junk bonds." The Portfolio may
invest up to 25% of its total assets in U.S. dollar-denominated equity
securities and bonds of foreign issuers that are traded on recognized U.S.
exchanges or in the U.S. OTC market. The Portfolio may invest in bonds for
purposes of seeking capital appreciation when, for example, Mitchell Hutchins
anticipates that market interest rates may decline or credit factors or ratings
affecting particular issuers may improve. The Portfolio may invest up to 10% of
its net assets in illiquid securities.
TACTICAL ALLOCATION PORTFOLIO has an investment objective of total return,
consisting of long-term capital appreciation and current income. In seeking
total return, the Portfolio uses a systematic investment strategy that
allocates its investments between an equity portion designed to track the
performance of the S&P 500 Composite Stock Price Index ("S&P 500 Index") and a
fixed income portion which generally will be comprised of either five-year U.S.
Treasury notes or 30-day U.S. Treasury bills. The Portfolio seeks to achieve
total return during all economic and financial market cycles, with lower
volatility than that of the S&P 500 Index. Mitchell Hutchins allocates the
Portfolio's assets based on the Tactical Allocation Model's quantitative
assessment of the projected rates of return for each asset class. The Model
attempts to track the S&P 500 Index in periods of strongly positive market
performance but attempts to take a more defensive posture by reallocating
assets to bonds or cash when the Model signals a potential bear market,
prolonged downturn in stock prices or significant loss in value.
The basic premise of the Tactical Allocation Model is that investors accept the
risk of owning stocks, measured as volatility of return, because they expect a
return advantage. This expected return advantage of owning stocks is called the
equity risk premium ("ERP"). The Model projects the stock market's expected ERP
based on several factors, including the current price of stocks and their
expected future dividends; three- to-five-year, "bottom-up" company earnings
projections; and the yield-to-maturity of the one-year U.S. Treasury bill. When
the stock market's ERP is high, the Model signals the Portfolio to invest 100%
in stocks. Conversely, when the ERP decreases below certain threshold levels,
the Model signals the Portfolio to reduce its exposure to stocks. The Model can
recommend stock allocations of 100%, 75%, 50%, 25% or 0%.
If the Tactical Allocation Model recommends a stock allocation of less than
100%, the Model also recommends a fixed income allocation for the remainder of
the Portfolio's assets. The Model will recommend either bonds (five-year
Treasury notes) or cash (30-day U.S. Treasury bills), but not both. To make
this determination, the Model calculates the risk premium available for the
notes. This bond risk premium ("BRP") is calculated based on the yield-to-
maturity of the five-year U.S. Treasury note and the one-year U.S. Treasury
bill. The Portfolio may invest up to 15% of its net assets in illiquid
securities.
Tactical Allocation Portfolio deviates from the recommendations of the Tactical
Allocation Model only to the extent necessary to
. Maintain an amount in cash, not expected to exceed 2% of its total assets
under normal market conditions, to pay Portfolio operating expenses,
dividends and other distributions on its shares and to meet anticipated
redemptions of shares;
. Qualify as a regulated investment company for federal income tax
purposes; and
PW 17
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. Meet the diversification requirements imposed by the Internal Revenue
Code on segregated asset accounts used to fund variable annuity and/or
life insurance contracts, which means, among other things, that the
Portfolio may not invest more than 55% of its total assets in U.S.
Treasury obligations.
As a result, if the Tactical Allocation Model recommends more than a 50%
allocation to bonds or cash, Tactical Allocation Portfolio must invest a
portion of its assets in bonds or money market instruments that are not U.S.
Treasury obligations and, even if the Model does not recommend an allocation to
cash, the Portfolio still may hold cash.
In its stock portion, Tactical Allocation Portfolio attempts to duplicate,
before the deduction of operating expenses, the investment results of the S&P
500 Index. Securities in the S&P 500 Index are selected, and may change from
time, based on a statistical analysis of such factors as the issuer's market
capitalization (the Index emphasizes large capitalization stocks), the
security's trading activity and its adequacy as a representative of stocks in a
particular industry section. The Portfolio's investment results for its stock
portion will not be identical to those of the S&P 500 Index. Deviations from
the performance of the S&P 500 Index may result from purchases and redemptions
of Portfolio shares that may occur daily, as well as from expenses borne by the
Portfolio. Instead, the Portfolio attempts to achieve a correlation of at least
0.95 between the performance of the Portfolio's stock portion, before the
deduction of operating expenses, and that of the S&P 500 Index (a correlation
of 1.00 would mean that the net asset value of the stock portion increased or
decreased in exactly the same proportion as changes in the Index). [Once its
assets have reached $ million,] the Portfolio expects to hold approximately
450 of the 500 stocks in the S&P 500 Index.
Asset reallocations are made on the first business day of each month. In
addition to any reallocation of assets directed by the Tactical Allocation
Model, any material amounts resulting from appreciation or receipt of
dividends, distributions, interest payments and proceeds from securities
maturing in each of the asset classes are reallocated (or "rebalanced") to the
extent practicable to establish the Model's recommended asset allocation mix.
GROWTH PORTFOLIO has an investment objective of long-term capital appreciation.
This Portfolio invests primarily in equity securities issued by companies
believed by Mitchell Hutchins to have substantial potential for capital growth.
Under normal circumstances, at least 65% of the Portfolio's total assets is
invested in equity securities. The Portfolio may invest up to 35% of its total
assets in U.S. government bonds and in corporate bonds, including up to 10% 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.
Securities rated below investment grade are commonly known as "junk bonds." The
Portfolio may invest up to 25% of its total assets in U.S. dollar-denominated
equity securities and bonds of foreign issuers if the securities are traded on
recognized U.S. exchanges or in the U.S. OTC market. The Portfolio may invest
in bonds for purposes of seeking capital appreciation when, for example,
Mitchell Hutchins anticipates that market interest rates may decline or credit
factors or ratings affecting particular issuers may improve. The Portfolio may
invest up to 10% of its net assets in illiquid securities.
In selecting equity securities with the potential for above-average growth in
earnings, cash flow and/or book value that are selling at a reasonable value
relative to that growth, Mitchell Hutchins follows a disciplined investment
process that relies on its Equity Research Team and combines a "bottom-up"
stock-by-stock approach with the proprietary Factor Valuation Model. The
Portfolio may invest in companies of large market capitalizations, medium-sized
companies and smaller companies that are aggressively expanding their
businesses. This flexibility allows the Portfolio to invest more of its assets
in companies that have greater earnings growth potential regardless of their
market capitalizations. When investing in small cap companies, the Team places
more emphasis on
PW 18
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the trading volume of the company's stock. The Model, which the Team generally
uses as part of the stock selection process, is described in greater detail
below under the discussion of "Investment Techniques and Strategies."
AGGRESSIVE GROWTH PORTFOLIO has an investment objective of maximizing long-term
capital appreciation. This 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 Index. 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 that, 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.
Under normal market conditions, 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, U.S. government bonds and investment grade corporate bonds.
The Portfolio may invest up to 15% of its net assets in illiquid securities.
In making decisions with respect to common stocks for 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.
Aggressive Growth Portfolio may invest up to 25% of its total assets in U.S.
dollar-denominated equity securities and bonds of foreign issuers that are
traded on recognized U.S. exchanges or in the U.S. OTC market.
SMALL CAP PORTFOLIO has an investment objective of long-term capital
appreciation. This Portfolio invests, under normal circumstances, at least 65%
of its total assets in equity securities of small capitalization ("small cap")
companies, which are defined as companies having market capitalizations of up
to $1 billion. In selecting small cap equity securities with the potential for
capital appreciation, Mitchell Hutchins follows a disciplined investment
process that relies on its Equity Research Team and its proprietary Factor
Valuation Model to identify stocks providing a combination of value and price
momentum. Refer to "Investment Techniques and Strategies" below for a more
detailed discussion of the Factor Valuation Model. The Portfolio may invest up
to 35% of its total assets in equity securities of companies that are larger
than small cap companies, as well as in U.S. government bonds, corporate bonds
and money market instruments, including up to 10% of total assets in
convertible bonds 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. Securities rated below
investment grade are commonly known as "junk bonds." Up to 25% of the
Portfolio's total assets may be invested in U.S. dollar-denominated equity
securities of foreign issuers that are traded on recognized U.S. exchanges or
in the U.S. OTC market. The Portfolio may invest up to 15% of its net assets in
illiquid securities.
GLOBAL GROWTH PORTFOLIO has an investment objective of long-term capital
appreciation. This 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'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
PW 19
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investment grade bonds, government bonds 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. The Portfolio may invest up to 10% of its net
assets in illiquid securities.
DESCRIPTION OF SECURITIES, RELATED RISKS AND INVESTMENT TECHNIQUES
EQUITY SECURITIES include common stocks, preferred stocks and securities that
are convertible into them, including common stock purchase warrants and rights,
equity interests in trusts, partnerships, joint ventures or similar enterprises
and depository receipts. Common stocks, the most familiar type, represent an
equity (ownership) interest in a corporation. Preferred stock has certain
fixed-income features, like a bond, but is actually equity in a company, like
common stock. Depository receipts typically are issued by banks or trust
companies and evidence ownership of underlying securities.
BONDS are fixed or variable rate debt obligations, including notes, debentures
and similar debt instruments and securities. Mortgage- and asset-backed
securities are types of bonds. Corporations, governments and other issuers use
bonds to borrow money from investors. The issuer pays the investor a fixed or
variable rate of interest and must repay the amount borrowed at or before
maturity. Bonds have varying degrees of investment risk and varying levels of
sensitivity to changes in interest rates.
U.S. GOVERNMENT BONDS include direct obligations of the U.S. government (such
as U.S. Treasury bills, notes and bonds) and obligations issued or guaranteed
by the U.S. government, its agencies or its instrumentalities. U.S. government
bonds include mortgage-backed securities issued or guaranteed by government
agencies or government-sponsored enterprises. Other U.S. government bonds may
be backed by the full faith and credit of the U.S. government or supported
primarily or solely by the creditworthiness of the government-related issuer,
such as the Resolution Funding Corporation, the Student Loan Marketing
Association ("Sallie Mae"), the Federal Home Loan Banks and the Tennessee
Valley Authority.
CORPORATE BONDS are bonds issued by corporations, banks, partnerships, trusts
or other non-governmental entities.
MONEY MARKET INSTRUMENTS are high grade debt obligations with maturities of 13
months or less and include government obligations, obligations of banks
(including certificates of deposit, bankers' acceptances, time deposits and
similar obligations, commercial paper and other short-term bonds of corporate
and other non-governmental issuers, including variable rate and floating rate
securities, participation interests and repurchase agreements secured by any of
these instruments. Global Growth Portfolio's investments in money market
instruments may be made indirectly through investments in a cash management
investment fund established and managed by GEIM at no additional cost to the
Fund.
MORTGAGE- AND ASSET-BACKED SECURITIES are bonds backed by specific types of
assets. Mortgage-backed securities represent direct or indirect interests in
pools of underlying mortgage loans that are secured by real property. U.S.
government mortgage-backed securities are issued or guaranteed as to principal
and interest (but not as to market value) by the Government National Mortgage
Association ("Ginnie Mae"), Fannie Mae (also known as the Federal National
Mortgage Association) and Freddie Mac (also known as the Federal Home Loan
Mortgage Corporation) or other government-sponsored entities. Other mortgage-
backed securities are sponsored or issued by private entities, including
investment banking firms and mortgage originators. The growth of mortgage-
backed securities and the secondary mortgage market in which they are traded
has helped to keep mortgage money available for home financing.
PW 20
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Mortgage-backed securities may be composed of one or more classes and may be
structured either as pass-through securities or collateralized debt
obligations. Multiple-class mortgage-backed securities are referred to in this
Prospectus as "CMOs." Some CMOs are directly supported by other CMOs, which in
turn are supported by mortgage pools. Investors typically receive payments out
of the interest and principal on the underlying mortgages. The portions of
these payments that investors receive, as well as the priority of their rights
to receive payments, are determined by the specific terms of the CMO class.
CMOs involve special risks and evaluating them requires special knowledge.
When interest rates go down and homeowners refinance their mortgages, mortgage-
backed bonds may be paid off more quickly than investors expect. When interest
rates rise, mortgage-backed bonds may be paid off more slowly than originally
expected. Changes in the rate or "speed" of these prepayments can cause the
value of mortgage-backed securities to fluctuate rapidly.
Other asset-backed securities are similar to mortgage-backed securities, except
that the underlying assets are different. These underlying assets may be nearly
any type of financial asset or receivable, such as motor vehicle installment
sales contracts, home equity loans, leases of various types of real and
personal property and receivables from credit cards.
CONVERTIBLE SECURITIES include bonds, preferred stock or other securities that
may be converted into or exchanged for a prescribed amount of common stock of
the same or a different issuer within a particular period of time at a
specified price or formula. A convertible security entitles the holder to
receive interest 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 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.
LOAN PARTICIPATIONS AND ASSIGNMENTS are investments in fixed and floating rate
loans arranged through private negotiations with a U.S. or foreign borrower.
These investments normally are participations in or assignments of all or a
portion of loans made by banks. Participations typically will result in a
Portfolio's having a contractual relationship only with the lender, not with
the borrower. In a participation, the Portfolio is entitled to receive payments
of principal, interest and any loan fees by the lender only when and if these
fees are received. Also, the Portfolio may not directly benefit from any
collateral supporting the underlying loan. As a result, the Portfolio assumes
the credit risk of both the borrower and the lender that is selling the
participation. If the lender becomes insolvent, 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. In a loan assignment, the Portfolio is entitled to
receive payments directly from the borrower and, therefore, does not depend on
the selling bank to pass these payments on to the Portfolio.
CURRENCY-LINKED INVESTMENTS are bonds that are indexed to specific foreign
currency exchange rates. The principal amount of these bonds may be adjusted up
or down (but not below zero) at maturity to reflect changes in the exchange
rate between two currencies. A Portfolio may experience loss of principal due
to these adjustments.
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RISKS
EQUITY SECURITIES. While past performance does not guarantee future results,
equity securities historically have provided the greatest long-term growth
potential in a company. However, their prices generally fluctuate more than
other securities, and reflect changes in a company's financial condition and in
overall market and economic conditions. Common stocks generally represent the
riskiest investment in a company. It is possible that a Portfolio may
experience a substantial or complete loss on an individual equity investment.
INTEREST RATE RISK. Interest rate risk is the risk that interest rates will
rise and that, as a result, bond prices will fall, lowering the value of a
Portfolio's investments. In general, bonds having longer durations are more
sensitive to interest rate changes than are bonds with shorter durations.
"Duration" is a measure of the expected life of a fixed income security on a
present value basis.
CREDIT RISK. Credit risk is the risk the issuer or guarantor may be unable to
pay interest or repay principal on the bond. This can be affected by many
factors, including adverse changes in the issuer's own financial condition or
in economic conditions.
CREDIT RATINGS; BONDS RATED BELOW INVESTMENT GRADE. Credit ratings attempt to
evaluate the safety of principal and interest payments, but they do not
evaluate the volatility of the security's value or its liquidity and do not
guarantee the performance of the issuer. Rating agencies may fail to make
timely changes in credit ratings in response to subsequent events, so that an
issuer's current financial condition may be better or worse than the rating
indicates. There is a risk that rating agencies may downgrade bonds.
Investment grade bonds are rated in one of the four highest rating categories
by a nationally recognized rating agency, such as S&P or Moody's or, if
unrated, are considered to be of comparable quality by Mitchell Hutchins or the
applicable Sub-Adviser. Moody's considers bonds rated Baa (its lowest
investment grade rating) to have speculative characteristics. This means that
changes in economic conditions or other circumstances are more likely to lead
to a weakened capacity to make principal and interest payments than is the case
for higher-rated bonds.
Debt rated D by S&P is in payment default or such rating is assigned upon the
filing of a bankruptcy petition or the taking of a similar action if payments
on an obligation are jeopardized Debt rated C by Moody's is in the lowest rated
class and can be regarded as having extremely poor prospects of attaining any
real investment standing.
Debt securities that are not rated by an NRSRO but that Mitchell Hutchins or
the applicable Sub-Advisor determines to be of comparable quality to that of
rated securities in which the Fund may invest are included in the computation
of any percentage limitations applicable to the comparatively rated securities.
