<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. Class H
and Class I shares of each Portfolio are offered only to insurance company
separate accounts that fund benefits under variable annuity contracts and/or
variable life insurance contracts ("Contracts"). High Income Portfolio,
Strategic Income Portfolio, Tactical Allocation Portfolio and Small Cap
Portfolio are newly organized and have no operating histories.
* 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 Standard and Poor's 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 May 1, 1998
(which is incorporated by reference herein) has been filed with the Securities
and Exchange Commission ("SEC" or "Commission"). The Statement of Additional
Information can be obtained without charge and further inquiries can be made by
contacting the Fund or by calling toll free 1-800-986-0088. In addition, the
Commission maintains a website (http://www.sec.gov) that contains the Statement
of Additional Information, material incorporated by reference and other
information regarding registrants that file electronically with the Commission.
STRATEGIC INCOME PORTFOLIO AND HIGH INCOME PORTFOLIO MAY INVEST WITHOUT LIMIT
IN HIGH YIELD, HIGH RISK BONDS, COMMONLY KNOWN AS "JUNK BONDS." BONDS OF THIS
TYPE ARE CONSIDERED SPECULATIVE WITH RESPECT TO THE PAYMENT OF INTEREST AND
RETURN OF PRINCIPAL. INVESTORS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED
WITH INVESTMENTS IN THESE FUNDS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 1998.
MH 1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Financial Highlights...................................................... MH 3
Offering of Fund Shares................................................... MH 12
Investment Objectives and Policies........................................ MH 12
Description of Securities, Related Risks and Investment Techniques........ MH 20
Purchases, Redemptions and Exchanges...................................... MH 30
Dividends, Other Distributions and Federal Income Tax..................... MH 30
Valuation of Shares....................................................... MH 32
Management................................................................ MH 32
General Information....................................................... MH 37
Appendix.................................................................. MH 38
</TABLE>
MH 2
<PAGE>
FINANCIAL HIGHLIGHTS
The tables below provide data and ratios for one Class H share of each
Portfolio that had operations during the periods shown. The Portfolios had no
Class I shares outstanding 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. 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.
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 shown below for the Portfolios' Class H shares should not be
considered indicative of the results the Class I shares would have achieved
had they been outstanding during these periods. The Portfolios' Class H shares
are not subject to any distribution fees. Because Class I shares will be
subject to a distribution fee at the annual rate of 0.25% of each Portfolio's
average daily net assets attributable to Class I shares, the ongoing expenses
for Class I shares of a Portfolio will be higher than those for its Class H
shares, and the investment returns for Class I shares are expected to be lower
than those for Class H shares of the same Portfolio.
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 Contract 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 $ 1.00
------ ------- ------- ------- ------- ------- ------- ------ ------ ------
Net investment income... 0.04 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) (0.04) (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 $ 1.00
====== ======= ======= ======= ======= ======= ======= ====== ====== ======
Total investment return
(1).................... 4.53% 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)......... $8,906 $12,287 $21,974 $25,042 $15,468 $19,383 $20,249 $8,720 $4,367 $3,278
Expenses to average net
assets*................ 1.22% 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*.... 4.43% 4.27% 5.23% 3.56% 2.43% 3.13% 4.92% 6.13% 7.62% 5.74%
</TABLE>
- -------
* During certain periods presented above, Mitchell Hutchins Asset Management
Inc. ("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% and 2.36% and 4.94%, respectively, for the years ending December 31,
1990, 1989 and 1988.
(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.
MH 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........................ $ 9.10 $ 9.49 $ 8.71 $ 9.61 $10.00
------ ------ ------ ------ ------
Net investment income ......... 0.55 0.50 0.56 0.26 0.02
Net realized and unrealized
gains (losses) from
investments................... 0.19 (0.63) 0.79 (0.89) (0.39)
------ ------ ------ ------ ------
Net increase (decrease) from
investment operations......... 0.74 0.13 1.35 (0.63) (0.37)
------ ------ ------ ------ ------
Dividends from net investment
income........................ (0.55) (0.52) (0.57) (0.27) (0.02)
------ ------ ------ ------ ------
Net asset value, end of period. $ 9.29 $ 9.10 $ 9.49 $ 8.71 $ 9.61
====== ====== ====== ====== ======
Total investment return (1).... 8.13% 1.41% 15.44% (6.56)% (3.73)%
====== ====== ====== ====== ======
Ratios/Supplemental Data:
Net assets, end of period
(000's)....................... $7,345 $7,902 $9,147 $7,638 $1,480
Expenses to average net
assets**...................... 1.43% 1.62% 1.01% 1.56% 0.00%
Net investment income to
average net assets**.......... 5.54% 5.04% 5.56% 4.61% 3.90%*
Portfolio turnover rate........ 95% 282% 136% 36% 0%
</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 other
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 has not been annualized.
