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GROWTH AND INCOME PORTFOLIO
A SERIES OF
MITCHELL HUTCHINS SERIES TRUST
1285 Avenue of the Americas
New York, New York 10019
Growth and Income Portfolio is a diversified series of Mitchell Hutchins
Series Trust ("Fund"), a professionally managed, open-end investment company.
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 Portfolio. The
Portfolio invests primarily in dividend-paying equity securities believed to
have the potential for rapid earnings growth. The Class H shares of the
Portfolio described in this Prospectus are offered only to a limited number of
insurance company separate accounts that fund benefits under variable annuity
contracts and/or variable life insurance contracts ("Contracts").
This Prospectus concisely sets forth information about the Fund and the
Portfolio 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. The Statement of Additional
Information can be obtained without charge and further inquiries can be made
by contacting the Fund at 1-800-647-1568.
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
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TABLE OF CONTENTS
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PAGE
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Financial Highlights...................................................... MH 3
Offering of Fund Shares................................................... MH 4
Investment Objective and Policies......................................... MH 4
Description of Securities, Related Risks and Investment Techniques........ MH 5
Purchases, Redemptions and Exchanges...................................... MH 9
Dividends, Other Distributions and Federal Income Tax..................... MH 9
Valuation of Shares....................................................... MH 10
Management................................................................ MH 10
General Information....................................................... MH 11
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MH 2
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FINANCIAL HIGHLIGHTS
The table below provides data and ratios for one Class H share of Growth and
Income Portfolio during the periods shown. This information is supplemented by
the financial statements, accompanying notes and the report of Ernst & Young
LLP, independent auditors, which appear in the Fund's Annual Report to
Shareholders for the fiscal year ended December 31, 1997, and are incorporated
by reference into the Statement of Additional Information. The financial
statements and notes, as well as the information in the tables appearing below
relating to each of the five years in the period ended December 31, 1997, have
been audited by Ernst & Young LLP. Further information about the performance
of the Portfolio is also included in the Annual Report to Shareholders, which
may be obtained without charge by calling 1-800-647-1568. The information
appearing below for periods prior to the year ended December 31, 1993 also has
been audited by Ernst & Young LLP, whose reports thereon were unqualified.
The financial highlights information pertains to the Portfolio and does not
reflect charges related to the separate accounts that fund the contracts. You
should refer to the appropriate separate account prospectus for additional
information regarding such charges.
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GROWTH AND INCOME PORTFOLIO
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FOR THE YEARS ENDED FOR THE PERIOD
DECEMBER 31, JANUARY 2, 1992+
---------------------------------------------- TO DECEMBER 31,
1997 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- ----------------
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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 -- -- -- --
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* 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 3
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OFFERING OF FUND SHARES
Class H shares of Growth and Income Portfolio are offered only to insurance
company separate accounts that fund benefits under variable annuity contracts
and/or variable life insurance contracts issued by those insurance companies.
Fees and charges imposed by the separate account, however, will affect the
actual return to the holder of a Contract. A separate account may also impose
certain restrictions or limitations on the allocation of purchase payments or
Contract value to the Portfolio. Prospective investors should consult the
applicable Contract prospectus for information regarding fees and expenses of
the Contract and separate account and any applicable restrictions or
limitations.
Shares of Growth and Income Portfolio may serve as the underlying investments
for separate accounts of unaffiliated insurance companies ("shared funding")
and may serve as the underlying investments for both annuity and life
insurance Contracts ("mixed funding"). Due to differences in tax treatment or
other considerations, the interests of various Contract owners might at some
time be in conflict. The Fund currently does not foresee any such conflict.
However, the Fund's board of trustees ("board") intends to monitor events to
identify any material irreconcilable conflict that may arise and to determine
what action, if any, should be taken in response to such conflict. If such a
conflict were to occur, one or more insurance companies' separate accounts
might be required to withdraw its investments in the Portfolio. This might
force the Portfolio to sell securities at disadvantageous prices.
The separate accounts that purchase shares of Growth and Income Portfolio are
the shareholders of the Portfolio--not the individual Contract owners.
However, the insurance company separate accounts may pass through voting
rights to the individual Contract owners.
INVESTMENT OBJECTIVE AND POLICIES
Growth and Income Portfolio has an investment objective of current income and
capital growth. There can be no assurance that the Portfolio's investment
objective will be met. The 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. The Model screens a universe of small- to-
large-capitalization companies in ten different business sectors. The Model
identifies undervalued companies with strong earnings momentum that rank well
in terms of value, momentum and economic sensitivity. 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. The equity securities ranking in the top
20% of the Model's universe are screened twice a month. The 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 Portfolio.
Growth and Income 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 Standard & Poor's, a division of The McGraw-Hill Companies,
Inc. ("S&P") or Moody's Investors Service, Inc. ("Moody's"), comparably rated
by another nationally recognized statistical rating organization ("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.