High yield, high risk bonds are rated below investment grade and are commonly
referred to as "junk bonds." High yield, high risk bonds are considered
predominantly speculative with respect to the issuer's ability to pay interest
and repay principal. A Portfolio's investments in these lower rated bonds
entail greater risk than its investments in investment grade bonds. Lower rated
bonds may involve major risk exposure to adverse market conditions. During an
economic downturn or period of rising interest rates, their issuers may
experience financial stress that adversely affects their ability to pay
interest and repay principal and may increase the possibility of default. Lower
rated bonds are frequently unsecured by collateral and will not receive payment
until more senior claims are paid in full. The market for these bonds is
thinner and less active, which may limit a Portfolio's ability to sell them at
fair value in response to changes in the economy or financial markets.
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During the fiscal year ended December 31, 1997, Portfolio,
Portfolio and Portfolio each invested at least 5% of its average annual
net assets in securities rated below investment grade. These Portfolios
invested their average annual net assets as follows:
<TABLE>
<CAPTION>
% OF AVERAGE ANNUAL NET
ASSETS INVESTED IN
----------------------- ---
<S> <C>
Debt Securities rated by S&P or Moody's................................
Debt Securities not so rated...........................................
Securities rated AAA/Aaa (including cash items)........................
Securities rated AA/Aa.................................................
Securities rated A/A...................................................
Securities rated BBB/Baa...............................................
Securities rated BB/Ba.................................................
Securities rated B/B...................................................
Securities rated CCC/Caa...............................................
</TABLE>
It should be noted that this information reflects the average composition of
the assets of each Portfolio during the fiscal year ended December 31, 1997,
and is not necessarily representative of the Portfolio's assets as of the end
of the fiscal year, the current fiscal year or at any time in the future.
MORTGAGE- AND ASSET-BACKED SECURITIES. The yield characteristics of mortgage-
and asset-backed securities differ from those of traditional bonds. Among the
major differences are that interest and principal payments are made more
frequently (usually monthly) and that principal may be prepaid at any time
because the underlying mortgage loans or other assets generally may be prepaid
at any time. Generally, prepayments on fixed rate mortgage loans will increase
during a period of falling interest rates and decrease during a period of
rising interest rates. Mortgage- and asset-backed securities may also decrease
in value as a result of increases in interest rates and, because of
prepayments, may benefit less than other bonds from declining interest rates.
Reinvestments of prepayments may occur at lower interest rates than the
original investment, thus adversely affecting a Portfolio's yield. Actual
prepayment experience may cause the yield of a mortgage-backed security to
differ from what was assumed when the Portfolio purchased the security.
The market for privately issued mortgage- and asset-backed securities is
smaller and less liquid than the market for U.S. government mortgage-backed
securities. 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 especially 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 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 considered to be of
the highest quality, or is rated AAA or the equivalent. Conversely, PO classes
are entitled to receive all or a portion of the principal payments, but none of
the interest, from the underlying mortgage assets. PO classes are purchased at
substantial discounts from par, and the yield to investors will be reduced if
principal payments are slower than expected. Some IOs and POs, as well as other
CMO classes, are structured to have special protections against the effects of
prepayments. These structural protections, however, normally are effective only
within certain ranges of prepayment rates and thus will not protect investors
in all circumstances.
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<PAGE>
Inverse floating rate CMO classes also may be extremely volatile. These classes
pay interest at a rate that decreases when a specified index of market rates
increases.
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's investments in mortgage-backed
securities so that the volatility of its portfolio, taken as a whole, is
consistent with the Portfolio's investment objective. If market interest rates
or other factors that affect the volatility of securities held by a Portfolio
change in ways that Mitchell Hutchins or the applicable Sub-Adviser does not
anticipate, the Portfolio's ability to meet its investment objective may be
reduced.
FOREIGN SECURITIES. Investing in foreign securities involves more risks than
investing in securities of U.S. companies. Their value is subject to economic
and political developments in the countries where the companies operate and to
changes in foreign currency values. Values may also be affected by foreign tax
laws, changes in foreign economic or monetary policies, exchange control
regulations and regulations involving prohibitions on the repatriation of
foreign currencies. Investments in foreign countries could be affected by other
factors not present in the United States, including expropriation, confiscatory
taxation, lack of uniform accounting and auditing standards and potential
difficulties in enforcing contractual obligations and could be subject to
extended clearance and settlement periods.
In general, less information may be available about foreign companies than
about U.S. companies, and foreign companies are generally not subject to the
same accounting, auditing and financial reporting standards as are U.S.
companies. Foreign securities markets may be less liquid and subject to less
regulation than the U.S. securities markets. The costs of investing outside the
United States frequently are higher than those in the United States. These
costs include relatively higher brokerage commissions and foreign custody
expenses.
INVESTING IN EMERGING MARKETS. Investing in securities issued by companies
located in emerging markets involves additional risks. These countries
typically have economic and political systems that are relatively less mature,
and can be expected to be less stable, than those of developed countries.
Emerging market countries may have policies that restrict investment by
foreigners in those countries, and there is a risk of government expropriation
or nationalization of private property. Similarly, for debt issued by
governments of emerging market countries, there is the risk that the issuer of
the debt or the governmental authorities that control the repayment of the debt
may be unable or unwilling to pay interest or repay principal when due in
accordance with the terms of the debt, and a Portfolio may have limited legal
recourse in the event of default. The possibility of low or nonexistent trading
volume in the securities of companies in emerging markets may also result in a
lack of liquidity and in price volatility. Issuers in emerging markets
typically are subject to a greater degree of change in earnings and business
prospects than are companies in developed markets.
CURRENCY RISK. Currency risk is the risk that changes in foreign exchange rates
may reduce the U.S. dollar value of a Portfolio's foreign investments. A
Portfolio's share value may change significantly when investments are
denominated in foreign currencies. Generally, currency exchange rates are
determined by supply and demand in the foreign exchange markets and the
relative merits of investments in different countries. Currency exchange rates
can also be affected by the intervention of the U.S. and foreign governments or
central banks, the imposition of currency controls, speculation or other
political or economic developments inside and outside the United States.
PW 24
<PAGE>
SOVEREIGN DEBT, BRADY BONDS AND STRUCTURED FOREIGN INVESTMENTS. Sovereign debt
includes bonds that are issued or guaranteed by foreign governments or their
agencies, instrumentalities or political subdivisions or by foreign central
banks. Sovereign debt also may be issued by quasi-governmental entities that
are owned by foreign governments but are not backed by their full faith and
credit or general taxing powers. The issuer of the debt or the governmental
authorities that control the repayment of the debt may be unable or unwilling
to pay interest or repay principal when due in accordance with the terms of
such debt, and a Portfolio may have limited legal recourse in the event of
default. Political conditions, especially a sovereign entity's willingness to
meet the terms of its debt obligations, are of considerable significance.
Foreign government securities also include debt obligations of supranational
entities such as international organizations designated or supported by
governmental entities to promote reconstruction or development, international
banking institutions and related government agencies.
Brady bonds are sovereign debt securities issued under a 1989 plan (named for
former Secretary of the Treasury Nicholas F. Brady) that allows emerging market
countries to restructure their outstanding debt to U.S. and other banks.
Although Brady Bonds are collateralized by U.S. government securities, payment
of interest and repayment of principal is not guaranteed by the U.S.
government.
Strategic Income Portfolio may invest in structured foreign investments. These
are securities backed by or representing interests in underlying securities or
instruments, such as commercial bank loans, Brady bonds or preferred stock. The
cash flow on these underlying instruments may be reapportioned among several
classes of the structured foreign investments so that the classes may have
different maturities, payment priorities and interest rate provisions.
Strategic Income Portfolio receives interest and principal payments on
structured foreign investments only to the extent that the underlying
instruments produce sufficient cash flow.
SMALL CAP COMPANIES. Small cap companies may be more vulnerable than larger
companies to adverse business or economic developments. Small cap companies may
also have limited product lines, markets or financial resources, and may be
dependent on a relatively small management group. Securities of such companies
may be less liquid and more volatile than securities of larger companies or the
market averages in general and, therefore, may involve greater risk than
investing in larger companies. In addition, small cap companies may not be
well-known to the investing public, may not have institutional ownership and
may have only cyclical, static or moderate growth prospects.
DERIVATIVES. Some of the instruments in which the Portfolios may invest 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, forward currency contracts,
interest rate protection contracts and similar instruments that may be used in
hedging and related strategies. There is limited consensus as to what
constitutes a "derivative" security. However, in Mitchell Hutchins' view,
derivative securities also include "stripped" securities, specially structured
types of mortgage- and asset-backed securities, such as IOs, POs or 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 applicable
Sub-Advisers take these risks into account in their management of the
Portfolios.
COUNTERPARTIES. The Portfolios may be exposed to the risk of financial failure
or insolvency of another party. To help lessen those risks, Mitchell Hutchins
and the applicable Sub-Advisers, subject to the supervision of the board,
monitor and evaluate the creditworthiness of the parties with which each
Portfolio does business.
PW 25
<PAGE>
RISKS OF ZERO COUPON, OID AND PIK BONDS. Zero coupon bonds are Treasury bills,
notes and bonds that have been stripped of their unmatured interest coupons,
and receipts or certificates representing interest in such stripped debt
obligations and coupons. A zero coupon security pays no cash interest to its
holder prior to maturity. The buyer of a zero coupon bond receives a rate of
return from the gradual appreciation of the securities that occurs because it
will be redeemed at face value on a specified maturity date. Federal tax law
requires that the holder of a zero coupon security and other securities issued
with original issue discount ("OID") include in gross income each year the OID
that accrues on the security for the year.
Because zero coupon bonds bear no interest, they usually trade at a substantial
discount from their face or par value and they are generally more sensitive to
changes in interest rates than other bonds. This means that when interest rates
fall, the value of zero coupon bonds rises more rapidly than bonds paying
interest on a current basis. However, when interest rates rise, their value
falls more dramatically.
Interest or dividends on payment in kind ("PIK") securities are paid in
additional securities. PIK securities often trade at a discount from their face
or par value and also are subject to greater fluctuations in market value in
response to changing interest rates than comparable securities that pay
interest or dividends in cash.
NON-DIVERSIFIED STATUS. Strategic Income Fund and Global Income Fund are "non-
diversified" as that term is defined in the 1940 Act. This means, in general,
that more than 5% of the total assets of each Portfolio may be invested in
securities of one issuer (including a foreign government), but only if, at the
close of each quarter of the Portfolio's taxable year, the aggregate amount of
such holdings does not exceed 50% of the value of its total assets and no more
than 25% of the value of its total assets is invested in the securities of a
single issuer. When a Portfolio's portfolio is comprised of securities of a
smaller number of issuers than if it were "diversified," the Portfolio will be
subject to greater risk because changes in the financial condition or market
assessment of a single issuer may have a greater effect on the Portfolio's
total return and the price of its shares.
INVESTMENT TECHNIQUES AND STRATEGIES
FACTOR VALUATION MODEL. In managing the Balanced, Growth and Income, Growth and
Small Cap Portfolios, Mitchell Hutchins uses its proprietary Factor Valuation
Model to identify stocks that provide a combination of value and price
momentum. This model screens a universe of small-to-large- capitalization
companies in ten different business sectors to identify undervalued companies
with strong earnings momentum that rank well in terms of value, momentum and
economic sensitivity measures. The equity securities ranking in the top 20% of
the Model's universe are screened twice a month to identify those that rank
higher based on value and momentum. Finally, Mitchell Hutchins Equity Research
Team applies traditional analysis and may speak to the management of these
companies, as well as those of their competitors. Mitchell Hutchins places the
Team's findings in the context of Mitchell Hutchins' economic forecast, in
deciding whether to purchase or sell equity securities for the Portfolios.
HEDGING AND OTHER STRATEGIES USING DERIVATIVES. Each Portfolio except Money
Market Portfolio may use derivatives, which may include options (both exchange
traded and OTC) and futures contracts, in strategies intended to reduce the
overall risk of its investments ("hedge") or, in the case of some Portfolios,
to enhance income or return (including reallocating exposure to different asset
classes) or realize gains. Use of these derivatives solely to enhance income or
realize gains may be considered a form of speculation. Portfolios that invest
in securities that are denominated in foreign currencies may use derivatives,
including forward currency contracts, to hedge exposure to currency
PW 26
<PAGE>
risks. Portfolios that invest substantially in bonds also may use interest rate
swaps and similar contracts to preserve a return or spread on a particular
investment or portion of their portfolios or to protect against an increase in
the price of securities that a Portfolio anticipates purchasing at a later date
or to manage the Portfolio's duration. New financial products and risk
management techniques continue to be developed, and may be used by a Portfolio
if consistent with its investment objective and policies. The Statement of
Additional Information contains further information on these derivative
contracts and related strategies.
The Portfolios might not use any derivative instruments or strategies, and
there can be no assurance that using them will succeed. If Mitchell Hutchins or
the applicable Sub-Adviser is incorrect in its judgment on market values,
interest rates or other economic factors in using a derivative strategy, a
Portfolio may have lower net income and a net loss on the investment. Each of
these strategies involves certain risks, which include:
. the fact that the skills needed to implement a strategy using derivative
contracts are different from those needed to select securities for the
Portfolios;
. the possibility of imperfect correlation, or even no correlation, between
price movements of derivative contracts used in hedging strategies and
price movements of the securities or currencies being hedged;
. possible constraints placed on a Portfolio's ability to purchase or sell
portfolio investments at advantageous times due to the need for the
Portfolio to maintain "cover" or to segregate securities; and
. the possibility that a Portfolio is unable to close out or liquidate its
hedged position.
DURATION. Duration is a measure of the expected life of a bond on a present
value basis. Duration incorporates a bond's yield, coupon interest payments,
final maturity and call features into one measure and is one of the fundamental
tools used in portfolio selection and yield curve positioning for the
Portfolios that invest in bonds.
Duration takes the length of the time intervals between the present time and
the time that the interest and principal payments are scheduled or, in the case
of a callable bond, expected to be made, and weights them by the present values
of the cash to be received at each future point in time. For any bond with
interest payments occurring prior to the payment of principal, duration is
always less than maturity.
Duration allows Mitchell Hutchins or the applicable 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 by approximately 3%. Thus, if
the duration of a Portfolio is calculated at three years, the Portfolio
normally would be expected 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 the above example.
LENDING OF PORTFOLIO SECURITIES. Each Portfolio is authorized to lend up to 33
1/3% of its total assets to broker-dealers or institutional investors that
Mitchell Hutchins 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.
PW 27
<PAGE>
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.
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
or upon demand and at a 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 to
present minimal credit risks in accordance with guidelines established by the
board.
BORROWINGS, REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. Each Portfolio may
borrow money for temporary purposes, but not in excess of the percentage of its
total assets indicated below:
<TABLE>
<S> <C>
Money Market Portfolio............................................. 10%
High Grade Fixed Income Portfolio.................................. 33 1/3%
Strategic Fixed Income Portfolio................................... 33 1/3%
Strategic Income Portfolio......................................... 33 1/3%
Global Income Portfolio............................................ 10%
High Income Portfolio.............................................. 33 1/3%
Balanced Portfolio................................................. 10%
Growth and Income Portfolio........................................ 10%
Tactical Allocation Portfolio...................................... 33 1/3%
Growth Portfolio................................................... 10%
Aggressive Growth Portfolio........................................ 20%
Small Cap Portfolio................................................ 33 1/3%
Global Growth Portfolio............................................ 10%
</TABLE>
Strategic Fixed Income, Strategic Income and Global Income Portfolios each may
invest in "arbitraged" reverse repurchase transactions and Strategic Fixed
Income and Strategic Income Portfolios may invest in dollar rolls. In a dollar
roll, the Portfolio sells mortgage-backed or other securities for delivery on
the next regular settlement date and, simultaneously, contracts to purchase
substantially identical securities for delivery on a later settlement date. In
a reverse repurchase agreement, the Portfolio sells securities to a bank or
dealer and agrees to repurchase them on demand or on a specified future date
and at a specified price. In "arbitraged" transactions, the Portfolio maintains
an offsetting position in cash or in U.S. government or investment grade bonds
that mature on or before the settlement date of the related dollar roll or
reverse repurchase agreement. Mitchell Hutchins and PIMCO believes that these
"arbitraged" transactions do not present the risks that are normally associated
with leverage. Strategic Fixed Income Portfolio may invest up to 5% of its
total assets in dollar rolls that are not arbitraged. The other Portfolios may
invest up to 5% of their total assets (10% for High Income Portfolio, and Small
Cap Portfolio) in reverse repurchase agreements. These dollar rolls and reverse
repurchase transactions are subject to each Portfolio's limitation on
borrowings.