MH 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.... $10.21 $ 10.61 $ 10.34 $ 11.93 $ 11.58 $ 11.61 $ 10.49 $10.17 $10.00
------ ------- ------- ------- ------- ------- ------- ------ ------
Net investment income... 0.69 0.70 0.88 0.85 0.87 0.74 0.47 0.45 0.10
Net realized and
unrealized gains
(losses) from
investments............ 0.44 (1.09) 1.03 (1.49) 0.48 0.05 1.12 0.32 0.17
------ ------- ------- ------- ------- ------- ------- ------ ------
Net increase (decrease)
from investment
operations............. 1.13 0.39 1.91 (0.64) 1.35 0.79 1.59 0.77 0.27
------ ------- ------- ------- ------- ------- ------- ------ ------
Dividends from net
investment income...... (0.70) (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
other distributions.... (0.70) (0.79) (1.64) (0.95) (1.00) (0.82) (0.47) (0.45) (0.10)
------ ------- ------- ------- ------- ------- ------- ------ ------
Net asset value, end of
period................. $10.64 $ 10.21 $ 10.61 $ 10.34 $ 11.93 $ 11.58 $ 11.61 $10.49 $10.17
====== ======= ======= ======= ======= ======= ======= ====== ======
Total investment return
(1).................... 11.00% 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)......... $9,891 $10,689 $13,741 $17,020 $22,354 $24,103 $15,690 $5,192 $1,294
Expenses to average net
assets**............... 1.00% 1.52% 0.99% 0.89% 0.79% 0.76% 1.25% 1.55% 1.55%*
Net investment income to
average
net assets**........... 6.04% 5.88% 6.35% 6.64% 6.13% 6.59% 6.43% 6.80% 6.17%*
Portfolio turnover rate. 175% 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 other
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 has not been annualized.
MH 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.... $ 11.14 $ 11.20 $ 10.88 $ 11.72 $ 11.17 $ 11.65 $ 11.16 $ 10.19 $10.67 $10.00
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Net investment income
(loss)................. 0.75 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............ (0.36) (0.13) 1.52 (1.60) 0.90 (0.65) 0.40 1.00 (0.22) 0.39
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Net increase (decrease)
from investment
operations............. 0.39 0.74 1.47 (0.63) 1.86 0.15 1.15 1.52 0.72 0.67
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Dividends from net
investment income...... (0.71) (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 from
investments............ (0.01) (0.01) -- -- (0.21) (0.07) (0.01) (0.03) (0.14) --
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total dividends and
other distributions.... (0.72) (0.80) (1.15) (0.21) (1.31) (0.63) (0.66) (0.55) (1.20) --
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Net asset value, end of
period................. $ 10.81 $ 11.14 $ 11.20 $ 10.88 $ 11.72 $ 11.17 $ 11.65 $ 11.16 $10.19 $10.67
======= ======= ======= ======= ======= ======= ======= ======= ====== ======
Total investment return
(1).................... 3.50% 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)......... $17,773 $24,436 $35,700 $52,688 $64,610 $63,172 $51,988 $30,778 $7,425 $7,298
Expenses to average net
assets**............... 1.52% 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**... 6.34% 6.56% 7.21% 7.23% 7.47% 7.20% 7.59% 8.64% 9.00% 6.35%*
Portfolio turnover rate
....................... 142% 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 other
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 has not been annualized.
MH 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.............. $ 10.95 $ 10.70 $ 9.54 $ 11.95 $ 11.63 $ 11.39 $ 9.99 $ 10.37 $ 10.54 $ 10.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income... 0.28 0.29 0.35 0.30 0.33 0.35 0.47 0.65 0.66 0.28
Net realized and
unrealized gains
(losses) from
investments............ 2.44 1.49 1.88 (1.44) 1.48 0.24 1.40 (0.38) 0.52 0.26
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net increase (decrease)
from investment
operations............. 2.72 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) (0.28) (0.35) (0.30) (0.33) (0.35) (0.47) (0.65) (0.94) --
Distributions from net
realized gains on
investments............ (2.06) (1.25) (0.72) (0.97) (1.16) -- -- -- (0.41) --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total dividends and
other distributions.... (2.34) (1.53) (1.07) (1.27) (1.49) (0.35) (0.47) (0.65) (1.35) --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
period................. $ 11.33 $ 10.95 $ 10.70 $ 9.54 $ 11.95 $ 11.63 $ 11.39 $ 9.99 $ 10.37 $ 10.54
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total investment return
(1).................... 24.86% 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)......... $28,211 $29,224 $23,413 $23,263 $33,367 $38,583 $33,327 $25,681 $26,851 $22,845
Expenses to average net
assets***.............. 1.19% 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***.. 2.06% 2.29% 2.88% 2.30% 2.27% 3.11% 4.64% 5.71% 6.54% 6.11%**
Portfolio turnover rate. 169% 235% 171% 112% 60% 31% 101% 169% 230% 70%
Average commission rate
paid (2)............... $0.0600 $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 other
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 has 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.