MH 4
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over-the-counter ("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.
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. 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. 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.
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.
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.
MH 5
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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 Growth and Income
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 Growth and Income Portfolio's investments in bonds.
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 NRSRO. 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.
Growth and Income Portfolio may invest up to 10% of its total assets in
convertible securities rated below investment grade but no lower than B by S&P
or Moody's or comparably rated by another NRSRO or, if unrated, determined by
Mitchell Hutchins to be of comparable quality. The Portfolio's investments in
these lower rated securities entail greater risk than its investments in
investment grade bonds. High yield, high risk securities generally offer a
higher current yield than that available for higher grade issues, but they are
considered predominantly speculative with 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. The market for these
securities is thinner and less active, which may limit the Portfolio's ability
to sell them at fair value in response to changes in the economy or financial
markets.
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. 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.
DERIVATIVES. Some of the instruments in which Growth and Income Portfolio 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 and futures contracts. There is limited
consensus as to what constitutes a "derivative" security. The market value of
MH 6
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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 take these risks into account in its
management of the Portfolio.
COUNTERPARTIES. Growth and Income Portfolio may be exposed to the risk of
financial failure or insolvency of another party. To help lessen those risks,
Mitchell Hutchins, subject to the supervision of the board, monitors and
evaluates the creditworthiness of the parties with which the Portfolio does
business.
YEAR 2000 RISKS. Like other mutual funds, financial and business organizations
around the world, Growth and Income Portfolio could be adversely affected if
the computer systems used by Mitchell Hutchins 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
the 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 Portfolio.
INVESTMENT TECHNIQUES AND STRATEGIES
HEDGING AND OTHER STRATEGIES USING DERIVATIVE INSTRUMENTS. Growth and Income
Portfolio may use certain instruments and strategies designed to reduce the
overall risk of its investments ("hedge"), to enhance income or to 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. New
financial products and risk management techniques continue to be developed and
may be used by the Portfolio if consistent with its investment objective and
policies. The Statement of Additional Information contains further information
on these derivative instruments and related strategies.
Growth and Income Portfolio might not use any derivative instruments or
strategies, and there can be no assurance that using them will succeed. If
Mitchell Hutchins is incorrect in its judgment on market values, interest
rates or other economic factors in using a derivative instrument or strategy,
the Portfolio may have lower net income or a net loss on the investment. Each
of these strategies involves certain risks, which include:
. the fact that the skills needed to implement a strategy using derivative
instruments or strategies are different from those needed to select
securities for the Portfolio;
. 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 the 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 the Portfolio is unable to close out or liquidate
its hedged position.
LENDING OF PORTFOLIO SECURITIES. Growth and Income 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 the Portfolio to
earn additional income, but could result in a loss or delay in recovering
those securities.
MH 7
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WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Growth and Income 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 the Portfolio would not pay for such securities or start earning
interest on them until they are delivered. However, when the 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. Growth and Income Portfolio may enter into repurchase
agreements. Repurchase agreements are transactions in which the 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 the Portfolio if the other
party to the repurchase agreement becomes insolvent. The Portfolio intends to
enter into repurchase agreements only with banks and dealers in transactions
believed by Mitchell Hutchins to present minimal credit risks in accordance
with guidelines established by the board.
BORROWINGS. Growth and Income Portfolio may borrow money for temporary
purposes, but not in excess of 10% of its total assets, including reverse
repurchase agreements up to an aggregate value of 5% of its total assets.
TEMPORARY DEFENSIVE POSITIONS; CASH RESERVES. When Mitchell Hutchins believes
that unusual market or economic circumstances warrant a defensive posture,
Growth and Income Portfolio may temporarily commit all or any portion of its
assets to cash or money market instruments of U.S. issuers. The Portfolio may
invest up to 35% of its total assets in cash or money market instruments of
U.S. issuers for liquidity purposes or pending investment in other securities.
The 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. Growth and Income Portfolio may invest up to 10% 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 has determined to be liquid pursuant to
guidelines established by the board. The Portfolio may invest in restricted
securities that are eligible for resale to qualified institutional buyers
pursuant to SEC Rule 144A, but the Portfolio will not consider those
securities to be illiquid if Mitchell Hutchins 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 the
Portfolio to assign a value to those securities for purposes of valuing its
investments and calculating its net asset value.
PORTFOLIO TURNOVER. Portfolio turnover rates may vary greatly from year to
year and will not be a limiting factor when Mitchell Hutchins deems portfolio
changes appropriate. A higher turnover rate may involve correspondingly
greater transaction costs, which will be borne directly by the Portfolio and
may increase the potential for short-term capital gains.
OTHER INFORMATION. Growth and Income 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 derivative instruments, hedging strategies and risk management
techniques are developed and marketed from time to time. Growth and Income
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.