DEFENSIVE POSITIONS; CASH RESERVES. When Mitchell Hutchins or the applicable
Sub-Adviser believes that unusual market or economic circumstances warrant a
defensive posture, each Portfolio may temporarily commit all or any portion of
its assets to cash or money market instruments of U.S. issuers (and foreign
issuers for some Portfolios). Each Portfolio may invest up to 35% of its total
assets in cash or money market instruments of U.S. issuers (and foreign issuers
for some Portfolios) for liquidity purposes or pending investment in other
securities.
PW 28
<PAGE>
ILLIQUID SECURITIES. Each Portfolio may invest up to 10% (15% for Strategic
Fixed Income Portfolio and Aggressive Growth Portfolio) of its net assets in
illiquid securities, including certain cover for OTC options and securities
whose disposition is restricted under the federal securities laws. The
Portfolios do not consider securities that are eligible for resale pursuant to
SEC Rule 144A to be illiquid securities if Mitchell Hutchins or the Sub-
Adviser, as applicable, has determined such securities to be liquid, based upon
the trading markets for the securities under procedures approved by the board.
PORTFOLIO TURNOVER. Portfolio turnover rates may vary greatly from year to year
and will not be a limiting factor when Mitchell Hutchins or a 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. 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 board 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. Shares may be purchased or redeemed by the
separate accounts without any sales or redemption charge at net asset value.
Proceeds from redemptions of shares 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.
The Fund reserves the right to reject any purchase order and to suspend the
offering of a Portfolio's shares for a period of time.
DIVIDENDS, OTHER DISTRIBUTIONS AND FEDERAL INCOME TAX
DIVIDENDS AND OTHER DISTRIBUTIONS. With the exception of Money Market
Portfolio, each Portfolio pays an annual dividend from its net investment
income and net short-term gain and, for certain portfolios, net gains from
foreign currency translations, if any. Each Portfolio also annually distributes
substantially all of its net capital gain (the excess of net long-term capital
gain over net short-term capital loss), if any. Each Portfolio may make
additional distributions, if necessary, to avoid a 4% excise tax on certain
undistributed income and capital gain.
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 Money Market Portfolio consists of
accrued interest and earned discount (including both OID and market discount),
less amortization of premium and accrued expenses. The Portfolio generally
distributes to its shareholders any net short-term capital gain annually but
may make more frequent distributions of that gain if necessary to maintain its
net asset
PW 29
<PAGE>
value per share at $1.00 or to avoid income or excise taxes. The Portfolio does
not expect to realize long-term capital gain and thus does not anticipate
payment of any net capital gain distributions.
Dividends and other 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 Accounts.
FEDERAL INCOME TAX. Each Portfolio intends to qualify or continue to qualify
for treatment as a regulated investment company under Subchapter M of the
Internal Revenue Code so that it will not have to pay federal income tax on
that part of its investment company taxable income and net capital gain that it
distributes to its shareholders. Investment company taxable income generally
consists of net investment income, net gains from certain foreign currency
transactions and net short-term capital gain (the excess of gains from the sale
or exchange of capital assets held for not more than one year over loss
therefrom).
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 Accounts that fund the 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 Accounts that purchase and hold shares of the Portfolios and
(2) the holders of Contracts funded through those Accounts.
Each Portfolio intends to comply or 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 Account--and,
because section 817(h) and those regulations treat the assets of each Portfolio
as assets of the related 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 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 regulated
investment companies. 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.
PW 30
<PAGE>
VALUATION OF SHARES
The net asset value of each Portfolio's shares, other than Money Market
Portfolio, fluctuates and is determined separately 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 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 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 board. The amortized cost method of valuation generally
is used to value debt obligations with 60 days or less remaining to maturity,
unless the board 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. It should be recognized
that judgment plays a greater role in valuing lower rated debt securities
because there is less reliable, objective data available.
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. 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 board. All investments denominated in foreign
currencies are valued daily in U.S. dollars based on the then-prevailing
exchange rate.
MANAGEMENT
The board, 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 all the Portfolios except Strategic Fixed Income, Aggressive
Growth and Global Growth Portfolios. The Sub-Advisers for these Portfolios,
make and implement all investment decisions for these Portfolios. Mitchell
Hutchins supervises the activities of the Sub-Advisers and supervises all
other aspects of these Portfolios' operations. In accordance with procedures
adopted by the board, brokerage transactions for the Portfolios may be
conducted through PaineWebber or its affiliates and the Portfolios may pay
fees, including fees calculated as a percentage of earnings, to PaineWebber
for its services as lending agent in their portfolio securities lending
programs.
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
such as the management fee paid to Mitchell Hutchins, custody and transfer
agency fees, brokerage commissions, professional fees, expenses of board and
shareholder meetings, fees and expenses relating to the registration of their
shares, taxes and governmental fees, fees and expenses of trustees, costs of
obtaining insurance, expenses of printing and distributing shareholder
materials, organizational expenses and extraordinary expenses, including costs
or losses
PW 31
<PAGE>
in any litigation. For those Portfolios that had operations during the fiscal
year ended December 31, 1996, total expenses for each Portfolio, stated as a
percentage of average net assets, were as set forth below.
<TABLE>
<CAPTION>
ANNUAL EXPENSES
ANNUAL RATE AS A PERCENTAGE
OF ADVISORY FEE OF EACH
AS A PERCENTAGE PORTFOLIO'S
OF EACH PORTFOLIO'S AVERAGE
PORTFOLIO AVERAGE NET ASSETS NET ASSETS
- --------- ------------------- ---------------
<S> <C> <C>
Money Market Portfolio 0.50% 1.17%
High Grade Fixed Income Portfolio 0.50 1.62
Strategic Fixed Income Portfolio 0.50 1.52
Global Income Portfolio 0.75 1.56
High Income Portfolio 0.50 n/a
Balanced Portfolio 0.75 1.24
Growth and Income Portfolio 0.70 1.58
Tactical Allocation Portfolio 0.50 n/a
Growth Portfolio 0.75 1.14
Aggressive Growth Portfolio 0.80 1.52
Small Cap Portfolio 1.00 n/a
Global Growth Portfolio 0.75 1.10
</TABLE>
Mitchell Hutchins is located at 1285 Avenue of the Americas, New York, New York
10019. It is a wholly owned asset management subsidiary of PaineWebber, which
is in turn wholly owned by Paine Webber Group Inc., a publicly owned financial
services holding company. At January 31, 1998 Mitchell Hutchins was adviser or
sub-adviser to 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 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 January 31, 1998,
PIMCO had approximately $ billion in assets under management and was adviser
or sub-adviser of pooled fund accounts with 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 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 January 31, 1998.
PW 32
<PAGE>
Mitchell Hutchins (not the Fund) pays Nicholas-Applegate a fee for its services
as sub-adviser for 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 15 other partners manage a staff of approximately
350 employees. As of January 31, 1998, Nicholas-Applegate managed a total of
approximately $ 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.
William C. Powers, a PIMCO Managing Director, has been primarily responsible
for the day-to-day management of Strategic Fixed Income Portfolio since
September 1996. Mr. Powers has been associated with PIMCO for more than five
years as a senior member of the fixed income portfolio management group.
James F. Keegan shares responsibility for the day-to-day management of the U.S.
government and investment grade securities sector of Strategic Income
Portfolio. Prior to joining Mitchell Hutchins in March 1996, Mr. Keegan was a
director with Merrion Group, L.P. From 1987 to 1994, he was a vice president of
global investment management of Bankers Trust Company. Mr. Keegan has held his
responsibilities for Strategic Income Portfolio since its inception.
Stuart Waugh is primarily responsible for the day-to-day management of Global
Income Portfolio. Stuart Waugh and William King are primarily responsible for
the day-to-day management of the Global Income Portfolio and Mr. Waugh is the
sector manager responsible for the day-to-day management of Strategic Income
Portfolio's foreign and emerging market bonds. Mr. Waugh has been involved with
Global Income Portfolio since its inception, first as an analyst and, since
1993, as portfolio manager. Mr. Waugh is a vice president of Mitchell Hutchins
Series Trust and a managing director of global fixed income investments of
Mitchell Hutchins. He has been with Mitchell Hutchins since 1983. Mr. King
joined Mitchell Hutchins in November 1995. Previously, he was at IBM
Corporation where he was responsible for the management of IBM Pension Fund's
global bond portfolio. Both Mr. Waugh and Mr. King are Chartered Financial
Analysts.
Other members of Mitchell Hutchins' international fixed income group provide
input on market outlook, interest rate forecasts and other considerations
relating to global fixed income investments.
Thomas J. Libassi, a senior vice president of Mitchell Hutchins, is responsible
for the day-to-day management of High Income Portfolio and is the sector
manager responsible for the day-to-day management of Strategic Income
Portfolio's U.S. high yield, high risk securities. Prior to May 1994, Mr.
Libassi was a vice president of Keystone Custodian Funds Inc. with portfolio
management responsibility for approximately $900 million in assets primarily
invested in high yield, high risk bonds. Mr. Libassi has held his day-to-day
portfolio management responsibilities for each Portfolio since its inception.
Mark A. Tincher is primarily responsible for the day-to-day management of
Growth and Income Portfolio. Mr. Tincher is a managing director and chief
investment officer of equities of Mitchell Hutchins, responsible for overseeing
the management of equity investments. 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.
PW 33
<PAGE>
Ellen R. Harris is primarily responsible for the day-to-day management of
Growth Portfolio. Mrs. Harris is 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 Aggressive Growth
Portfolio, has been 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 the Portfolio's inception in November 1993.
Donald R. Jones is primarily responsible for the day-to-day management of Small
Cap Portfolio. Mr. Jones has been a first vice president of Mitchell Hutchins
since February 1996. Prior to joining Mitchell Hutchins, Mr. Jones was a vice
president in the Asset Management Group of First Fidelity Bancorporation, which
he joined in 1983.
Ralph R. Layman and Michael J. Solecki are primarily responsible for the day-
to-day management of 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. Solecki has more than six years investment experience and has held
positions with GEIM since 1990. He is currently a Vice President of GEIM. Mr.
Layman has held his Global Growth Portfolio responsibilities since March 1995
and Mr. Solecki has held his Global Growth Portfolio responsibilities since May
1997.
T. Kirkham Barneby is responsible for the asset allocation decisions for both
Balanced Portfolio and Tactical Allocation Portfolio and is responsible for the
day-to-day management of Tactical Allocation Fund. Mr. Barneby is a managing
director and chief investment officer--quantitative investments of 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. Mr. Barneby has held
his Balanced Portfolio responsibilities since August 1995 and his Tactical
Allocation Portfolio responsibilities since inception.
Mark A. Tincher is responsible for the day-to-day management of the equity
portion of Balanced Portfolio. Please refer to Mr. Tincher's prior experience
provided under the "Growth and Income Portfolio" above. Mr. Tincher has held
his Balanced Portfolio responsibilities since August 1995.
Dennis L. McCauley is primarily responsible for the day-to-day management of
High Grade Fixed Income Portfolio and the fixed income portion of Balanced
Portfolio and has been Strategic Income Portfolio's allocation manager since
its inception. 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. Mr. McCauley has held his High Grade Fixed Income Portfolio
responsibilities since July 1995 and his Balanced Portfolio responsibilities
since August 1995.
PW 34
<PAGE>
Nirmal Singh, Craig Varrelman and Mr. Keegan assist Mr. McCauley in managing
High Grade Fixed Income Portfolio and Messrs. Singh and Varrelman and Susan
Ryan assist Mr. McCauley in managing Balanced Portfolio's fixed income
investments. Messrs. Singh and Varrelman are both first vice presidents 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. From 1990 to 1993, Mr. Singh was a senior portfolio
manager at Nomura Mortgage Fund Management Corporation. Mr. Varrelman has been
with Mitchell Hutchins as a portfolio manager since 1988 and manages fixed
income portfolios with an emphasis on U.S. government securities. Prior to
joining Mitchell Hutchins in March 1996, Mr. Keegan was a director with
Merrion Group, L.P. From 1987 to 1994, he was a vice president of global
investment management of Bankers Trust Company. From 1987 to 1994, he was vice
president of global investment management of Bankers Trust Company. Ms. Ryan
is a senior vice president of Mitchell Hutchins and has been with Mitchell
Hutchins since 1982.
Messrs. Singh and Varrelman first assumed responsibility for High Grade Fixed
Income Portfolio in July 1995 and Mr. Keegan assumed his responsibility for
this Portfolio in April 1996. Messrs. Singh and Varrelman and Ms. Ryan first
assumed their responsibilities for Balanced Portfolio in August 1995.
Ms. Ryan is responsible for the day-to-day management of Money Market
Portfolio and the cash portion of all the other Portfolios except Aggressive
Growth, Strategic Fixed Income and Global Growth Portfolios. She has held her
Money Market Portfolio responsibilities since its inception in May 1987.
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.
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 14 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. Brown Brothers Harriman & Co., 40 Water Street,
Boston, Massachusetts 02109, is custodian of the assets of Global Income
Portfolio. State Street Bank and Trust Company, One Heritage Drive, North
Quincy, Massachusetts 02171, is custodian of the assets of the other
Portfolios. Both custodians employ foreign sub-custodians approved by the
board of trustees to provide custody of the foreign assets of the Portfolios
that invest outside the United States. PFPC Inc., a subsidiary of PNC Bank,
N.A., 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.
PW 35
<PAGE>
APPENDIX
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
AAA. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as a "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues; AA. Bonds which are
rated Aa are judged to be of high quality by all standards. Together with the
Aaa group they comprise what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the long
term risks appear somewhat larger than in Aaa securities; A. Bonds which are
rated A possess many favorable investment attributes and are to be considered
as upper medium grade obligations. Factors giving security to principal and
interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future; BAA. Bonds which are rated
Baa are considered as medium grade obligations, i.e., they are neither highly
protected nor poorly secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well; BA. Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments my be very moderate and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class; B. Bonds which are
rated B generally lack characteristics of the desirable investment. Assurance
of interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small; CAA. Bonds which are rated
Caa are of poor standing. Such issues may be in default or there may be present
elements of danger with respect to principal or interest; CA. Bonds which are
rated Ca represent obligations which are speculative in a high degree. Such
issues are often in default or have other marked shortcomings; C. Bonds which
are rated C are the lowest rated class of bonds and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Moody's 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.
DESCRIPTION OF S&P CORPORATE DEBT RATINGS
AAA. An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to pay interest and repay principal is extremely strong; AA.
An obligation rated AA differs from the highest rated issues only in small
degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong; A. An obligation rated A is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories, however, the obligor's
capacity to meet its financial commitment on the obligation is still strong;
BBB. An obligation rated BBB exhibits adequate protection parameters, however
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to meet its financial commitment on the obligation; BB,
B, CCC, CC, C. Obligations rated BB, B, CCC,CC and C are regarded, as having
significant speculative characteristics. BB indicates the least degree of
speculation and C the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major risk exposures to adverse conditions.
PW 36
<PAGE>
"BB" An obligation rated "BB" is less vulnerable to nonpayment that other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" An obligation rated "B' is more vulnerable to nonpayment than obligations
rated "BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" An obligation rated "CCC" is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
"CC" An obligation rated "CC" is currently highly vulnerable to nonpayment.
"C" The "C" rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on the obligation
are being continued.
"D" An obligation rated "D" is in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due over the
applicable grace period has not expired unless Standard & Poor's believes that
such payments will be made during such grace period. The "D" rating also will
be used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
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.
PW 37
<PAGE>
MARCH 1, 1998
MITCHELL HUTCHINS SERIES TRUST
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
Mitchell Hutchins Series Trust ("Fund") is a professionally managed, open-end
investment company that offers shares in the Portfolios listed below. All the
Portfolios except Strategic Income Portfolio and 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 have sub-advisers ("Sub-Advisers").
*MONEY MARKET PORTFOLIO invests in high grade money market instruments
and repurchase agreements secured by such instruments.