MH 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.... $ 12.27 $ 11.83 $ 9.16 $ 9.87 $ 10.26 $ 10.00
------- ------- ------- ------- ------- -------
Net investment income... 0.10 0.06 0.10 0.10 0.16 0.08
Net realized and
unrealized gains
(losses) from
investments............ 3.88 2.53 2.70 (0.71) (0.39) 0.26
------- ------- ------- ------- ------- -------
Net increase (decrease)
from investment
operations............. 3.98 2.59 2.80 (0.61) (0.23) 0.34
------- ------- ------- ------- ------- -------
Dividends from net
investment income...... (0.10) (0.06) (0.10) (0.10) (0.16) (0.08)
Distributions from net
realized gains from
investments............ (2.46) (2.09) (0.03) -- -- --
------- ------- ------- ------- ------- -------
Total dividends and
other distributions.... (2.56) (2.15) (0.13) (0.10) (0.16) (0.08)
------- ------- ------- ------- ------- -------
Net asset value, end of
period................. $ 13.69 $ 12.27 $ 11.83 $ 9.16 $ 9.87 $ 10.26
======= ======= ======= ======= ======= =======
Total investment return
(1).................... 32.45% 22.12 % 30.52 % (6.18)% (2.26)% 3.40 %
======= ======= ======= ======= ======= =======
Ratios/Supplemental
Data:
Net assets, end of
period (000's)......... $18,493 $14,520 $14,797 $12,872 $16,281 $20,037
Expenses to average net
assets................. 1.04% 1.58 % 1.37 % 1.35 % 1.12 % 1.29 %*
Net investment income to
average net assets..... 0.71% 0.49 % 0.94 % 1.06 % 1.37 % 1.21 %*
Portfolio turnover rate. 92% 99 % 134 % 150 % 52 % 14 %
Average commission rate
paid (2)............... $0.0599 $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 other
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 has 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.
MH 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.............. $ 17.48 $17.57 $ 14.56 $ 18.06 $ 15.68 $ 14.92 $ 10.57 $ 11.66 $10.38 $ 8.76
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Net investment income
(loss)................. 0.03 (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............ 2.69 3.29 4.68 (2.13) 3.08 0.76 4.35 (1.09) 3.90 1.41
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Net increase (decrease)
from investment
operations............. 2.72 3.23 4.72 (2.12) 3.08 0.87 4.45 (0.95) 3.99 1.62
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Dividends from net
investment income...... (0.03) -- (0.08) (0.01) -- (0.11) (0.10) (0.14) (0.30) --
Distributions from net
realized gains from
investments............ (4.54) (3.32) (1.63) (1.37) (0.70) -- -- -- (2.41) --
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total dividends and
other distributions.... (4.57) (3.32) (1.71) (1.38) (0.70) (0.11) (0.10) (0.14) (2.71) --
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Net asset value, end of
period................. $ 15.63 $17.48 $ 17.57 $ 14.56 $ 18.06 $ 15.68 $ 14.92 $ 10.57 $11.66 $10.38
======= ======= ======= ======= ======= ======= ======= ======= ====== ======
Total investment return
(1).................... 15.41% 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)......... $30,586 $36,357 $42,784 $39,135 $51,696 $46,479 $37,470 $12,283 $4,264 $ 802
Expenses to average net
assets*................ 1.05% 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*................ 0.12% (0.29)% 0.23% 0.04% 0.00% 0.78% 1.07% 1.90% 1.53% 0.63%
Portfolio turnover rate. 89% 53% 41% 27% 35% 29% 28% 35% 68% 190%
Average commission rate
paid (2)............... $0.0598 $0.0600 -- -- -- -- -- -- -- --
</TABLE>
- -------
* 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)%, and 3.58% and (1.15)%,
respectively, for the years ending December 31, 1990, 1989 and 1988.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and other
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.
(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.
MH 9
<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..... $ 13.09 $ 11.34 $ 9.65 $ 9.95 $10.00
------- ------- ------- ------- ------
Net investment income
(loss).................. (0.09) (0.10) 0.03 0.01 0.01
Net realized and
unrealized gains
(losses) from
investments............. 2.78 2.93 2.00 (0.30) (0.05)
------- ------- ------- ------- ------
Net increase (decrease)
from investment
operations.............. 2.69 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............. (2.38) (1.08) (0.32) -- --
------- ------- ------- ------- ------
Total dividends and other
distributions........... (2.38) (1.08) (0.34) (0.01) (0.01)
------- ------- ------- ------- ------
Net asset value, end of
period.................. $ 13.40 $ 13.09 $ 11.34 $ 9.65 $ 9.95
======= ======= ======= ======= ======
Total investment return
(1)..................... 20.76% 25.23% 21.04% (2.90)% (0.36)%
======= ======= ======= ======= ======
Ratios/Supplemental Data:
Net assets, end of period
(000's)................. $19,076 $19,167 $17,660 $13,600 $2,814
Expenses to average net
assets**................ 1.18% 1.52% 1.29% 1.59% 0.00%
Net investment income
(loss) to average net
assets**................ (0.59)% (0.74)% 0.23% 0.07% 3.31%*
Portfolio turnover rate.. 89% 115% 119% 90% 0%
Average commission rate
paid (2)................ $0.0552 $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 other
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 has 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.