MH 8
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PURCHASES, REDEMPTIONS AND EXCHANGES
Class H shares of Growth and Income Portfolio are offered only to the
insurance company separate accounts that fund the Contracts. Shares may be
purchased or redeemed by these separate accounts without any sales or
redemption charge at net asset value. Proceeds from redemptions of Portfolio
shares will be paid on or before the seventh day following the request for
redemption by a Contract holder.
The Fund reserves the right to reject any purchase order and to suspend the
offering of Growth and Income Portfolio shares for a period of time.
DIVIDENDS, OTHER DISTRIBUTIONS AND FEDERAL INCOME TAX
DIVIDENDS AND OTHER DISTRIBUTIONS. Growth and Income Portfolio pays an annual
dividend from its net investment income and net short-term capital gain (the
excess of gain from the sale or exchange of capital assets held for not more
than one year over losses therefrom). The 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. The Portfolio may make
additional distributions, if necessary, to avoid a 4% excise tax on certain
undistributed income and capital gain.
Dividends and other distributions from Growth and Income Portfolio are paid in
additional shares of the Portfolio at net asset value per share, unless the
Fund's transfer agent is instructed otherwise. See the applicable Contract
prospectus for information regarding the federal income tax treatment of
distributions to the separate accounts.
FEDERAL INCOME TAX. Growth and Income 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 and net short-term capital gain.
Dividends and other distributions declared by Growth and Income 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.
Growth and Income 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 separate accounts
that purchase and hold shares of the Portfolio and (2) the holders of
Contracts funded through those separate accounts.
Growth and Income 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 Portfolio by the
Investment Company Act and Subchapter M, place certain limitations on the
assets of each separate account--and, because section 817(h) and those
regulations treat the assets of the Portfolio as assets of the related
separate account, of the 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 the
Portfolio may be represented by any one investment, no more than
MH 9
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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 the 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 Growth and Income Portfolio and its
shareholders; see the Statement of Additional Information for a more detailed
discussion. Prospective shareholders are urged to consult their tax advisers.
VALUATION OF SHARES
The net asset value of Growth and Income Portfolio's shares fluctuates and is
determined as of the close of regular trading on the NYSE (currently 4:00
p.m., Eastern time) on each Business Day. 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. The 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. 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.
MANAGEMENT
The board, as part of its overall management responsibility, oversees various
organizations responsible for Growth and Income Portfolio's day-to-day
management. Mitchell Hutchins, the investment adviser and administrator for
the Portfolio, makes and implements all investment decisions and supervises
all aspects of the operations of the Portfolio.
In accordance with procedures adopted by the board, brokerage transactions for
Growth and Income Portfolio may be conducted through PaineWebber or its
affiliates and the Portfolio may pay fees, including fees calculated as a
percentage of earnings, to PaineWebber for its services as lending agent in
its portfolio securities lending program. Personnel of Mitchell Hutchins may
engage in securities transactions for their own accounts pursuant to the
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 rate of 0.70% of the
average net assets of Growth and Income Portfolio. The Portfolio also incurs
other expenses in its operation and, for the fiscal year ended December 31,
1997, total expenses for the Portfolio were 1.04% of its average net assets.
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.
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Mark A. Tincher is primarily responsible for the day-to-day management of
Growth and Income Portfolio. Mr. Tincher is a managing director and chief
investment officer of equities of Mitchell Hutchins, responsible for
overseeing the management of equity investments. Prior to joining Mitchell
Hutchins in March 1995, Mr. Tincher worked for Chase Manhattan Private Bank,
where he was vice president and directed the U.S. funds management and equity
research area. At Chase since 1988, Mr. Tincher oversaw the management of all
Chase equity funds (the Vista Funds and Trust Investment Funds). Mr. Tincher
has held his Portfolio responsibilities since April 1995.
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.
The Fund does not hold annual meetings of shareholders. There normally will be
no meetings of shareholders to elect trustees unless fewer than a majority of
the trustees holding office have been elected by shareholders. Shareholders of
record of no less than two-thirds of the outstanding shares of the Fund may
remove a trustee by votes cast in person or by proxy at a meeting called for
that purpose. The trustees are required to call a meeting of shareholders for
the purpose of voting upon the question of removal of any trustee when so
requested in writing by the shareholders of record of not less than 10% of the
Fund's outstanding shares. Each share of Growth and Income Portfolio has equal
voting, dividend and liquidation rights. The shares of each Portfolio will be
voted separately except when an aggregate vote of all series is required by
the 1940 Act.
Information concerning Growth and Income Portfolio's Class I shares may be
obtained by contacting the Fund at 1-800-647-1568.
CUSTODIAN AND TRANSFER AGENT. State Street Bank and Trust Company, One
Heritage Drive, North Quincy, Massachusetts 02171, is custodian of the assets
of Growth and Income Portfolio. 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 Growth and Income Portfolio shares. Monthly statements sent
to each separate account report that account's Portfolio activity.
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