*HIGH GRADE FIXED INCOME PORTFOLIO invests primarily in U.S. government
bonds, including those backed by mortgages, and high quality corporate
bonds and mortgage-backed and asset-backed securities of private issuers.
*STRATEGIC FIXED INCOME PORTFOLIO invests primarily in bonds and other
fixed income securities of varying maturities with a dollar-weighted
average portfolio duration between three and eight years.
*STRATEGIC INCOME PORTFOLIO strategically allocates its investments among
three bond market categories: U.S. government and investment grade
corporate bonds; U.S. high yield, high risk, corporate bonds; and foreign
and emerging market bonds.
*HIGH INCOME PORTFOLIO invests primarily in a diversified range of high
yield, high risk U.S. and foreign corporate bonds.
*GLOBAL INCOME PORTFOLIO invests principally in high quality bonds of
foreign and U.S. issuers.
*BALANCED PORTFOLIO invests primarily in a combination of equity
securities, investment grade bonds and money market instruments.
*GROWTH AND INCOME PORTFOLIO invests primarily in dividend-paying equity
securities believed to have the potential for rapid earnings growth.
*TACTICAL ALLOCATION PORTFOLIO follows a disciplined investment strategy
that allocates its assets between common stocks and U.S. Treasury notes or
U.S. Treasury bills.
*GROWTH PORTFOLIO invests primarily in equity securities of companies
believed to have substantial potential for capital growth.
*AGGRESSIVE GROWTH PORTFOLIO invests primarily in the common stocks of
U.S. companies expected to grow faster in assets and stock prices than the
average rate of companies in the S&P 500 Composite Stock Price Index.
*SMALL CAP PORTFOLIO invests primarily in equity securities of small
capitalization ("small cap") companies.
*GLOBAL GROWTH PORTFOLIO invests primarily in common stocks of companies
based in the United States, Europe, Japan and the Pacific Basin.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Fund's current Prospectus, dated March 1,
1998. A copy of the Prospectus may be obtained by contacting the Fund or your
PaineWebber investment executive or by calling toll free 1-800-986-0088.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Limitations........................................ 3
Hedging and Related Strategies Using Derivative Instruments................ 21
Trustees and Officers; Principal Holders of Securities..................... 30
Investment Advisory Services............................................... 37
Portfolio Transactions..................................................... 39
Additional Purchase and Redemption Information............................. 42
Valuation of Shares........................................................ 43
Taxes...................................................................... 44
Dividends.................................................................. 46
Other Information.......................................................... 46
Financial Statements....................................................... 47
Description of Commercial Paper and Bond Ratings........................... 47
</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 nine Portfolios.
Except as otherwise indicated in the Prospectus or the Statement of Additional
Information, there are no policy limitations on a Portfolio's ability to use
the investments or techniques discussed in these documents.
FOREIGN SECURITIES. An investment in securities of foreign issuers or
securities denominated in foreign currency may involve risks relating to
political, social and economic developments abroad as well as risks resulting
from the differences between the regulations to which U.S. and foreign issuers
and markets are subject. These risks include expropriation, confiscatory
taxation, withholding taxes, 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 positions. Securities of foreign issuers may not be
registered with the Securities and Exchange Commission ("SEC"), and the issuers
thereof may not be subject to its reporting requirements. Accordingly, there
may be less publicly available information concerning foreign issuers of
securities held by the 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. Securities of many foreign companies may be
less liquid and their prices more volatile than those of securities of
comparable U.S. companies. Transactions in foreign securities may be subject to
less efficient settlement practices. Legal remedies for defaults and disputes
may have to be pursued in foreign courts, whose procedures differ substantially
from those of U.S. courts. Foreign securities trading practices, including
those involving securities settlement where a Portfolio's assets may be
released prior to receipt of payment, may expose that Portfolio to increased
risk in the event of a failed trade or the insolvency of a foreign broker-
dealer.
If the value of a foreign currency rises against the value of the U.S.
dollar, the value of a Portfolio's assets denominated in that currency or
linked to that currency will increase; correspondingly, if the value of a
foreign currency declines against the value of the U.S. dollar, the value of a
Portfolio's assets denominated in that currency or linked to that currency will
decrease. The exchange rate between the U.S. dollar and other currencies are
determined by supply and demand in the currency exchange markets, international
balances of payments, governmental intervention, speculation and other economic
and political conditions.
The Portfolios may purchase depository receipts, including American
Depository Receipts ("ADRs"), European Depository Receipts ("EDRs"), global
depository receipts ("GDRs") 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, may be denominated in other
currencies and are designed for use in European securities markets. GDRs are
similar to EDRs and are designed for use in several international financial
markets. For purposes of the Fund's investment policies, ADRs, EDRs or GDRs are
deemed to have the same classification as the underlying securities they
represent. Thus, an ADR, EDR or GDR evidencing ownership of common stock will
be treated as common stock.
The Portfolios that may invest outside the United States each 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. There is generally less government
supervision and regulation of exchanges and brokers in foreign countries than
in the United States.
The costs attributable to foreign investing frequently are higher than those
attributable to domestic investing; this is particularly true with respect to
emerging capital markets. For example, the cost of
3
<PAGE>
maintaining custody of foreign securities exceeds custodian costs for domestic
securities, and transaction and settlement costs of foreign investing also
frequently are higher than those attributable to domestic investing. Costs
associated with the exchange of currencies also make foreign investing more
expensive than domestic investing.
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 a Portfolio would be
subject.
All or a substantial portion of High Income Portfolio's or Strategic Income
Portfolio's investments in foreign and emerging market securities may be rated
below investment grade or may be unrated securities with credit
characteristics that are comparable to securities that are rated below
investment grade. Strategic Income Portfolio may invest without limit in
securities of issuers in emerging market countries and in non-U.S. dollar-
denominated fixed income securities, including securities denominated in the
local currencies of emerging market countries.
SPECIAL CHARACTERISTICS OF FOREIGN AND EMERGING MARKET SECURITIES
EMERGING MARKET SECURITIES. Many foreign and emerging market securities are
not registered with the SEC, nor are the issuers thereof subject to SEC
reporting requirements. Accordingly, there may be less publicly available
information concerning foreign issuers of securities held by a Portfolio than
is available concerning U.S. companies. 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.
Foreign companies and, in particular, companies in smaller and emerging
capital markets 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. A Portfolio net investment income and
capital gains from its foreign investment activities may be subject to non-
U.S. withholding taxes.
Foreign markets also have different clearance and settlement procedures, and
in certain markets there have been times when settlements have failed to keep
pace with the volume of securities transactions, making it difficult to
conduct such transactions. Delays in settlement could result in the temporary
periods when assets of a Portfolio are uninvested and no return is earned
thereon. The inability of a Portfolio to make intended security purchases due
to settlement problems could cause the Portfolio to miss attractive investment
opportunities. Inability to dispose of a portfolio security due to settlement
problems could result either in losses to the Portfolio due to subsequent
declines in the value of such portfolio security or, if the Portfolio has
entered into a contract to sell the security, could result in possible
liability to the purchaser.
SOVEREIGN DEBT. Investment in debt securities issued by foreign governments
and their political subdivisions or agencies ("Sovereign Debt") involves
special risks. 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, limited.
Political conditions, especially a sovereign entity's willingness to meet the
terms of its debt obligations, are of considerable significance. Also, there
can be no assurance that the holders of commercial bank debt issued by the
same sovereign entity may not contest payments to the holders of Sovereign
Debt in the event of default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and interest
due in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
principal international lenders and the political constraints to which a
sovereign debtor may be subject. 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.
4
<PAGE>
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.
Another factor bearing on the ability of a country to repay sovereign debt
is the level of the country's international reserves. Fluctuations in the
level of these reserves can affect the amount of foreign exchange readily
available for external debt payments and, thus, could have a bearing on the
capacity of the country to make payments on its sovereign debt.
To the extent that a country has a current account deficit (generally when
exports of merchandise and services are less than the country's imports of
merchandise and services plus net transfers (e.g., gifts of currency and
goods) to foreigners), it will need to depend on loans from foreign
governments, multilateral organizations or private commercial banks, aid
payments from foreign governments and inflows of foreign investment. The
access of a country to these forms of external funding may not be certain, and
a withdrawal of external funding could adversely affect the capacity of a
government to make payments on its obligations. In addition, the cost of
servicing debt obligations can be affected by a change in international
interest rates, since the majority of these obligations carry interest rates
that are adjusted periodically based upon international rates.
With respect to sovereign debt of emerging market issuers, investors should
be aware that certain emerging market countries are among the largest debtors
to commercial banks and foreign governments. At times certain emerging market
countries have declared moratoria on the payment of principal and interest on
external debt; such moratoria are currently in effect in certain Latin
American countries.
Certain emerging market countries have experienced difficulty in servicing
their sovereign debt on a timely basis which led to defaults on certain
obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit
agreements or converting outstanding principal and unpaid interest to Brady
Bonds (discussed below), and obtaining new credit to finance interest
payments. Holders of sovereign debt, including the Portfolios, may be
requested to participate in the rescheduling of such debt and to extend
further loans to sovereign debtors. The interests of holders of sovereign debt
could be adversely affected in the course of restructuring arrangements or by
certain other factors referred to below. Furthermore, some of the participants
in the secondary market for sovereign debt may also be directly involved in
negotiating the terms of these arrangements and may, therefore, have access to
information not available to other market participants. Obligations arising
from past restructuring agreements may affect the economic performance and
political and social stability of certain issuers of sovereign debt. There is
no bankruptcy proceeding by which sovereign debt on which a sovereign has
defaulted may be collected in whole or in part.
Foreign investment in certain sovereign debt is restricted or controlled to
varying degrees. These restrictions or controls may at times limit or preclude
foreign investment in such sovereign debt and increase the costs and expenses
of a Portfolio. Certain countries in which a Portfolio may invest require
governmental approval prior to investments by foreign persons, limit the
amount of investment by foreign persons in a particular issuer, limit the
investment by foreign persons only to a specific class of securities of an
issuer that may have less advantageous rights than the classes available for
purchase by domiciliaries of the countries or impose additional taxes on
foreign investors. Certain issuers may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in a
country's balance of payments the country could impose temporary restrictions
on foreign capital remittances. A Portfolio could be adversely affected by
delays in, or a refusal to grant, any required governmental approval for
repatriation of capital, as well as by the application to the Portfolio of any
restrictions on investments. Investing in local markets may require a
Portfolio to adopt special procedures, seek local government approvals or take
other actions, each of which may involve additional costs to the Portfolio.
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BRADY BONDS. Brady Bonds are sovereign debt securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness. In
restructuring its external debt under the Brady Plan framework, a debtor
nation negotiates with its existing bank lenders as well as multilateral
institutions such as the International Monetary Fund ("IMF"). The Brady Plan
framework, as it has developed, contemplates the exchange of commercial bank
debt for newly issued Brady Bonds. Brady Bonds may also be issued in respect
of new money being advanced by existing lenders in connection with the debt
restructuring. The World Bank and the IMF support the restructuring by
providing funds pursuant to loan agreements or other arrangements which enable
the debtor nation to collateralize the new Brady Bonds or to repurchase
outstanding bank debt at a discount.
There can be no assurance that the circumstances regarding the issuance of
Brady Bonds by these countries will not change. Investors should recognize
that Brady Bonds have been issued only recently, and accordingly do not have a
long payment history. Agreements implemented under the Brady Plan to date are
designed to achieve debt and debt-service reduction through specific options
negotiated by a debtor nation with its creditors. As a result, the financial
packages offered by each country differ. The types of options have included
the exchange of outstanding commercial bank debt for bonds issued at 100% of
face value of such debt, which carry a below-market stated rate of interest
(generally known as par bonds), bonds issued at a discount from the face value
of such debt (generally known as discount bonds), bonds bearing an interest
rate which increases over time and bonds issued in exchange for the
advancement of new money by existing lenders. Regardless of the stated face
amount and stated interest rate of the various types of Brady Bonds, a
Portfolio will purchase Brady Bonds in secondary markets, as described below,
in which the price and yield to the investor reflect market conditions at the
time of purchase.
Certain Brady Bonds have been collateralized as to principal due at maturity
by U.S. Treasury zero coupon bonds with maturities equal to the final maturity
of such Brady Bonds. Collateral purchases are financed by the IMF, the World
Bank and the debtor nations' reserves. In the event of a default with respect
to collateralized Brady Bonds as a result of which the payment obligations of
the issuer are accelerated, the U.S. Treasury zero coupon obligations held as
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held by the collateral agent to the scheduled maturity of the
defaulted Brady Bonds, which will continue to be outstanding, at which time
the face amount of the collateral will equal the principal payments which
would have then been due on the Brady Bonds in the normal course. In addition,
interest payments on certain types of Brady Bonds may be collateralized by
cash or high grade securities in amounts that typically represent between 12
and 18 months of interest accruals on these instruments, with the balance of
the interest accruals being uncollateralized. Brady Bonds are often viewed as
having several valuation components: (1) the collateralized repayment of
principal, if any, at final maturity, (2) the collateralized interest
payments, if any, (3) the uncollateralized interest payments and (4) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk"). In light of the residual risk of
Brady Bonds and, among other factors, the history of defaults with respect to
commercial bank loans by public and private entities of countries issuing
Brady Bonds, investments in Brady Bonds are to be viewed as speculative. A
Portfolio may purchase Brady Bonds with no or limited collateralization, and
will be relying for payment of interest and (except in the case of principal
collateralized Brady Bonds) repayment of principal primarily on the
willingness and ability of the foreign government to make payment in
accordance with the terms of the Brady Bonds. Brady Bonds issued to date are
purchased and sold in secondary markets through U.S. securities dealers and
other institutions and are generally maintained through European transnational
securities depositories.
STRUCTURED FOREIGN INVESTMENTS. This term refers to interests in U.S. and
foreign entities organized and operated solely for the purpose of securitizing
or restructuring the investment characteristics of foreign securities. This
type of securitization or restructuring involves the deposit with or purchase
by a U.S. or foreign entity, such as a corporation or trust, of specified
instruments (such as commercial bank loans or Brady Bonds) and the issuance by
that entity of one or more classes of securities backed by, or representing
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interests in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued structured foreign
investments to create securities with different investment characteristics such
as varying maturities, payment priorities and interest rate provisions, and the
extent of the payments made with respect to structured foreign investments is
dependent on the extent of the cash flow on the underlying instruments.
Structured foreign investments frequently involve no credit enhancement.
Accordingly, their credit risk generally will be equivalent to that of the
underlying instruments. In addition, classes of structured foreign investments
may be subordinated to the right of payment of another class. Subordinated
structured foreign investments typically have higher yields and present greater
risks than unsubordinated structured foreign investments. Structured foreign
investments are typically sold in private placement transactions, and there
currently is no active trading market for structured foreign investments.
FOREIGN CURRENCY TRANSACTIONS. Although each Portfolio that invests in
securities denominated in foreign currencies values its assets daily in U.S.
dollars, none of these Portfolios intends 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 SECURITIES--STRATEGIC INCOME PORTFOLIO. In selecting U.S.
government and investment grade securities for Strategic Income Portfolio's,
Mitchell Hutchins will consider factors such as the general level of interest
rates, changes in the perceived creditworthiness of the issuers, the prepayment
outlook for the mortgage market and changes in general economic conditions and
business conditions affecting the issuers and their respective industries.
In selecting U.S. high yield securities for Strategic Income Portfolio's
portfolio, Mitchell Hutchins seeks to identify issuers and industries that
Mitchell Hutchins believes are more likely to experience stable or improving
financial conditions. Many corporations are in the process of strengthening, or
have recently improved, their financial positions through cost-cutting,
restructuring or refinancing with lower cost debt. Mitchell Hutchins expects
that, at times when the U.S. economy is improving, these factors and others may
lead many issuers to experience financial improvement and possible credit
upgrades. Mitchell Hutchins seeks to identify these issuers through detailed
credit research. Mitchell Hutchins' analysis may include consideration of
general industry trends, the issuer's experience and managerial strength,
changing financial conditions, borrowing requirements or debt maturity
schedules, the issuer's responsiveness to changes in business conditions and
interest rates, and other terms and conditions. Mitchell Hutchins may also
consider relative values based on anticipated cash flow, interest or dividend
coverage, asset coverage and earnings prospects.