MH 10
<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.............. $ 13.74 $ 12.00 $ 12.44 $ 14.97 $ 11.10 $ 12.06 $ 11.76 $ 11.43 $10.49 $ 8.35
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Net investment income
(loss)................. 0.04 0.07 0.01 (0.03) 0.03 0.10 0.23 0.19 0.07 0.07
Net realized and
unrealized gains
(losses) from
investments............ 0.94 1.75 (0.45) (1.76) 4.42 (1.01) 0.35 0.67 1.94 2.07
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Net increase (decrease)
from investment
operations............. 0.98 1.82 (0.44) (1.79) 4.45 (0.91) 0.58 0.86 2.01 2.14
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Dividends from net
investment income...... (0.04) (0.08) -- (0.01) -- (0.05) (0.23) (0.19) (0.07) --
Distributions in excess
of net investment
income................. -- -- -- -- -- -- -- -- (0.19) --
Distributions from net
realized gains from
investments............ (0.06) -- -- (0.73) (0.58) -- (0.05) (0.34) (0.81) --
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total dividends and
distributions.......... (0.10) (0.08) 0.00 (0.74) (0.58) (0.05) (0.28) (0.53) (1.07) --
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Net asset value, end of
period................. $ 14.62 $ 13.74 $ 12.00 $ 12.44 $ 14.97 $ 11.10 $ 12.06 $ 11.76 $11.43 $10.49
======= ======= ======= ======= ======= ======= ======= ======= ====== ======
Total investment
return (1)............. 7.16% 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)......... $21,215 $25,701 $28,507 $40,493 $38,035 $21,493 $24,308 $16,149 $3,806 $3,250
Expenses to average net
assets*................ 1.07% 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*............ 0.26% 0.46% 0.10% (0.13)% 0.38% 0.82% 2.12% 3.29% 0.71% 0.68%
Portfolio turnover rate. 81% 44% 157% 175% 267% 127% 89% 120% 201% 33%
Average commission rate
paid (2)............... $0.0062 $0.0110 -- -- -- -- -- -- -- --
</TABLE>
- -------
* 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)%, and 4.55% and (1.79)%,
respectively, for the years ended December 31, 1990, 1989, and 1988.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and other
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.
(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.
MH 11
<PAGE>
OFFERING OF FUND SHARES
The Fund is a professionally managed mutual fund that offers Class H and Class
I shares of the Portfolios listed on the cover page and described in greater
detail below. Shares of each Portfolio are offered only to insurance company
separate 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. Fees and charges imposed by a 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. 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.
Each Portfolio offers both Class H shares and Class I shares, and both classes
of shares are sold and redeemed at net asset value. Class H shares are offered
only to the separate account of PaineWebber Life Insurance Company and certain
other insurance company separate accounts where the related insurance company
receives no payments from the Fund for its services in connection with the
distribution of the Portfolios' shares. Class I shares are offered to insurance
company separate accounts where the related insurance company does receive such
payments and are subject to a distribution fee at the annual rate of 0.25% of
net assets attributable to Class I shares. As a result, Class I shares have
higher ongoing expenses than Class H shares.
Shares of the Portfolios may serve as the underlying investments for separate
accounts of unaffiliated insurance companies ("shared funding") as well as 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.
The separate accounts that purchase shares of the Portfolios are the
shareholders of the Portfolios-- not the individual Contract owners. However,
the insurance company separate accounts may pass through voting rights to the
individual contract owners.
INVESTMENT OBJECTIVES AND POLICIES
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
asset management subsidiary of PaineWebber Incorporated ("PaineWebber"),
provides investment advisory and administrative services to the Fund. Certain
Portfolios, as indicated below, have sub-advisers ("Sub-Advisers").
MH 12
<PAGE>
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.
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"). The 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 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-
MH 13
<PAGE>
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, 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 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 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 foreign 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 or other securities issued with 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
MH 14
<PAGE>
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 it to achieve a higher level of investment return than if it
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.
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 that are issued or
guaranteed by foreign governments, by the U.S. government, by their respective
agencies or instrumentalities or by supranational organizations, or issued by
U.S. or foreign companies. 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 is invested in high quality bonds (and receivables
from the sale of such bonds), denominated in foreign currencies or U.S.
dollars, of issuers 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
normally is invested in securities of issuers located in any one country other
than the United States. 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 bonds 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 (commonly known as "junk bonds") 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.
Governments and businesses in emerging markets often issue bonds that are rated
below investment grade. However, some emerging market bonds may have investment
grade ratings. As a result, the Portfolio's investments in emerging markets may
exceed the 20% limit on its investments rated below investment grade. The
Portfolio may invest up to 35% of its total assets in mortgage-backed
securities of U.S. or foreign issuers that are rated in one of the two highest
rating categories by S&P, Moody's or another NRSRO or, if unrated, determined
by Mitchell Hutchins to be of comparable quality. 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 bonds that are not paying current income. The Portfolio may
purchase these bonds 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.
MH 15
<PAGE>
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
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 or other securities issued with 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 advisers 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 bonds to yields on
riskier types of bonds).
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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 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 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. The Portfolio
seeks to achieve its objective by using the Tactical Allocation Model, 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 that 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 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 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.
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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
. 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 to time, based on a statistical analysis of such factors as the issuer's
market capitalization (the S&P 500 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
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, other 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.
Tactical Allocation Portfolio is subject to the risk that the Tactical
Allocation Model may not correctly predict the appropriate times to shift the
Portfolio's assets from one type of investment to another. Also, in following
its asset allocation strategy, the Portfolio may not achieve as high a level of
either capital appreciation or current income as a fund that has only one of
those objectives as its primary objective.