Mitchell Hutchins selectively invests Strategic Income Portfolio's assets
allocated to foreign and emerging market securities in securities of issuers in
countries where the combination of income market yields, the price appreciation
potential of fixed income securities and, with respect to non-U.S. dollar-
denominated securities, currency exchange rate movements present opportunities
for high current income and, secondarily, capital appreciation. Determinations
as to the foreign markets in which the Portfolio invests are based on an
evaluation of total debt levels, currency reserve levels, net exports/imports,
overall economic growth, level of inflation, currency fluctuation, political
and social climate and payment history of the country in which the issuer is
located. Particular securities are selected based upon credit risk analysis of
potential issuers, the characteristics of the security and interest rate
sensitivity of the various issues by a single issuer, analysis of volatility
and liquidity of these particular instruments and the tax implications to the
Portfolio of various instruments.
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SELECTION OF INVESTMENTS BY BALANCED PORTFOLIO. The money market instruments
in which 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
Balanced Portfolio will consist only of obligations of U.S. corporations that
are (1) rated at least Prime-2 by Moody's Investors Service, Inc. ("Moody's")
or A-2 by Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("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.
YIELD FACTORS AND RATINGS. S&P, Moody's and other NRSRO's are private
services that provide ratings of the credit quality of debt obligations. A
description of the ratings assigned to debt obligations by S&P and Moody's is
included in the Appendix to the Prospectus. The process by which S&P and
Moody's determine ratings for mortgage- and asset-backed securities includes
consideration of the likelihood of the receipt by security holders of all
distributions, the nature of the underlying securities, the credit quality of
the guarantor, if any, and the structural, legal and tax aspects associated
with such securities. Not even the highest such ratings represent an assessment
of the likelihood that principal prepayments will be made by mortgagors or the
degree to which such prepayments may differ from that originally anticipated,
nor do such ratings address the possibility that investors may suffer a lower
than anticipated yield or that investors in such securities may fail to recoup
fully their initial investment due to prepayments.
A Portfolio may use these ratings in determining whether to purchase, sell or
hold a security. It should be emphasized, however, that ratings are general and
are not absolute standards of quality. Consequently, debt obligations with the
same maturity, interest rate and rating may have different market prices. Also,
rating agencies may fail to make timely changes in credit ratings in response
to subsequent events so that an issuer's current financial condition may be
better or worse than the rating indicates. The rating assigned to a security by
a NRSRO does not reflect an assessment of the volatility of the security's
market value or of the liquidity of an investment in the security. Subsequent
to its purchase by any Portfolio, an issue of debt obligations may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by that Portfolio.
In addition to ratings assigned to individual bond issues, Mitchell Hutchins
or a Sub-Adviser, as applicable, will analyze interest rate trends and
developments that may affect individual issuers, including factors such as
liquidity, profitability and asset quality. The yields on bonds and other debt
securities in which the Portfolios invest are dependent on a variety of
factors, including general money market conditions, general conditions in the
bond market, the financial condition of the issuer, the size of the offering,
the maturity of the obligation and its rating. There is a wide variation in the
quality of bonds, both within a particular classification and between
classifications. An issuer's obligations under its bonds are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of bond holders or other creditors of an issuer; litigation or other
conditions may also adversely affect the power or ability of issuers to meet
their obligations for the payment of interest and principal on their bonds.
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Debt securities rated Ba or lower by Moody's, BB or lower by S&P, comparably
rated by another NRSRO or determined by Mitchell Hutchins or a Sub-Adviser, as
applicable, to be of comparable quality are below investment grade, are deemed
by those agencies to be predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal and may involve major risk
exposure to adverse conditions. Lower rated debt securities generally offer a
higher current yield than that available for investment grade issues, but they
involve higher risks, in that they 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
fluctuations 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 interest and principal and increase the possibility of default. In
addition, such issuers may not have more traditional methods of financing
available to them and may be unable to repay debt at maturity by refinancing.
The risk of loss due to default by such issuers is significantly greater
because such securities frequently are unsecured and subordinated to the prior
payment of senior indebtedness.
The market for lower rated debt securities has expanded rapidly in recent
years, and its growth generally 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. However, 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 defaults. There can be
no assurance that such declines will not recur. The market for lower rated debt
issues generally is thinner or 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 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.
ASSET-BACKED SECURITIES. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed in more
detail below. However, the underlying assets are not first lien mortgage loans
or interests therein, but include assets such as motor vehicle installment sale
contracts, other installment sale contracts, home equity loans, leases of
various types of real and personal property and receivables from revolving
credit (credit card) agreements. Such assets are securitized through the use of
trusts or special purpose corporations. Payments or distributions of principal
and interest may be guaranteed up to a certain amount and for a certain time
period by a letter of credit or pool insurance policy issued by a financial
institution unaffiliated with the issuer, or other credit enhancements may be
present.
MORTGAGE-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. The U.S. government mortgage-backed securities in which the
Portfolios may invest include mortgage-backed securities issued or guaranteed
as to the payment of principal and interest (but not as to market value) by the
Government National Mortgage Association ("Ginnie Mae"), Fannie Mae (also known
as, the Federal National Mortgage Association), or the Federal Home Loan
Mortgage Corporation ("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-government credit enhancement. New
types of mortgage-backed securities are developed and marketed from time to
time and, consistent with its investment limitations, each Portfolio
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expects to invest in those new types of mortgage-backed securities that
Mitchell Hutchins or a Sub-Adviser believes may assist a Portfolio in achieving
its investment objective. Similarly, a Portfolio may invest in mortgage-backed
securities issued by new or existing governmental or private issuers other than
those identified herein.
Ginnie Mae Certificates. Ginnie Mae guarantees certain mortgage pass-through
certificates ("Ginnie Mae certificates") that are issued by Private Mortgage
Lenders and that represent ownership interests in individual pools of
residential mortgage loans. These securities are designed to provide monthly
payments of interest and principal to the investor. Timely payment of interest
and principal is backed by the full faith and credit of the U.S. government.
Each mortgagor's monthly payments to his lending institution on his residential
mortgage are "passed through" to certificateholders such as 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 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. 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 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.
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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 CMOs, 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 a 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.
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.
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 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. Credit enhancements
do not provide protection against changes in the market value of a security.
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Examples of credit enhancement arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "spread accounts" or "reserve funds" (where cash or investments,
sometimes funded from a portion of the payments on the underlying assets, are
held in reserve against future losses) and "over-collateralization" (where the
scheduled payments on, or the principal amount of, the underlying assets exceed
that required to make payment of the securities and pay any servicing or other
fees). The degree of credit enhancement provided for each issue generally is
based on historical information regarding the level of credit risk associated
with the underlying assets. Delinquency or loss in excess of that anticipated
could adversely affect the return on an investment in such a security.
Special Characteristics of Mortgage- and Asset-Backed Securities. The yield
characteristics of mortgage- and asset-backed securities differ from those of
traditional debt securities. Among the major differences are that interest and
principal payments are made more frequently, usually monthly, and that
principal may be prepaid at any time because the underlying mortgage loans or
other obligations generally may be prepaid at any time. Prepayments on a pool
of mortgage loans are influenced by a variety of economic, geographic, social
and other factors, including changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged properties and
servicing decisions. Generally, however, prepayments on fixed-rate mortgage
loans will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Similar factors apply to prepayments
on asset-backed securities, but the receivables underlying asset-backed
securities generally are of a shorter maturity and thus are less likely to
experience substantial prepayments. Such securities, however, often provide
that for a specified time period the issuers will replace receivables in the
pool that are repaid with comparable obligations. If the issuer is unable to do
so, repayment of principal on the asset-backed securities may commence at an
earlier date. Mortgage- and asset-backed securities may decrease in value as a
result of increases in interest rates and may benefit less than other fixed-
income securities from declining interest rates because of the risk of
prepayment.
The rate of interest on mortgage-backed securities is lower than the interest
rates paid on the mortgages included in the underlying pool due to the annual
fees paid to the servicer of the mortgage pool for passing through monthly
payments to certificateholders and to any guarantor, and due to any yield
retained by the issuer. Actual yield to the holder may vary from the coupon
rate, even if adjustable, if the mortgage-backed securities are purchased or
traded in the secondary market at a premium or discount. In addition, there is
normally some delay between the time the issuer receives mortgage payments from
the servicer and the time the issuer makes the payments on the mortgage-backed
securities, and this delay reduces the effective yield to the holder of such
securities.
Yields on pass-through securities are typically quoted by investment dealers
and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice has been to assume that prepayments on pools
of fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. However, these effects may not be present, or may
differ in degree, if the mortgage loans in the pools have adjustable interest
rates or other special payment terms, such as a prepayment charge. Actual
prepayment experience may cause the yield of mortgage-backed securities to
differ from the assumed average life yield. Reinvestment of prepayments may
occur at lower interest rates than the original investment, thus adversely
affecting the yield of a Portfolio.
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Additional Information on ARM and Floating Rate Mortgage-Backed
Securities. Adjustable rate mortgage ("ARM") 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. As a result, during
periods of rising interest rates, ARMs generally do not decrease in value as
much as fixed rate securities. Conversely, during periods of declining rates,
ARMs generally do not increase in value as much as fixed rate securities. 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 specify that the borrower's mortgage interest rate may not be
adjusted above a specified lifetime maximum rate or, in some cases, below a
minimum lifetime rate. In addition, certain ARMs specify limitations on the
maximum amount by which the mortgage interest rate may adjust for any single
adjustment period. ARMs also may limit 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 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.
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 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
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.
CONVERTIBLE SECURITIES. Convertible securities have unique investment
characteristics in that they generally (1) have higher yields than common
stocks, but lower yields than comparable fixed income nonconvertible
securities, (2) are less subject to fluctuation in value than the underlying
stock since they have fixed income characteristics and (3) provide the
potential for capital appreciation if the market price of the underlying common
stock increases.
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The value of a convertible security is a function of its "investment value"
(determined by its yield comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
its "conversion value" (the security's worth, at market value, if converted
into the underlying common stock). The investment value of a convertible
security is influenced by changes in interest rates, with investment value
declining as interest rates increase and increasing as interest rates decline.
The credit standing of the issuer and other factors also may have an effect on
the convertible security's investment value. The conversion value of a
convertible security is determined by the market price of the underlying common
stock. If the conversion value is low relative to the investment value, the
price of the convertible security is governed principally by its investment
value, and generally the conversion value decreases as the convertible security
approaches maturity. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. In addition,
a convertible security generally will sell at a premium over its conversion
value, determined by the extent to which investors place value on the right to
acquire the underlying common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a Portfolio is called for
redemption, the Portfolio will be required to permit the issuer to redeem the
security, convert it into the underlying common stock or sell it to a third
party. The Portfolios that may invest in convertible securities may hold any
equity securities they acquire upon conversion subject only to their
limitations on holding equity securities.
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 "term
to maturity." 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 for a final payment, taking no account of the pattern of the
security's payments prior to maturity.
For any fixed income security with interest payments occurring prior to the
payment of principal, duration is always less than maturity. For example,
depending upon its coupon and the level of market yields, a U.S. Treasury note
with a remaining maturity of five years might have a duration of 4.5 years. For
mortgage-backed and other securities that are subject to prepayments, put or
call features or adjustable coupons, the difference between the remaining
stated maturity and the duration is likely to be much greater.
Futures, options and options on futures have durations that, in general, are
closely related to the duration of the securities that underlie them. Holding
long futures or call option positions (backed by a segregated account of cash
and cash equivalents) will lengthen a Portfolio's duration by approximately the
same amount as would holding an equivalent amount of the underlying securities.
Short futures or put options have durations roughly equal to the negative
duration of the securities that underlie these positions and have the effect of
reducing portfolio duration by approximately the same amount as would selling
an equivalent amount of the underlying securities.
There are some situations in which the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or
more years; however, their interest rate exposure corresponds to the frequency
of the coupon reset. Another example where the interest rate exposure is not
properly captured by the standard duration calculation is the case of mortgage-
backed securities. The stated final maturity of such securities is generally 30
years, but current prepayment rates are critical in determining the securities'
interest rate exposure. In these and other similar situations, Mitchell
Hutchins and the Sub-Advisers, as applicable, will use more sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its duration and, therefore, its interest rate exposure.
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ILLIQUID SECURITIES. Each Portfolio may invest up to 10% (15% for 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 (sometimes referred to as the "board"). 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 a Portfolio that may invest
outside the United States 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 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 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.
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ZERO COUPON, OID AND PIK SECURITIES. Federal tax law requires that a holder
of a security with original issue discount ("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 a
Portfolio will receive no payments on its zero coupon securities prior to their
maturity or disposition, it will have income each year attributable to such
securities. Similarly, while payment-in-kind ("PIK") securities may pay
interest in the form of additional securities rather than cash, that interest
must be included in a Portfolio's annual income.
To qualify for pass-through federal income tax treatment as regulated
investment companies, the Portfolios 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. See
"Taxes." 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.
Certain zero coupon securities are U.S. Treasury notes and bonds that have
been stripped of their unmatured interest coupon receipts or interests in such
U.S. Treasury securities or coupons. The staff of the SEC currently takes the
position that "stripped" U.S. government securities that are not issued through
the U.S. Treasury are not U.S. government securities. This technique is
frequently used with U.S. Treasury bonds to create CATS (Certificate of Accrual
Treasury Securities), TIGRs (Treasury Income Growth Receipts) and similar
securities. [As long as the SEC takes this position, CATS and TIGRs, which are
not issued through the U.S. Treasury, will not be counted as U.S. government
securities for purposes of the 65% investment requirement applicable to
Strategic Fixed Income Portfolio].
MONEY MARKET INSTRUMENTS OF GLOBAL GROWTH PORTFOLIO. For cash management
purposes, the Global Growth Portfolio may invest directly, or indirectly
through its investment in the GEIM Short-Term Investment Fund (the "Investment
Fund"), in the following types of money market instruments: (i) securities
issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities. (ii) debt obligations of banks, savings and loan
institutions, insurance companies and mortgage bankers, (iii) commercial paper
and notes, including those with variable and floating rates of interest, (iv)
debt obligations of foreign branches of U.S. banks, U.S. branches of foreign
banks and foreign branches of foreign banks, (v) debt obligations issues or
guaranteed by one or more foreign governments or any of their political
subdivisions, agencies or instrumentalities, including obligations of
supranational entities, (vi) debt securities issued by foreign issuers, and
(vii) repurchase agreements. For these purposes, the Portfolio may invest up to
25% of its assets in the Investment Fund, an investment fund created
specifically to serve as a vehicle for the collective investment of cash
balances of the Portfolio and other accounts advised by either GEIM, or its
affiliate, General Electric Investment Corporation. The Investment Fund invests
exclusively in the money market instruments described in (i) through (vii)
above. The Investment Fund is advised by GEIM. No advisory fee is charged by
GEIM to the Investment Fund, nor will the Portfolio incur any sales charge,
redemption fee, distribution fee or service in connection with its investments
in the Investment Fund.
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
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144A described under "Illiquid Securities" above. Each Portfolio 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 board. 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 or upon demand and at a 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 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 board. Mitchell Hutchins [or the applicable Sub-Adviser]
reviews and monitors the creditworthiness of those institutions under the
board's general supervision.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. Strategic Fixed Income,
Strategic Income and Global Income Portfolios may enter into arbitraged reverse
repurchase agreements with banks and securities dealers. Strategic Fixed Income
and Strategic Income Portfolios also may invest in dollar rolls. Such
agreements involve the sale of securities held by the Fund subject to its
agreement to repurchase the securities at an agreed upon date or upon demand
and at a price reflecting a market rate of interest. Such transactions are
considered to be borrowings and may be entered into only for temporary
purposes. While a reverse repurchase agreement or dollar roll is outstanding, a
Portfolio's custodian segregates assets to cover the amount of its obligations
under the reverse repurchase agreement or dollar roll. See "Investment Policies
and Restrictions--Segregated Accounts."
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 a Portfolio'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 its total assets. A Portfolio
may lend its portfolio securities to broker-dealers or institutional
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investors that Mitchell Hutchins deems qualified, but only when the borrower
maintains 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 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.