The Portfolio may invest up to 15% of its net assets in illiquid securities.
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,
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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 a modified, growth-oriented 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 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
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
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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 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
DESCRIPTION OF SECURITIES
EQUITY SECURITIES include common stocks, most preferred stocks and securities
that are convertible into them, including common stock purchase warrants and
rights, equity interests in trusts, partnerships, joint ventures or similar
enterprises and 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 equity securities.
BONDS are fixed or variable rate debt obligations, including notes, debentures
and similar instruments and securities. Mortgage- and asset-backed securities
are types of bonds and income-producing, non-convertible preferred stocks may
be treated as bonds for investment purposes. 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 also 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, 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.
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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 its Sub-Adviser, 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, 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 domestic mortgage-
backed securities are sponsored or issued by private entities, including
investment banking firms and mortgage originators. Foreign mortgage-backed
securities may be issued by mortgage banks and other private or governmental
entities outside the United States and are supported by interests in foreign
real estate.
Mortgage-backed securities may be composed of one or more classes and may be
structured either as pass-through securities or collateralized debt
obligations. Multiple-class mortgage-backed securities are referred to 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.
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, a Portfolio is entitled to receive payments
of principal, interest and any
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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, a 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.
RELATED 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.
BONDS. Bonds are subject to interest rate risk and credit risk. Interest rate
risk is the risk that interest rates will rise and bond prices will fall,
lowering the value of a Portfolio's investments in bonds. 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 is the risk the
issuer or guarantor may be unable or unwilling 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, which
normally would lower their value and liquidity.
Investment grade bonds are rated in one of the four highest rating categories
by S&P or Moody's or comparably rated by another nationally recognized rating
agency. 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. Bonds rated D by S&P are in payment default or such rating is
assigned upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized. Bonds rated C by Moody's
are in the lowest rated class and can be regarded as having extremely poor
prospects of attaining any real investment standing. References to rated bonds
in this Prospectus include bonds that are not rated by an NRSRO but that
Mitchell Hutchins or the applicable Sub-Adviser determines to be of comparable
quality.
High yield, high risk bonds are rated below investment grade and are commonly
referred to as "junk bonds."A Portfolio's investments in these lower rated
bonds entail greater risk than its investments in investment grade bonds. High
yield, high risk bonds generally offer a higher current yield than that
available for higher grade issues, but they are considered predominantly
speculative with
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respect to the issuer's ability to pay interest and repay principal and may
involve major risk exposure to adverse market conditions. They are especially
subject to adverse changes in general economic conditions and in the industries
in which the issuers are engaged, to changes in the financial condition of the
issuers and to price fluctuations in response to changes in interest rates.
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. 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 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.
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.
When interest rates go down and homeowners refinance their mortgages, mortgage-
backed securities may be paid off more quickly than investors expect. When
interest rates rise, mortgage-backed securities may be paid off more slowly
than originally expected. Changes in the rate or "speed" of these prepayments
can cause the value of mortgage-backed securities to fluctuate rapidly.
Because of prepayments, mortgage-backed securities 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 a Portfolio
purchased the security.
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. 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.
The market for privately issued mortgage-backed securities is smaller and less
liquid than the market for U.S. government mortgage-backed securities. Foreign
mortgage-backed securities markets are
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substantially smaller than U.S. markets, but have been established in several
countries, including Germany, Denmark, Sweden, Canada and Australia, and may be
developed elsewhere. Foreign mortgage-backed securities generally are
structured differently than domestic mortgage-backed securities, but they
normally present substantially similar risks.
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. Transactions in foreign
securities may be subject to less efficient settlement practices, including
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.
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.
MH 24
<PAGE>
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.
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.
Emerging markets include formerly communist countries of Eastern Europe, the
Commonwealth of Independent States (formerly the Soviet Union), and the
People's Republic of China. Upon the accession to power of communist regimes
approximately 50 to 80 years ago, the governments of a number of these
countries expropriated a large amount of property. The claims of many property
owners against these governments were never finally settled. There can be no
assurance that a Portfolio's investments in these countries, if any, would not
also be expropriated, nationalized or otherwise confiscated, in which case the
Portfolio could lose its entire investment in the country involved. In
addition, any change in the leadership or policies of these countries may halt
the expansion of or reverse the liberalization of foreign investment policies
now occurring. Hong Kong reverted to Chinese administration on July 1, 1997.
The long-term effects of this reversion are not known at this time. However, a
Portfolio's investments in Hong Kong may now be subject to the same or similar
risks as any investment in China.
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, currency devaluation
policies, speculation or other political or economic developments inside and
outside the United States.
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.
MH 25
<PAGE>
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,
swap agreements and similar instruments. 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.
RISKS OF ZERO COUPON, OID AND PIK SECURITIES. Zero coupon securities are
Treasury bills, notes and bonds that have been stripped of their unmatured
interest coupons and receipts or certificates representing interests 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 security
receives a rate of return from the gradual appreciation of the security 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 securities 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 securities 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.
TREASURY INFLATION PROTECTION SECURITIES. Treasury bonds include Treasury
Inflation Protection Securities ("TIPS"), which are Treasury bonds on which the
principal value is adjusted daily in accordance with changes in the Consumer
Price Index. Interest on TIPS is payable semiannually on the adjusted principal
value. The principal value of TIPS would decline during periods of deflation,
but the principal amount payable at maturity would not be less than the
original par amount. If inflation is lower than expected while a Portfolio
holds TIPS, the Portfolio may earn less on the TIPS than it would on
conventional Treasury bonds. Any increase in the principal value of TIPS is
taxable in the year the increase occurs, even though holders do not receive
cash representing the increase at that time.
NON-DIVERSIFIED STATUS. Strategic Income Portfolio and Global Income Portfolio
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
MH 26
<PAGE>
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.
YEAR 2000 RISKS. Like other mutual funds, financial and business organizations
around the world, each Portfolio could be adversely affected if the computer
systems used by Mitchell Hutchins, a Sub-Adviser or other service providers and
entities with computer systems that are linked to Portfolio records do not
properly process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 Issue." Mitchell
Hutchins is taking steps that it believes are reasonably designed to address
the Year 2000 Issue with respect to the computer systems that it uses and to
obtain satisfactory assurances that comparable steps are being taken by each
Portfolio's other, major service providers. However, there can be no assurance
that these steps will be sufficient to avoid any adverse impact on the
Portfolios.
INVESTMENT TECHNIQUES AND STRATEGIES
FACTOR VALUATION MODEL. In managing Balanced, Growth and Income, Growth and
Small Cap Portfolios, Mitchell Hutchins uses its proprietary Factor Valuation
Model. This Model screens a universe of small- to large-capitalization
companies in ten different business sectors. The equity securities ranking in
the top 20% of the Model's universe are screened twice a month. The Mitchell
Hutchins Equity Research Team also applies traditional fundamental 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.
For Growth and Income Portfolio and Small Cap Portfolio, the Model identifies
undervalued companies with strong earnings momentum that rank well in terms of
value, momentum and economic sensitivity. For Growth and Income Portfolio, the
Team takes a closer look at those equity securities that rank in the top 20% of
the Model's universe based on value and momentum. For Small Cap Portfolio, the
Team takes a closer look at the equity securities of small cap companies
ranking in the top 20% of the Model's universe. For Growth Portfolio, the Team
applies a modified "bottom-up," stock-by-stock approach with a modified growth-
oriented Factor Valuation Model, which seeks to identify companies that rank
especially well on growth variables, including earnings momentum, stock price
movement, economic sensitivity and other growth factors.
HEDGING AND OTHER STRATEGIES USING DERIVATIVE INSTRUMENTS. Each Portfolio
except Money Market Portfolio may use certain instruments and strategies
designed to reduce the overall risk of its investments ("hedge") to enhance
income or realize gains (including reallocating exposure to different asset
classes). Use of these derivatives solely to enhance income or realize gains
may be considered a form of speculation. These strategies involve derivative
instruments, including options (both exchange-traded and OTC) and futures
contracts. Portfolios that invest in securities that are denominated in foreign
currencies may use derivative instruments, including forward currency
contracts, to hedge exposure to currency 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 instruments 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 instrument or
strategy, a Portfolio may have lower net income or a net loss on the
investment. Each of these strategies involves certain risks, which include:
MH 27
<PAGE>
. the fact that the skills needed to implement a strategy using derivative
instruments or strategies 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 instruments 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%, the value of a fixed income security having a
positive duration of three years generally will decrease by approximately 3%.
Thus, if the duration of a Portfolio's investments is calculated at three
years, the investments 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 in the above example.
LENDING OF PORTFOLIO SECURITIES. Each Portfolio may lend its securities to
qualified broker-dealers or institutional investors in an amount up to 33 1/3%
of its total assets. Lending securities enables a Portfolio to earn additional
income, but could result in a loss or delay in recovering those securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase
securities on a "when-issued" basis or may purchase or sell securities for
delayed delivery. In when-issued or delayed delivery transactions, delivery of
the securities occurs beyond normal settlement periods, but a Portfolio would
not pay for such securities or start earning interest on them until they are
delivered. However, when a Portfolio purchases securities on a when-issued or
delayed delivery basis, it immediately assumes the risks of ownership,
including the risk of price fluctuation.
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
MH 28
<PAGE>
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%
</TABLE>
<TABLE>
<S> <C>
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 "arbitraged" dollar rolls.
In a dollar roll, a 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, a 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
each invest up to 5% of its 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.
TEMPORARY DEFENSIVE POSITIONS; CASH RESERVES. When Mitchell Hutchins or the
applicable Sub-Adviser believes that unusual market or economic circumstances
warrant a defensive posture, a 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. Each Portfolio also may reinvest cash
collateral from securities lending in money market instruments, and
reinvestment of such cash collateral is not subject to this 35% limitation.