Pursuant to procedures adopted by the board governing each Portfolio's
securities lending program, the board has approved retention of PaineWebber to
serve as lending agent for each Portfolio. The board also has authorized the
payment of fees (including fees calculated as a percentage of invested cash
collateral) to PaineWebber for these services. The board periodically reviews
all portfolio securities loan transactions for which PaineWebber acted as
lending agent.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Strategic Fixed Income Portfolio and
High Income Portfolio each may invest up to 5% of its net assets, and Strategic
Income Portfolio may invest without limit, 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"). A
Portfolio's investments in Loans are expected in most instances to be in the
form of participations ("Participations") in Loans 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. A 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, a
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 a Portfolio may not directly benefit 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, a 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. A Portfolio will acquire Participations only if the Lender
interpositioned between the Portfolio and the borrower is determined by
Mitchell Hutchins to be creditworthy.
When a 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 a Portfolio as the purchaser
of an Assignment may differ from, and be more limited than, those held by the
assigning Lender.
Assignments and Participations are generally not registered under the 1933
Act and thus are subject to each Portfolio's limitation on investment in
illiquid securities. Because there is no liquid market for such securities, the
Portfolios anticipate that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market will
have an adverse impact on the value of such securities and on a Portfolio's
ability to dispose of particular Assignments or Participations when necessary
to meet its liquidity needs or in response to a specific economic event, such
as a deterioration in the creditworthiness of the borrower.
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SHORT SALES "AGAINST THE BOX". Each Portfolio (other than Money Market
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 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 a Sub-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. 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 or liquid 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.
FUNDAMENTAL INVESTMENT LIMITATIONS. The foregoing fundamental investment
limitations cannot be changed for 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.
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.
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(2) issue senior securities or borrow money, except as permitted under
the Investment Company Act of 1940 ("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 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 applies to all Portfolios except Global
Income Portfolio and Strategic 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.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions may be
changed by the board 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) 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.
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(3) 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.
(4) 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.
(5) purchase portfolio securities while borrowings in excess of 5% of its
total assets are outstanding.
HEDGING AND RELATED STRATEGIES USING DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. As discussed in the
Prospectus, Mitchell Hutchins or the applicable Sub-Adviser may use a variety
of financial instruments ("Derivative 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 Portfolios that are permitted to
invest outside the United States, Mitchell Hutchins or the applicable Sub-
Adviser also may use forward currency contracts, foreign currency options and
futures and options thereon. Portfolios that invest primarily in bonds also may
enter into interest rate protection transactions. A Portfolio may enter into
transactions using one or more types of Derivative Instruments under which the
full value of its portfolio is at risk. Under normal circumstances, however, a
Portfolio's use of these instruments will place at risk a much smaller portion
of its assets. The particular Derivative Instruments used by the Portfolios are
described below. Money Market Portfolio is not authorized to use these
Derivative Instruments. The particular Derivative Instruments used by the
Portfolios are described below.
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
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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 currencies, except that an option on a futures
contract gives the purchaser the right, in return for the premium, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase or sell a
security or currency, at a specified price at any time during the option term.
Upon exercise of the option, the delivery of the futures position to the holder
of the option will be accompanied by delivery of the accumulated balance that
represents the amount by which the market price of the futures contract
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the future. The writer of an option, upon
exercise, will assume a short position in the case of a call and a long
position in the case of a put.
FORWARD CURRENCY CONTRACTS--A forward currency contract involves an
obligation to purchase or sell a specific currency at a specified future date,
which may be any fixed number of days from the contract date agreed upon by the
parties, at a price set at the time the contract is entered into.
GENERAL DESCRIPTION OF STRATEGIES USING DERIVATIVE INSTRUMENTS. Hedging
strategies can be broadly categorized as "short hedges" and "long hedges." A
short hedge is a purchase or sale of a Derivative Instrument intended partially
or fully to offset potential declines in the value of one or more investments
held by a Portfolio. Thus, in a short hedge a Portfolio takes a position in a
Derivative Instrument whose price is expected to move in the opposite direction
of the price of the investment being hedged. For example, a 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 Derivative 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 Derivative 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 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 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.
Derivative 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. Derivative Instruments on stock indices, in
contrast, generally are used to hedge against price movements in broad equity
market sectors in
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which the Portfolio has invested or expects to invest. Derivative Instruments
on debt securities may be used to hedge either individual securities or broad
fixed income market sectors.
Income strategies include the writing of covered options to obtain the
related option premiums. Return strategies include the use of Derivative
Instruments to increase or reduce a Portfolio's exposure to an asset class
without buying or selling the underlying instruments.
The use of Derivative Instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon which they are traded and
the Commodity Futures Trading Commission ("CFTC"). In addition, a Portfolio's
ability to use Derivative 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, income and return strategies. 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 this 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 STRATEGIES USING DERIVATIVES CONTRACTS. The use of
Derivative Instruments involves special considerations and risks, as described
below. Risks pertaining to particular Derivative Instruments are described in
the sections that follow.
(1) Successful use of most Derivative Instruments depends upon 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 Derivative Instruments, there can be no assurance
that any particular strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Derivative Instrument and price movements of the
investments being hedged. For example, if the value of a Derivative
Instrument used in a short hedge increased by less than the decline in
value of the hedged investment, the hedge would not be fully successful.
Such a lack of correlation might occur due to factors unrelated to the
value of the investments being hedged, such as speculative or other
pressures on the markets in which Derivative Instruments are traded.
The effectiveness of hedges using Derivative Instruments on indices will
depend on the degree of correlation between price movements in the index
and price movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly
or partially offsetting the negative effect of unfavorable price movements
in the investments being hedged. However, hedging strategies can also
reduce opportunity for gain by offsetting the positive effect of favorable
price movements in the hedged investments. For example, if a 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 Derivative Instrument. Moreover, if the price of the Derivative
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.
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(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 Derivative Instruments involving obligations to third
parties (i.e., Derivative Instruments other than purchased options). If a
Portfolio were unable to close out its positions in such Derivative
Instruments, it might be required to continue to maintain such assets or
accounts or make such payments until the 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 Derivative Instrument prior to expiration or maturity depends on the
existence of a liquid secondary market or, in the absence of such a market,
the ability and willingness of a contra party to enter into a transaction
closing out the position. Therefore, there is no assurance that any
position can be closed out at a time and price that is favorable to the
Portfolio.
COVER FOR STRATEGIES USING DERIVATIVES INSTRUMENTS. Transactions using
Derivative 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 liquid securities, with a value sufficient at all
times to cover its potential obligations to the extent not covered as provided
in (1) above. Each Portfolio will comply with SEC guidelines regarding cover
for such transactions and will, if the guidelines so require, set aside cash or
liquid securities in a segregated account with its custodian in the prescribed
amount.
Assets used as cover or held in a segregated account cannot be sold while the
position in the corresponding Derivative Instrument is open, unless they are
replaced with similar assets. As a result, 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, Strategic Income
Portfolio, High Income Portfolio, 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, Balanced Portfolio [and
Strategic Income Portfolio] may purchase options to enhance return by
increasing or reducing its exposure to an asset class without purchasing or
selling the underlying securities. Writing covered put or call options can
enable a 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.
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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.
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 a 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 board 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
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call options on securities and indices. In addition, Balanced Portfolio may
purchase or sell futures contracts or purchase options thereon to enhance
return by increasing or reducing its exposure to an asset class without
purchasing or selling the underlying 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.
Strategic Fixed Income, Strategic Income, High 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,
obligations of the United States or obligations fully guaranteed as to
principal and interest by the United States, in an amount generally equal to
10% or less of the contract value. Margin must also be deposited when writing
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
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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 volatility of the instruments and distort the normal price
relationship between the futures or options and the investments being hedged.
Also, because initial margin deposit requirements in the futures market are
less onerous than margin requirements in the securities markets, there might
be increased participation by speculators in the futures markets. This
participation also might cause temporary price distortions. In addition,
activities of large traders in both the futures and securities markets
involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.
LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS. The Portfolios' use
of futures is governed by the following guidelines, which can be changed by
the board without shareholder vote.
(1) To the extent a Portfolio enters into futures contracts, options on
futures contracts or options on foreign currencies traded 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. Portfolios that
may invest outside the United States 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 Derivative Instruments on that currency are
available or such Derivative Instruments are more expensive than certain other
Derivative Instruments. In such cases, a Portfolio may hedge against price
movements in that currency by entering into transactions using Derivative
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 Derivative 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 Derivative Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Derivative
Instruments, 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.
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There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Quotation information generally is representative of very large transactions
in the interbank market and thus might not reflect odd-lot transactions where
rates might be less favorable. The interbank market in foreign currencies is a
global, round-the-clock market. To the extent the U.S. options or futures
markets are closed while the markets for the underlying currencies remain
open, significant price and rate movements might take place in the underlying
markets that cannot be reflected in the markets for the Derivative Instruments
until they reopen.
Settlement of 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. Portfolios that may invest outside the United
States may enter into forward currency contracts to purchase or sell foreign
currencies for a fixed amount of U.S. dollars or another foreign currency.
Such transactions may serve as long hedges--for example, a 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 Strategic 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.
28
<PAGE>
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.
LIMITATIONS ON THE USE OF FORWARD CURRENCY CONTRACTS. Portfolios that may
invest outside the United States may enter into forward currency contracts or
maintain a net exposure to such contracts only if (1) the consummation of the
contracts would not obligate the 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. Portfolios that invest primarily in
bonds 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 applicable Sub-Adviser believe such obligations do
not constitute senior securities and, accordingly, will not treat them as being
subject to any 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 board. 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.
29
<PAGE>
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.
TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES
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**; 50 Trustee and President Mrs. Alexander is presi-
dent, chief executive of-
ficer and a director of
Mitchell Hutchins (since
January 1995) and an ex-
ecutive vice president
and director of
PaineWebber. Mrs. Alexan-
der is president and a
director or trustee of 28
investment companies for
which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
Richard Q. Armstrong; 62 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 andsparkling/still
waters) (October 1993-
March 1995). Mr. Arm-
strong was a partner of
The New England Consult-
ing 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, Louis 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 27 invest-
ment companies for which
Mitchell Hutchins or
PaineWebber serves as in-
vestment adviser.
E. Garrett Bewkes, Jr.**; 71 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
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
NAME AND ADDRESS*; AGE POSITION WITH THE FUND AND OTHER DIRECTORSHIPS
---------------------- ---------------------- -----------------------
<C> <C> <S>
Bakeries Company. Mr.
Bewkes is also a direc-
tor of Interstate Baker-
ies Corporation and
NaPro BioTherapeutics,
Inc. Mr. Bewkes is a di-
rector or trustee of 28
investment companies for
which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
Richard R. Burt; 50 Trustee Mr. Burt is chairman of
1101 Connecticut Avenue, International Equity
N.W. Partners (international
Washington, D.C. 20036 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 and
Archer-Daniels-Midland
Co. (agricultural com-
modities). 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 Federal Republic
of Germany (1985-1989).
Mr. Burt is a director
or trustee of 27 invest-
ment companies for which
Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Mary C. Farrell**; 47 Trustee Ms. Farrell is a managing
director, senior
investment strategist
and member of the In-
vestment Policy Commit-
tee of PaineWebber. Ms.
Farrell joined
PaineWebber in 1982. She
is a member of the Fi-
nancial Women's Associa-
tion and Women's Eco-
nomic Roundtable and ap-
pears as a regular pan-
elist on Wall $treet
Week with Louis
Rukeyser. She also
serves on the Board of
Overseers of New York
University's Stern
School of Business. Ms.
Farrell is a director or
trustee of 27 investment
companies for which
Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Meyer Feldberg; 55 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 K-III Communi-
cations Corporation,
Federated Department
Stores Inc., and Revlon,
Inc. Dean Feldberg is a
director or trustee of
27 investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment ad-
viser.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
NAME AND ADDRESS*; AGE POSITION WITH THE FUND AND OTHER DIRECTORSHIPS
---------------------- ---------------------- -----------------------
<C> <C> <S>
George W. Gowen; 68 Trustee Mr. Gowen is a partner
666 Third Avenue in the law firm of Dun-
New York, New York 10017 nington, Bartholow &
Miller. Prior to May
1994 he was a partner
in the law firm of Fry-
er, Ross & Gowen.
Mr. Gowen is also a di-
rector of Columbia Real
Estate Investments,
Inc. Mr. Gowen is a di-
rector or trustee of 27
investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Frederic V. Malek; 60 Trustee Mr. Malek is Chairman of
1455 Pennsylvania Avenue, N.W. Thayer Capital Partners
Suite 350 (merchant bank). From
Washington, D.C. 20004 January 1992 to Novem-
ber 1992 he was cam-
paign manager of Bush-
Quayle '92. From 1990
to 1992, he was vice
chairman and, from 1989
to 1990, he was presi-
dent of Northwest Air-
lines Inc., NWA Inc.
(holding company of
Northwest Airlines
Inc.) and Wings Hold-
ings Inc. (holding com-
pany of NWA Inc.).
Prior to 1989, he was
employed by the
Marriott Corporation
(hotels, restaurants,
airline catering and
contract feeding),
where he most recently
was an executive vice
president and president
of Marriott Hotels and
Resorts. Mr. Malek is
also a director of
American Management
Systems, Inc. (manage-
ment consulting and
computer related ser-
vices), Automatic Data
Processing, Inc., CB
Commercial Group, Inc.
(real estate services),
Choice Hotels Interna-
tional (hotel and hotel
franchising), FPL
Group, Inc. (electric
services), Integra,
Inc. (bio-medical),
Manor Care, Inc.
(health care), National
Education Corporation
and Northwest Airlines
Inc. Mr. Malek is a di-
rector or trustee of 27
investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Carl W. Schafer; 61 Trustee Mr. Schafer is president
P.O. Box 1164 of the Atlantic Founda-
Princeton, NJ 08542 tion (charitable foun-
dation supporting
mainly oceanographic
exploration and re-
search). He is a direc-
tor of Roadway Express,
Inc. (trucking), The
Guardian Group of Mu-
tual Funds, Evans Sys-
tems, Inc. (motor fu-
els, convenience store
and diversified compa-
ny), Electronic Clear-
ing House, Inc. (finan-
cial transactions
processing), Wainoco
Oil Corporation and
Nutraceutix
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
NAME AND ADDRESS*; AGE POSITION WITH THE FUND AND OTHER DIRECTORSHIPS
---------------------- ---------------------- -----------------------
<C> <C> <S>
Inc. (biotechnology com-
pany). Prior to January
1993, he was chairman of
the Investment Advisory
Committee of the Howard
Hughes Medical Institute.
Mr. Schafer is a director
or trustee of 27 invest-
ment companies for which
Mitchell Hutchins or
PaineWebber serves as in-
vestment adviser.
T. Kirkham Barneby; 50 Vice President Mr. Barneby is a managing
director and chief in-
vestment officer--quanti-
tative investment of
Mitchell Hutchins. Prior
to September 1994, he was
a senior vice president
at Vantage Global Manage-
ment. Prior to June 1993,
he was a senior vice
president at Mitchell
Hutchins. Mr. Barneby is
a vice president of five
investment companies for
which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
Ellen R. Harris; 51 Vice President Ms. Harris is a managing
director and a portfolio
manager of Mitchell
Hutchins. Ms. Harris is a
vice president of two in-
vestment companies for
which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
Donald R. Jones; 36 Vice President Mr. Jones is a first vice
president and a portfolio
manager of Mitchell
Hutchins. Prior to Febru-
ary 1996, he was a vice
president in the asset
management group of First
Fidelity Bancorporation.
Mr. Jones is a vice pres-
ident of two investment
companies for which
Mitchell Hutchins or
PaineWebber serves as in-
vestment adviser.
James F. Keegan; 36 Vice President Mr. Keegan is a senior
vice president and a
portfolio manager of
Mitchell Hutchins. Prior
to March 1996, he was di-
rector of fixed income
strategy and research of
Merrion Group, L.P. From
1987 to 1994, he was a
vice president of global
investment management of
Bankers Trust. Mr. Keegan
is a vice president of
three investment compa-
nies for which Mitchell
Hutchins or PaineWebber
serves as investment ad-
viser.
Thomas J. Libassi; 38 Vice President Mr. Libassi is a senior
vice president and a
portfolio manager of
Mitchell Hutchins. Prior
to May 1994, he was a
vice president of Key-
stone Custodian Funds
Inc. with portfolio man-
agement responsibility.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
NAME AND ADDRESS*; AGE POSITION WITH THE FUND AND OTHER DIRECTORSHIPS
---------------------- ---------------------- -----------------------
<C> <C> <S>
Mr. Libassi is a vice
president of five invest-
ment companies for which
Mitchell Hutchins or
PaineWebber serves as in-
vestment adviser.
Dennis McCauley; 51 Vice President Mr. McCauley is a managing
director and chief in-
vestment officer--fixed
income of Mitchell
Hutchins. Prior to Decem-
ber 1994, he was director
of fixed income
investments of IBM Corpo-
ration. Mr. McCauley is a
vice president of 18 in-
vestment companies for
which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
Ann E. Moran; 40 Vice President and Ms. Moran is a vice presi-
Assistant Treasurer dent and a manager of the
mutual fund finance divi-
sion of Mitchell
Hutchins. Ms. Moran is a
vice president and assis-
tant treasurer of 28 in-
vestment companies for
which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
Dianne E. O'Donnell; 45 Vice President and Ms. O'Donnell is a senior
Secretary vice president and deputy
general counsel of Mitch-
ell Hutchins. Ms.
O'Donnell is a vice pres-
ident and secretary of 27
investment companies and
vice president and assis-
tant secretary of one in-
vestment company for
which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
Emil Polito; 37 Vice President Mr. Polito is a senior
vice president and direc-
tor of operations and
control for Mitchell
Hutchins. From March 1991
to September 1993 he was
director of the mutual
funds sales support and
service center for Mitch-
ell Hutchins and
PaineWebber. Mr. Polito
is a vice president of 28
investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Susan Ryan; 37 Vice President Ms. Ryan is a senior vice
president of Mitchell
Hutchins. Ms. Ryan has
been with Mitchell
Hutchins since 1982.
Ms. Ryan is a vice presi-
dent of five investment
companies for which
Mitchell Hutchins or
PaineWebber serves as in-
vestment adviser.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
NAME AND ADDRESS*; AGE POSITION WITH THE FUND AND OTHER DIRECTORSHIPS
---------------------- ---------------------- -----------------------
<C> <C> <S>
Victoria E. Schonfeld; 46 Vice President Ms. Schonfeld is a managing
director and general coun-
sel of Mitchell Hutchins.
Prior to May 1994, she was
a partner in the law firm
of Arnold & Porter.
Ms. Schonfeld is a vice
president of 27 investment
companies and a vice presi-
dent and secretary of one
investment company for
which Mitchell Hutchins or
PaineWebber serves as in-
vestment adviser.
Paul H. Schubert; 34 Vice President and Mr. Schubert is a first vice
Treasurer president and the director
of the mutual fund finance
division of Mitchell
Hutchins. From August 1992
to August 1994, he was a
vice president at BlackRock
Financial Management Inc.
Prior to August 1992, he
was an audit manager with
Ernst & Young LLP. Mr.
Schubert is a vice presi-
dent and treasurer of 28
investment companies for
which Mitchell Hutchins or
PaineWebber serves as in-
vestment adviser.
Nirmal Singh; 41 Vice President Mr. Singh is a first vice
president and portfolio
manager of Mitchell
Hutchins. Prior to 1993, he
was a member of the portfo-
lio management team at Mer-
rill Lynch Asset Manage-
ment, Inc. Mr. Singh is a
vice president of five in-
vestment companies for
which Mitchell Hutchins or
PaineWebber serves as in-
vestment adviser.
Barney A. Taglialatela; 36 Vice President and Mr. Taglialatela is a vice
Assistant Treasurer president and a manager of
the mutual fund finance di-
vision of Mitchell
Hutchins. Prior to February
1995, he was a manager of
the mutual fund finance di-
vision of Kidder Peabody
Asset Management, Inc. Mr.
Taglialatela is a vice
president and assistant
treasurer of 28 investment
companies for which Mitch-
ell Hutchins or PaineWebber
serves as investment advis-
er.
Mark A. Tincher; 41 Vice President Mr. Tincher is a managing
director and chief invest-
ment officer--equities of
Mitchell Hutchins. Prior to
March 1995, he was a
vice president and directed
the U.S. funds management
and equity research areas
of Chase Manhattan Private
Bank. Mr. Tincher is a vice
president of 13 investment
companies for which Mitch-
ell Hutchins or PaineWebber
serves as investment advis-
er.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
NAME AND ADDRESS*; AGE POSITION WITH THE FUND AND OTHER DIRECTORSHIPS
---------------------- ---------------------- -----------------------
<C> <C> <S>
Craig M. Varrelman; 38 Vice President Mr. Varrelman is a first vice
president and a portfolio man-
ager of Mitchell Hutchins. Mr.
Varrelman is a vice president
of five investment companies
for which Mitchell Hutchins or
PaineWebber serves as invest-
ment adviser.
Stuart Waugh; 42 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 a vice president
of five investment companies
for which Mitchell Hutchins or
PaineWebber serves as invest-
ment adviser.
Keith A. Weller; 36 Vice President and Mr. Weller is a first vice pres-
Assistant Secretary ident and associate general
counsel of Mitchell Hutchins.
Prior to May 1995, he was an
attorney in private practice.
Mr. Weller is a vice president
and assistant secretary of 28
investment companies for which
Mitchell Hutchins or
PaineWebber serves as invest-
ment adviser.
Ian W. Williams; 40 Vice President and Mr. Williams is a vice president
Assistant Treasurer and a manager of the mutual
fund finance division of Mitch-
ell Hutchins. Prior to June
1992, he was an audit senior
accountant with Price
Waterhouse LLP. Mr. Williams is
a vice president and assistant
treasurer of 28 investment com-
panies for which Mitchell
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 1940 Act by virtue of their positions with Mitchell
Hutchins, PaineWebber and/or PW Group.
The Fund pays trustees who are not "interested persons" of the Fund $500
annually for each Portfolio and $150 for each board meeting and for each
separate meeting of a board committee. The Fund presently has 13 Portfolios and
thus pays each such trustee $6,500 annually, plus any additional amounts due
for board or committee meetings. Each chairman of the audit and contract review
committees of individual funds within the PaineWebber fund complex receives
additional compensation aggregating $15,000 annually from the relevant funds.
All 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.
36
<PAGE>
The table below includes certain information relating to the compensation of
the Fund's current trustees who held office with the Fund or other PaineWebber
funds during the fiscal year ended December 31, 1997.
COMPENSATION TABLE+
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM THE TRUST AND
NAME OF PERSON, POSITION FROM THE TRUST* THE FUND COMPLEX**
------------------------ --------------- ------------------
<S> <C> <C>
Richard Q. Armstrong,
Trustee................................... $ $
Richard R. Burt,
Trustee...................................
Meyer Feldberg,
Trustee...................................
George W. Gowen,
Trustee...................................
Frederic V. Malek,
Trustee...................................
Carl W. Schafer,
Trustee...................................
</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, 1997.
** Represents total compensation paid to each trustee by the fund complex
during the twelve months ended December 31, 1997; no fund within the complex
has a bonus, pension, profit sharing or retirement plan.
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, September
1, 1993 and February , 1998 ("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, 1997,
Mitchell Hutchins earned (or accrued) advisory fees (net of any waivers) in the
amounts set forth below for the Portfolios that had operations:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
PORTFOLIO 1997 1996 1995
- --------- ---- -------- --------
<S> <C> <C> <C>
Money Market Portfolio................................... $ $ 79,283 $128,777
High Grade Fixed Income Portfolio........................ 44,461 48,852
Strategic Fixed Income Portfolio......................... 62,785 90,046
Global Income Portfolio.................................. 230,262 351,681
Balanced Portfolio....................................... 249,995 110,377
Growth and Income Portfolio.............................. 111,599 94,315
Growth Portfolio......................................... 325,065 334,603
Aggressive Growth Portfolio.............................. 155,896 133,956
Global Growth Portfolio.................................. 198,128 257,692
</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
37
<PAGE>
Investment Management Company ("PIMCO") serves as Sub-Adviser to Strategic
Fixed Income Portfolio and was paid (or accrued) by Mitchell Hutchins (not the
Portfolio) sub-advisory fees of , $31,393 and $11,324 for the fiscal years
ended December 31, 1997, December 31, 1996 and December 31, 1995, respectively.
Under a Sub-Advisory Contract dated September 1, 1993, Nicholas-Applegate
Capital Management serves as Sub-Adviser to Aggressive Growth Portfolio and was
paid (or accrued) by Mitchell Hutchins (not the Portfolio) sub-advisory fees of
, $97,434 and $83,723 for the fiscal years ended December 31, 1997, December
31, 1996 and December 31, 1995, respectively. Under a Sub-Advisory Contract
dated March 23, 1995, GE Investment Management Incorporated serves as Sub-
Adviser to Global Growth Portfolio and was paid (or accrued) by Mitchell
Hutchins (not the Portfolio) sub-advisory fees of , $76,609 and $74,893 for
the fiscal years ended December 31, 1997, December 31, 1996 and December 31,
1995, respectively.
Under a Sub-Advisory Contract dated September 1, 1993, Wolf, Webb, Burk &
Campbell served as Sub-Adviser to High Grade Fixed Income Portfolio until July
21, 1995 and was paid (or accrued) by Mitchell Hutchins (not the Portfolio)
sub-advisory fees of $15,832 for the fiscal year ended December 31, 1995. Under
a Sub-Advisory Contract dated May 26, 1994, Mitchell Hutchins Institutional
Investors Inc. served as Sub-Adviser to Growth and Income Portfolio until April
3, 1995 and was paid (or accrued) by Mitchell Hutchins (not the Portfolio) sub-
advisory fees of $7,400 for the fiscal year ended December 31, 1995.
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 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
38
<PAGE>
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.
Mitchell Hutchins personnel may invest in securities for their own accounts
pursuant to a code of ethics that describes the fiduciary duty owed to
shareholders of the PaineWebber funds and other Mitchell Hutchins' advisory
accounts by all Mitchell Hutchins' directors, officers and employees,
establishes procedures for personal investing and restricts certain
transactions. For example, employee accounts generally must be maintained at
PaineWebber, personal trades in most securities require pre-clearance and
short-term trading and participation in initial public offerings generally are
prohibited. In addition, the code of ethics puts restrictions on the timing of
personal investing in relation to trades by PaineWebber funds and other
Mitchell Hutchins advisory clients.
Personnel of each Sub-Adviser also may invest in securities for their own
accounts pursuant to the applicable Sub-Adviser's code of ethics, which
establishes procedures for personal investing and restricts certain
transactions.
PORTFOLIO TRANSACTIONS
Subject to policies established by the board, 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.
39
<PAGE>
During each of the three years in the period ended December 31, 1997, the
Portfolios that had operations paid the brokerage commissions set forth below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
PORTFOLIO 1997 1996 1995
- --------- -------------------- ------------
<S> <C> <C> <C>
Money Market Portfolio....................... $ $ 0 $ 0
High Grade Fixed Income Portfolio............ 0 0
Strategic Fixed Income Portfolio............. 2,729 0
Global Income Portfolio...................... 0 0
Balanced Portfolio........................... 65,857 39,766
Growth and Income Portfolio.................. 31,792 34,846
Growth Portfolio............................. 33,885 52,967
Aggressive Growth Portfolio.................. 53,904 57,802
Global Growth Portfolio...................... 78,261 341,107
</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, 1997, the Portfolios that had operations
paid to PaineWebber the brokerage commissions set forth below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
PORTFOLIO 1997 1996 1995
- --------- --------------------- -----------
<S> <C> <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........................... 1,320 504
Growth and Income Portfolio.................. 852 1,400
Growth Portfolio............................. 300 900
Aggressive Growth Portfolio.................. 186 0
Global Growth Portfolio...................... 0 0
</TABLE>
The $ in brokerage commissions paid by Growth Portfolio to PaineWebber
during the fiscal year ended December 31, 1997 represented % of the aggregate
brokerage commissions paid by that Portfolio and % of the aggregate dollar
amount of transactions involving the payment of commissions. The $ in
brokerage commissions paid by Balanced Portfolio to PaineWebber during the
fiscal year ended December 31, 1997 represented % of the aggregate brokerage
commissions paid by that Portfolio and % of the aggregate dollar amount of
transactions involving the payment of commissions. The $ in brokerage
commissions paid by Growth and Income Portfolio to PaineWebber during the
fiscal year ended December 31, 1997 represented % of the aggregate brokerage
commissions paid by that Portfolio and % of the aggregate dollar amount of
transactions involving the payment of commissions. The $ in brokerage
commissions paid by Aggressive Growth Portfolio to PaineWebber during the
fiscal year ended December 31, 1997 represented % of the aggregate brokerage
commissions paid by that Portfolio and % of the aggregate dollar amount of
transactions involving the payment of commissions.
40
<PAGE>
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, 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 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, 1997, the
Portfolios that had operations 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..................... $ $
High Grade Fixed Income Portfolio.......... $ $
Strategic Fixed Income Portfolio........... $ $
Global Income Portfolio.................... $ $
Balanced Portfolio......................... $ $
Growth and Income Portfolio................ $ $
Growth Portfolio........................... $ $
Aggressive Growth Portfolio................ $ $
Global Growth Portfolio.................... $ $
</TABLE>
For purchases or sales with broker-dealer firms that 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
41
<PAGE>
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 pursuant to Rule 10f-3 under the 1940
Act. 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, 1997 and December 31, 1996, respectively, the portfolio turnover
rates were as set forth below:
<TABLE>
<CAPTION>
PORTFOLIO TURNOVER RATES
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
PORTFOLIO 1997 1996
- --------- ---- ----
<S> <C> <C>
Money Market Portfolio............................. n/a
High Grade Fixed Income Portfolio.................. 282%
Strategic Fixed Income Portfolio................... 317%
Global Income Portfolio............................ 134%
Balanced Portfolio................................. 235%
Growth and Income Portfolio........................ 99%
Growth Portfolio................................... 53%
Aggressive Growth Portfolio........................ 115%
Global Growth Portfolio............................ 44%
</TABLE>
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 ("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, Martin Luther King, Jr. 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 regular trading (currently 4:00 p.m., Eastern time) on the NYSE 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
42
<PAGE>
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 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 the
Nasdaq Stock Market ("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 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 board 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 board.
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. In valuing thinly traded securities
and lower rated corporate bonds, it should be recognized that judgment often
plays a greater role than is the case with respect to securities for which a
broader range of dealer quotations and last-sale information is available.
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 regular trading on 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 conducted on
a spot (that is, cash) basis for the Portfolios that invest outside the United
States 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.
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
43
<PAGE>
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 board has established procedures for the purpose of maintaining a
constant net asset value of $1.00 per share for 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. 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 (as calculated under Rule 2a-7) and except that securities subject to
repurchase agreements may have maturities in excess of 13 months, will limit
portfolio investments, including repurchase agreements, to those U.S. dollar-
denominated instruments that are of high quality and that the trustees
determine present minimal credit risks as advised by Mitchell Hutchins and
will comply with certain reporting and recordkeeping procedures. There is no
assurance that constant net asset 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.
TAXES
Shares of the Portfolios are offered only to insurance company separate
accounts that fund benefits under the 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 qualify or 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) 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 (3) 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.
44
<PAGE>
As noted in the Prospectus, each Portfolio intends to comply or continue to
comply with the diversification requirements imposed on it 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 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 amount, character and timing of recognition of the gains and losses a
Portfolio realizes in connection therewith. Gains from the disposition of
foreign currencies (except certain gains therefrom that may be excluded by
future regulations), and gains from 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.
Dividends and interest received by a Portfolio, and gains realized thereby,
may be subject to income, withholding or other taxes imposed by foreign
countries and U.S. possessions that would reduce the yield and/or total return
on its 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 the
stock of "passive foreign investment companies" ("PFICs"). A PFIC is a foreign
corporation--other than a "controlled foreign corporation" (i.e., a foreign
corporation in which, on any day during its taxable year, more than 50% of the
total voting power of all voting stock therein or the total value of all stock
therein is owned, directly, indirectly, or constructively, by "U.S.
shareholders," defined as U.S. persons that individually own, directly,
indirectly, or constructively, at least 10% of that voting power) as to which a
Portfolio is a U.S. shareholder --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 will be subject to
federal income tax on a portion of any "excess distribution" received on the
stock of a PFIC or of any gain from disposition of such 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 each 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" ("QEF"), then in lieu of the foregoing tax and interest
obligation, the Portfolio would be required to include in income each year its
pro rata share of the QEF's annual ordinary earnings and net capital gain (the
excess of net long-term capital gain over net short-term capital loss)--which
most likely would have to be distributed to the Portfolio's shareholders to
satisfy the Distribution Requirement--even if those earnings and gain were not
distributed to the Portfolio by the QEF. In most instances it will be very
difficult, if not impossible, to make this election because of certain
requirements thereof.