ILLIQUID SECURITIES. Each Portfolio may invest up to 10% or 15% of its net
assets in illiquid securities, including certain cover for OTC options and
securities whose disposition is restricted under the federal securities laws,
other than those Mitchell Hutchins or a Sub-Adviser has determined to be liquid
pursuant to guidelines established by the board. For Portfolios that may invest
outside the United States, to the extent that securities are freely tradeable
in the country in which they are principally traded, they are not considered
illiquid even if they are not freely tradeable in the United States. Each
Portfolio may invest in restricted securities that are eligible for resale to
qualified institutional buyers pursuant to SEC Rule 144A, but a Portfolio will
not consider those securities to be illiquid if Mitchell Hutchins or a Sub-
Adviser, as applicable, determines them to be liquid in accordance with
procedures approved by the board. The lack of a liquid secondary market for
illiquid securities may make it more difficult for a Portfolio to assign a
value to those securities for purposes of valuing its investments and
calculating its net asset value.
MH 29
<PAGE>
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 instruments,
hedging strategies and risk management techniques are developed and marketed
from time to time. Each Portfolio may invest in these securities and
instruments and use these strategies and techniques to the extent consistent
with its investment objective and limitations and with regulatory and tax
considerations.
PURCHASES, REDEMPTIONS AND EXCHANGES
Insurance company separate accounts may purchase and redeem Class H shares and
Class I shares of the Portfolios at net asset value without paying any sales or
redemption charges. Class I shares, however, are subject to a distribution fee
at the annual rate of 0.25% of average daily net assets and thus have higher
ongoing expenses than the Class H shares of the same Portfolio. 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 the same
class in another Portfolio at their relative net asset values per share,
provided that both Portfolios are offered by the separate account.
The Fund and, with respect to Class I shares, Mitchell Hutchins reserve 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. Each Portfolio other than Money Market
Portfolio pays an annual dividend from its net investment income 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 losses therefrom) and, for certain
Portfolios, net gains from foreign currency transactions, if any. Each
Portfolio also distributes annually substantially all of its net capital gain
(the excess of net long-term capital gain over net short-term capital loss), if
any.
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 value per share at $1.00 or to avoid income tax. The Portfolio does
not expect to realize long-term capital gain and thus does not anticipate
payment of any net capital gain distributions.
MH 30
<PAGE>
Dividends and other distributions paid on each class of shares of a Portfolio
are calculated at the same time and in the same manner. Dividends on Class H
shares of a Portfolio are expected to be higher than those on its Class I
shares because Class I shares have higher expenses resulting from their
distribution fees.
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 insurance company separate 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.
Dividends and other distributions declared by a Portfolio in October, November
or December of any year and payable to shareholders of record on a date in any
of those months will be deemed to have been paid by the Portfolio and received
by the shareholders on December 31 of that year if the distributions are paid
by the Portfolio during the succeeding January.
Portfolio shares are offered only to insurance company separate accounts that
fund 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 insurance company separate accounts
that purchase and hold shares of the Portfolios and (2) the holders of
Contracts funded through those separate accounts.
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 imposed on the Portfolios by the 1940 Act and
Subchapter M, place certain limitations on the assets of each insurance company
account--and, because section 817(h) and those regulations treat the assets of
each Portfolio as assets of the related separate account, of each Portfolio--
that may be invested in securities of a single issuer. Specifically, the
regulations provide that, except as permitted by the "safe harbor" described
below, as of the end of each calendar quarter or within 30 days thereafter no
more than 55% of the total assets of a Portfolio may be represented by any one
investment, no more than 70% by any two investments, no more than 80% by any
three investments and no more than 90% by any four investments. For this
purpose, all securities of the same issuer are considered a single investment,
and each U.S. government agency and instrumentality is considered a separate
issuer. Section 817(h) provides, as a safe harbor, that a separate account will
be treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
separate 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.
MH 31
<PAGE>
VALUATION OF SHARES
The net asset value of each Portfolio's shares, other than Money Market
Portfolio, fluctuates and is determined separately as of the close of regular
trading on the NYSE (currently 4:00 p.m., Eastern time) on each Business Day.
For each Portfolio other than 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 thinly traded and 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.
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. 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.
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 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 in any litigation. For those Portfolios
MH 32
<PAGE>
that had operations during the fiscal year ended December 31, 1997, 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% 1.22%
High Grade Fixed Income Portfolio 0.50 1.43
Strategic Fixed Income Portfolio 0.50 1.00
Strategic Income Portfolio 0.75 n/a
Global Income Portfolio 0.75 1.52
High Income Portfolio 0.50 n/a
Balanced Portfolio 0.75 1.19
Growth and Income Portfolio 0.70 1.04
Tactical Allocation Portfolio 0.50 n/a
Growth Portfolio 0.75 1.05
Aggressive Growth Portfolio 0.80 1.18
Small Cap Portfolio 1.00 n/a
Global Growth Portfolio 0.75 1.07
</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 March 31, 1998 Mitchell Hutchins was adviser or
sub-adviser to 31 investment companies with 68 separate portfolios and
aggregate assets of approximately $39.9 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 Advisors L.P. ("PIMCO Advisors"), a publicly held
investment advisory firm. A majority interest in PIMCO Advisors is held by
PIMCO Partners, G.P. ("PIMCO Partners"), a general partnership between Pacific
Investment Management Company, a California corporation, an indirect wholly
owned subsidiary of Pacific Life Insurance Company, and PIMCO Partners, LLC, a
limited partnership controlled by the PIMCO Managing Directors. As of December
31, 1997, PIMCO had approximately $118 billion in assets under management and
was adviser or sub-adviser of 46 pooled fund accounts with aggregate assets of
approximately $28.2 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 $70.4 billion as of January 31, 1998.