Each Portfolio may elect to "mark-to-market" its stock in any PFIC. "Marking-
to-market," in this context, means including in ordinary income each taxable
year the excess, if any, of the fair market value of a PFIC's stock over a
Portfolio's adjusted basis therein as of the end of that year. Pursuant to the
election, a Portfolio also would be allowed to deduct (as an ordinary, not
capital, loss) the excess, if any, of its adjusted basis in PFIC stock over the
fair market value thereof as of the taxable year-end, by only to the extent of
any net mark-to-market gains with respect to that stock included by the
Portfolio for prior taxable years. A Portfolio's adjusted basis in each PFIC's
stock with respect to which it makes this election will be adjusted to
45
<PAGE>
reflect the amounts of income included and deductions taken under the election.
Regulations proposed in 1992 would provide a similar election with respect to
the stock of certain PFICs.
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.
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
Portfolio's 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 board may revise the above dividend policy, or postpone the payment of
dividends, if the Portfolio has or anticipates 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 to take any such action.
OTHER INFORMATION
Prior to August 14, 1995, the name of Growth and Income Portfolio was
"Dividend Growth Portfolio." Prior to September 21, 1995, the name of Strategic
Fixed Income Portfolio was "Government Portfolio" and the name of High Grade
Fixed Income Portfolio was "Fixed Income Portfolio." Prior to January 26, 1996,
the name of Balanced Portfolio was "Asset Allocation Portfolio." Prior to
November 19, 1997, the Fund was known as "PaineWebber Series Trust."
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 board intends 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 Money Market, Strategic Fixed
Income, Global Income, Balanced, Growth and Income, Growth and Global Growth
Portfolios is, at the date of this Statement of Additional Information, 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
46
<PAGE>
[99%] of the outstanding shares of High Grade Fixed Income and Aggressive
Growth Portfolios is, at the date of this Statement of Additional Information,
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, serves as counsel to the Fund.
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.
FINANCIAL STATEMENTS
The Fund's Annual Report to shareholders for the fiscal year ended December
31, 1997 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 (or supporting institutions) have a superior
ability for repayment of senior short-term debt 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 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may 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 (or supporting institutions) have an acceptable ability
for repayment of senior short-term obligations. The effect of industry
characteristics and market composition may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt
protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained. Not Prime. Issuers assigned this
rating do not fall within any of the Prime rating categories.
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market. Ratings
are graded into several categories, ranging from "A-1" for the highest quality
obligations to "D" for the lowest. These categories are as follows: A-1. This
highest rating category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation. A-2. Capacity for
timely payment on issues with this designation is satisfactory. However, the
relative degree of safety is not as high as for issues designated "A-1." A-3.
Issues carrying this designation have adequate capacity for timely payment.
They are, however, 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 speculative capacity for timely payment.
C. This rating is assigned to short-term debt obligations with a doubtful
capacity for payment. D. Debt rated "D" is in payment default. The "D" rating
category is used when interest payments or principal payments are not made on
the date due, even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period.
47
<PAGE>
APPENDIX
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues; Aa. Bonds which are
rated Aa are judged to be of high quality by all standards. Together with the
Aaa group they comprise what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the long
term risks appear somewhat larger than in Aaa securities; A. Bonds which are
rated A possess many favorable investment attributes and are to be considered
as upper medium grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future; Baa. Bonds which are rated
Baa are considered as medium grade obligations, (i.e., they are neither highly
protected nor poorly secured). Interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well; Ba. Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class; B. Bonds which are
rated B generally lack characteristics of the desirable investment. Assurance
of interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small; Caa. Bonds which are rated
Caa are of poor standing. Such issues may be in default or there may be present
elements of danger with respect to principal or interest; Ca. Bonds which are
rated Ca represent obligations which are speculative in a high degree. Such
issues are often in default or have other marked shortcomings; C. Bonds which
are rated C are the lowest rated class of bonds and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from "AA" to "B." The modifier 1 indicates that the company
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 company
ranks in the lower end of its generic rating category.
DESCRIPTION OF S&P CORPORATE DEBT RATINGS
AAA. An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong; AA. An obligation rated AA differs from the higher rated
issues only in small degree. The obligor's ability to meet its financial
commitment on the obligation is very strong; A. An obligation rated A is
somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than obligations in higher rated categories. However,
the obligor's capacity to meet its financial commitment on the obligation is
still strong; BBB. An obligation rated BBB exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation; BB, B, CCC, CC, C. Obligations rated BB, B, CCC,
CC and C are regarded as having significant speculative characteristics. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse conditions; BB.
An obligation rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation; B. An
obligation rated B is more vulnerable to nonpayment
48
<PAGE>
than obligations rated BB, but the obligor currently has the capacity to meet
its financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation; CCC. An obligation rated CCC
is currently vulnerable to nonpayment and is dependent upon favorable business,
financial and economic conditions for the obligor to meet its financial
commitments on the obligation. In the event of adverse business, financial, or
economic conditions, the obligor is not likely to have the capacity to meet its
financial commitment on the obligation; CC. An obligation rated CC is currently
highly vulnerable to nonpayment; C. The C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action has been
taken, but payments on this obligation are being continued; D. An obligation
rated D is in payment default. The D rating category is used when payments on
an obligation are not made on the date due even if the applicable grace period
has not expired, unless S&P believes that such payments will be made during
such grace period. The D rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
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.
49
<PAGE>
PART C. OTHER INFORMATION
--------------------------
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements (to be filed):
Included in Part A of this Registration Statement:
- --------------------------------------------------
Financial Highlights for each of Global Growth Portfolio, Growth Portfolio
and Money Market Portfolio for each of the ten years in the period ended
December 31, 1997.
Financial Highlights for Global Income Portfolio for each of the nine years
in the period ended December 31, 1997 and for the period May 1, 1988
(commencement of operations) to December 31, 1988.
Financial Highlights for Balanced Portfolio for each of the nine years in the
period ended December 31, 1997 and for the period June 1, 1988 (commencement
of operations) to December 31, 1988.
Financial Highlights for Strategic Fixed Income Portfolio for each of the
eight years in the period ended December 31, 1997 and for the period July 5,
1989 (commencement of operations) to December 31, 1989.
Financial Highlights for Growth and Income Portfolio for each of the five
years in the period ended December 31, 1997 and for the period January 2,
1992 (commencement of operations) to December 31, 1992.
Financial Highlights for Aggressive Growth Portfolio for each of the four
years in the period ended December 31, 1997 and for the period November 2,
1993 (commencement of operations) to December 31, 1993.
Financial Highlights for High Grade Fixed Income Portfolio for each of the
four years in the period ended December 31, 1997 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 , 1998,
- -------------------------------------------------------------------------
Accession No. :
- -----------------------
Portfolio of Investments at December 31, 1997
Statement of Assets and Liabilities at December 31, 1997
Statement of Operations for the year ended December 31, 1997
Statement of Changes in Net Assets for each of the two years in the period
ended December 31, 1997
Notes to Financial Statements
Financial Highlights for each of the five years in the period ended December
31, 1997 for Balanced Portfolio, Global Growth Portfolio, Global Income
Portfolio, Growth Portfolio, Growth and Income Portfolio, Money Market and
Strategic Fixed Income Portfolio.
Financial Highlights for each of the four years in the period ended December
31, 1997 and for the period November 2, 1993 (commencement of operations) to
December 31, 1993 for Aggressive Growth Portfolio.
C-1
<PAGE>
Financial Highlights for each of the four years in the period ended December
31, 1997 and for the period November 8, 1993 (commencement of operations) to
December 31, 1993 for High Grade Fixed Income Portfolio.
Report of Ernst & Young LLP, Independent Auditors, dated February ,
1998.
(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 16/
--
(i) Amendment effective May 29, 1997 to Declaration of Trust (to be filed)
(j) Amendment effective November 12, 1997 to Declaration of Trust
(to be filed)
(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
Strategic Fixed Income Portfolio 6/
-
(b) Investment Advisory and Administration Fee Agreement with respect to
Growth and Income Portfolio 9/
-
(c) Investment Advisory and Administration Fee Agreement with respect to
High Grade Fixed Income Portfolio 12/
--
(d) Investment Advisory and Administration Fee Agreement with respect to
Balanced Portfolio 12/
--
(e) Investment Advisory and Administration Fee Agreement with respect to
Aggressive Growth Portfolio 12/
--
(f) Investment Advisory and Administration Fee Agreement with respect to
High Income Portfolio, Small Cap Portfolio, Strategic Income
Portfolio and Tactical Allocation Portfolio (to be filed)
(g) Sub-Investment Advisory Contract with respect to the Aggressive Growth
Portfolio 11/
--
(h) Sub-Advisory Agreement with respect to the Global Growth Portfolio 16/
--
(i) Sub-Advisory Agreement with respect to the Strategic Fixed Income
Portfolio 16/
--
(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 Money Market Portfolio and Growth Portfolio 2/
-
(b) Addendum to Custodian Agreement with State Street Bank and Trust
Company for addition of Balanced Portfolio 5/
-
(c) Amendment to Custodian Agreement with State Street Bank and Trust
Company for addition of Strategic Fixed Income Portfolio 6/
-
(d) Addendum to Custodian Agreement with State Street Bank and Trust
Company for addition of Growth and Income Portfolio 9/
-
(e) Addendum to Custodian Agreement with State Street Bank and Trust
Company for addition of Global Growth Portfolio 16/
--
(f) Custodian Agreement with Brown Brothers Harriman & Co. with respect
to the assets of Global Income Portfolio 5/
-
(g) Addendum to Custodian Agreement with State Street Bank and Trust
Company for addition of High Income Portfolio, Small Cap Portfolio,
Strategic Income Portfolio and Tactical Allocation Portfolio
(to be filed)
C-2
<PAGE>
(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 Growth and Income Portfolio 8/
-
(c) Opinion and Consent of Kirkpatrick & Lockhart LLP with respect
to High Grade Fixed Income Portfolio and Aggressive Growth
Portfolio 10/
--
(d) Opinion and Consent of Kirkpatrick & Lockhart LLP with respect
to High Income Portfolio, Small Cap Portfolio, Strategic
Income Portfolio and Tactical Allocation Portfolio (to be filed)
(11) Other opinions, appraisals, rulings and consents:
(a) Independent Auditors' Consent (to be filed)
(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 (to be filed)
(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, 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.
C-3
<PAGE>
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.
16/ Incorporated by reference to Post-Effective Amendment No. 23, SEC File No.
- --
10438, filed May 1, 1996.
Item 25. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------
As of December 15, 1997, more than 99% of the outstanding shares of
beneficial interest of each of the nine operating portfolios of the Registrant
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 Fixed Income,
Balanced and Aggressive Growth Portfolios is, at the date of this Prospectus,
owned by 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
-------------------------------
Title of Class of Shares Number of Record Holders
------------------------ ------------------------
of Beneficial Interest as of December 15, 1997
---------------------- ------------------------
Money Market Portfolio 4
Global Growth Portfolio 4
Growth Portfolio 4
Balanced Portfolio 4
Global Income Portfolio 4
Strategic Income Portfolio 4
Growth and Income Portfolio 4
High Grade Fixed Income Portfolio 2
Aggressive Growth Portfolio 2
High Income Portfolio 0
Small Cap Portfolio 0
Strategic Income Portfolio 0
Tactical Allocation Portfolio 0
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
C-4
<PAGE>
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.
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-5
<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.
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-6
<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 16/
--
(i) Amendment effective May 29, 1997 to Declaration of Trust (to be filed)
(j) Amendment effective November 12, 1997 to Declaration of Trust
(to be filed)
(8) (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
Strategic Fixed Income Portfolio 6/
-
(b) Investment Advisory and Administration Fee Agreement with respect to
Growth and Income Portfolio 9/
-
(c) Investment Advisory and Administration Fee Agreement with respect to
High Grade Fixed Income Portfolio 12/
--
(d) Investment Advisory and Administration Fee Agreement with respect to
Balanced Portfolio 12/
--
(e) Investment Advisory and Administration Fee Agreement with respect to
Aggressive Growth Portfolio 12/
--
(f) Investment Advisory and Administration Fee Agreement with respect to
High Income Portfolio, Small Cap Portfolio, Strategic Income
Portfolio and Tactical Allocation Portfolio (to be filed)
(g) Sub-Investment Advisory Contract with respect to the Aggressive Growth
Portfolio 11/
--
(h) Sub-Advisory Agreement with respect to the Global Growth Portfolio 16/
--
(i) Sub-Advisory Agreement with respect to the Strategic Fixed Income
Portfolio 16/
--
(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 Money Market Portfolio and Growth Portfolio 2/
-
(b) Addendum to Custodian Agreement with State Street Bank and Trust
Company for addition of Balanced Portfolio 5/
-
(c) Amendment to Custodian Agreement with State Street Bank and Trust
Company for addition of Strategic Fixed Income Portfolio 6/
-
(d) Addendum to Custodian Agreement with State Street Bank and Trust
Company for addition of Growth and Income Portfolio 9/
-
(e) Addendum to Custodian Agreement with State Street Bank and Trust
Company for addition of Global Growth Portfolio 16/
--
(f) Custodian Agreement with Brown Brothers Harriman & Co. with respect
to the assets of Global Income Portfolio 5/
-
(g) Addendum to Custodian Agreement with State Street Bank and Trust
Company for addition of Small Cap Portfolio, Strategic Income
Portfolio and Tactical Allocation Portfolio (to be filed)
(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
Growth and Income Portfolio 8/
-
C-7
<PAGE>
(c) Opinion and Consent of Kirkpatrick & Lockhart LLP with respect to High
Grade Fixed Income Portfolio and Aggressive Growth Portfolio 10/
--
(d) Opinion and Consent of Kirkpatrick & Lockhart LLP with respect to High
Income Portfolio, Small Cap Portfolio, Strategic Income Portfolio and
Tactical Allocation Portfolio (to be filed)
(11) Other opinions, appraisals, rulings and consents:
(a) Independent Auditors' Consent (to be filed)
(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 (to be filed)
(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, 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.
C-8
<PAGE>
15/ Incorporated by reference to Post-Effective Amendment No. 21, SEC File No.
- --
33-10438, filed September 1, 1995.
16/ Incorporated by reference to Post-Effective Amendment No. 23, SEC File No.
- --
10438, filed May 1, 1996.
C-9
<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 its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York and State of New
York, on the 15th day of December, 1997.
MITCHELL HUTCHINS 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 December 15, 1997
Margo N. Alexander * (Chief Executive Officer)
/s/ E. Garrett Bewkes, Jr.
- -------------------------------------------- Trustee and Chairman December 15, 1997
E. Garrett Bewkes, Jr. * of the Board of Trustees
/s/ Richard Q. Armstrong
- -------------------------------------------- Trustee December 15, 1997
Richard Q. Armstrong *
/s/ Richard R. Burt
- -------------------------------------------- Trustee December 15, 1997
Richard R. Burt *
/s/ Mary C. Farrell
- -------------------------------------------- Trustee December 15, 1997
Mary C. Farrell *
/s/ Meyer Feldberg
- -------------------------------------------- Trustee December 15, 1997
Meyer Feldberg *
/s/ George W. Gowen
- -------------------------------------------- Trustee December 15, 1997
George W. Gowen *
/s/ Frederic V. Malek
- -------------------------------------------- Trustee December 15, 1997
Frederic V. Malek *
/s/ Carl W. Schafer
- -------------------------------------------- Trustee December 15, 1997
Carl W. Schafer *
/s/ Paul H. Schubert
- -------------------------------------------- Vice President and Treasurer (Chief December 15, 1997
Paul H. Schubert Financial and Accounting Officer)
</TABLE>
10
<PAGE>
SIGNATURES (CONTINUED)
* Signature affixed by Elinor W. Gammon pursuant to powers of attorney dated
May 21, 1996 and incorporated by reference from Post-Effective Amendment
No. 30 to the registration statement of PaineWebber Managed Municipal
Trust, SEC File 2-89016, filed June 27, 1996.