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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 22 other partners manage a staff of approximately
478 employees. As of January 31, 1998, Nicholas-Applegate managed a total of
approximately $29.4 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 seven
years as a senior member of the fixed income portfolio management group.
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 Mitchell Hutchins responsible for global fixed
income investments. 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 and the equity portion of Balanced 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 and his Balanced Portfolio
responsibilities since August 1995.
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
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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 and GEIC. 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 seven 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 Portfolio. 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 a 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.
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.
Nirmal Singh, Craig Varrelman and James Keegan assist Mr. McCauley in managing
High Grade Fixed Income Portfolio and Strategic Income Portfolio and Messrs.
Singh and Varrelman and Susan Ryan assist Mr. McCauley in managing Balanced
Portfolio's fixed income investments. Messrs. Singh, Varrelman and Keegan
share responsibility for the U.S. government and investment grade securities
sector of Strategic Income Portfolio. Messrs. Singh, Varrelman and Keegan are
senior 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.
MH 35
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Messrs. Singh and Varrelman first assumed responsibility for High Grade Fixed
Income Portfolio in July 1995. Mr. Keegan assumed his responsibility for High
Grade Fixed Income Portfolio in April 1996. Messrs. Singh, Varrelman and
Keegan first assumed responsibility for Strategic Income Portfolio at its
inception. 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. Ms.
Ryan is a senior vice president of Mitchell Hutchins and has been with
Mitchell Hutchins since 1982.
DISTRIBUTION ARRANGEMENTS FOR CLASS I SHARES
Mitchell Hutchins is the distributor of each Portfolio's Class I shares. Under
a distribution plan adopted with respect to the Class I shares ("Class I
Plan"), each Portfolio pays Mitchell Hutchins monthly distribution fees at the
annual rate of 0.25% of the average daily net assets attributable to that
Portfolio's Class I shares. Under the Class I Plan, Mitchell Hutchins uses the
distribution fees to pay insurance companies whose separate accounts purchase
Class I shares for distribution-related services that the insurance companies
provide with respect to those Class I shares. These distribution-related
services include (1) the printing and mailing of Fund prospectuses, statements
of additional information, related supplements and shareholder reports to
current and prospective Contract owners, (2) the development and preparation
of sales material, including sales literature, relating to Class I shares, (3)
materials and activities intended to educate and train insurance company sales
personnel concerning the Portfolios and Class I shares, (4) obtaining
information and providing explanations to Contract owners concerning the
Portfolios; (5) compensating insurance company sales personnel with respect to
services that result in the sale or retention of Class I shares; (6) providing
personal services and/or account maintenance to Contract owners with respect
to insurance company separate accounts that hold Class I shares; and (7)
financing other activities that the board determines are primarily intended to
result in the sale of Class I shares.
The Class I Plan and the related distribution contract specify that the
distribution fees paid to Mitchell Hutchins are not reimbursement for specific
expenses incurred. Therefore, even if Mitchell Hutchins' expenses exceed the
distribution fees it receives, the Portfolios will not be obligated to pay
more than those fees. On the other hand, if Mitchell Hutchins' expenses are
less than such fees, it will retain its full fees and realize a profit.
Expenses in excess of distribution fees received or accrued through the
termination date of the Class I Plan will be Mitchell Hutchins' sole
responsibility and not that of the Portfolios. The board reviews the Class I
Plan and Mitchell Hutchins' corresponding expenses annually.
MH 36
<PAGE>
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 13 series are
authorized.
Shares of each Portfolio are divided into two classes, designated Class H and
Class I shares. A share of each class represents an identical interest in the
respective Portfolio's investment portfolio and has the same rights, privileges
and preferences. However, each class may differ with respect to distribution
fees, if any, other expenses allocable exclusively to each class, voting rights
on matters exclusively affecting that class, and its exchange privilege, if
any. The different expenses applicable to the different classes of shares of
the Portfolios will affect the performance of those classes.
Each share of a Portfolio is entitled to participate equally in dividends,
other distributions and the proceeds of any liquidation of that Portfolio.
However, due to the differing expenses of the classes, dividends on Class H and
Class I shares will differ.
Shareholders of the Fund are entitled to one vote for each full shares held and
fractional votes for fractional shares. Voting rights are not cumulative and,
as a result, the holders of more than 50% of all the shares may elect all of
the Fund's board members. The shares of a Portfolio will be voted together,
except that only the shareholders of a class may vote on matters affecting only
that class, such as the terms of the Class I Plan. The shares of each Portfolio
will be voted separately, except when an aggregate vote of all the shares of
the Fund is required by law.
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.
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
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.
MH 37
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APPENDIX
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.
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,
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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 meet its financial commitment on the obligation 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;
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, D. Obligations rated BB, B, CCC,CC and C are regarded, as having
significant speculative characteristics. BB indicates the least degree of
speculation and C the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major risk exposures to adverse conditions.
"BB" An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" An obligation rated "B' is more vulnerable to nonpayment than obligations
rated "BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" An obligation rated "CCC" is 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.
MH 39
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"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 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.
MH 40
